-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wu+IU7SVypxq2ZmDKxs/60dLi22xEOBCMwGjNKoNKMzR/TtKeRqvuPTfcXHxDAXw rKd+5Suj7a0XtJsQDcdJ3A== 0000950110-02-000634.txt : 20020920 0000950110-02-000634.hdr.sgml : 20020920 20020920171333 ACCESSION NUMBER: 0000950110-02-000634 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZYGO CORP CENTRAL INDEX KEY: 0000730716 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 060864500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12944 FILM NUMBER: 02769315 BUSINESS ADDRESS: STREET 1: LAUREL BROOK RD CITY: MIDDLEFIELD STATE: CT ZIP: 06455 BUSINESS PHONE: 8603478506 MAIL ADDRESS: STREET 1: LAUREL BROOK ROAD CITY: MIDDLEFIELD STATE: CT ZIP: 06455 10-K 1 e89840_10-k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2002 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------- ---------------- Commission file number 0-12944 ------- ZYGO CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0864500 - ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) Laurel Brook Road, Middlefield, Connecticut 06455 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (860) 347-8506 ----------------------------------------------------- (Registrant's telephone number, including area code:) Securities registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------- None Securities registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- Common Stock, $.10 Par Value 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 [ ] NO [ X ] (1) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate market value at September 18, 2002, was $87,039,362 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 17,509,427 Shares of Common Stock, $.10 Par Value, at September 18, 2002 Documents incorporated by reference: Specified portions of the registrant's Proxy Statement related to the registrant's 2002 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K. (1) The Company erroneously omitted to file by EDGAR with the Securities and Exchange Commission a copy of the Company's proxy statement dated October 6, 2001, in connection with the Annual Meeting of Stockholders held on November 14, 2001. The proxy and the consequent amendment to the Company's Annual Report on Form 10-K dated June 30, 2001 were filed by the Company on February 13, 2002. FORWARD LOOKING STATEMENTS All statements other than statements of historical fact included in this Annual Report regarding the Company's financial position, business strategy, plans and objectives of management of the Company for future operations are forward-looking statements. These forward looking statements include without limitation statements under "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors." Forward-looking statements are intended to provide management's 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 such as those disclosed under "Risk Factors." Such statements reflect the current views of the Company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, and growth strategy of the Company. 2 PART I ITEM 1. BUSINESS OVERVIEW Zygo Corporation ("Zygo" or "Company") is a leading designer, developer and manufacturer of optics, metrology and on-line yield enhancement solutions for the semiconductor and industrial manufacturing markets, as well as a supplier of optical components and modules for the telecommunications market. We have achieved our leadership position through 30 years of understanding, utilizing and developing applications related to the physics of light. We intend to leverage this knowledge and expertise in on-line yield enhancement, namely metrology and automation, to provide innovative solutions and advanced optical components, optical assemblies and modules to customers in the semiconductor, and industrial market. We believe this knowledge of optics and associated metrology, optical assembly and automation, combined with our vertical manufacturing capabilities, position us to continue our growth in these markets. Selected semiconductor customers include Canon, IBM, KLA-Tencor, and Nikon. Selected industrial customers include Bosch, Siemens, Caterpillar, Corning, Lockheed, and Raytheon. Our metrology unit manufactures noncontact optical measurement instruments and products. We are one of the largest and most experienced manufacturers of interferometric products that inspect and analyze surfaces of objects. Zygo is also a leader in displacement interferometry, which is used to achieve highly accurate distance measurement and motion control. These products enable lithography tool and semiconductor chip manufacturers to increase yield and semiconductor chip capacity. These interferometric measurement instruments are sold to customers in the semiconductor and industrial manufacturing markets and are used by us in our manufacture of optical components, assemblies, and modules. Our optics unit manufactures high performance macro-optics components, optical coatings, and optical system assemblies. We are a leader in the manufacture of plano-optics that are used in applications such as, laser fusion research, semiconductor manufacturing equipment, and aerospace optical systems. Optical assemblies are manufactured in our optical assembly center in Tucson, Arizona. These optical systems are used in applications such as laser fusion research and semiconductor manufacturing equipment. These components and assemblies are also an integral part of our own optical measurement instruments and systems. Our Automation Group, located in Delray Beach, Florida, designs, develops, manufactures, and markets automated system solutions to reduce downtime and to enhance operational efficiencies and product yields by building metrology into the production process. These automation systems are used in the manufacture of high precision components. We are currently shipping automation systems to semiconductor and industrial manufacturers. Our telecommunications unit develops and manufactures micro-optic components and modules for the telecommunications industry and macro-optic components for the telecommunications, semiconductor, and industrial manufacturing markets. As a result of the decline in the telecommunications industry, our telecommunications unit has become a significantly smaller source of our revenues. Management is reviewing various options to reduce the effect on the ongoing negative impact on the financial results resulting from this business. 3 INDUSTRY BACKGROUND AND SOLUTIONS PRECISION MANUFACTURING INDUSTRY Manufacturers in the semiconductor and industrial industries continue to redesign their processes in order to compete more effectively in an increasingly competitive marketplace. These changes are necessitated by: o decreasing product geometries; o increasing complexity of manufacturing processes; o shortening product life cycles; o declining product prices; and o intensifying global competition. Precision metrology is an enabling technology for the semiconductor and industrial markets. The pressures on manufacturers to improve productivity and quality have fueled demand for precision noncontact optical metrology, and required integration of high precision metrology directly into the manufacturing process in order to increase yields and quality control. Advancing technologies have required manufacturers in a variety of industries to produce smaller products with more precise tolerances and increased complexity of design geometries. These components cannot be adequately measured by the metrology devices and systems historically utilized. For example, contact profilers and visual qualitative inspection systems are inadequate for quantitative analysis of critical dimensions such as semiconductor line widths, photomask surface quality, and flat panel displays. Additionally, precision machined part tolerances now required in high-performance automotive engines are approaching dimensions that require manufacturers to implement sophisticated metrology and inspection tools. The trend towards miniaturization and tighter tolerances creates new challenges for manufacturers as they are forced to handle, measure, and test ever-smaller components. As piece part dimensions and tolerances become smaller, "nanotechnology scale" precision is necessary and, to a greater extent than ever, manufacturers require automated measurement and control. With on-line process control and yield improvement metrology solutions being enabling factors for manufacturers of precision components, the growth for yield enhancement solutions is expected to continue. Our growth is driven by both projected number of steppers to be sold, and an increase in the number of axes per stepper as the need for precision requirements and throughput increases. Shortening product lifecycles, increased competition and declining product prices in these industries have forced manufacturers no longer to depend solely on sales growth to fuel financial performance improvement, but rather to focus greater attention on the need to reduce production defects and significantly increase production yields. While the semiconductor market is rather mature in its use of these types of tools, the industrial manufacturing markets' requirement for on-line automated metrology solutions is at an early stage of penetration, since manufacturers are just beginning to measure critical dimensions and surface topography of smaller parts to tighter tolerances. OUR HIGH PRECISION MANUFACTURING SOLUTIONS A significant problem facing the precision manufacturing industry today is an increased requirement for in-production automated measurement systems. The precision tolerances that are required today make historical methods of measuring sample parts obsolete. We believe that we are able to address this problem for our customers by virtue of the following: 4 History of innovation and commercialization. Throughout our history, we have met our customers' requirements through innovation and commercialization. Since we introduced the first optical interferometer in 1972, we have been issued 98 United States patents, of which 93 are currently active, and 50 foreign patents, and we have 152 United States and 110 foreign patent applications pending. Our intellectual property has been the foundation and driver for our yield enhancement solutions over the last 30 years. We have received numerous achievement awards, including: o R&D Magazine 100 Award in 2002, for the Simetra, 3D Relational Metrology System and R&D 100 Awards in 1978, 1982, 1988 (three awards), 1994, 1996, 1997 and 1998; o Laser Focus World Commercial Technology Award in 2001; o Photonics Spectra Circle of Excellence Awards in 1988, 1994, 1996, 1997, 1998 and 2001; o American Machinist Excellence in Manufacturing Technology Achievement Award for Technology & Reliability in 2000; o 1998 R&D Magazine 100 and Photonics Spectra Circle of Excellence Award for MESA Interferometric System; and o 1997 R&D Magazine 100 and Photonics Spectra Circle of Excellence Award for ZMI 2001 Displacement Measuring Interferometer. Integration of our metrology and automation capabilities. We can provide yield enhancement solutions integrating our metrology and automation capabilities. For example, our automation unit has built systems that enable manufacturers of flat panel LCD screens to automatically handle and measure critical dimensions in a continuous manufacturing process. As a result, these manufacturers can now measure critical dimensions on these substrates prior to assembly into the final product, resulting in increased yields and cost effectiveness. INTEGRATED CORE COMPETENCIES OPTICAL COMPONENTS, ASSEMBLIES AND MODULES As illustrated in the following chart, we combine our expertise in optics, our capabilities in design and manufacturing and our expertise in metrology to manufacture semiconductor and industrial optical components and optical assemblies. --[FLOW CHART]-- Optics Design & Optical Components Manufacturing & Assemblies Capabilities for Semiconductor, Industrial Metrology 5 METROLOGY AND AUTOMATION: YIELD ENHANCEMENT SOLUTIONS As illustrated in the following chart, the combination of our high precision metrology systems and our parts handling automation solutions results in on-line yield enhancement solutions for our customers. These solutions can be customized to a customer's specific application. --[FLOW CHART]-- High Precision Metrology Solutions On-Line Yield Enhancement Solutions Parts Handling Automation Solutions OUR STRATEGY Our objective is to: o continuously improve our customers' competitiveness by providing on-line yield enhancement metrology and automation solutions for the semiconductor and other high-precision industrial markets; and o become a significant provider of cost-effective optical components, and optical assemblies on a volume basis for the semiconductor and high-precision industrial markets. Our strategy to accomplish these objectives has the following elements: Continued emphasis in the semiconductor market. Our precision measurement technology enables us to focus on the semiconductor market. Due to the technological complexities of measuring sub-nanometer stage positioning and sub-micron features few industry players have the required technology portfolio to meet this industry's needs. We are able to compete in this market because of our skilled employee base which encompasses a wide range of scientific disciplines and technical capabilities. Maintain strong manufacturing capability in the optics business. Optical manufacturing is a key enabling technology for the semiconductor and industrial markets. With the nanometer tolerances in optical components and sub-micron tolerances in optical assemblies, few industry players are able to provide the needed combination of the required technical capability and metrology. This combination of metrology and optical manufacturing technology will allow us to make better products and reduce manufacturing costs. We will continue to expand our technical capabilities in optical manufacturing and optical system assembly to meet this market need. Continue to diversify customer base and products. We believe that diversifying the customer base we serve as well as the products we manufacture will enable us to minimize the traditional cyclical effects of the semiconductor industry on our business. We have a significant market presence in North America, Asia, and Europe. Moreover, our products are used in a broad range of applications which reduces our reliance 6 on sales to any particular industry. This ability to leverage our intellectual property across markets allows us to diversify our investment in research and design. Develop long-term and significant customer relationships. We seek to enter into collaborative arrangements with existing and potential customers in attractive end-user markets in order to jointly develop and optimize our products for their use. We believe that our ability to provide technical assistance to these companies in terms of the design and development of solutions encourages the incorporation of our products in their devices. Pursue a selective acquisition and investment strategy. We seek to access additional technological capabilities and complementary product lines through selective acquisitions and strategic investments. PRODUCTS AND APPLICATIONS We manufacture, design, and market yield enhancement solutions that utilize optical metrology and automation for high performance manufacturers. We also manufacture macro-optical components, such as flats, spheres, waveplates, and mirrors, and optical assemblies for the semiconductor and industrial markets. Our products are based on our two core competencies: o Metrology--including OEM, process control, and on-line automated metrology for yield enhancement; and o Optics--sold as components and assemblies. We provide the following Metrology products: METROLOGY OEM: PRODUCT DESCRIPTION BENEFITS TO CUSTOMER MARKET - ------- ----------- -------------------- ------ Displacement Used to measure and o Improves Semiconductor Measuring control, while they positioning Industrial Interferometers are in motion, the accuracy x, y and theta o High Resolution stages in photo o High Velocity lithography equipment o Low data age uncertainty PROCESS CONTROL: Interferometric Used for o Improves Semiconductor Microscopes three-dimensional analysis of Industrial analysis of the various types of surface of an object surfaces 7 PRODUCT DESCRIPTION BENEFITS TO CUSTOMER MARKET - ------- ----------- -------------------- ------ Small Aperture Used to analyze the o Measures Industrial Wavefront surface shape of performance of Interferometer transmitted lenses wavelengths and optical components Large Aperture Used to analyze o Precise process Semiconductor Wavefront surface shape and control Industrial Interferometer transmitted wavelength of optical components and modules Photomask Critical Used to measure and o Allows superior Semiconductor Dimension Metrology analyze resolution, System resist-coated and repeatability production masks and linearity o Available with defect printability analysis Geometrically Used to measure the o Allows Industrial Desensitized flatness of industrial Interferometer precision machined surfaces to be parts measured quickly and without contact Digital Video Disk Used to measure the o Allows Industrial Interferometer transmitted inspection of wavefront quality of small, aspherical small lenses lenses for digital video disk optical devices 3-D Interferometer Used to measure o High throughput Industrial flatness, thickness, o High yield and parallelism of precision machined parts AUTOMATED METROLOGY PRODUCT DESCRIPTION BENEFITS TO CUSTOMER MARKET - ------- ----------- -------------------- ------ Auto KMS 100 Fully automated o High throughput Semiconductor system used to o High yield measure critical o Process control dimensions on reticles FPD 1500 Fully automated system o High throughput Semiconductor measures critical o High yield dimensions on flat o Process control panel displays 8 METROLOGY We offer a broad range of interferometry-based and imaging products. An interferometer analyzes the number, shape, and position of the lines in the fringe pattern of bright and dark lines that result from the optical path difference between a reference and a measurement beam. These interferometric and imaging instruments and systems utilize highly sophisticated subsystems including precision optical components, stable and long-life laser or other light sources, piece part positioning stages, and high-powered workstations or PCs for processing and analyzing fringe pattern data and image analysis. Our metrology products include: OEM Displacement Measuring Interferometers. Our displacement measuring interferometer family of laser interferometer systems provides measurements that control some of the world's most sophisticated machinery in the semiconductor, flat panel display production, and optical component manufacturing industries. These products are used to measure the position of a tool relative to a part under fabrication through the use of a directed laser beam reflected from the moving portion of a machine. Most of these systems are sold on an OEM basis into the semiconductor photolithography market. PROCESS CONTROL Interferometric Microscopes. Our interferometric microscopes combine advanced techniques of interferometry, microscopy, and precision analysis algorithms in an automated package. These instruments make high precision surface analysis possible and are important because they provide surface structure analysis. These microscopes use scanning white light interferometry to measure non-specular surfaces and build ultra-high z-axis resolution images. Our patented Frequency Domain Analysis system and powerful workstations and personal computers then combine for next-generation three-dimensional surface structure analysis. Small Aperture Wavefront Interferometer. Our small aperture wavefront interferometer is a compact interferometer that is designed for ease of use, especially for applications that involve repetitive testing of similar components. It has the ability to quickly and automatically characterize microlenses as small as 20 microns to three millimeters in diameter. Its integrated motion control and down facing orientation make it ideal for testing lens arrays and picking and testing discrete lenses, molded aspherics, miniature mirrors, and filters. Large Aperture Wavefront Interferometer. Our large aperture wavefront interferometer is used for large surface metrology. Our interferometers are used extensively in the optics industry to measure glass or plastic optical components such as flats, lenses, and prisms. In addition, they are used to measure other precision components such as bearings, sealing surfaces, polished ceramics, and contact lens molds. Photomask Critical Dimension Metrology System. Our photomask critical dimension metrology system product lines hold a significant market share of the photomask metrology market. They provide the measurement of photomask line width. The positioning, measurement, and data collection functions of the products can be custom configured to specific applications. Geometrically Desensitized Interferometer. Our geometrically desensitized interferometer product is a patented interferometer that utilizes diffraction gratings to measure surfaces that have roughness and departures approximately 20 times greater than those surfaces presently measurable with existing interferometer technology. It is able to measure rougher, non-specular surfaces, such as those used in precision-machined parts applications, without sacrificing such advantages of other interferometers, such as the ability to utilize high-speed non-contact interferometry and to produce a full-field wide aperture view. 9 Digital Video Disk Interferometer. The digital disk interferometer measures spherical and aspherical lenses for next-generation DVD players. 3-D Interferometer. The 3-D interferometer product family is a new concept in interferometric metrology. They extend optical interferometric metrology to the rapid measurement of dimensional relationships. While previous interferometric metrology only measured one primary surface parameter such as roughness or flatness, it simultaneously measures the flatness, thickness, and parallelism of industrial components. This patent pending technology combines our scanning broadband interferometry and our displacement interferometry into one system. We expect industrial assemblies, such as fuel injector systems, to benefit from this technology with both increased efficiency and improved production yields. AUTOMATED METROLOGY Our Automation Group develops products used across a broad range of industries. Our automation products include: Auto KMS 100. This fully automated inspection system incorporates our KMS microscope with a robotic material handling system. The system accepts an individual reticle from a carrier, automatically presents it to a bar code reader for identification, loads it to the microscope's inspection stage, performs an automated inspection routine, and returns the reticle to the original input location. A single graphical user interface provides the operator with input to both the handling and inspection systems. FPD 1500: This fully automated inspection system incorporates our NewView 5000 microscope with a robotic material handling system. The system accepts an individual flat panel display from a carrier, loads it to the microscope's inspection stage, performs an automated inspection routine, and returns the flat panel display to the original input location. A single graphical user interface provides the operator with input to both the handling and inspection systems. We provide the following Macro-Optics and Assemblies products:
MACRO-OPTICS AND ASSEMBLIES: PRODUCT DESCRIPTION BENEFITS TO CUSTOMER MARKET - ------- ----------- -------------------- ------ Prisms, Rhomboids, High precision plano, o Low insertion loss Semiconductor and Beamsplitters or flat, optical components o High quality used singly or in combination to direct, steer, combine, divide and separate laser beams Optical Coatings Thin-film coatings used to o High efficiency Semiconductor reflect, minimize loss, energy transfer separate or combine light o Reduced feedback and noise
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MACRO-OPTICS AND ASSEMBLIES: PRODUCT DESCRIPTION BENEFITS TO CUSTOMER MARKET - ------- ----------- -------------------- ------ Lenses and Lens High precision spherical o High resolution Semiconductor Systems and aspherical lens optical imaging elements and assemblies o High resolution used in industrial and lithography semiconductor imaging systems Reference Flat Super-smooth flat mirrors o Precise location Semiconductor Mirrors used as reference of reference surfaces surfaces with o High resolution displacement measurement lithography sensors Stage Mirrors Lightweight wafer and o High throughput Semiconductor reticle stages used for lithography and metrology systems used in semiconductor manufacturing and testing Laser Optics Mirrors, polarizers and o Improved laser Industrial laser and assemblies performance and disks used in high energy damage resistance laser systems for alternative energy research and nuclear weapons simulation
MACRO-OPTICS AND ASSEMBLIES We manufacture and supply high precision optical components and modules to customers as well as for use in our own instruments. Our macro-optics products include: Prisms, Rhomboids, and Beamsplitters. Our high-precision plano optical components are manufactured and supplied to our external customers for use in a variety of modules and assemblies. In addition, they are also used internally as part of our metrology and automation solutions. They are used individually or in combination with one another to direct, steer, combine, divide, and separate laser beams. These products are often coated with special optical films to meet the highly demanding requirements for low insertion loss and cross-channel isolation. Optical Coatings. Reflective films are designed to minimize loss of optical energy upon reflection from the coated surface. Anti-reflective films minimize the loss of energy upon transmission through the coated surface. These coatings are produced by vacuum deposition of thin dielectric films in sophisticated coating chambers. Reflective and anti-reflective coatings are essential for achieving low insertion losses through components and assemblies. Polarization coatings are applied to prisms and other plano optical components to separate or combine laser beams of orthogonal polarization. Lenses and Lens Systems. Lenses are transmissive optical components with spherical or aspherical surfaces. They are used individually or in combination as lens systems to form and transfer images. We produce lenses and assemblies for use in a wide variety of applications, ranging from spectrum analyzers for optical telecom systems to semiconductor lithography. Such lenses are produced using advanced computer numeric control manufacturing and metrology equipment. We assemble lens systems in clean-room conditions using laser-based alignment and centering equipment. 11 Reference Flat Mirrors. Our super-smooth flat mirrors serve as reference surfaces when used in conjunction with displacement measurement interferometers. These reference mirrors must be made of special materials to be insensitive to temperature variation and non-uniformity. We produce a large quantity and variety of reference flat mirrors used in semiconductor manufacturing and metrology equipment. The flatness and smoothness of these mirrors are essential for precise location of semiconductor wafers and exposure masks during production and testing of integrated circuits. Stage Mirrors. Our stage mirrors are lightweight structures, which serve as both a mechanical support for a wafer or reticle and two orthogonal reference flat mirror surfaces. Stage mirrors are used in high performance lithography and metrology systems employing laser, electron-beam, or x-ray exposure sources. They are made of low-expansion materials to reduce sensitivity to thermal variations, and are machined to produce a lightweight but stiff mechanical structure with excellent dimensional stability. Two adjacent sides of the stage are finished using proprietary technology to serve as reference flat mirrors. The combined optical and structural properties of such stage mirrors are critical for achieving higher wafer throughput in advanced lithography and metrology tools. We supply stage mirrors to a number of manufacturers of semiconductor lithography and metrology equipment. Laser Optics. Laser optics are mirrors, polarizers and solid-state laser amplifiers used in high energy laser systems. Such components are used in laser fusion research and nuclear weapons simulation. Such optical components must be finished to the highest quality in terms of surface flatness, smoothness, and surface cosmetics. Even the smallest defects can lead to catastrophic failure in use. We are a leader in producing large plano laser optics, having supplied such components to major laser fusion laboratories for nearly two decades. We are under contract with the Lawrence Livermore National Laboratory to produce mirrors, polarizers and amplifier slabs for the National Ignition Facility, also known as NIF. The NIF, when completed in 2007, is expected to be the largest laser system ever built. CUSTOMERS AND MARKETS The growing requirements for dimensional control to the sub-nanometer level have created an escalating need for our yield enhancement instruments and systems among both OEMs and end-users of microfabrication technology. We have been able to meet these demands with on-line yield improvement instruments and systems as well as with our off-line quality control instruments. Today, our installed base of high precision metrology systems exceeds 6,500 systems. Several of our customers purchase multiple product family types and multiple technology platforms and employ our solutions at their facilities worldwide. The following is a sampling of our customers in fiscal 2002: SELECTED CUSTOMERS BY END MARKET SEMICONDUCTOR INDUSTRIAL ------------- ---------- Applied Materials Agilent Canon Bosch Electro Scientific Caterpillar IBM Elcan KLA-Tencor Hitachi Nikon Lawrence Livermore National Samsung University of Rochester Zeiss Raytheon 12 During fiscal 2002, 2001, and 2000, sales to Canon Inc. and Canon Sales Co., Inc., amounted to 21%, 33%, and 19%, respectively, of our net sales. No other single customer accounted for more than 10% of our sales in any of the fiscal years 2002, 2001, and 2000. PATENTS AND OTHER INTELLECTUAL PROPERTY Our success and ability to compete depend substantially upon our internally developed technology. We have been developing a portfolio of intellectual property for 30 years. We rely on a combination of patent, copyright, trademark and trade secret laws and license agreements to establish and protect our proprietary rights in our products. We believe, however, that our success depends upon innovation, technological expertise and distribution strength. Since we introduced the first optical interferometer in 1972, we have had 98 United States patents issued, of which 93 are currently active, and 50 foreign patents issued, and we have 152 United States and 110 foreign patent applications pending. In addition, we have a number of registered and unregistered trademarks. While we rely on patent, copyright, trade secret and trademark law to protect our technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. RESEARCH AND DEVELOPMENT AND ENGINEERING OPERATIONS We operate in industries that are subject to rapid technological change and engineering innovation. We dedicate substantial resources to research and development. At June 30, 2002, we employed 131 individuals within our research and development and engineering operations. Our strategy is to form close technical working relationships with customers and OEM suppliers in our markets to ensure that our products have relevancy when commercialized. In connection with our research and development operations, we also maintain a close working relationship with various research groups and academic institutions in the United States as well as abroad, such as Zetetic Institute in Arizona. We believe that continued enhancement, development and commercialization of new and existing products and systems are essential to maintaining and improving our leadership position. COMPETITION The industries in which we participate are intensely competitive and are characterized by price pressure and technological change. Furthermore, these markets are dominated by a few market leaders. We believe that we are one of a limited group of companies that develop and market yield enhancement solutions. Our primary yield enhancement competitors in the semiconductor and industrial markets include Agilent's Laser Interferometer Positioning Systems Division, ADE's Phase Shift Technology, Leica's Mask Metrology Division, and Veeco's Metrology Division. The principal factors upon which we compete are: o performance and flexibility of solutions; o value; o on-time delivery; o responsive customer service and support; and o breadth of product line. 13 We believe we compete favorably on each of these factors. BACKLOG Backlog at June 30, 2002 was $47,129,000, a decrease of $6,768,000, or 13%, as compared to $53,897,000 (excluding backlog from Automation Systems Group sold in December 2001) at June 30, 2001. The year-end fiscal 2002 backlog consisted of $21,983,000, or 47%, in the semiconductor segment, $15,700,000, or 33%, in the industrial segment, and $9,446,000, or 20%, in the telecommunications segment. Orders, net of debookings, for the fiscal year ended June 30, 2002 totaled $79,106,000 (including $1,448,000 related to the Automation Systems Group) and consisted of $27,578,000, or 35%, in the semiconductor segment, $44,287,000, or 56%, in the industrial segment, and $7,241,000, or 9%, in the telecommunications segment. MARKETING AND SALES In the semiconductor and industrial markets our sales and marketing strategy is to establish and/or solidify strategic relationships with leading OEMs and end-users in targeted market sectors. The selling process for our products is performed through our worldwide sales organization operating out of six regional sales offices in California, Connecticut, Germany, Japan, Singapore, and Taiwan. Supporting this core sales team are business development, marketing, service, and engineering specialists representing our various optics, metrology, and automation factories in Connecticut, Massachusetts, California, and Florida. Product promotion is done through trade shows, printed and e-business advertising, and industry technical organizations. The underlying focus of all our sales and marketing activities is to improve the performance of our customers' products and process through value-added, yield-enhancing solutions. The following table sets forth the percentage of our total sales by region (including sales delivered through distributors) during the past three years:
Fiscal Year Ended June 30, ------------------------------------------- 2002 2001 2000 ---- ---- ---- Americas (primarily United States) .......... 49% 51% 56% Far East: Japan .................................... 25% 34% 20% Pacific Rim .............................. 9% 6% 14% --- --- --- Total Far East .............................. 34% 40% 34% Europe and other (primarily Europe) ......... 17% 9% 10% --- --- --- Total ....................................... 100% 100% 100% === === ===
Customer service is an essential and growing part of our business since product up time is critical given its effect on our customers' production efficiency. As of June 30, 2002, our global sales customer support and service organization consisted of over 88 people skilled in sales, marketing, optical and electro component repair, software, application and system integration, diagnostics, and problem-solving capabilities. 14 MANUFACTURING, RAW MATERIALS AND SOURCES OF SUPPLY Our principal manufacturing activities are conducted at our facilities in Middlefield, Connecticut, Westborough, Massachusetts, and Tucson, Arizona. We maintain an advanced optical components manufacturing facility in Middlefield specializing in the fabrication, polishing, and coating of plano, or flat, optics for sales to third parties, as well as the manufacturing of a wide variety of optics that are used in our metrology products. Our manufacturing activities for our metrology and system products consist primarily of assembling and testing components and sub assemblies, some of which are supplied by us and others are supplied by third-party vendors and then integrated into our finished products. Our optical assembly manufacturing activities are conducted in our Tucson, Arizona facility. We integrate ZYGO optics, optics from third party vendors, and mechanical sub-systems utilizing Zygo metrology, for semiconductor and industrial customers in these facilities. Certain components and subassemblies incorporated into our systems are obtained from a single source or a limited group of suppliers. We routinely monitor single or limited source supply parts, and we endeavor to ensure that adequate inventory is available to maintain manufacturing schedules should the supply of any part be interrupted. Although we seek to reduce our dependence on sole or limited source suppliers, we have not qualified a second source for various of these products and the partial or complete loss of certain of these sources could have a negative impact on our results of operations and damage customer relationships. EMPLOYEES At June 30, 2002, we employed 537 people. Our employees are not represented by a labor union or a collective bargaining agreement. We regard our employee relations as good. EXECUTIVE OFFICERS OF THE REGISTRANT J. BRUCE ROBINSON - AGE 60 - CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER Mr. Robinson has served as Chairman, President, and Chief Executive Officer since November 2000, as President and Chief Executive Officer from November 1999 to November 2000, and as President from February 1999 to November 1999. Previously, he spent 25 years with The Foxboro Company; his most recent positions were President Worldwide Operations from 1996 to 1998 and President of Europe from 1990 to 1996. Mr. Robinson has served as an executive officer of the Company since February 1999 and is a director of the Company. RICHARD M. DRESSLER - AGE 57 - VICE PRESIDENT, FINANCE, CHIEF FINANCIAL OFFICER, AND TREASURER Mr. Dressler has served as Vice President, Finance, Chief Financial Officer, and Treasurer since January 2001. Previously, he served as President of Richard Dressler L.L.C. Consulting from July 2000 until January 2001. From 1976 to 2000, Mr. Dressler served in various capacities with units of United Technologies Corporation, including as Director of Cost Management and Financial Systems of Carrier, as Controller of Sikorsky Aircraft, and as Vice President, Finance and Administration of United Technologies Control Systems. 15 Mr. Dressler has served as an executive officer of the Company since January 2001. JOHN S. BERG - AGE 39 - PRESIDENT, ZYGO TERAOPTIX Mr. Berg has served as the President, Zygo TeraOptix, one of our subsidiaries, since May 2000. Previously, he served as the President and Chief Technical Officer of Firefly Technologies, Inc. from 1997 to 2000 and held senior management and key engineering positions at Digital Papyrus Corporation from 1995 to 1997. Mr. Berg has served as an executive officer of the Company since May 2000 and is a director of the Company. WILLIAM H. BACON - AGE 52 - VICE PRESIDENT, METROLOGY MANUFACTURING Mr. Bacon has served as Vice President, Manufacturing since April 2002. Previously, he served as Vice President, Metrology Manufacturing from April 2000 to April 2002, and Vice President, Corporate Quality from January 1996 to April 2000. From November 1993 to January 1996, Mr. Bacon was Director of Total Quality and also served as Manager of Instrument Manufacturing Engineering from June 1987 to November 1993. Mr. Bacon has served as an executive officer of the Company since January 1996. BRIAN J. MONTI - AGE 46 - VICE PRESIDENT, WORLDWIDE SALES AND MARKETING Mr. Monti has served as Vice President, Worldwide Sales and Marketing since July 1999. Previously, he served as Vice President, Sales, Service and Marketing for Radiometric Corporation from 1998 to 1999. From 1994 to 1998, Mr. Monti held various positions for Honeywell Measurex, including Vice President, Sales, Service and Marketing. Mr. Monti has served as an executive officer of the Company since July 1999. PETER B. MUMOLA - AGE 58 - VICE PRESIDENT, BUSINESS DEVELOPMENT Mr. Mumola has served as Vice President, Business Development since February 2002. Previously, he served as Vice President, Optics Division from February 2000 to February 2002. From June 1999 to February 2000, he served as General Manager, Optics Business. From January 1996 until June 1999, Mr. Mumola was President of IPEC-Precision Inc., a supplier of specialty silicon wafer manufacturing and metrology equipment. Previously, he served as the Business Director for Diversification of Hughes Electronics, Danbury Optical Systems. Mr. Mumola has served as an executive officer of the Company since July 2000. DAVID J. PERSON - AGE 54 - VICE PRESIDENT, HUMAN RESOURCES Mr. Person has served as Vice President, Human Resources since September 1998. Previously, he served in a number of senior human resource management positions with Digital Equipment Corporation from 1972 to September 1998. Mr. Person has served as an executive officer of the Company since September 1998. PATRICK K. TAN - AGE 42 - VICE PRESIDENT, BUSINESS OPERATIONS, ZYGO TERAOPTIX Mr. Tan has served as the Vice President, Business Operations, Zygo TeraOptix since May 2000. Previously, he served as the Vice President of Business Operations of Firefly Technologies, Inc. from 1997 to 2000 and held management and engineering positions at Quantum Corporation from 1994 to 1997. 16 Mr. Tan has served as an executive officer of the Company since May 2000. ROBERT A. SMYTHE - AGE 50 - VICE PRESIDENT, MARKETING Mr. Smythe has served as Vice President, Marketing since April 2002. Previously, he served as Vice President, Engineering from June 1998 to April 2002. From January 1996 to June 1998, he served as Vice President, Sales and Marketing. From June 1993 to January 1996, Mr. Smythe was Director of Sales and Marketing and from April 1992 to June 1993 served as Manager, Industry Marketing. Mr. Smythe has served as an executive officer of the Company since January 1996. CARL A. ZANONI - AGE 61 -SENIOR VICE PRESIDENT, TECHNOLOGY Dr. Zanoni has served as Senior Vice President, Technology since November 2001. Previously, he served as Vice President, Technology from June 1998 to November 2001, and Vice President, Research, Development and Engineering from April 1992 to June 1998. Dr. Zanoni is a cofounder of the Company and has served as an executive officer since its inception in 1970. He is also a director of the Company. Of the above executive officers, Mr. Robinson, Mr. Berg, and Dr. Zanoni are directors of the Company. Under the By-laws, executive officers serve for a term of one year and until their successors are chosen and qualified unless earlier removed. 17 ITEM 2. PROPERTIES The Company's principal manufacturing facilities are located in Middlefield, Connecticut and Westborough, Massachusetts. The Corporate headquarters is located on Laurel Brook Road in Middlefield, Connecticut. The Middlefield facility consists of one 135,500-square-foot building on approximately 13 acres.
SQUARE FOOTAGE ------------------------------ OWNED / LEASED OPERATION/LOCATION MANUFACTURING TOTAL EXPIRATION DATE ------------------ ------------- ----- --------------- CORPORATE HEADQUARTERS, EASTERN REGIONAL SALES OFFICE, AND INSTRUMENT AND OPTICS MANUFACTURING Middlefield, Connecticut 80,000 135,500 Owned ZYGO TERAAUTOMATION Delray Beach, Florida 6,000 10,343 Leased - 07/31/04 ZYGO TERAOPTIX Westborough, Massachusetts 95,075 118,575 Owned ZYGO - LASER TECHNOLOGY (R&D) Watsonville, California 0 1,452 Leased - 04/14/05 OPTO-MECHANICAL ASSEMBLY Tucson, Arizona 14,560 22,560 Leased - 08/31/06 WESTERN REGIONAL SALES OFFICE AND R&D CENTER Sunnyvale, California 0 20,000 Leased - 10/31/03 R&D CENTER Simi Valley, California 0 6,290 Leased - 12/14/05 ZYGO - PACIFIC RIM SALES OFFICE Singapore 0 2,350 Leased - 01/01/03 ZYGOLOT Damstad, Germany 0 1,296 Leased - 10/01/04 ZYGO KK Japan 0 1,775 Leased - 10/31/03 PROPERTIES UNOCCUPIED OR LEASED TO OTHERS Longmont, Colorado 0 32,000 Leased - 05/31/06 Newbury Park, California 0 12,240 Leased - 02/02/03 Asslar, Germany 0 4,000 Leased - 08/31/03 ------- ------- Total 195,635 368,381 ======= =======
18 ITEM 3. LEGAL PROCEEDINGS From time to time, we are subject to certain legal proceedings and claims that arise in the normal course of our business. In the opinion of management, we are not party to any litigation that we believe could have a material effect on our business or us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common shares are traded over-the-counter and are quoted on the NASDAQ/National Market under the symbol "ZIGO". Market price data for 2002 and 2001 is as follows:
FISCAL YEAR ENDED JUNE 30, 2002 FISCAL YEAR ENDED JUNE 30, 2001 ------------------------------- ------------------------------- High Low High Low ---- --- ---- --- First quarter $22 $8 7/10 $93 15/16 $53 3/4 Second quarter $19 17/20 $9 3/4 $76 1/8 $21 15/16 Third quarter $18 $11 1/10 $48 3/4 $15 7/16 Fourth quarter $18 $6 4/5 $38 1/25 $16 5/16
The number of record holders of our common stock at June 30, 2002 was 483. The Company has never declared or paid a cash dividend on its capital stock. The Company currently intends to retain all its earnings to finance the expansion and development of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and with the Company's Consolidated Financial Statements and notes thereto included elsewhere in this form 10-K405.
(Dollars in thousands, except for share, per share, and ratio amounts) Fiscal Year Ended June 30, ------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net Sales ............................................. $84,426 $133,250 $87,243 $63,382 $99,084 Gross Profit .......................................... $24,796 (1) $61,169 $32,555 (1) $22,385 $41,449 % of sales ...................................... 29% 46% 37% 35% 42% (Loss) earnings before taxes and nonrecurring items ... ($22,111)(1) $14,113 $7,256 (1) ($6,851) $12,940 (1) % of sales ...................................... (26%) 11% 8% (11%) 13% (Loss) earnings before nonrecurring items ............. ($13,889)(1) $10,659 $4,797 (1) ($3,876) $8,949 (1) % of sales ...................................... (16%) 8% 5% (6%) 9% (Loss) earnings per share before nonrecurring items Basic ........................................... ($0.80)(1) $0.69 $0.38 (1) ($0.33) $0.78 (1) Diluted ......................................... ($0.80)(1) $0.66 $0.34 (1) ($0.33) $0.69 (1) Net (loss) earnings ................................... ($11,733) $10,659 ($16,047) ($3,876) $7,029 Net (loss) earnings per common share: Basic .............................................. ($0.67) $0.69 ($1.28) ($0.33) $0.61 Diluted ............................................ ($0.67) $0.66 ($1.28) ($0.33) $0.55 Weighted average number of shares: Basic (2) .......................................... 17,414 15,398 12,511 11,780 11,480 Diluted (2) ........................................ 17,414 16,063 12,511 11,780 12,877 Research and development .............................. $21,346 $17,673 $11,270 (1) $9,185 $9,844 Capital expenditures .................................. $17,640 $33,050 $6,513 $4,372 $9,126 Depreciation and amortization ......................... $7,251 $3,996 $11,318 (1) $4,448 $3,412 June 30, ------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Working capital ....................................... $73,931 $94,112 $56,550 $43,766 $50,246 Current ratio ......................................... 5.7 4.8 4.5 4.8 4.1 Total assets .......................................... $169,201 $186,832 $95,162 $82,442 $91,444 Long-term debt (excluding current portion) ............ $11,374 $12,281 $84 $36 $65 Stockholders' equity .................................. $140,005 $149,139 $78,229 $68,712 $72,391 Price-earnings ratio .................................. N/A 33.7 N/A N/A 26.9 Number of employees at year end ....................... 537 648 486 444 466 Sales per employee - average .......................... $157 $206 $179 $143 $213 Book value per common share ........................... $7.99 $8.48 $5.50 $6.16 $6.60 Market price per common share at year-end ............. $8.050 $22.250 $90.813 $11.438 $14.813
- ---------- (1) Nonrecurring items include the gain on sale of the Automation Systems Group of $6,142 and related exit costs of $1,856, inventory write-downs of $808, and tax expense of $1,322 in the second quarter ended December 30, 2001; acquisition-related charges of $14,001 and $1,585, in the fourth quarter ended June 30, 2000, and in the first quarter ended September 30, 1997, respectively; West Coast operations reorganization costs of $10,567 in the fourth quarter ended June 30, 2000; and failed merger costs of $335, in the first quarter ended September 30, 1997. (2) The difference between basic shares outstanding and diluted shares outstanding is the assumed conversion of common stock equivalents (stock options) in the amounts of 0, 665, 0, 0, and 1,397, in the years ended June 30, 2002, 2001, 2000, 1999, and 1998, respectively. Accounting principles generally accepted in the United States of America require the computation of the net loss per share to be based on the weighted average basic shares outstanding. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, warranty obligations, income taxes, and long-lived assets. Management bases its estimates and judgments on historical experience 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. The Company considers certain accounting policies related to revenue recognition and allowance for doubtful accounts, inventory valuation, warranty costs, accounting for incomes taxes, and valuation of long-lived assets to be critical policies due to the estimates and judgments involved in each. REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company recognizes revenue based on guidance provided in Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, there is no significant risk pertaining to customer acceptance, our price is fixed or determinable, and collectibility is reasonably assured. The Company maintains an allowance for doubtful accounts based on a continuous review of customer accounts, payment patterns, and specific collection issues. We perform on-going credit evaluations of our customers and do not require collateral from our customers. For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before a shipment is made. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required. INVENTORY VALUATION Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. Management evaluates the need to record adjustments for impairment of inventory on a monthly basis. The Company's policy is to assess the valuation of all inventories, including raw materials, work-in-process, and finished goods. Obsolete inventory or inventory in excess of management's estimated usage is written-down to its estimated market value, if less than its cost. Contracts with fixed prices are evaluated to determine if estimated total costs will exceed revenues. A loss provision is recorded when the judgement is made that actual costs incurred plus estimated costs remaining to be incurred will exceed total revenues from the contract. Inherent in the estimates of market value are management's estimates related to current economic trends, future demand for the Company's products, and technological obsolescence. Significant management judgments must be made when establishing the reserve for obsolete and excess inventory and losses on contracts. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. WARRANTY COSTS The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company considers historical warranty costs actually incurred to establish the warranty liability. 21 Should actual costs differ from management's estimates, revisions to the estimated warranty liability would be required. ACCOUNTING FOR INCOME TAXES Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to an estimated amount based on historical and forecasted results. While management has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event management were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should management determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, and deductibility of certain costs and expenses by jurisdiction. VALUATION OF LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment. Some factors we consider important, which could trigger the impairment review, include a significant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, a significant adverse change in the business climate that could affect the value of an asset, and an accumulation of costs for an asset in excess of the amount originally expected. If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the assets and comparing that value to the carrying value of the assets. If the carrying value of the asset is greater than the estimated future cash flows, the asset is written down to the estimated fair value. We determine the estimated fair value of the assets on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Our cash flow estimates contain management's best estimates, using appropriate and customary assumptions and projections at the time. 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. RESULTS OF OPERATIONS FISCAL 2002 COMPARED TO FISCAL 2001 On December 12, 2001, the Company sold its Automation Systems Group in Longmont, Colorado, to Brooks Automation, Inc. of Chelmsford, Massachusetts, in a cash transaction, for $12,165,000. 22 Substantially all of the assets were sold to Brooks and substantially all of the liabilities were assumed by Brooks. The gain on the sale was $6,142,000 before related exit costs of $1,856,000 to be paid from the proceeds, inventory write-downs of $808,000, and tax expense of $1,322,000. Net sales of $84,426,000 for fiscal 2002 decreased by $48,824,000, or 37%, from fiscal 2001 net sales of $133,250,000. For fiscal 2002, net sales in the semiconductor segment were $37,483,000, or 44% of total net sales, as compared to $84,561,000, or 64%, in the prior year period; net sales in the industrial segment were $40,336,000, or 48% of total net sales, as compared to $35,178,000, or 26%, in the prior year period; and net sales in the telecommunications segment were $6,607,000, or 8% of total net sales, as compared to $13,511,000, or 10%, in the prior year period. The decrease in sales is primarily due to a decrease in units sold, reflecting the downturn in the semiconductor and telecommunications industries. Company sales to the Americas, primarily the United States, amounted to $41,040,000 in fiscal 2002, a decrease of $27,259,000, or 40%, from fiscal 2001 levels of $68,299,000. The Company's sales to outside the Americas amounted to $43,386,000 in fiscal 2002, a decrease of $21,565,000, or 33%, from fiscal 2001 levels of $64,951,000. Sales to Japan during fiscal 2002 amounted to $21,268,000, a decrease of $23,926,000, or 53%, from fiscal 2001 sales levels. Sales to Europe/Other, primarily Europe, amounted to $14,064,000, an increase of $1,730,000, or 14%, from fiscal 2001. Sales to the Pacific Rim, excluding Japan, amounted to $8,054,000, an increase of $631,000, or 9%, from 2001 sales levels. Substantially all of the Company's sales and costs are negotiated and paid in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of the Company's products in its export markets, as would changes in the general economic conditions in those markets. The impact of such changes in foreign currency values on the Company's sales cannot be measured. Gross profit in fiscal 2002 amounted to $24,796,000 (including $808,000 of inventory write-downs related to the sale of the Automation Systems Group in Longmont, Colorado to Brooks Automation, Inc. in December 2001), a decrease of $36,373,000, or 59%, from gross profit of $61,169,000 in fiscal 2001. Gross profit as a percentage of sales in fiscal 2002 was 29%, as compared to 46% in fiscal 2001. The decrease in gross profit and gross profit as a percentage of sales were primarily due to lower production volumes. Selling, general and administrative expenses ("SG&A") in fiscal 2002 amounted to $25,173,000, a decrease of $3,946,000, or 14%, from fiscal 2001. SG&A as a percentage of net sales in fiscal 2002 was 30%, as compared to 22% in fiscal 2001. The decrease in SG&A for fiscal 2002 resulted from lower incentive compensation costs due to lower sales volumes and net losses for fiscal 2002. Research, development and engineering expenses ("R&D") in fiscal 2002 totaled $21,346,000 and increased by $3,673,000, or 21%, from fiscal 2001. R&D as a percentage of net sales in fiscal 2002 was 25%, as compared to 13% in fiscal 2001. This increase was primarily due to the continued investment in the semiconductor segment, primarily in the motion measurement product line, through the first three quarters of fiscal 2002. Amortization expense of $963,000 for fiscal 2002 increased by $166,000, or 21%, from fiscal 2001 levels of $797,000. The Company's operating loss in fiscal 2002 was $24,542,000 (including $1,856,000 of exit costs and $808,000 of inventory write-downs related to the sale of the Automation Systems Group in Longmont, Colorado), as compared to an operating profit of $13,580,000 in fiscal 2001. Operating loss as a 23 percentage of sales in fiscal 2002 was 29%, as compared to the operating profit as a percentage of sales of 10% in fiscal 2001. Income tax benefit in fiscal 2002 totaled $6,900,000, or 38% of pretax losses, which compares with income tax expense of $3,454,000, or 24% of pretax profits, in fiscal 2001. The change in the effective tax rate is primarily due to the impact of transactions involving the early sale of stock resulting from the exercise of incentive stock options by former employees of Firefly (renamed Zygo TeraOptix), and changes in the valuation for certain state tax carryforwards. The Company recorded a net loss for fiscal year 2002 of $11,733,000, or $.67 loss per share, as compared to a net profit of $10,659,000, or $.66 on a diluted per share basis, during fiscal 2001. Excluding the gain on sale of the Automation Systems Group in Longmont, Colorado of $6,142,000 and related exit costs ($1,856,000), inventory write-downs ($808,000), and tax expense ($1,322,000), the net loss was $13,889,000, or $.80 on a diluted per share basis, for fiscal year 2002. The basic and diluted weighted average number of shares outstanding for the fiscal year ended June 30, 2002 were 17,414,000 as compared to 15,398,000 basic shares and 16,063,000 fully diluted shares for the fiscal year ended June 30, 2001. The increase in the number of shares outstanding was primarily due to the 2,925,000 shares issued in March 2001 in the secondary offering of the Company's common stock. Backlog at June 30, 2002 was $47,129,000, a decrease of $6,768,000, or 13%, as compared to $53,897,000 (excluding backlog from the Automation Systems Group in Longmont, Colorado) at June 30, 2001. The year-end fiscal 2002 backlog consisted of $21,983,000, or 47%, in the semiconductor segment, $15,700,000, or 33%, in the industrial segment, and $9,446,000, or 20%, in the telecommunications segment. Orders, net of debookings, for the fiscal year ended June 30, 2002 totaled $79,106,000 (including $1,448,000 related to the Automation Systems Group in Longmont, Colorado) and consisted of $27,578,000, or 35%, in the semiconductor segment, $44,287,000, or 56%, in the industrial segment, and $7,241,000, or 9%, in the telecommunications segment. FISCAL 2001 COMPARED TO FISCAL 2000 Net sales of $133,250,000 for fiscal 2001 increased by $46,007,000, or 53%, from fiscal 2000 net sales of $87,243,000. The significant increase in sales was due to increased demand from key markets, specifically increased sales and market share in stage metrology, optical metrology, and macro optics products. For fiscal 2001, net sales in the semiconductor segment were $84,561,000, or 64%, net sales in the industrial segment were $35,178,000, or 26%, and net sales in the telecommunications segment were $13,511,000, or 10%. Company sales to the Americas, primarily the United States, amounted to $68,299,000 in fiscal 2001, an increase of $19,464,000, or 40%, from fiscal 2000 levels of $48,835,000. The Company's sales to outside the Americas amounted to $64,951,000 in fiscal 2001, an increase of $26,543,000, or 69%, from fiscal 2000 levels of $38,408,000. Sales to Japan during fiscal 2001 amounted to $45,194,000, an increase of $27,606,000, or 157%, from fiscal 2000 sales levels. Japan sales reached record levels driven by demand for stage metrology, metrology instrumentation components and systems, and semiconductor and optical storage. Sales to Europe/Other, primarily Europe, amounted to $12,334,000, an increase of $3,228,000, or 35%, from fiscal 2000 due to increased sales in the industrial and semiconductor markets driven by the first full year of operations of the ZygoLOT joint venture. Sales to the Pacific Rim, excluding Japan, amounted to $7,423,000, a decrease of $4,291,000, or 37%, from 2000 sales levels due to reductions in sales in the semiconductor and industrial markets. Substantially all of the Company's 24 sales and costs are negotiated and paid in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of the Company's products in its export markets, as would changes in the general economic conditions in those markets. The impact of such changes in foreign currency values on the Company's sales cannot be measured. Gross profit in fiscal 2001 amounted to $61,169,000, an increase of $28,614,000, or 88%, from gross profit of $32,555,000 in fiscal 2000. Excluding fiscal 2000 nonrecurring charges of $4,214,000, gross profit for fiscal 2001 increased $24,400,000, or 66%. Gross profit as a percentage of sales in fiscal 2001 was 46%, as compared to 37% in fiscal 2000. Excluding nonrecurring charges, fiscal 2000 gross profit as a percentage of net sales was 42%. On a comparable basis, excluding nonrecurring charges for fiscal 2000, the increase in gross profit and gross profit as a percentage of sales were primarily due to the increase in volume and higher productivity resulting from investments in equipment and manufacturing process enhancements. Selling, general and administrative expenses ("SG&A") in fiscal 2001 amounted to $29,119,000, an increase of $10,615,000, or 57%, from fiscal 2000. As a percentage of net sales, SG&A has remained relatively constant at approximately 22%. The increase in fiscal 2001 resulted from increased commissions and incentive compensation costs resulting from higher sales and profit and increased administrative costs due to one new location that opened during the year, three locations which opened last fiscal year that now have been operating for a full year, and higher professional fees. During fiscal 2000, the Company recorded a $1,000,000 credit to SG&A as a result of a legal settlement. Research, development and engineering expenses ("R&D") in fiscal 2001 totaled $17,673,000 and increased by $6,403,000, or 57%. Excluding fiscal 2000 nonrecurring charges of $875,000, fiscal 2001 R&D costs increased $7,278,000, or 70%. R&D as a percentage of net sales has remained relatively constant at approximately 13%. The Company continues to invest in technology to enhance its position in the marketplace. R&D was driven by investments in next generation lithography product requirements and investments to broaden our customer base into automotive and telecommunications. The Company did not record any nonrecurring charges in fiscal 2001. The Company recorded nonrecurring charges in the amount of $24,568,000 in fiscal 2000. The Company recorded nonrecurring charges of $14,001,000 as a result of the acquisition of Firefly Technologies, Inc., which became Zygo TeraOptix, Inc. ("Zygo TeraOptix"). The nonrecurring charge from the acquisition consisted of $12,024,000 for compensation expense resulting from the difference in the Firefly stock option exercise price and the deemed fair market value on the date of grant for financial statement purposes and $1,977,000 for the payment of professional fees related to the transaction. In 2000, the Company recorded a charge of $10,567,000 as a result of its reorganization of its West Coast operations, principally for the write off of goodwill and inventory. Amortization expense of $797,000 for fiscal 2001 decreased by $6,305,000, or 89%, from fiscal 2000 levels of $7,102,000. Substantially all of the decrease is associated with the West Coast operations write-off of goodwill and other intangible assets in fiscal 2000. The Company's operating profit in fiscal 2001 was $13,580,000, an increase of $31,902,000 from the operating loss of $18,322,000. Excluding fiscal 2000 nonrecurring charges of $24,568,000, operating profit for fiscal 2001 increased $7,334,000. Operating profit as a percentage of sales in fiscal 2001 was 10%, as compared to the operating loss as a percentage of sales of 21% in fiscal 2000. Excluding nonrecurring charges, fiscal 2000 operating profit as a percentage of sales was 7%. 25 Income tax expense in fiscal 2001 totaled $3,454,000, or 24% of pretax profits, which compares with income tax benefit of $1,459,000, or 8% of pretax losses, in fiscal 2000. The effective tax rate of 24% versus the combined federal and state statutory rate of 39% in fiscal 2001 is primarily due to the impact of transactions involving the early sale of stock resulting from the exercise of incentive stock options by former employees of Firefly (renamed Zygo TeraOptix). The effective tax rate of 8% versus the combined statutory rate of 39% in fiscal 2001 was primarily due to the tax benefits related to expenses that could not be recorded as a charge to earnings for financial statement purposes associated with the compensation charge in connection with the Firefly acquisition. The Company recorded net earnings for fiscal year 2001 of $10,659,000, or $.66 on a diluted per share basis, as compared to a net loss of $16,047,000, or $1.28 loss per share, during fiscal 2000. Excluding nonrecurring charges for fiscal year 2000, net earnings were $4,797,000, or $.34 on a diluted per share basis. The diluted weighted average number of shares outstanding at June 30, 2001 was 16,063,000, an increase of 3,552,000 as compared to 12,511,000 at June 30, 2000. The increase is due to the shares related to the secondary offering and the impact of stock options offset by the repurchase of shares from two officers and directors. Backlog at June 30, 2001 was $55,502,000, an increase of $9,559,000, or 21%, as compared to $45,943,000 at June 30, 2000. The year-end fiscal 2001 backlog consisted of $11,206,000, or 20%, in the semiconductor segment, $31,689,000, or 57%, in the industrial segment, and $12,607,000, or 23%, in the telecommunications segment. The backlog decreased $14,851,000 between the third and fourth quarters due to the slowdown in the semiconductor and telecommunications markets. Orders for fourth quarter fiscal 2001 totaled $23,019,000 and consisted of $17,308,000, or 75%, in the semiconductor segment, $7,711,000, or 34%, in the industrial segment, and net debooking of $2,000,000, or (9%), in the telecommunications segment. The net debooking in the telecommunications segment was primarily due to cancellations of orders totaling $8,806,000 from two major customers due to market conditions. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, working capital was $73,931,000, a decrease of $20,181,000 from the $94,112,000 at June 30, 2001. The Company maintained cash, cash equivalents, and marketable securities (excluding restricted cash of $1,225,000) at June 30, 2002 totaling $37,247,000, a decrease of $22,504,000 from June 30, 2001. Excluding the cash received from the sale of the Automation Systems Group of $10,949,000 (net of escrow of $1,216,000) there would have been a decrease of $33,453,000 during the year ended June 30, 2002. Marketable securities are invested primarily in securities with maturity dates ranging from fiscal 2003 to fiscal 2006. The decrease in working capital was due to the operating loss, decreases in accounts payable and accrued expenses and progress payments, and investments in property, plant, and equipment, partially offset by a decrease in receivables (in all cases, after excluding the Automation Systems Group assets and liabilities from the June 30, 2001 balance sheet which were transferred to Brooks Automation, Inc.). The decrease in accrued expenses was due to payments of profit sharing and other incentive compensation liabilities that existed at June 30, 2001. Due to the current year net loss, similar liabilities did not exist as of June 30, 2002. The investments in property, plant, and equipment are primarily due to investments in optical equipment ($4,959,000) and the completion of the TeraOptix facility in Westborough, Massachusetts ($7,657,000). There were no borrowings outstanding under the Company's $3,000,000 bank line of credit at fiscal year-end 2002. Stockholders' equity at June 30, 2002 decreased by $9,134,000 from the year earlier to $140,005,000, primarily due to 2002 net loss. The Company incurred significant losses from its telecommunications segment and there is very little visibility as to when a healthy telecommunications market will occur. Management is reviewing various options to reduce the effect of its ongoing negative impact on the financial results. The Company's short 26 term liquidity at June 30, 2002 was adequate for its requirements and the Company expects that available cash and its existing credit facility will be sufficient to meet normal operating requirements over the near term. RISK FACTORS THAT MAY IMPACT FUTURE RESULTS INDUSTRY CONCENTRATION AND CYCLICALITY ZYGO's business is significantly dependent on capital expenditures and component requirements for manufacturers in the semiconductor and telecommunications industries. These industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products manufactured and marketed by us. For the foreseeable future, our operations will continue to be dependent on the capital expenditures in these industries which, in turn, is largely dependent on the market demand in the semiconductor, industrial, and telecommunications markets. The overall economy continues to be in a low growth period, which could have a significant impact on the Company's near-term financial results, as customer demand remains stagnant. During the fourth quarter of 2002, the Company showed a slight increase in orders over the average of the previous three quarters. The increase was due to an increase in the industrial segment. The semiconductor and telecommunications segments continue to be adversely affected by the current economic conditions. ZYGO's net sales and results of operations will be materially adversely affected if downturns or slowdowns in the markets in which we serve extend significantly into the future. RISKS ASSOCIATED WITH ACQUISITIONS ZYGO's growth strategy includes expanding our products and services, and we may seek acquisitions to expand our business. We regularly review potential acquisitions of businesses, technologies or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. Acquisitions involve numerous risks, including some or all of the following: substantial cash expenditures; potentially dilutive issuance of equity securities; incurrence of debt and contingent liabilities; amortization of certain intangible assets; difficulties in assimilating the operations and products of the acquired companies; diverting our management's attention away from other business concerns; risks of entering markets in which we have limited or no direct experience; the inability to manage the growth expected for various acquisitions; and potential loss of key employees of the acquired companies in the process of integrating personnel with disparate business backgrounds; and combining different corporate cultures. We cannot assure you that any acquisition will result in long-term benefits to us or that our management will be able to effectively manage the acquired businesses. We may also incorrectly judge the value or worth of an acquired company or business. Furthermore, the development or expansion of our business or any acquired business may require substantial capital investment. We may not have the necessary funds nor may they be readily available to us on acceptable terms or at all. MANUFACTURING CAPACITY We have recently built and financed a new facility in Westborough, Massachusetts for our Zygo TeraOptix operation, providing us with significantly more micro-optics manufacturing capacity. To the extent our micro-optics business continues to not grow as quickly as we had expected, our new manufacturing facility might in part represent excess capacity for which we may not recover the cost. In that circumstance, our revenues may be inadequate to support our committed costs and our planned growth, and our profitability and business results would suffer. 27 CUSTOMER CONCENTRATION; RELATIONSHIP WITH CANON During fiscal 2002, 2001, and 2000, sales to Canon Inc. and Canon Sales Co., Inc. (collectively, "Canon"), ZYGO's largest customer in those periods, accounted for 21%, 33%, and 19% of our net sales, respectively. We expect that sales to Canon, an original investor in ZYGO which owns approximately 7% of ZYGO's outstanding shares of common stock and is a distributor of certain ZYGO products in the Japanese market, will continue to represent a significant percentage of our net sales for the foreseeable future. Our customers generally do not enter into long-term agreements obligating them to purchase ZYGO's products. A reduction or delay in orders from this customer, including reductions or delays due to market, economic, or competitive conditions in the industries in which we serve, could have a material adverse effect upon ZYGO's results of operations. QUARTERLY FLUCTUATIONS ZYGO's quarterly and annual operating results have varied in the past and may in the future vary significantly depending on factors such as: the effect of our acquisitions and consequent integration; the size, timing and recognition of revenue from significant orders; increased competition; our ability to develop innovative products; the timing of new product releases by us or our competitors; market acceptance of our products; changes in our and our competitors' pricing policies; budgeting cycles of our customers; changes in operating expenses and personnel changes; changes in our business strategy; and general economic factors. Due to these and other factors we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for one quarter as any indication of our future performance. In future periods our operating results may be below the expectations of public market analysts or investors. If this occurs, the price of our common stock would likely decrease. Current conditions in the domestic and global economies are extremely uncertain. As a result, it is difficult to estimate the level of growth for the economy as a whole or of capital expenditures in the semiconductor, industrial and telecommunications markets. Because all of the components of the Company's budgeting and forecasting are dependent on estimates of spending within these markets, the prevailing economic uncertainty renders estimates of future revenue and expenses even more difficult than usual to make. POSSIBLE VOLATILITY OF STOCK PRICE ZYGO believes that factors such as the announcement of new products or technologies by ZYGO or our competitors, market conditions in the semiconductor, industrial, and telecommunications markets, and quarterly fluctuations in financial results are expected to cause the market price of the common stock to vary substantially. Further, our net sales or results of operations in future quarters may be below the expectations of public market securities analysts and investors. In such event, the price of the common stock would likely decline. In addition, historically the stock market has experienced price and volume fluctuations that have particularly affected the market prices for many high technology companies and which often have been unrelated to the operating performance of such companies. The market volatility may adversely affect the market price of the shares of ZYGO's common stock. COMPETITION ZYGO faces competition from a number of companies in all its markets, some of which have greater manufacturing and marketing capabilities, and greater financial, technological, and personnel resources. In addition, we compete with the internal development efforts of our current and prospective customers, some of which may attempt to become vertically integrated. ZYGO's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with 28 competitive price/performance characteristics. Competitive pressures may necessitate price reductions, which can adversely affect results of operations. Although we believe that we have certain technical and other advantages over some of our competitors, maintaining such advantages will require a continued high level of investment by ZYGO in research and development and sales, marketing, and service. There can be no assurance that we will have sufficient resources to continue to make such investments or that we will be able to make the technological advances necessary to maintain such competitive advantages. In addition, there can be no assurance that the bases of competition in the industries in which ZYGO competes will not shift. TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT The market for ZYGO's products is characterized by rapidly changing technology. Our future success will continue to depend upon our ability to enhance our current products and to develop and introduce new products that keep pace with technological developments and evolving industry standards, respond to changes in customer requirements, and achieve market acceptance. The development of new technologically advanced products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. ZYGO commits significant financial and personnel resources on a continuous basis to redesign and enhance its instruments, systems, and components and upgrade its proprietary software technology incorporated in its products. Any failure by us to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on ZYGO's business and impact our close relationships with customers. This could have an impact on customers' willingness to share proprietary information about their requirements and participate in collaborative efforts with us. There can be no assurance that our customers will continue to provide us with timely access to such information, that we will be successful in developing and marketing new products and services or product and service enhancements on a timely basis, or respond effectively to technological changes or new product announcements by others. In addition, there can be no assurance the new products and services or product enhancements, if any, developed by ZYGO will achieve market acceptance. DEPENDENCE ON PROPRIETARY TECHNOLOGY ZYGO's success is heavily dependent upon its proprietary technology. There can be no assurance that the steps taken by us to protect our proprietary technology will be adequate to prevent misappropriation of our technology by third parties or will be adequate under the laws of some foreign countries, which may not protect our proprietary rights to the same extent as do laws of the United States. In addition, there remains the possibility that others will "reverse engineer" our products in order to determine their method of operation and introduce competing products or that others will develop competing technology independently. Any such adverse circumstances could have a material adverse effect on our results of operations. Some of the markets in which we compete are characterized by the existence of a large number of patents and frequent litigation for financial gain that is based on patents with broad, and often questionable, application. As the number of our products increase, the markets in which our products are sold expands, and the functionality of those products grows and overlaps with products offered by competitors, we believe that ZYGO may become increasingly subject to infringement claims. Although we do not believe any of our products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against ZYGO in the future or that any such claim will not result in costly litigation or require us to enter into royalty arrangements, which may not be available to us on commercially acceptable terms if at all. 29 DEPENDENCE ON KEY PERSONNEL ZYGO's success depends in large part upon the continued services of many of our highly skilled personnel involved in management, research, development and engineering, sales and marketing, manufacturing, and support and upon our ability to attract and retain additional highly qualified employees. Our employees may voluntarily terminate their employment with us at any time. Competition for these individuals from a variety of employers, including our competitors and companies in computer or technology-related industries, is intense. We cannot assure you that we will be able to retain our existing personnel or attract and retain additional personnel. DEPENDENCE ON THIRD-PARTY SUPPLIERS ZYGO is dependent on suppliers for raw materials and various electrical, mechanical, and optical supplies, including fiber and electronic components and modules. If any relationship with a key supplier is terminated or if a supplier fails or is unable to provide reliable services or equipment and we are unable to reach suitable alternative solutions quickly, we may experience significant delays and additional costs in the manufacturing of our products. If our key suppliers cease manufacturing the supplies we require, if their manufacturing operations are interrupted for any significant amount of time, or if they are unwilling to supply us for any other reason, including capacity restraints, then we may be at least temporarily unable to obtain these supplies, thus exposing us to significant delays and additional costs. Currently there are only a limited number of companies that are capable of supplying optical materials in the quantity and of the quality we require. Although we enter, either directly or through our contract manufacturers, into purchase orders with our suppliers based on our forecasts, we do not have any guaranteed supply arrangements with these suppliers. Moreover, as our demand for supplies increases, we may not be able to obtain these supplies in a timely manner. If we are unable to obtain, either directly or through contract manufacturers, a sufficient amount of supplies, or if we experience any interruption in delivery of supplies, we could experience difficulties in obtaining alternative sources or in altering product designs to use alternative supplies. REVENUES DERIVED FROM INTERNATIONAL SALES AND FOREIGN OPERATIONS We sell our products internationally, primarily to customers in Japan and throughout the Pacific Rim. Net sales to customers outside the Americas (primarily the United States) accounted for 51%, 49%, and 44% of our net sales in each of the fiscal years ended June 30, 2002, 2001, and 2000, respectively, and are expected to continue to account for a substantial percentage of our net sales. International sales and foreign operations are subject to inherent risks, including the economic conditions in these various foreign countries and their trading partners, political instability, longer payment cycles, greater difficulty in accounts receivable collection, compliance with foreign laws, changes in regulatory requirements, tariffs or other barriers, difficulties in obtaining export licenses, staffing and managing foreign operations, exposure to currency exchange fluctuations, transportation delays, and potentially adverse tax consequences. Substantially all ZYGO's sales and costs are negotiated and paid in U.S. dollars. However, changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive to the extent locally produced alternative products are available. Such conditions could negatively impact international sales of our products and foreign operations, as would changes in the general economic conditions in those markets. There can be no assurance that risks inherent in international sales and foreign operations will not have a material adverse effect on ZYGO in the future. 30 BACKLOG ZYGO schedules the production of its systems based in part upon order backlog. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. There can be no assurance that amounts included in backlog will ultimately result in future sales. A reduction in backlog during any particular period, or the failure of our backlog to result in future sales could adversely affect our results of operations. The Company has recently experienced a significant decrease in backlog primarily due to the slowdown in the semiconductor and telecommunications markets, and net debookings in the telecommunications segment, primarily due to order cancellations. SALES CYCLE ZYGO's lengthy and variable qualification and sales cycle makes it difficult to predict the timing of a sale or whether a sale will be made, which may cause us to have excess manufacturing capacity or inventory and negatively impact our operating results. As is typical in the industry, our customers generally expend significant efforts in evaluating and qualifying our products and manufacturing process. This evaluation and qualification process frequently results in a lengthy sales cycle, typically ranging from three to six months and sometimes longer. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales, marketing and research and development expenses, expend significant management efforts, increase manufacturing capacity and order long-lead-time supplies prior to receiving an order. Even after this evaluation process, it is possible that a potential customer will not purchase our products. In addition, product purchases are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for which our products represent a very small percentage of their overall purchase activity. If we increase capacity and order supplies in anticipation of an order that does not materialize, our gross margins will decline and we will have to carry or write off excess inventory. Even if we receive an order, the additional manufacturing capacity that we add to service the customer's requirements may be underutilized in a subsequent quarter. Either situation could cause our results of operations to be below the expectations of investors and public market analysts, which would, in turn, cause the price of our stock to decline. Our long sales cycles, as well as the practice of companies in the telecommunications industry to sporadically place large orders with short lead times, may cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter. 31 PREDICTION OF MANUFACTURING REQUIREMENTS If we fail to predict our manufacturing requirements accurately, we could incur additional costs or experience manufacturing delays, which could cause us to lose orders or customers and result in lower net sales. We currently use a rolling 12-month forecast based primarily on our anticipated product orders and, in the telecommunications field, our limited product order history to help determine our requirements for components and materials. It is very important that we accurately predict both the demand for our products and the lead-time required to obtain the necessary components and raw materials. Lead times for materials and components that we order vary significantly and depend on factors such as the specific supplier, the size of the order, contract terms, and demand for each component at a given time. If we underestimate our requirements, we may have inadequate manufacturing capacity or inventory, which could interrupt manufacturing of our products and result in delays in shipments and net sales. If we overestimate our requirements, we could have excess inventory of parts. We also may experience shortages of components from time to time, which also could delay the manufacturing of our products and could cause us to lose orders or customers. UNDETECTED PRODUCT DEFECTS ZYGO's products are deployed in large and complex systems and may contain defects that are not detected until after our products have been installed, which could damage our reputation and cause us to lose customers. We design some of our products for deployment in large and complex optical networks. Because of the nature of these products, they can only be fully tested for reliability when deployed in networks for long periods of time. Our fiber optic products may contain undetected defects when first introduced or as new versions are released, and our customers may discover defects in our products only after they have been fully deployed and operated under peak stress conditions. In addition, our products are combined with products from other vendors. As a result, should problems occur, it might be difficult to identify the source of the problem. These conditions increase the risk that we could experience, among other things: loss of customers; damage to our brand reputation; failure to attract new customers or achieve market acceptance; diversion of development and engineering resources; and legal actions by our customers. The occurrence of any one or more of the foregoing factors could cause us to experience losses, incur liabilities, and cause our net sales to decline. ENVIRONMENTAL REGULATIONS Environmental regulations applicable to ZYGO's manufacturing operations could limit our ability to expand or subject us to substantial costs. We are subject to a variety of environmental regulations relating to the use, storage, discharge, and disposal of hazardous chemicals used during our manufacturing processes. Any failure by us to comply with present and future regulations could subject us to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" which addresses the financial accounting and reporting for business combinations and supercedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires that all business combinations be accounted for by a single method, the purchase method, modifies the criteria for recognizing intangible assets, and expands disclosure requirements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material effect on our results of operations or statements of financial position. 32 In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. SFAS No. 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. In addition, SFAS No. 142 expands the disclosure requirements for goodwill and other intangible assets in the years subsequent to their acquisition. SFAS No. 142 is effective for our fiscal year 2003. Impairment losses for goodwill and indefinite-life intangible assets that arise due to the initial application of SFAS No. 142 are to be reported as resulting from a change in accounting principles. However, goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to provisions of SFAS No. 142. Management is currently assessing the impact that SFAS No. 142 will have on our results of operations and financial position. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for retirement obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation in the period in which it is incurred. When the retirement obligation is initially recorded, the company also records a corresponding increase to the carrying amount of the related tangible long-lived asset and depreciates that cost over the useful life of the tangible long-lived asset. The retirement obligation is increased at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. Upon settlement of the retirement obligation, the company either settles the retirement obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 with earlier application encouraged. Management is currently assessing the impact that SFAS No. 143 will have on the Company's financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and also affects certain aspects of accounting for discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and certain aspects of APB No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management is currently assessing the impact that SFAS No. 144 will have on the Company's financial position and results of operations. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The adoption of this statement will not have a material impact on the Company's current financial position and results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with the exit or disposal activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability 33 Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to record liabilities for exit or disposal activities in the period in which they are incurred, except for certain types of transactions. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Management is currently assessing the impact that SFAS No. 146 will have on the Company's financial position and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The following discussion about our market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. INTEREST RATE SENSITIVITY We maintain a portfolio of cash equivalents and marketable securities including money market funds, commercial paper, government agency securities, and corporate bonds. Our interest income on our variable rate investments is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are short-term instruments. Due to the short-term nature of our investments, we do not believe that a material risk exposure exists. During fiscal 2001 the company entered into a mortgage on its Westborough facility of $12,560,000 at the interest rate of LIBOR (1.8% at June 30, 2002) which is payable in full in May 2007. In addition to the normal fluctuations in LIBOR, the interest rate can increase during the life of the mortgage by up to 250 basis points depending on the Company's performance against a debt ratio. In conjunction with the mortgage, the Company entered into an interest rate swap agreement that provides for a fixed interest rate of 6% for the duration of the mortgage. In addition, the variable interest rate will continue to be applied to the outstanding mortgage amount. The effective interest rate at June 30, 2002 and 2001 was 8.5% and 7%, respectively. Due to the existence of the swap agreement, we do not believe that a material risk exposure exists. EXCHANGE RATE SENSITIVITY Substantially all of the Company's sales and costs are negotiated and paid in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of the Company's products in its export markets as would changes in the general economic conditions in those markets. The impact of such changes in foreign currency values on the Company's sales cannot be measured. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required pursuant to this Item begin on Page F-1 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for the information concerning executive officers which is set forth in Part I of this Annual Report, information required by this item will be included under the captions "Election of Board of Directors" and "Other Agreements and Other Matters" in the Proxy Statement to be filed pursuant to Regulation 14A for use in connection with the Registrant's 2002 Annual Meeting of Stockholders ("the Proxy Statement") and is herein incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this item will be included in the Proxy Statement under the caption "Executive Compensation" and is herein incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item will be included in the Proxy Statement under the captions "Election of Board of Directors," "Equity Compensation Plan Information," and "Principal Stockholders" and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item will be included in the Proxy Statement under the caption "Certain Relationships and Related Transactions" and is herein incorporated by reference. 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. and 2. Financial Statements and Financial Statement Schedules: An index to the financial statements and financial statement schedules filed is located on page F-1. 3. EXHIBITS 3.(i) Restated Certificate of Incorporation of the Company and amendments thereto (Exhibit 3.(i) to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)* 3.(ii) Certificate of Amendment of Certificate of Incorporation, filed June 3, 1996 (Exhibit 3.(ii) to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1996)* 3.(iii) By-laws of the Company (Exhibit (3)(b) to Registration No. 2-87253 on Form S-1 hereinafter "Registration No. 2-87253")* 10.1 Confidentiality and Non-Competition Agreement dated October 25, 1983, between the Company and Carl A. Zanoni (Exhibit (10)(b) to Registration No. 2-87253)* 10.2 Agreement dated May 27, 1975, between the Company and Canon U.S.A., Inc., regarding information sharing and marketing (Exhibit (10)(x) to Registration No. 2-87253)* 10.3 Agreement dated November 20, 1980, between the Company and Canon Inc. regarding exchange of information (Exhibit (10)(y) to Registration No. 2-87253)* 10.4 Amended and Restated Zygo Corporation Profit Sharing Plan (Exhibit 10.15 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 1995)* 10.5 Canon/Zygo Confidentiality Agreement dated March 7, 1990, between the Company and Canon Inc. regarding confidential technical information received from each other (Exhibit 10.42 to the Company's Annual Report on Form 10-K for its year ended June 30, 1991)* 36 10.6 Services Agreement dated August 26, 1993, between the Company and Paul F. Forman (Exhibit 10.26 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)* 10.7 Amendment Agreement dated as of December 31, 1996, between the Company and Paul F. Forman (Exhibit 10.16 to the Company's Annual Report on Form 10-K for its year ended June 30, 1997)* 10.8 Non-Competition Agreement dated August 26, 1993, between the Company and Paul F. Forman (Exhibit 10.27 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)* 10.9 Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan ratified and approved by the Company's Stockholders on November 19, 1992 (Exhibit 10.30 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)* 10.10 Renewal of Line of Credit dated June 4, 1997, between the Company and Fleet Bank Connecticut, N.A. (Exhibit 10.23 to the Company's Annual Report on Form 10-K for its year ended June 30, 1997)* 10.11 Zygo Corporation Non-Employee Director Stock Option Plan ratified and approved by the Company's stockholders on November 17, 1994 (Exhibit 10.30 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 1996)* 10.12 Subcontract B335188 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated May 9, 1997 (Exhibit 10.31 to the Company's Annual Report on Form 10-K for its year ended June 30, 1997)* 10.13 Agreement between Zygo Corporation and Dacon Corporation covering an addition to the Company's Middlefield, Connecticut, facilities (Project 1774) and the N.I.F. Manufacturing Renovation (Project 1842) dated April 7, 1997 (Exhibit 10.32 to the Company's Annual Report on Form 10-K for its year ended June 30, 1997)* 37 10.14 Employment agreement dated January 15, 1999, between Zygo Corporation and J. Bruce Robinson. (Exhibit 10.34 to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1999)* 10.15 Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan ratified and approved by the Company's stockholders on November 17, 1999. (Exhibit to the Company's Definitive Proxy Statement for its year ended June 30, 1999)* 10.16 Employment agreement dated July 1, 1999, between Zygo Corporation and Brian J. Monti. (Exhibit 10.22 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 2000)* 10.17 Acquisition Agreement dated May 5, 2000, by and among Zygo Corporation, Firefly Technologies Inc., and the Shareholders of Firefly Technologies Inc. (Company's Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)* 10.18 Employment agreement dated May 5, 2000, between Zygo Corporation and John Berg. (Exhibit 10.01(e)(1) to the Company's Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)* 10.19 Employment agreement dated May 5, 2000, between Zygo Corporation and Patrick Tan. (Exhibit 10.01(e)(2) to the Company's Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)* 10.20 Promissory Note to the amended and restated credit agreement dated May 14, 2001, between Zygo Corporation and Fleet National Bank (Exhibit 10.26 to the Company's Annual Report on Form 10K 405 for its year ended June 30, 2001)* 10.21 Amended and restated credit agreement dated May 14, 2001, between Zygo Corporation and Fleet National Bank 10.22 Amended and restated credit agreement dated November 22, 2001 between Zygo Corporation and Fleet National Bank 10.23 Amended and restated credit agreement dated June 26, 2002 between Zygo Corporation and Fleet National Bank 10.24 Subcontract B514527 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated April 14, 2001 10.25 Subcontract B519044 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated January14, 2002 21. Subsidiaries of Registrant 23. Accountants' Consent 24. Power of Attorney 99.1 Certification - ---------- * Incorporated herein by reference. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By /s/ Richard M. Dressler Date September 20, 2002 ----------------------- ------------------ Richard M. Dressler Vice President, Finance, Chief Financial Officer, and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ J. Bruce Robinson Chairman, President, and Chief Date September 20, 2002 - --------------------------- Executive Officer J. Bruce Robinson /s/ Richard M. Dressler Vice President, Finance, Chief Date September 20, 2002 - --------------------------------- Richard M. Dressler Financial Officer, and Treasurer /s/ Carl A. Zanoni Senior Vice President, Technology Date September 20, 2002 - ------------------------------------ and Director Carl A. Zanoni John Berg* President, Zygo TeraOptix - ------------------------------ and Director (John Berg) Paul F. Forman* Director - ----------------------------------- (Paul F. Forman) R. Clark Harris* Director - -------------------------------- (R. Clark Harris) Seymour E. Liebman* Director - ------------------------------- (Seymour E. Liebman) Robert G. McKelvey* Director - -------------------------------- (Robert G. McKelvey) Robert B. Taylor* Director - ------------------------------------- (Robert B. Taylor) Bruce Worster* Director - -------------------------------------- (Bruce Worster) *By /s/ Richard M. Dressler Date September 20, 2002 ----------------------- ------------------ Richard M. Dressler Attorney-in-Fact
39 CERTIFICATION OF DISCLOSURE IN THE REGISTRANT'S ANNUAL REPORT I, J. Bruce Robinson, certify that: 1. I have reviewed this annual report on Form 10-K of Zygo Corporation; 2. Based on my knowledge, this annual 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 annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: September 13, 2002 ------------------ /s/ J. Bruce Robinson --------------------------- J. Bruce Robinson Chairman, President, and Chief Executive Officer 40 CERTIFICATION OF DISCLOSURE IN THE REGISTRANT'S ANNUAL REPORT I, Richard M. Dressler, certify that: 1. I have reviewed this annual report on Form 10-K of Zygo Corporation; 2. Based on my knowledge, this annual 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 annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: September 13, 2002 ------------------ /s/ Richard M. Dressler ---------------------------- Richard M. Dressler Vice President, Finance, Chief Financial Officer 41 ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page - ---- F-2 Report of Management F-3 Report of Independent Auditors F-4 Consolidated balance sheets at June 30, 2002 and 2001 F-5 Consolidated statements of operations for the years ended June 30, 2002, 2001, and 2000 F-6 Consolidated statements of stockholders' equity for the years ended June 30, 2002, 2001, and 2000 F-7 Consolidated statements of cash flows for the years ended June 30, 2002, 2001, and 2000 F-8 to F-24 Notes to consolidated financial statements F-25 Selected consolidated quarterly financial data for the years ended June 30, 2002 and 2001 Consolidated Schedules ---------------------- S-1 Independent Auditors' Report on Schedule II S-2 Schedule II -Valuation and qualifying accounts
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules or the information required is included in the consolidated financial statements or notes thereto. F-1 REPORT OF MANAGEMENT Management is responsible for preparing the Company's consolidated financial statements and related information that appears in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and, accordingly, include some amounts based on management's best judgements and estimates. Financial information in this Annual Report is consistent with that in the consolidated financial statements. The Company maintains a system of internal controls and procedures which provides reasonable assurance, at an appropriate cost/benefit relationship, that assets are safeguarded and that transactions are authorized, recorded, and reported properly. Management believes that the Company's system of internal controls provides reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements and other data and for maintaining accountability for assets. The Audit Committee of the Board of Directors, composed solely of Directors who are not officers or employees of the Company, meets with the independent auditors and financial management periodically to discuss internal accounting controls, auditing and financial reporting matters, and to discharge its responsibilities outlined in its written charter. The Committee reviews with the independent auditors the scope and results of the audit effort. The Committee also meets with the independent auditors without management present to ensure that the independent auditors have free access to the Committee. The independent auditors, KPMG LLP, were recommended by the Audit Committee of the Board of Directors and selected by the Board of Directors. KPMG LLP was engaged to audit the 2002, 2001, and 2000 consolidated financial statements of Zygo Corporation and its subsidiaries and conducted such tests and related procedures as deemed necessary in conformity with auditing standards generally accepted in the United States of America. The opinion of the independent auditors, based upon their audits of the consolidated financial statements, is included in this annual report. Richard M. Dressler Vice President, Finance, Chief Financial Officer, and Treasurer F-2 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ZYGO CORPORATION: We have audited the accompanying consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zygo Corporation and subsidiaries as of June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Hartford, Connecticut August 16, 2002 F-3
CONSOLIDATED BALANCE SHEETS (Thousands of dollars, except share amounts) JUNE 30, 2002 June 30, 2001 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents ......................................... $ 28,513 $ 52,630 Restricted cash ................................................... 1,225 -- Marketable securities (note 3) .................................... 8,734 7,121 Receivables (note 4) .............................................. 21,241 27,278 Inventories (note 5) .............................................. 23,612 24,261 Costs in excess of billings (note 6) .............................. -- 1,802 Prepaid expenses .................................................. 1,444 1,393 Deferred income taxes (note 17) ................................... 4,899 4,076 --------- --------- Total current assets ........................................... 89,668 118,561 --------- --------- Property, plant and equipment, net (notes 7 and 10) .......................... 55,045 47,475 Deferred income taxes (note 17) .............................................. 19,981 15,819 Goodwill and other intangibles, net (notes 8 and 20) ......................... 4,507 4,867 Other assets ................................................................. -- 110 --------- --------- TOTAL ASSETS ................................................................. $ 169,201 $ 186,832 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (note 10) ............................. $ 837 $ 279 Accounts payable ........................................................ 5,020 8,648 Accrued progress payments ............................................... 368 549 Accrued salaries and wages .............................................. 3,451 7,153 Interest rate swap liability (note 10) .................................. 832 -- Other accrued expenses (note 2) ......................................... 4,300 4,688 Income taxes payable .................................................... 929 3,132 --------- --------- Total current liabilities ......................................... 15,737 24,449 --------- --------- Long-term debt (note 10) ..................................................... 11,374 12,281 Other long-term liabilities (note 2) ......................................... 1,115 -- Minority interest ............................................................ 970 963 --------- --------- TOTAL LIABILITIES ............................................................ 29,196 37,693 --------- --------- Commitments (note 11) STOCKHOLDERS' EQUITY (NOTES 13, 14, 15, AND 16): Common stock, $ .10 par value per share: 40,000,000 shares authorized (40,000,000 in 2001); 17,892,564 shares issued (17,803,812 in 2001); 17,445,359 shares outstanding (17,356,607 in 2001) ...................... 1,789 1,780 Additional paid-in capital ................................................ 137,390 134,380 Retained earnings ......................................................... 7,981 19,714 Accumulated other comprehensive income (loss): Currency translation effects ........................................... (1,369) (1,786) Net unrealized gain (loss) on swap agreement (note 10) ................. (515) 31 Net unrealized gain on marketable securities (note 3) .................. 16 37 --------- --------- 145,292 154,156 Less treasury stock, at cost; 447,205 common shares (447,205 shares in 2001) ................................................ 5,287 5,017 --------- --------- Total stockholders' equity ............................................. 140,005 149,139 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $ 169,201 $ 186,832 ========= =========
See accompanying notes to consolidated financial statements. F-4
CONSOLIDATED STATEMENTS OF OPERATIONS (Thousands except per share amounts) Fiscal Year Ended June 30, ----------------------------------- 2002 2001 2000 --------- --------- --------- Net sales (notes 18 and 19) ........................... $ 84,426 $ 133,250 $ 87,243 Cost of goods sold .................................... 59,630 72,081 54,688 --------- --------- --------- Gross profit .................................... 24,796 61,169 32,555 Selling, general and administrative expenses .......... 25,173 29,119 18,504 Research and development .............................. 21,346 17,673 11,270 Nonrecurring acquisition-related charges .............. -- -- 14,001 Amortization and impairment of goodwill and other intangibles (note 2) ..................... 963 797 7,102 Automation Systems Group exit costs (note 2) .......... 1,856 -- -- --------- --------- --------- Operating (loss) profit ......................... (24,542) 13,580 (18,322) --------- --------- --------- Gain on sale of Automation Systems Group (note 2) ..... 6,142 -- -- --------- --------- --------- Other income (expense): Interest income ................................. 1,686 1,641 1,250 Miscellaneous expense, net ...................... (1,443) (526) (240) --------- --------- --------- Total other income ........................... 243 1,115 1,010 --------- --------- --------- (Loss) earnings before income taxes and minority interest ........................ (18,157) 14,695 (17,312) Income tax benefit (expense) (note 17) ................ 6,900 (3,454) 1,459 --------- --------- --------- (Loss) earnings before minority interest .............. (11,257) 11,241 (15,853) Minority interest ..................................... 476 582 194 --------- --------- --------- Net (loss) earnings ................................... $ (11,733) $ 10,659 $ (16,047) ========= ========= ========= (Loss) earnings per common and common equivalent share: Basic ........................................... $ (0.67) $ 0.69 $ (1.28) ========= ========= ========= Diluted ......................................... $ (0.67) $ 0.66 $ (1.28) ========= ========= ========= Weighted average common shares and common dilutive equivalents outstanding: Basic ........................................... 17,414 15,398 12,511 ========= ========= ========= Diluted ......................................... 17,414 16,063 12,511 ========= ========= =========
See accompanying notes to consolidated financial statements. F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Thousands of dollars) Accum. Other Comp. Comp. Income Retained Income Common Treasury Paid-In Total (Loss) Earnings (Loss) Stock Stock Capital --------- ---------- --------- --------- --------- --------- --------- Balance at June 30, 1999 ...................... $ 68,712 $ 25,102 $ (126) $ 1,370 $ (301) $ 42,667 Comprehensive loss Net loss .................................... (16,047) (16,047) (16,047) --------- Other comprehensive loss, net of tax Unrealized loss on marketable securities .. (22) (22) Foreign currency translation effect ....... (125) (125) --------- Other comprehensive loss .................... (147) (147) --------- Comprehensive loss ............................ (16,194) ========= Unearned Compensation ......................... 12,024 12,024 Exercise of employee stock options And related tax effect ...................... 13,687 74 13,613 --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 2000 ...................... $ 78,229 $ 9,055 $ (273) $ 1,444 $ (301) $ 68,304 Comprehensive income (loss) Net earnings ................................ 10,659 10,659 10,659 --------- Other comprehensive income (loss), net of tax Unrealized gain on marketable securities 128 128 Unrealized gain on Swap Agreement ...... 31 31 Foreign currency translation effect .... (1,604) (1,604) --------- Other comprehensive loss .................... (1,445) (1,445) --------- Comprehensive income .......................... 9,214 ========= Repurchased common stock ...................... (4,716) (4,716) Secondary offering ............................ 51,824 292 51,532 Exercise of employee stock options and related tax effect ...................... 14,588 44 14,544 --------- --------- --------- --------- ------ --------- --------- Balance at June 30, 2001 ...................... $ 149,139 $ 19,714 $ (1,718) $1,780 $ (5,017) $ 134,380 Comprehensive income (loss) Net loss .................................... (11,733) (11,733) (11,733) --------- Other comprehensive income (loss), net of tax Unrealized loss on marketable securities (21) (21) Unrealized loss on Swap Agreement ...... (546) (546) Foreign currency translation effect .... 417 417 --------- Other comprehensive loss .................... (150) (150) --------- Comprehensive loss ............................ (11,883) ========= Repurchased common stock adjustment ........... (270) (270) Non-cash compensation charges related to stock options .................. 83 83 Employee stock purchase ....................... 1,098 8 1,090 Exercise of employee stock options and related tax effect ...................... 1,838 1 1,837 --------- -------- --------- --------- ------- --------- Balance at June 30, 2002 ...................... $ 140,005 $ 7,981 $ (1,868) $ 1,789 $(5,287) $ 137,390 ========= ========= ========= ========= ======= ========= See accompanying notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of dollars) Fiscal Year Ended June 30, --------------------------------- 2002 2001 2000 -------- -------- --------- Cash provided by (used for) operating activities: Net (loss) earnings ............................................... $(11,733) $ 10,659 $(16,047) Adjustments to reconcile net (loss) earnings to cash provided by (used for) operating activities: Depreciation and amortization .................................. 7,251 3,996 11,318 Gain on sale of Automation Systems Group ....................... (6,142) -- -- Loss on disposal of assets ..................................... 2,320 869 1,176 Deferred income taxes .......................................... (4,705) 2,446 (7,247) Non-cash compensation charges related to stock options ......... 83 -- 12,024 Changes in operating accounts: Receivables ................................................. 3,975 (7,140) (7,657) Costs in excess of billings ................................. (690) 3,942 (5,083) Inventories ................................................. (727) (12,382) 3,594 Prepaid expenses ............................................ (72) 3,721 4,770 Accounts payable and accrued expenses ....................... (7,795) 3,306 4,654 Minority interest ........................................... 476 520 194 -------- -------- -------- Net cash provided by (used for) operating activities ........... (17,759) 9,937 1,696 -------- -------- -------- Cash provided by (used for) investing activities: Additions to property, plant and equipment ........................ (17,640) (33,050) (6,513) Investment in marketable securities ............................... (8,001) (2,155) (2,466) Investments in other assets ....................................... (493) (1,790) -- Proceeds from the sale of assets .................................. 673 -- -- Proceeds from sale of Automation Systems Group, net of cash sold ($88) ......................................... 12,077 -- -- Restricted cash with interest from sale of Automation Systems Group (1,225) -- -- Proceeds from the sale of marketable securities ................... 4,248 2,250 -- Proceeds from maturity of marketable securities ................... 2,155 1,180 2,500 -------- -------- -------- Net cash used for investing activities ......................... (8,206) (33,565) (6,479) -------- -------- -------- Cash provided by (used for) financing activities: (Payments) proceeds of debt ....................................... (349) 12,556 48 Dividend payments to minority interest ............................ (469) -- -- Employee stock purchase ........................................... 1,098 -- -- Exercise of employee stock options ................................ 1,838 996 7,062 Issuance and repurchase of common stock ........................... (270) 47,108 -- Contributions from minority interest of consolidated subsidiaries . -- -- 249 -------- -------- -------- Net cash provided by financing activities ...................... 1,848 60,660 7,359 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................. (24,117) 37,032 2,576 Cash and cash equivalents, beginning of year ......................... 52,630 15,598 13,022 -------- -------- -------- Cash and cash equivalents, end of year ............................... $ 28,513 $ 52,630 $ 15,598 ======== ======== ========
See accompanying notes to consolidated financial statements. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001, and 2000 Dollars in thousands, except for share and per share amounts NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION Zygo Corporation is a worldwide developer and supplier of high performance metrology instruments, high precision optics, optical assemblies, and automation for the semiconductor, industrial, and telecommunications markets. The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries ("Company"). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. As discussed in Note 2, all the outstanding shares of Firefly Technologies, Inc. ("Firefly") were acquired by the Company on May 5, 2000, in a transaction accounted for as a pooling-of-interests. Accordingly the financial statements of the Company have been restated to reflect the merger as if it had occurred on July 1, 1997. CASH AND CASH EQUIVALENTS The Company considers cash and investments in securities with maturities at the date of purchase of three months or less to be cash and cash equivalents. MARKETABLE SECURITIES The Company considers investments in securities with maturities at the date of purchase in excess of three months as marketable securities. Marketable securities primarily consist of corporate bonds, government agency securities, and tax-exempt bonds. All securities held by the Company at June 30, 2002 and 2001, were classified as available-for-sale and recorded at fair value or held to maturity and recorded at cost. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. DEPRECIATION Depreciation is based on the estimated useful lives of the various classes of assets and is computed using the straight-line method. See note 7. IMPAIRMENT OF LONG-LIVED ASSETS As required by Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company evaluates the carrying value of its long-lived and intangible assets at each balance sheet date to determine if impairment exists based upon estimated undiscounted future cash flows. The impairment, if any, is measured by the difference between carrying value and estimated fair value and charged to expense in the period identified. The remaining depreciation and amortization periods are periodically evaluated and would be revised if considered necessary. REVENUE RECOGNITION Revenues, other than revenue from certain automation contracts (note 6), are recognized when units are shipped unless there is significant uncertainty concerning customer acceptance, in which case, revenue is recognized when the customer accepts the product. Revenues related to certain automation contracts are recognized under the percentage-of-completion method of accounting. F-8 In December 1999, the Securities and Exchange Commission ("SEC") issued SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarized certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101 was effective for the fourth quarter of fiscal 2001. The adoption of SAB No. 101 did not have a material effect on the Company's financial position or results of operations. EARNINGS PER SHARE Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding: JUNE 30, June 30, June 30, 2002 2001 2000 ----------- ----------- ------------ Weighted average shares outstanding .................. 17,414,000 15,398,000 12,511,000 Dilutive effect of stock options ...................... -- 665,000 -- ---------- ---------- ----------- Diluted weighted average shares outstanding ........... 17,414,000 16,063,000 12,511,000 ---------- ---------- ---------- For the fiscal years ended June 30, 2002 and June 30, 2000, the Company recorded net losses. Due to these net losses, stock options of 319,000 and 1,547,000 for the fiscal years ended 2002 and 2000, respectively, were excluded from the computation because of the anti-dilutive effect on earnings per share. GAIN ON LEGAL SETTLEMENT The Company recorded a gain of $1 million in the third quarter of 2000 from the settlement of a legal claim. STOCK BASED COMPENSATION Stock-based compensation awards to employees under the Company's stock option plans are accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional paid in capital. Except as discussed in Note 2, no charges are reflected in the consolidated statements of operations as a result of the grant or exercise of stock options, which are granted with an exercise price at fair market value on the date of grant. The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that reporting entities provide, to the extent practicable, the fair value of financial instruments, both assets and liabilities. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. F-9 USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. On an ongoing basis, management evaluates its estimates and judgements, including those related to bad debts, inventories, long-lived assets, income taxes, and warranty obligations. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" which addresses the financial accounting and reporting for business combinations and supercedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires that all business combinations be accounted for by a single method, the purchase method, modifies the criteria for recognizing intangible assets, and expands disclosure requirements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material effect on our results of operations or statements of financial position. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. SFAS No. 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. In addition, SFAS No. 142 expands the disclosure requirements for goodwill and other intangible assets in the years subsequent to their acquisition. SFAS No. 142 is effective for our fiscal year 2003. Impairment losses for goodwill and indefinite-life intangible assets that arise due to the initial application of SFAS No. 142 are to be reported as resulting from a change in accounting principles. However, goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to provisions of SFAS No. 142. Management is currently assessing the impact that SFAS No. 142 will have on our results of operations and financial position. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for retirement obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation in the period in which it is incurred. When the retirement obligation is initially recorded, the company also records a corresponding increase to the carrying amount of the related tangible long-lived asset and depreciates that cost over the useful life of the tangible long-lived asset. The retirement obligation is increased at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. Upon settlement of the retirement obligation, the company either settles the retirement obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 with earlier application encouraged. Management is currently assessing the impact that SFAS No. 143 will have on the Company's financial position and results of operations. F-10 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and also affects certain aspects of accounting for discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and certain aspects of APB No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management is currently assessing the impact that SFAS No. 144 will have on the Company's financial position and results of operations. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The adoption of this statement will not have a material impact on the Company's current financial position and results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which addresses financial accounting and reporting for costs associated with the exit or disposal activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to record liabilities for exit or disposal activities in the period in which they are incurred, except for certain types of transactions. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Management is currently assessing the impact that SFAS No. 146 will have on the Company's financial position and results of operations. NOTE 2: MERGERS, ACQUISITIONS AND STRATEGIC INITIATIVES On December 12, 2001, the Company sold its Automation Systems Group in Longmont, Colorado, to Brooks Automation, Inc. of Chelmsford, Massachusetts, in a cash transaction, for $12,165. Substantially all of the assets were sold to Brooks and substantially all of the liabilities were assumed by Brooks. The gain on the sale was $6,142 before related exit costs of $1,856 to be paid from the proceeds, inventory write-downs of $808, and tax expense of $1,322. As of June 30, 2002, the restricted cash balance of $1,225 related to the Automation sale is being held in escrow for a period of one year from the date of sale. The Company established certain reserves of $2,333, which includes $1,115 for lease costs classified as a long-term liability, for costs to be incurred as a result of the sale. On May 5, 2000, the Company entered into an agreement and plan of merger with Firefly Technologies, Inc. ("Firefly"), a Delaware corporation, Zygo TeraOptix, Inc., ("Zygo TeraOptix") a Delaware corporation and a wholly-owned subsidiary of the Company, and the security holders of Firefly, pursuant to which the Company agreed to acquire Firefly. Immediately thereafter, the acquisition was consummated by the merger of Zygo TeraOptix with and into Firefly and Firefly became a wholly-owned subsidiary of the Company under the new name Zygo TeraOptix, Inc. Under the terms of the acquisition, the Company exchanged an aggregate of 2,303,937 shares of its common stock, $.10 par value per share, for all of the then outstanding capital stock and stock options of Firefly. The acquisition, which is intended to be tax free for federal income tax purposes to the Firefly security holders, has been accounted for as a pooling-of-interest transaction. Firefly manufactures metrology equipment, micro-optics, switches, and filters for the telecommunications industry, as well as heads and related products for the optical data storage industry. The telecommunications components F-11 are used in wave division multiplexers to increase the capacity of optical fibers. The Company intends to continue to use the assets acquired in the acquisition for these purposes. Related to the transaction and the vesting of certain Firefly stock options, the Company has recorded approximately $12,024 of additional compensation expense and in addition recorded $1,977 in acquisition related costs for legal, investment banking and accounting fees in fiscal 2000. In the fourth quarter of fiscal 2000, the Company decided to discontinue its investment in certain product lines, which were no longer compatible with its strategic plan. Related to the discontinuance of these product lines, the Company recorded approximately $10,567 of charges in the fourth quarter of fiscal year 2000 which consisted of the write-down of goodwill and other intangible assets ($5,478) and inventory ($5,089) which the Company will no longer continue to develop. NOTE 3: MARKETABLE SECURITIES Marketable securities consisted primarily of corporate bonds, government agency securities and tax-exempt bonds issued by various federal, state and municipal agencies for both 2002 and 2001. Marketable securities at June 30, 2002 and June 30, 2001 are reported either at fair value or at cost depending on their classification. The gross unrealized gains on marketable securities of $22 and $51 at June 30, 2002 and 2001, respectively, are shown net of their related tax effects, resulting in balances of $16 and $37, respectively, as a separate component of stockholders' equity. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The cost, gross unrealized holding gains (losses), and fair value of available-for-sale securities at June 30, 2002 and 2001 were as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value --------- ---------- ----------- -------- AT JUNE 30, 2002 Corporate, federal, state and local municipal bonds ........... $8,094 $75 ($ 53) $8,116 ====== ==== ==== ====== At June 30, 2001 Corporate, state and local municipal bonds ................. $5,320 $51 $ -- $5,371 ====== ==== ==== ======
There were $59 gross realized gains recorded in 2002. There were no gross realized gains or losses recorded in 2001. F-12 Maturities of investment securities classified as available-for-sale were as follows at June 30, 2002 and 2001: JUNE 30, 2002 June 30, 2001 ----------------- ------------------ AMORTIZED FAIR Amortized Fair COST VALUE Cost Value --------- ------- --------- -------- Due within one year ................. $ 44 $ 91 $ -- $ -- Due after one year through five years 8,050 8,025 5,320 5,371 ------ ------ ------ ------ $8,094 $8,116 $5,320 $5,371 ====== ====== ====== ====== Maturities of investment securities classified as held-to-maturity were as follows at June 30, 2002 and 2001: JUNE 30, 2002 June 30, 2001 --------------- ----------------- AMORTIZED FAIR Amortized Fair COST VALUE Cost Value ------ ------ --------- ------ Due within one year ................. $ 618 $ 630 $1,750 $1,750 Due after one year through five years -- -- -- -- ------ ------ ------ ------ $ 618 $ 630 $1,750 $1,750 ====== ====== ====== ====== NOTE 4: ACCOUNTS RECEIVABLE At June 30, 2002 and 2001, accounts receivable were as follows: JUNE 30, June 30, 2002 2001 -------- -------- Trade (note 19) ........................ $ 20,737 $ 25,644 Other .................................. 1,453 2,015 -------- -------- 22,190 27,659 llowance ............................... (949) (381) -------- -------- $ 21,241 $ 27,278 ======== ======== NOTE 5: INVENTORIES At June 30, 2002 and 2001, inventories, net of reserves, were as follows: JUNE 30, June 30, 2002 2001 ------- -------- Raw materials and manufactured parts .... $18,695 $20,359 Work in process ......................... 8,477 5,674 Finished goods .......................... 179 1,308 ------- ------- 27,351 27,341 Reserve ................................. (3,739) (3,080) ------- ------- $23,612 $24,261 ======= ======= F-13 NOTE 6: COSTS IN EXCESS OF BILLINGS Revenues from certain automation projects were accounted for under the percentage-of-completion method using total project costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. The cumulative effects of revisions of estimated total contract costs and revenues were recorded in the period in which the facts became known. The differences between amounts billed and revenue recognized is shown as costs in excess of billings on the accompanying balance sheets. Totals of revenue earned and billings issued on uncompleted contracts as of June 30, 2001 were as follows: Revenue recognized to date ............................ $ 50,529 Billings to date ...................................... 48,727 -------- $ 1,802 ======== As a result of the sale of the Company's Automation Systems Group in Longmont, Colorado, there were no outstanding projects accounted for under the percentage-of-completion method as of June 30, 2002. NOTE 7: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Costs of additions, replacements and improvements are capitalized and depreciated over a range of 3-40 years. Maintenance and repairs are charged to expense as incurred. Management evaluates, on an ongoing basis, the carrying value of its property, plant and equipment and makes adjustments when impairments are identified. At June 30, 2002 and 2001, property, plant and equipment, at cost, were as follows: JUNE 30, June 30, 2002 2001 --------- -------- Land .................................... $ 3,822 $ 3,778 Building ................................ 25,252 9,199 Machinery, equipment and office furniture 47,640 31,101 Leasehold improvements .................. 237 625 Construction in progress ................ 2,878 23,849 -------- -------- 79,829 68,552 Less accumulated depreciation .......... (24,784) (21,077) -------- -------- $ 55,045 $ 47,475 ======== ======== NOTE 8: GOODWILL AND OTHER INTANGIBLES The cost of goodwill and other intangible assets is amortized on a straight-line basis, which ranges from 4 to 20 years. Management evaluates, on an ongoing basis, the carrying value of its goodwill and other intangible assets and makes adjustments when impairments are identified. Goodwill and other intangibles, net, at June 30, 2002 and 2001 were as follows: F-14 JUNE 30, June 30, 2002 2001 ------- ------- Goodwill and other intangibles ............ $ 8,329 $ 7,726 Accumulated amortization .................. (3,822) (2,859) ------- ------- $ 4,507 $ 4,867 ======= ======= NOTE 9: BANK LINE OF CREDIT The Company has a $3,000 unsecured bank line of credit with interest at LIBOR plus 60 basis points (approximately 2.4% at June 30, 2002). The line of credit is available through November 21, 2002. At June 30, 2002 and 2001, no amounts were outstanding under the bank line of credit. NOTE 10: LONG-TERM DEBT In May 2001 the Company entered into a mortgage on the newly constructed facility located in Westborough, Massachusetts. The mortgage amount was $12,560 at an interest rate of LIBOR plus a variable interest rate of 1% to 1.5%, which was based on a pricing grid related to a certain debt ratio and adjusted quarterly. The mortgage agreement contains financial covenants which, among others, relate to debt service and consolidated debt ratios. In June 2002, the mortgage agreement was amended to revise the financial covenants and adjust the variable interest rate pricing grid, such that the variable interest rate can fluctuate between 1% and 2.5% based on the debt ratio. At June 30, 2002, the LIBOR plus variable rate was 4.3%. The mortgage is amortizing on a 15-year schedule requiring level monthly principal and interest payments and is payable in full in May 2007. The Company made interest only payments through February 2002. As of June 30, 2002, long-term debt was $11,374 with a current portion of long-term debt of $837. Principal payments for fiscal years 2003-2006 will be $837 annually and the principal payment for the fiscal year 2007 will be $8,862, including a balloon payment of $8,164 due in May 2007. In conjunction with the mortgage, the Company entered into a $12,560 notional principal interest rate swap that effectively converted the variable rate LIBOR-based payments to a fixed rate of 6% for the duration of the mortgage. In addition, the variable interest rate based on a pricing grid related to a certain debt ratio will continue to be applied to the outstanding mortgage amount. The effective interest rate at June 30, 2002 and 2001 was 8.5% and 7%, respectively. In accordance with SFAS No. 133, as amended, the Company recorded a liability for the present value of the increase in interest over the remaining term of the mortgage of approximately $832. This amount, net of taxes of $317, is reflected with a corresponding debit to the stockholders' equity of $515. Interest payments on debt were $1,158, $107, and $6 in fiscal 2002, 2001, and 2000, respectively. NOTE 11: LEASES The Company leases certain manufacturing equipment and facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through 2007. Total lease expense charged to operations was $1,603 in 2002, $1,562 in 2001, and $986 in 2000. At June 30, 2002 the minimum future lease commitments under noncancellable leases payable over the remaining lives of the leases were: F-15 Minimum Future Lease Year ending June 30, Commitments ------------- 2003 .......................................................... $ 1,382 2004 .......................................................... 1,219 2005 .......................................................... 743 2006 .......................................................... 262 2007 .......................................................... 119 ------- Total minimum lease payments ................. $ 3,725 ======= NOTE 12: PROFIT-SHARING PLAN The Company maintains a deferred profit-sharing plan under which substantially all full-time employees of the Company are eligible to participate. Profit-sharing expense for the years ended June 30, 2002, 2001, and 2000, amounted to $0, $2,516, and $1,209, respectively. The profit-sharing plan consists of a cash distribution and a contribution to the Company's 401(k) program. Profit-sharing contributions are determined annually at the discretion of the Board of Directors. The cash distribution for the years ended June 30, 2002, 2001, and 2000, amounted to $0, $930, and $709, respectively. The Company also maintains a 401(k) tax deferred payroll deduction program and an Employee Stock Ownership Program. Under the 401(k) program, employees may contribute a tax-deferred amount of up to 15% of their compensation, as defined. The Company may contribute to the 401(k) program an amount determined annually at the discretion of the Board of Directors. The 401(k) contribution expense for the years ended June 30, 2002, 2001, and 2000 amounted to $780, $1,586, and $500, respectively. As of January 1, 2001, the employees of Zygo TeraOptix have been incorporated into the Company's 401(k) program for fiscal 2001. Prior to January 1, 2001, the Company maintained a separate defined contribution retirement plan for the employees of Zygo TeraOptix. The plan allowed employees to participate after three months of employment with the Company by deferring up to 15% of their salary on a pre-tax basis, and allowed the Company to make discretionary contributions to the plan, which were allocated to the participants' accounts. The Company did not make any contributions to the plan through January 1, 2001. Under the Employee Stock Ownership Program, the Company may, at the discretion of the Board of Directors, contribute its own stock or contribute cash to purchase its own stock. The purchased stock's fair market value can not exceed the maximum amount of employee stock ownership credit as determined under Section 416 of the Internal Revenue Code. There were no purchases and no contributions made under this program for the years ended June 30, 2002, 2001, and 2000. NOTE 13: STOCKHOLDERS' EQUITY On July 31, 2000 the shareholders voted to increase the number of authorized shares of common stock from 15 million to 40 million. On March 7, 2001 the Company closed a secondary public offering of 2,924,500 shares of common stock including 424,500 shares sold to underwriters to cover over-allotments. The offering price was $19 per share. The net proceeds to the Company including the over-allotment shares, after deducting underwriting discounts, commissions, and offering expenses totaled $51,824. F-16 On April 11, 2001, the Company purchased 239,605 shares of its common stock from two officers and directors, pursuant to stock purchase agreements; all at a price per share of $20.81 (the closing price of the common stock in the public markets on that day) for $4,986. The funding for the purchase came from cash balances. The purpose of the purchase was to allow these two officers and directors to satisfy their tax obligations arising from the Firefly acquisition, in which they were principal stockholders, and to satisfy and extinguish the margin loans they incurred to pay additional taxes, which arose from the acquisition of Firefly. The common stock purchased is being held as treasury stock. NOTE 14: STOCK COMPENSATION PLANS As of June 30, 2002, the Company has two stock-based compensation plans, which are described below (see note 15). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Since all options were granted with an exercise price equal to the fair market value on the date of the grant, no compensation cost has been recognized for its fixed option plans. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation," which requires that the information be determined as if the Company has accounted for its stock options granted in fiscal years beginning after December 15, 1994 under the fair value method of the statement. The fair value of options at date of grant was estimated using the Black-Scholes model. The Company's pro forma information is as follows:
JUNE 30, June 30, June 30, 2002 2001 2000 --------- --------- ----------- Pro forma net (loss) earnings ................... $ (12,161) $ 9,952 $ (16,930) Pro forma net (loss) earnings per share - diluted $ (0.70) $ 0.62 $ (1.35)
The fair value of these options at the date of grant was estimated with the following weighted average assumptions of 2002, 2001 and 2000: JUNE 30, June 30, June 30, 2002 2001 2000 --------- --------- ---------- Risk free rate of interest ...... 4.3% 5.0% 5.9% Dividend yield .................. 0.0% 0.0% 0.0% Volatility factor ............... 76% 77% 67% Expected life of option ......... 4.5 YEARS 4.8 years 5.6 years The above pro forma information is based on historical activity and may not represent future trends. On June 26, 2001, the Board of Directors granted a warrant to purchase 25,000 shares of the Company's common stock to the Zetetic Institute, a non-profit organization that provides assistance to the Company in connection with certain research and development activities. The warrant has an exercise price of $18.64 per share, the closing price of the common stock on the date of the grant, and will vest, in equal annual increments, over the four-year period following the date of grant. F-17 NOTE 15: STOCK OPTION PLANS EMPLOYEE STOCK OPTION PLAN AND DATA The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan permits the granting of non-qualified options to purchase a total of 4,850,000 shares (adjusted for splits) of common stock at prices not less than the fair market value on the date of grant. There are 1,487,893 shares available under the plan as of June 30, 2002. Options generally become exercisable at the rate of 25% of the shares each year commencing one year after the date of grant. The Plan, as amended, expires on September 3, 2002. JUNE 30, 2002 ---------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ------------- Outstanding at beginning of year 1,778,308 $ 50.223 Granted ........................ 325,075 $ 12.870 Exercised ...................... (2,125) $ 10.425 Expired or canceled ............ (150,539) $ 44.774 ---------- ----------- Outstanding at end of year ..... 1,950,719 $ 44.527 ========== =========== June 30, 2001 --------------------------- Weighted Average Shares Exercise Price ----------- --------------- Outstanding at beginning of year 798,299 $ 10.020 Granted ........................ 1,386,436 $ 61.810 Exercised ...................... (347,463) $ 3.508 Expired or canceled ............ (58,964) $ 58.527 ---------- ----------- Outstanding at end of year ..... 1,778,308 $ 50.223 ========== =========== June 30, 2000 --------------------------- Weighted Average Shares Exercise Price ------------ --------------- Outstanding at beginning of year 1,245,299 $ 7.228 Granted ........................ 182,650 $ 23.139 Exercised ...................... (519,200) $ 7.215 Expired or canceled ............ (110,450) $ 13.240 ---------- ----------- Outstanding at end of year ..... 798,299 $ 10.020 ========== =========== NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA The Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan permits the granting of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock at prices not less than the fair market value on the date of grant. Under the terms of the Plan, as amended on September 24, 1999, each new non-employee director (other than a person who was previously an employee of the Company or any of its subsidiaries) is granted an option to purchase 8,000 shares of Common stock, generally, on his or her first day of service as a non-employee director; and each other non-employee director is granted an option to purchase 3,000 shares of Common stock on an annual basis. All options are fully exercisable on the date of grant and have a 10-year term. The Plan, as amended, will expire on November 17, 2009. There are 89,000 shares available under the plan as of June 30, 2002. F-18 JUNE 30, 2002 ------------------------------ WEIGHTED AVERAGE SHARES EXERCISE PRICE ------------ --------------- Outstanding at beginning of year ............. 182,000 $13.996 Granted ...................................... 23,000 $16.276 Exercised .................................... (10,000) $ 2.000 Expired or canceled .......................... -- $ -- -------- ------- Outstanding at end of year ................... 195,000 $14.880 ======== ======= June 30, 2001 -------------------------------- Weighted Average Shares Exercise Price ------------ ---------------- Outstanding at beginning of year ............. 249,000 $ 5.792 Granted ...................................... 23,000 $55.873 Exercised .................................... (90,000) $ 2.000 Expired or canceled .......................... -- $ -- -------- ------- Outstanding at end of year ................... 182,000 $13.996 ======== ======= June 30, 2000 ------------------------------- Weighted Average Shares Exercise Price ------------ ----------------- Outstanding at beginning of year ............. 450,000 $ 6.229 Granted ...................................... 15,000 $17.250 Exercised .................................... (216,000) $ 7.498 Expired or canceled .......................... -- $ -- --------- ------- Outstanding at end of year ................... 249,000 $ 5.792 ========= ======= The following table summarizes information about all fixed stock options outstanding at June 30, 2002:
Options Outstanding Options Exercisable ----------------------------------------- ---------------------------------- Number Weighted Average Range of Outstanding Remaining Weighted Number Weighted Exercise as of Contractual Average Exercisable as of Average Prices June 30, 2002 Life Exercise Price June 30, 2002 Exercise Price ------------------- ------------ ------------- -------------- ----------------- -------------- $ 1.92 - $ 2.00 ... 175,124 2.1 $ 2.00 175,124 $ 2.00 $ 7.44 - $11.10 ... 212,300 6.4 $ 10.16 144,652 $ 10.25 $11.40 - $17.10 ... 335,950 8.8 $ 12.92 36,200 $ 13.73 $17.18 - $24.56 ... 463,346 8.5 $ 18.93 164,434 $ 18.80 $26.38 - $39.13 ... 69,970 6.4 $ 29.73 44,630 $ 28.80 $40.38 - $58.75 ... 80,265 8.2 $ 45.21 37,210 $ 45.09 $60.75 - $90.81 ... 808,764 8.1 $ 84.59 223,951 $ 84.46 - ----------------------- --------- --- --------- ------- --------- $ 1.92 - $90.81 ... 2,145,719 7.6 $ 41.82 826,201 $ 33.04 ======================= ========= === ========= ======= =========
As discussed in Note 2, the Company recorded approximately $12,024 of additional compensation expense to reflect the derived fair market value of certain Firefly stock options, which were exercised by Firefly employees in connection with the exchange of Firefly capital stock and stock options for the Company's common stock. No Firefly options have been included in the tables above because all Firefly options were exercised and converted to the Company's common shares in connection with the merger. F-19 NOTE 16: EMPLOYEE STOCK PURCHASE PLAN In November 2000, the Company adopted a non-compensatory Employee Stock Purchase Plan ("ESPP"). Under the ESPP, employees of the Company who elect to participate have the ability to purchase common stock at a 15% discount from the market value of such stock. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1% and 10% of compensation. The total number of shares of common stock that may be issued under the ESPP is approximately 500,000. At June 30, 2002 and 2001, the Company had withheld $532 and $613, respectively, for purchase of shares under this plan; and in July 2002 and 2001, issued approximately 64,000 and 32,000, respectively, shares of common stock. NOTE 17: INCOME TAXES The components of income tax expense (benefit) for each year are as follows: Fiscal Year Ended June 30, ----------------------------- 2002 2001 2000 -------- ------- ------- Currently payable: Federal ....................... $(3,118) $ -- $ 1,136 State ......................... 4 -- (71) Foreign ....................... 798 1,008 604 ------- ------- ------- $(2,316) $ 1,008 $ 1,669 ======= ======= ======= Deferred: Federal ....................... $(3,859) $ 2,328 $(3,051) State ......................... (725) 118 (77) Foreign ....................... -- -- -- ------- ------- ------- $(4,584) $ 2,446 $(3,128) ------- ------- ------- Total income tax (benefit) expense $(6,900) $ 3,454 $(1,459) ======= ======= ======= Income tax refunds, net of payments, amounted to $149, $1,979, and $2,539 in fiscal 2002, 2001, and 2000, respectively. The total income tax expense (benefit) differs from the amount computed by applying the applicable U.S. federal income tax rate of 35% in each of the fiscal years 2002, 2001, and 2000 to earnings before income taxes for the following reasons: F-20 Fiscal Year Ended June 30, ------------------------------ 2002 2001 2000 ------- ------- -------- Computed "expected" tax expense (benefit) .................................. $(6,355) $ 5,143 $(5,886) Increases (reductions) in taxes resulting from: Acquisition-related charges ............... (72) (1,112) 4,329 State taxes, net of federal income tax benefit ...................... (1,787) (331) (96) Tax exempt interest income ................ (29) (43) (15) Export tax incentives ..................... -- (254) (300) Change in Valuation Allowance ............. 1,987 619 -- Research Credit ........................... (1,358) (1,114) (300) Other, net ................................ 714 546 809 ------- ------- ------- $(6,900) $ 3,454 $(1,459) ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2002 and 2001 are presented below: JUNE 30, June 30, 2002 2001 --------- ---------- Deferred tax assets: Accounts receivable .................... $ 358 $ 143 Accrued liabilities .................... 1,965 610 Inventory valuation .................... 1,066 1,492 One-time charges ....................... 1,725 1,943 Intangibles ............................ 262 96 Federal and state NOLs and credits ..... 26,207 17,486 Other .................................. 46 -- -------- -------- 31,629 21,770 Less valuation allowance ............... 3,803 1,653 -------- -------- Deferred tax asset ..................... 27,826 20,117 -------- -------- Deferred tax liabilities: Prepaid expenses ....................... (208) (92) Plant and equipment .................... (2,731) (111) Unrealized gain on marketable securities (7) (19) -------- -------- Deferred tax liability ................. (2,946) (222) -------- -------- Net deferred tax asset .................... $ 24,880 $ 19,895 ======== ======== The net current deferred tax assets and net non-current deferred tax assets as recorded on the balance sheet as of June 30, 2002 and 2001 are as follows: JUNE 30, June 30, 2002 2001 ------- -------- Net current deferred tax asset ............... $ 4,899 $ 4,076 Net noncurrent deferred tax asset ............ 19,981 15,819 ------- ------- Net deferred tax asset ....................... $24,880 $19,895 ======= ======= F-21 The Company has recorded a valuation allowance to reflect the uncertainty of realizing certain state net operating loss and credit carryforwards. The valuation allowance as of June 30, 2001 was $1,653. The net change in the total valuation allowance for the year ended June 30, 2002 was an increase of $2,150. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of June 30, 2002 will be allocated as follows: Income tax benefit ................ $ 1,987 Additional paid-in capital ........ 163 ------- $ 2,150 Management believes it is more likely than not that the remaining net deferred tax assets of $24,880 will be realized as the results of future operations are expected to generate sufficient taxable income to do so. The deferred tax provision for 2002 does not reflect tax benefits of ($328) allocated to other comprehensive income and ($73) allocated to paid in capital. At June 30, 2002, the Company's share of the cumulative undistributed earnings of foreign subsidiaries was $991. No provision has been made for U.S. or additional foreign taxes on the undistributed earnings of foreign subsidiaries because the Company intends to continue to reinvest these earnings. Determination of the amount of unrecognized deferred tax liability associated with these earnings is not practicable. At June 30, 2002, the Company has federal and state net operating loss carryforwards of approximately $45,405 and $73,089, respectively, and various state credit carryforwards of $3,175, which are available to reduce income taxes in various jurisdictions through 2022. The Company also has a federal general business credit carryforward of approximately $4,592, which is available to reduce federal taxable income, if any, through 2022. In addition, the Company has alternative minimum tax credit carryforwards of approximately $206 which are available to reduce future federal regular income taxes, if any, over an indefinite period. NOTE 18: SEGMENT REPORTING The Company has adopted the SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." FASB No. 131 establishes standards, using a management approach, for reporting information regarding operating segments in annual financial statements. The management approach designates the internal reporting that is used by the chief operating decision maker when making operating decisions and assessing performance as the source of the Company's reportable segments. The Company's president has been determined to be its chief operating decision-maker, as defined under SFAS No. 131. The Company operates in three principal business segments globally: Semiconductor, Industrial, and Telecommunications. For fiscal 2000, the Company operated in one segment, as a world leader in metrology, process control, and yield solutions servicing high precision industries. Substantially all of the Company's operating results, assets, depreciation, and amortization are U.S. based. The segment data is presented below in a manner consistent with management's internal measurement of the business. F-22
Fiscal Year Ended June 30, 2002 ---------------------------------------------------------------------------- Semiconductor Industrial Telecommunications Total ------------- ------------ ------------------ ------------ Sales .............................. $37,483 $40,336 $ 6,607 $ 84,426 Gross Profit ....................... 9,909 16,882 (1,995) 24,796 Gross Profit as a % Sales .......... 26% 42% (30)% 29%
Fiscal Year Ended June 30, 2001 ---------------------------------------------------------------------------- Semiconductor Industrial Telecommunications Total -------------- -------------- -------------------- ----------- Sales .............................. $84,561 $35,178 $13,511 $133,250 Gross Profit ....................... 38,737 15,969 6,463 61,169 Gross Profit as a % Sales .......... 46% 45% 48% 46%
The total gross profit and the Semiconductor segment gross profit for the fiscal year ended June 30, 2002 included $808 of inventory write-downs related to the sale of the Automation Systems Group. Separate financial information by segment for total assets, capital expenditures, and depreciation and amortization is not available and is not evaluated by the chief operating decision-maker of the Company. Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than 19% of total Company sales for each of the years ended June 30, 2002, 2001, and 2000 (see note 19). No other individual customer accounted for more than 10% of total Company sales for any year presented in the accompanying consolidated financial statements. Substantially all of the Company's operating results, assets, depreciation, and amortization are U.S. based. The Company's sales are noted below. Sales by geographic area were as follows:
Fiscal Year Ended June 30, -------------------------------------- 2002 2001 2000 -------- -------- -------- Americas (primarily United States) ................ $ 41,040 $ 68,299 $ 48,835 Far East: Japan .......................................... 21,268 45,194 17,588 Pacific Rim .................................... 8,054 7,423 11,714 -------- -------- -------- Total Far East .................................... $ 29,322 $ 52,617 $ 29,302 Europe and Other (primarily Europe) ............... 14,064 12,334 9,106 -------- -------- -------- Total ............................................. $ 84,426 $133,250 $ 87,243 ======== ======== ========
F-23 NOTE 19: RELATED PARTY TRANSACTIONS Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of the Company's products in Japan and a subsidiary of Canon Inc., amounted to $17,636 (21% of net sales), $43,336 (33% of net sales), and $16,463 (19% of net sales), for the years ended June 30, 2002, 2001, and 2000, respectively. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the normal terms given to distributors. At June 30, 2002 and 2001, there was approximately, in the aggregate, $2,683 and $3,827, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc. On April 11, 2001, the Company purchased 239,605 shares of its common stock from two officers and directors for $4,986 (see note 13). NOTE 20: MATERIAL CONTRACTS In May 1997, the Company entered into a contract with the University of California's Lawrence Livermore National Laboratory ("LLNL"), whereby the Company will be a primary supplier of large plano optical components for the National Ignition Facility ("NIF"). In April 2001 and January 2002, the Company entered into related contracts with LLNL to supply additional optical components to NIF. Revenues under the NIF contract, which is presently a fixed price contract, are recorded as deliveries are made. Revenues recognized in fiscal 2002, 2001, and 2000 amounted to $3,834, $3,308, and $2,802, respectively. During fiscal year 1999, the Company entered into an agreement with IBM, which allows for marketing and servicing rights for its Atomic Force Microscope (AFM) line of business for a four-year period. The Company made payments totaling $2,250 to secure this relationship, which are being amortized over four years or less. On March 28, 2000, the Company entered into an agreement to terminate the distribution agreement to market and sell AFM products. As part of the agreement, the Company was granted a nonexclusive license to the IBM AFM technology for the next three years and may continue to license the technology for additional terms thereafter. The Company and Veeco Corporation, which subsequently entered into the distribution agreement with IBM, have entered into an additional agreement for support and service of AFM products previously sold by the Company. As a result of this agreement, the Company's AFM sales and service department was discontinued. F-24 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Thousands except per share amounts)
FOR THE FISCAL YEAR ENDED JUNE 30, 2002 ------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (1) MARCH 31, JUNE 30, (1) ------------- ---------------- --------- -------------- Net sales ............................. $ 20,956 $ 19,006 $ 21,298 $ 23,166 Gross profit .......................... $ 7,025 $ 4,678 $ 6,282 $ 6,811 Loss before taxes and minority interest $ (3,711) $ (4,737) $ (5,851) $ (3,858) Income tax benefit .................... 1,410 1,800 2,223 1,467 Minority interest ..................... 70 82 94 230 -------- -------- -------- -------- Net loss .............................. $ (2,371) $ (3,019) $ (3,722) $ (2,621) ======== ======== ======== ======== Net loss per share: Basic (2) .......................... $ (0.14) $ (0.29) $ (0.21) $ (0.15) ======== ======== ======== ======== Diluted (2) ........................ $ (0.14) $ (0.29) $ (0.21) $ (0.15) ======== ======== ======== ========
For the Fiscal Year Ended June 30, 2001 ----------------------------------------------------- September 30, December 31, March 31, June 30, ------------- ------------ ---------- --------- Net sales ................................. $23,932 $32,731 $38,717 $37,870 Gross profit .............................. $ 9,969 $13,611 $19,489 $18,100 Earnings before taxes and minority interest $ 1,379 $ 3,063 $ 5,055 $ 5,198 Income taxes .............................. 469 1,041 1,719 225 Minority interest ......................... 93 117 129 243 ------- ------- ------- ------- Net earnings .............................. $ 817 $ 1,905 $ 3,207 $ 4,730 ======= ======= ======= ======= Net earnings per share: Basic (2) (3) .......................... $ 0.06 $ 0.13 $ 0.21 $ 0.27 ======= ======= ======= ======= Diluted (2) (3) ........................ $ 0.05 $ 0.13 $ 0.20 $ 0.26 ======= ======= ======= =======
- ---------- (1) Loss includes the gain on sale of the Automation Systems Group of $6,142 and related exit costs of $1,856, inventory write-downs of $808, and tax expense of $1,322 in the second and fourth quarters ended December 31, 2001 and June 30, 2002, respectively. (2) Accounting principles generally accepted in the United States of America require the computation of the net loss per share to be based on the weighted average basic shares outstanding. (3) The difference between basic shares outstanding and diluted shares outstanding is the assumed conversion of common stock equivalents (stock options) in the amounts of 909, 764, 440, and 547 for fiscal 2001 quarters ended September 30, December 31, March 31, and June 30, respectively. F-25 INDEPENDENT AUDITORS' REPORT ON SCHEDULE II The Board of Directors Zygo Corporation Under date of August 16, 2002, we reported on the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2002 as contained in the 2002 annual report to stockholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, this financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Hartford, Connecticut August 16, 2002 S-1
ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2002, 2001, AND 2000 (Thousands of dollars) Balance Balance at Beginning at End Description of Period Provision Write-Offs of Period - ----------- ------------- --------- ---------- --------- YEAR ENDED JUNE 30, 2002: ALLOWANCE FOR DOUBTFUL ACCOUNTS ....................... $ 381 $ 599 $ 31 $ 949 INVENTORY RESERVE ................ $3,080 $ 842 $ 183 $3,739 VALUATION ALLOWANCE ON NET DEFERRED TAX ASSETS .............. $1,653 $2,150 $ -- $3,803 Year Ended June 30, 2001: Allowance for Doubtful Accounts ....................... $234 $ 246 $ 99 $ 381 Inventory Reserve ................ $2,846 $ 312 $ 78 $3,080 Valuation allowance on net Deferred tax assets .............. $ -- $1,653 $ -- $1,653 Year Ended June 30, 2000: Allowance for Doubtful Accounts ....................... $1,324 $ 70 $1,160 $ 234 Inventory Reserve ................ $4,513 $ (24) $1,643 $2,846 Valuation allowance on net Deferred tax assets .............. $ -- $ -- $ -- $ --
S-2
EXHIBIT INDEX EXHIBIT TABLE FORM 10K NUMBER PAGE NUMBER ------ ----------- 10.27 Amended and restated credit agreement dated May 14, 2001, between Zygo Corporation and Fleet National Bank. 10.28 Amended and restated credit agreement dated November 22, 2001, between Zygo Corporation and Fleet National Bank. 10.29 Amended and restated credit agreement dated June 26, 2002, between Zygo Corporation and Fleet National Bank. 10.30 Subcontract B514527 between The Regents of the University of California Lawrence Livermore National Laboratory and Zygo Corporation dated April 14, 2001. 10.31 Subcontract B519044 between The Regents of the University of California Lawrence Livermore National Laboratory and Zygo Corporation dated January 14, 2002. 21. Subsidiaries of Registrant 23. Accountants' Consent 24. Power of Attorney 99.1 Certification
EX-10.21 3 e89840_ex10-21.txt AMENDED & RESTATED CREDIT AGREEMENT EXHIBIT 10.21 AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF MAY 14, 2001 AMONG ZYGO CORPORATION AS BORROWER AND GUARANTOR ZTO PROPERTY HOLDINGS, LLC AS BORROWER AND GUARANTOR ZYGO TERAOPTIX, INC. AS GUARANTOR AND FLEET NATIONAL BANK, AS LENDER TABLE OF CONTENTS ARTICLE I DEFINITIONS AND ACCOUNTING TERMS....................................2 Section 1.1 Defined Terms..............................................2 Section 1.2 Terms Generally...........................................17 Section 1.3 Computation of Time Periods...............................17 Section 1.4 Conflicting Terms.........................................18 ARTICLE II AMOUNT AND TERMS OF THE CREDITS...................................18 Section 2.1 The Loans.................................................18 Section 2.2 Letters of Credit.........................................18 Section 2.3 Procedure for Revolving Loans; Certain Conditions; the Revolving Loan Note...................................19 Section 2.4 Procedure for Construction Loan Advances; Certain Conditions; Conversion to Converted Construction Loan; Construction Loan Note..............................19 Section 2.5 Procedure for Letters of Credit; Certain Conditions.......21 Section 2.6 Method of Payment, Direct Debits, Payment Date Adjustments, Application of Payments......................23 Section 2.7 Use of Proceeds...........................................24 Section 2.8 Fees......................................................24 Section 2.9 Interest Rates............................................24 Section 2.10 Interest Periods and Continuation of Interest Periods.....26 Section 2.11 Conversion of Loans.......................................27 Section 2.12 Late Payment..............................................27 Section 2.13 Repayments and Prepayments of Loans.......................27 Section 2.14 Illegality................................................28 Section 2.15 Intentional Omitted.......................................29 Section 2.16 Basis for Determining LIBOR Base Rate Inadequate or Unfair.................................................29 Section 2.17 Indemnity.................................................29 Section 2.18 Intentionally Omitted.....................................30 Section 2.19 Obligations Absolute......................................30 Section 2.20 Independent Obligations...................................30 Section 2.21 Required Hedge............................................31 ARTICLE III CONDITIONS PRECEDENT.............................................31 Section 3.1 Conditions Precedent to Effectiveness.....................31 Section 3.2 Conditions Precedent to Loans.............................33 ARTICLE IV REPRESENTATIONS AND WARRANTIES....................................33 Section 4.1 Incorporation, Good Standing, and Due Qualification.......33 Section 4.2 Corporate Power and Authority.............................34 Section 4.3 Legally Enforceable Agreement.............................34 Section 4.4 Governmental Approvals....................................34 Section 4.5 Financial Statements and Condition: Full Disclosure.......34 Section 4.6 Other Agreements, No Default..............................35 Section 4.7 Litigation................................................35 Section 4.8 Subsidiaries..............................................35 -i- Section 4.10 Operation of Business.....................................35 Section 4.10 Taxes.....................................................36 Section 4.11 Federal Reserve Regulations...............................36 Section 4.12 Fiscal Year...............................................36 Section 4.13 No Broker's Fees, etc.....................................36 Section 4.14 Investment Company Act, Public Utility Holding Company Act...............................................36 Section 4.15 Environmental Matters.....................................36 Section 4.16 Compliance with Laws......................................37 Section 4.17 Defaults, Events of Default and Material Adverse Effect...37 Section 4.18 Labor Disputes and Acts of God............................37 Section 4.19 ERISA.....................................................38 Section 4.20 Insurance.................................................38 Section 4.21 Location of Real Property and Leased Premises.............38 Section 4.22 Mortgage and Collateral Assignment of Leases and Rentals..38 Section 4.23 Public Filings............................................38 ARTICLE V AFFIRMATIVE COVENANTS..............................................38 Section 5.1 Maintenance of Existence..................................39 Section 5.2 Maintenance of Records....................................39 Section 5.3 Business and Properties...................................39 Section 5.4 Maintenance of Insurance..................................39 Section 5.5 Obligations and Taxes.....................................40 Section 5.6 Right of Inspection.......................................40 Section 5.7 Reporting Requirements....................................40 Section 5.8 Litigation and other Notices..............................41 Section 5.9 Collateral................................................41 Section 5.10 Defend Collateral.........................................41 Section 5.11 Additional Guarantors.....................................41 Section 5.15 Further Assurances........................................42 Section 5.16 Comply with Bank Swap Agreement...........................42 ARTICLE VI NEGATIVE COVENANTS................................................42 Section 6.1 Mergers, Consolidations and Acquisitions..................42 Section 6.2 Change Name; Location or State of Incorporation...........42 Section 6.3 Fiscal Year...............................................42 Section 6.4 Declaration of Negative Covenant..........................43 ARTICLE VII FINANCIAL COVENANTS..............................................43 Section 7.1 Consolidated Fixed Charge Coverage Ratio..................43 Section 7.2 Consolidated Senior Funded Debt-to-EBITDA Ratio...........43 ARTICLE VIII SECURITY........................................................43 Section 8.1 Security..................................................43 ARTICLE IX EVENTS OF DEFAULT.................................................43 Section 9.1 Events of Default.........................................43 -ii- ARTICLE X GENERAL PROVISIONS.................................................46 Section 10.1 Expenses..................................................46 Section 10.2 Amendments, Etc...........................................46 Section 10.3 Notices, Etc..............................................47 Section 10.4 No Waiver; Remedies.......................................48 Section 10.5 Successors and Assigns....................................48 Section 10.6 Transfer of Lender's Interests............................49 Section 10.7 Costs, Expenses, Indemnification..........................50 Section 10.8 Right of Setoff...........................................51 Section 10.9 Governing Law; Jurisdiction; Waivers......................52 Section 10.10 Payment Set-Aside.........................................53 Section 10.11 Entire Agreement, Severability of Provisions..............53 Section 10.12 Waivers of Jury Trial, Consequential Damages, Etc.........54 Section 10.13 Replacement of a Note or other Loan Document..............54 Section 10.14 Survival of Agreement.....................................54 Section 10.15 Construction..............................................55 Section 10.16 Captions..................................................55 Section 10.17 Counterparts..............................................55 EXHIBITS: Exhibit A Form of Revolving Loan Note Exhibit B Form of Construction Loan Note SCHEDULES: Schedule A Construction Loan Terms and Conditions Schedule Schedule 4.7 Litigation Schedule 4.8 Subsidiaries Schedule 4.15 Environmental Matters Schedule 4.20 Insurance Schedule 4.21(a) Real Property-Owned Schedule 4.21(b) Real Property-Leased Schedule 6.2 Business Locations -iii- AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT ("AGREEMENT"), dated as of the 14th day of May, 2001, by and among ZYGO CORPORATION, a Delaware corporation with its principal place of business located at Laurel Brook Road, Middlefield, Connecticut 06455 ("ZYGO"), ZTO PROPERTY HOLDINGS, LLC, a Delaware limited liability company with its principal place of business located at 20 Walkup Drive, Westborough, Massachusetts 01581 ("ZTO"), ZYGO TERAOPTIX, INC., a Delaware corporation with its principal place of business located at 100 Kuniholm Drive, Holliston, Massachusetts 01746 ("TERAOPTIX" and together with Zygo and ZTO, the "OBLIGORS") and FLEET NATIONAL BANK, a national banking institution with a place of business at 777 Main Street, Hartford, Connecticut 06115 ("LENDER") PREAMBLE WHEREAS, Zygo and Lender are parties to that certain Loan Agreement dated June 3, 1997, as amended by a First Amendment to Loan Agreement dated March 1, 2000 (as amended, the "EXISTING LOAN AGREEMENT"), pursuant to which Lender has extended to Zygo a revolving loan in the original principal amount of up to $3,000,000 (the "EXISTING REVOLVING LOAN"), made pursuant to the terms and conditions of, and as evidenced by, in addition to the Existing Loan Agreement, a Promissory Note dated June 4, 1997 from Zygo to Lender in such amount (the "EXISTING REVOLVING LOAN NOTE"); WHEREAS, the Lender has also extended to Zygo a $5,000,000 bridge loan (the "BRIDGE LOAN") as evidenced by a Promissory Note in the original principal amount of $5,000,000 dated November 29, 2000; and WHEREAS, TeraOptix guaranteed all obligations of the Zygo to the Lender under the Bridge Loan pursuant to a Continuing Guaranty Agreement dated November 29, 2000 (the "EXISTING GUARANTY"); and WHEREAS, the Obligors have requested Lender, and Lender has agreed: (a) to extend to ZTO a $12,560,000 construction line of credit-to-permanent term loan, the proceeds of which will be used by ZTO to repay the Bridge Loan and to finance the construction on the Property (as defined below) of an approximately 80,000 square foot expansion to the facility at which TeraOptix conducts or will conduct its business, and (b) to extend the maturity date of the Existing Revolving Loan to November 22, 2001; and WHEREAS, the Obligors and Lender desire to amend and restate the Existing Loan Agreement and certain of the other Loan Documents (as such term is defined in the Existing Loan Agreement) in order to memorialize their understandings and agreements with respect to the foregoing, and further desire to confirm that the terms and provisions of this Agreement and the other Loan Documents (as such term is defined below) shall supersede and replace the Existing Loan Agreement, the other Loan Documents and control and govern the Loans, including, but not limited to, the Existing Revolving Loan. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties to this Agreement do each hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms. The following capitalized terms are used in this Agreement with the respective meanings set forth in this Section 1.1: "Adjustment Date" means the Initial Adjustment Date and each date thereafter which is the first day following Lender's actual receipt of both of (a) the applicable quarterly compliance certificate of Zygo required under Section 5.7(b) hereof, and (b) either (i) Zygo's quarterly consolidated financial statements required to be delivered under Section 5.7(b) hereof for the quarterly and fiscal year-to-date periods ending on the last day of each of the first three (3) fiscal quarters of Zygo, or (ii) Zygo's consolidated annual financial statements required to be delivered under Section 5.7(a) hereof, as applicable. "Affiliate" means, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with, the Person specified and shall include another Person who Controls ten percent (10%) or more (on a fully diluted basis) of the voting securities or other equity interest of the Person specified. "Agreement" means this Amended and Restated Credit Agreement, as amended, restated, supplemented, or otherwise modified and in effect from time to time. "Applicable Margin" means for each LIBOR Loan then outstanding: (a) for the period commencing on the date hereof and ending on the day immediately preceding the Initial Adjustment Date, 1.0% above the applicable LIBOR Rate; and (b) for each period commencing on an Adjustment Date (including, but not limited to, the Initial Adjustment Date) and ending on the day immediately preceding the next Adjustment Date, the percentage rate set forth below opposite the level of Zygo's consolidated financial performance as measured by its Consolidated Leverage Ratio as of the end of its most recent fiscal quarter for the then ended Rolling Period (as determined on the basis of the financial statements required to be delivered in respect of such Adjustment Date): -2- - -------------------------------------------------------------------------------- LIBOR LEVEL CONSOLIDATED LEVERAGE RATIO MARGIN - -------------------------------------------------------------------------------- I =>1.25x 1.50% - -------------------------------------------------------------------------------- II =>.75x < 1.25x 1.25% - -------------------------------------------------------------------------------- III <.75x 1.00% - -------------------------------------------------------------------------------- By way of illustration, if Zygo's Consolidated Leverage Ratio on June 30, 2001 is .70 to 1.0, then, effective on the first day following the date upon which Zygo's June, 2001 quarterly compliance certificate and quarterly financial statements are received by Lender, the interest rate applicable to the LIBOR Loans shall be adjusted (if not the same) to be priced at the LIBOR Rate plus 1.00%. "Available Amount" of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions of drawing). "Bank Swap Agreement" means each Swap Agreement between ZTO and Lender whether now existing or hereafter arising, together with any and all Schedules and all Confirmations related thereto, including without limitation, the Schedules and/or Confirmations related to the Converted Construction Loan, if any. "Bridge Loan" means that term as defined in the preamble to this Agreement. "Business Day" means a day other than a Saturday, Sunday, or a day on which banks in the State of Connecticut or Commonwealth of Massachusetts are required or authorized by law to be closed. "Capital Expenditures" means, for any period, the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability) of the Obligors during such period that, in accordance with GAAP, are or should be included in "additions to property, plant and equipment" or similar items reflected in the consolidated statement of cash flows of the Obligors for such period (including the amount of assets leased in connection with any Capital Lease Obligation). "Capital Lease Obligations" means all obligations of the Obligors to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations would properly be classified and accounted for as Capital Leases on the consolidated balance sheet of the Obligors under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Capital Leases" means all leases of property (whether real, personal or mixed) which have been or should be capitalized on the books of the lessee thereof in accordance with GAAP. -3- "CMLTD" means, for any period with respect to all Debt of the Obligors which, in accordance with GAAP, may be properly classified as long-term debt, the portion of such Debt which was due and payable (whether or not paid) during such period, including, but not limited to, Capital Lease Obligations payable during such period. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means all the "Collateral" and "Property" as defined in any Security Document and all other property now or hereafter subject to the Liens granted in the Security Documents. "Collateral Assignment of Architect's Contract" means that certain Collateral Assignment of Architect's Contract from TeraOptix to the Lender dated as of the date hereof. "Collateral Assignment of General Contractor's Contract" means that certain Collateral Assignment of General Contractor's Contract from TeraOptix to the Lender dated as of the date hereof. "Collateral Assignments of Leases and Rentals" means that certain Collateral Assignments of Leases, Rentals and Property Income from ZTO in favor of Lender dated of even date herewith relating to the Westborough Property. "Commitments" means the Revolving Loan Commitment, the L/C Commitment and the Construction Loan Commitment. "Commitment Fee" means that term as defined in Section 2.8. "Consolidated Fixed Charge Coverage Ratio" means, for each applicable Rolling Period, the ratio of (a) EBIDA for such period, to (b) the sum of (i) CMLTD for such period, (ii) Interest Expense for such period, and (iii) Distributions made by any of the Obligors for such period. "Consolidated Leverage Ratio" means, for each applicable Rolling Period, the ratio of (a) Total Funded Debt as of the end of such period, to (b) EBITDA for such period. "Consolidated Senior Funded Debt-to-EBITDA Ratio" means, for each applicable Rolling Period, the ratio of (a) Senior Funded Debt as of the end of such period, to (b) EBITDA for such period. "Construction Loan Advance" means that term as defined in Section 2.1(b). "Construction Loan Commitment" means Lender's commitment to make Construction Loans to ZTO pursuant to Section 2.1(b) in an aggregate principal amount not to exceed at any time outstanding TWELVE MILLION FIVE HUNDRED SIXTY THOUSAND AND NO/100 DOLLARS ($12,560,000). "Construction Loan Conversion Date" means February 14, 2002. -4- "Construction Loan Note" means the construction loan promissory note of ZTO dated the date of this Agreement and payable to the order of Lender in substantially the form of Exhibit B hereto, evidencing the Obligations arising under the Construction Loans and the Converted Construction Loan, and any and all substitutions and replacements thereof, all as the same may be amended and/or modified from time to time. "Construction Loan Notice of Borrowing" means that term as defined in Section 2.4(a). "Construction Loan Terms and Conditions Schedule" means the Construction Loan Terms and Conditions attached hereto as Schedule A. "Contaminant" means any pollutants, hazardous or toxic substances or wastes or contaminated materials, including, but not limited to, oil and oil products, asbestos, asbestos containing materials, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls, flammables, explosives, radioactive materials, laboratory wastes, biohazardous wastes, chemicals, elements, compounds or any other materials and substances (including materials, substances or things which are composed of or which have as constituents any of the foregoing substances), which are or may be subject to regulation under, or the Release of which or exposure to which is prohibited, limited or regulated under, any Environmental Law. "Control" means the possession, directly or indirectly, of the legal power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise, and the terms "Controlling" and "Controlled" shall have the meanings correlative thereto. "Converted Construction Loan" means that term as defined in Section 2.4(c). "Debt", of any Person, means, without duplication: (a) all indebtedness or liability of such Person for borrowed money, or with respect to deposits or advances of any kind; (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments; (c) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person; (d) all obligations of such Person issued or assumed as the deferred purchase price of property or services (including trade obligations and accrued obligations incurred in the ordinary course of business which are not more that sixty (60) calendar days past due); (e) all indebtedness or liability of others secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed; (f) all obligations of such Person under Capital Leases; (g) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements; (h) current liabilities of such Person in respect of any Plan; (i) obligations of such Person under letters of credit, bankers acceptances or comparable arrangements; (j) all obligations of such Person under guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations of such Person to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; and (k) all other indebtedness of such Person that in accordance with GAAP is classified as liabilities upon the balance sheet of such -5- Person or to which reference is made by footnotes thereto. The Debt of any Person (x) shall include the Debt of any partnership in which such Person is a general partner, and (y) in the case of any limited recourse liability, shall not exceed the amount of such recourse. "Default" means an event or condition the occurrence or existence of which, with the lapse of time or the giving of a required notice, or both, would constitute an Event of Default. "Default Rate" means that term as defined in Section 2.9(b). "Distributions" means, as to any Person, the following: (a) the declaration or payment of any dividend or distribution (whether in cash, property or otherwise) on or in respect of the shares of any class of capital stock or of the equivalent equity interests of such Person, except dividends payable solely in such shares or equity interests; and (b) any other dividend or distribution for any purpose by such Person (however characterized, except for salaries, directors' fees, bonuses and other forms of compensation for services rendered to such Person), including without limitation, inter-company loans and guarantees, to or for the benefit of any or all of its shareholders or equity holders, Affiliates and/or Subsidiaries, whether paid on or in respect of the shares of any class of capital stock or equivalent equity interests of such Person or otherwise. "Dollar" and the sign "$" means lawful money of the United States of America. "Drawdown Date" means the date on which any Revolving Loan or any Construction Loan Advance is made. "EBIDA" means, for any period, the sum of (a) Net Income for such period, (b) Interest Expense for such period, and (c) amortization and depreciation deducted in determining such Net Income. "EBITDA" means, for any period, the sum of (a) Net Income for such period, (b) any provision for (or less any benefit from) income and franchise taxes included in the determination of such Net Income, (c) Interest Expense for such period, and (d) amortization and depreciation deducted in determining such Net Income. "Environment" means ambient air, surface water and groundwater (including potable water, navigable water and wetlands), the land surface or subsurface strata, the workplace or as otherwise defined in any Environmental Law. "Environmental Claim" means any accusation, allegation, notice of violation, claim, demand, order, directive, cost recovery action or other cause of action by, or on behalf of, the U.S. Environmental Protection Agency, any other Governmental Authority or any other Person, for damages, injunctive or equitable relief, personal injury (including sickness, disease or death), Remedial Action costs, tangible or intangible property damage, natural resource damages, nuisance, pollution, any adverse effect on the Environment caused by any Contaminant, or for fines, penalties or restrictions, resulting from or based upon (a) the existence, or the continuance of the existence, of a Release (including sudden or non-sudden, accidental or non-accidental Releases), (b) exposure to any Contaminant, (c) the presence, use, handling, transportation, storage, treatment, or disposal of any Contaminant, or (d) the violation or alleged violation of any Environmental Law. -6- "Environmental Indemnity Agreement" means that certain Environmental Indemnity Agreement among the Obligors and the Lender dated as of the date hereof relating to the Westborough Property. "Environmental Law" means any and all applicable present and future treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the Environment, preservation or reclamation of natural resources, the management, use, treatment, storage, disposal, transportation, transfer, generation, processing, production, refining, control, handling, Release or threatened Release of any Contaminant or to health and safety matters (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. ss.9601 et seq. (collectively, "CERCLA"); the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. ss.6901 et seq.; the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. ss.1251 et seq.; the Clean Air Act of 1970, as amended, 42 U.S.C. ss.7401 et seq.; The Toxic Substances Control Act of 1976, as amended, 15 USC ss.2601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986 (also known as SARA Title III), as amended, 42 USC ss. 11001 et seq.; the Safe Drinking Water Act of 1974, as amended, 42 USC ss.300(f) et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, as amended, 7 USC ss.136 et seq.; the Occupational Safety and Health Act of 1970, as amended, 29 USC ss.651 et seq.; the Endangered Species Act, as amended, 16 USC ss.1531 et seq.; the National Environmental Policy Act, as amended, 42 USC ss.4321 et seq.; the Rivers and Harbors Act of 1899 33 USC ss.401 et seq., and any similar or implementing state or local law, rule or regulation); all laws, rules and regulations governing underground or above-ground storage tanks, conditioning transfer of property upon a form of negative declaration or other approval of a Governmental Authority of the environmental condition of a property or requiring the disclosure of conditions relating to Contaminants in connection with transfer of title to or interest in property; conditions or requirements imposed in connection with any Environmental Permits; government orders and demands and judicial orders pursuant to any of the foregoing; any and all other laws, rules and regulations of any Governmental Authority relating to the protection of human health or the Environment from Contaminants; and all amendments or regulations promulgated under any of the foregoing. "Environmental Permit" means any permit, approval, authorization, certificate, license, variance, filing or permission required by or from any Governmental Authority pursuant to any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, the regulations and published official interpretations thereunder and judicial interpretations thereof. "ERISA Affiliate" means any trade or business (whether or not incorporated) which, together with any of the Obligors, is treated as a single employer under Section 414(b), (c) (m) or (o) of the Code. -7- "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan, whether or not notice is waived; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303 of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or Multiemployer Plan; (f) the receipt by any Obligor or any ERISA Affiliate from the PBGC of any notice relating to the intention to terminate any Plan or to appoint a trustee to administer any Plan or the intention to terminate any Plan subject to Title IV of ERISA; (g) the receipt by any Obligor or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited transaction" with respect to which any Obligor or any of its Subsidiaries is a "disqualified person" (within the meaning of Section 4975 of the Code) or with respect to which any Obligor or any such Subsidiary could otherwise be liable; (i) the notice of the IRS with respect to any defect with respect to the qualification of any Plan; (j) the voluntary or involuntary correction of any form or operational defect with respect to any Plan or the failure to correct any known defect; (k) the imposition of any retroactive rate increase or other charge with respect to any Welfare Plan; (l) the failure to timely remit contributions to any Plan pursuant to ERISA Regulations sections 2510.3-102; and (m) any other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be expected to result in a Material Adverse Effect. "Event of Default" means any of the events specified in Section 9.1. "Existing Loan Agreement" means that term as defined in the preamble to this Agreement. "Existing Loan and Security Documents" means the Existing Loan Agreement and the other Loan Documents (as that term as defined in the Existing Loan Agreement). "Existing Revolving Loan Note" means that term as defined in the preamble to this Agreement. "Fiscal Year" means the fiscal year of Zygo ending on June 30th of each calendar year. For purposes of this Agreement, any particular Fiscal Year shall be designated by reference to the calendar year in which such Fiscal Year ends. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. -8- "Governmental Authority" means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government. "Guarantor" means, initially, TeraOptix, ZTO and Zygo and hereafter, shall include each other subsidiary of any of the Obligors accounting for ten percent (10%) or more of the consolidated assets or consolidated revenues of the Obligors and their Subsidiaries. "Guaranty Agreement" means, initially, those certain Continuing Guaranty Agreements dated of even date herewith executed by each of TeraOptix, ZTO and Zygo in favor of Lender and hereafter, shall include each other guaranty agreement entered into by any other Guarantor on or after the date hereof as required hereby, in each case as amended, restated, supplemented, or otherwise modified and in effect from time to time. "Head Office" means the principal office of Lender at 777 Main Street, Hartford, Connecticut. "Initial Adjustment Date" means the first day following Lender's receipt of Zygo's consolidated annual financial statements required to be delivered under Section 5.7(a) hereof for the Fiscal Year ending on June 30, 2001. "Interest Expense" means, for any period, the consolidated interest expense net of interest income of the Obligors for such period (whether paid or accrued) on all Debt outstanding during all or any part of such period, whether such interest was or is required to be reflected as an item of expense or capitalized, including without limitation, payments consisting of interest in respect of Capital Leases. "Interest Period" means (a) as to any Revolving Loan or Construction Loan Advance or any portion or portions thereof which bears interest at a rate determined by reference to the LIBOR Rate, an available period of one (1) month commencing on the date upon which such Loan is made or is continued as a LIBOR Loan or is converted from a Prime Rate Loan to a LIBOR Loan, as the case may be, and shall end on the last London Business Day of such Interest Period, and (b) as to the Converted Construction Loan, or any portion or portions thereof which bears interest at a rate determined by reference to the LIBOR Rate, an available period of one (1) month commencing on the Construction Loan Conversion Date or the date upon which such Loan is continued as a LIBOR Loan or is converted from a Prime Rate Loan to a LIBOR Loan, as the case may be, and shall end on the last London Business Day of such Interest Period; PROVIDED, HOWEVER, that the foregoing provisions are subject to the following: (i) if any Interest Period would otherwise end on a day which is not a London Business Day, such Interest Period shall be extended to occur on the next succeeding London Business Day; provided, however, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding London Business Day; -9- (ii) any Interest Period that begins on the last London Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last London Business Day of a calendar month; (iii) no Interest Period shall end after the Maturity Date of the applicable Loan; (iv) no Interest Period with respect to any Construction Loan Advance shall end after the Construction Loan Conversion Date; and (v) no Interest Period with respect to the Converted Construction Loan shall end after any regularly scheduled principal payment date set forth in the Construction Loan Note. "L/C Commitment" means the Lender's commitment to issue standby and/or commercial Letters of Credit pursuant to Section 2.2 of this Agreement in an outstanding face amount not to exceed at any time THREE MILLION AND NO/100 DOLLARS ($3,000,000). "L/C Disbursement" means a payment or disbursement made by the Lender pursuant to a standby and/or commercial Letter of Credit. "Legal Requirements" means, as to such Person, all Federal, state and local statutes, ordinances, by-laws, codes, rules, rulings, regulations, licenses, permits, approvals, restrictions, orders, judgments, decrees, writs, judicial or administrative interpretations and injunctions (including, without limitation, licensing and other regulatory statutes, ERISA, the Code, the terms of each Plan and each Welfare Plan, and the United States Occupational Safety and Health Act of 1970, as amended), whether now or hereafter enacted, promulgated or issued by any Governmental Authority affecting such Person or the ownership and/or operation of such Person's business and/or assets. "Lender" means Fleet National Bank, or any successors or assigns thereof. "Lender Parties" means that term as defined in Section 10.7(a). "Letter of Credit" means each standby and/or commercial letter of credit issued by the Lender pursuant to Section 2.2 hereof for the account of Zygo. "Letter of Credit Annual Fee" means for each Letter of Credit then outstanding: (a) for the period commencing on the date hereof and ending on the day immediately preceding the Initial Adjustment Date, a per annum fee equal to 1.0% of the face amount of such Letter of Credit; and (b) for each period commencing on an Adjustment Date (including, but not limited to, the Initial Adjustment Date) and ending on the day immediately preceding the next Adjustment Date, a per annum fee equal to the percentage of the face amount of such Letter of Credit set forth -10- below opposite the level of Zygo's consolidated financial performance as measured by its Consolidated Leverage Ratio as of the end of its most recent fiscal quarter for the then ended Rolling Period (as determined on the basis of the financial statements required to be delivered in respect of such Adjustment Date): - -------------------------------------------------------------------------------- LETTER OF CREDIT LEVEL CONSOLIDATED LEVERAGE RATIO ANNUAL FEE - -------------------------------------------------------------------------------- I =>1.25x 1.50% - -------------------------------------------------------------------------------- II =>.75x < 1.25x 1.25% - -------------------------------------------------------------------------------- III <.75x 1.00% - -------------------------------------------------------------------------------- By way of illustration, if Zygo's Consolidated Leverage Ratio on June 30, 2001 is .70 to 1.0, then, effective on the first day following the date upon which Zygo's June, 2001 quarterly compliance certificate and quarterly financial statements are received by Lender, the Letter of Credit Annual Fee applicable to each outstanding Letter of Credit shall be adjusted (if not the same) to a per annum fee equal to 1.0% of the face amount of such Letter of Credit. "Letter of Credit Fees" means that term as defined in Section 2.8(b). "LIBOR Base Rate" means, as applicable to any LIBOR Loan, the rate per annum as determined on the basis of the offered rates for deposits in Dollars, for a period of time comparable to the Interest Period applicable to such LIBOR Loan, which appears on the Telerate page 3750 as of 11:00 a.m. London time on the day that is two (2) London Business Days prior to the first day of the Interest Period applicable to such LIBOR Loan; PROVIDED, HOWEVER, if the rate described above does not appear on the Telerate System on any applicable interest determination date, the LIBOR Base Rate shall be the rate (rounded upwards, if necessary, to the nearest one hundred-thousandth of a percentage point determined on the basis of the offered rates for deposits in Dollars for a period of time comparable to the Interest Period applicable to such LIBOR Loan which are offered by four (4) major banks in the London interbank market at approximately 11:00 a.m. London time on the day that is two (2) London Business Days prior to the first day of the Interest Period applicable to such LIBOR Loan as selected by Lender. The principal London office of each of the four major London banks will be requested to provide a quotation of its Dollar deposit offered rate. If at least two (2) such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer that two (2) quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in Dollars to leading European banks for a period of time comparable to the Interest Period applicable to such LIBOR Loan offered by major banks in New York City at approximately 11:00 a.m. New York City time, on the day that is two (2) London Business Days prior to the first day of the Interest Period applicable to such LIBOR Loan. In the event that Lender is unable to obtain any such quotation as provided above, it will be deemed that a LIBOR -11 Loan is unavailable and, accordingly, such requested LIBOR Loan shall initially be made as, or be converted to, a Prime Rate Loan, as the case may be. "LIBOR Loan" means any Revolving Loan, any Construction Loan Advance or the Converted Construction Loan, or any portion or portions of any thereof, at such time as the same bears interest at a rate determined by reference to the LIBOR Rate. "LIBOR Rate" means, for any LIBOR Loan for any Interest Period, an interest rate per annum determined pursuant to the following formula, as adjusted from time to time in order to reflect changes in the Reserve Percentage: LIBOR Rate = LIBOR Base Rate ---------------------- 1 - Reserve Percentage "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, whether based on common law, statute, or contract, (b) the interest of a vendor or a lessor under any conditional sale agreement, Capital Lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset, and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan" means, as the context requires, a Revolving Loan, a Construction Loan Advance or the Converted Construction Loan. "Loan Documents" means all now existing or hereafter arising instruments, loan agreements and any other agreements and documents governing, evidencing, guarantying, securing or otherwise relating to any or all of the Obligations, together with all amendments, modifications, renewals or extensions thereof, including without limitation, this Agreement, the Notes, the Security Documents, the Environmental Indemnity Agreement, the Guaranty Agreement, the Bank Swap Agreements, the Reimbursement Agreements, the Existing Loan and Security Documents (if and to the extent not otherwise expressly superseded by another Loan Document), and all other promissory notes, guaranties, mortgages, security documents, deeds to secure debt, deeds of trust, pledges, assignments, contracts, negative pledges, powers of attorney, landlord waivers, trust account agreements, and written matters, whenever executed and delivered to Lender, with respect to the transactions contemplated by this Agreement. "London Business Day" means a Business Day on which dealings in Dollar deposits are also carried on in the London interbank market and banks are open for business in London, England. "Margin Stock" means that term as defined in Regulation U. "Material Adverse Effect" means (a) a material adverse effect on the business, condition (financial or otherwise), operations or properties of the Obligors, taken as a whole, (b) material impairment of the validity or enforceability of this Agreement or any of the other Loan Documents as against any Obligor, (c) material impairment of the ability of Lender to enforce any of the rights and remedies of Lender hereunder or under any other Loan Document, or (d) -12- material impairment of the ability of any Obligor to perform their respective obligations under any Loan Document to which any of them is or will be a party "Maturity Date" means (a) with respect to the Revolving Loan Commitment, November 22, 2001, and any subsequent date to which such Maturity Date may be extended by Lender in writing in its sole and absolute discretion, (b) with respect to the L/C Commitment, November 22, 2001, and (c) with respect to the Converted Construction Loan, May 14, 2007. "Mortgage" means that certain Mortgage and Security Agreement with Assignment of Rents and Fixture Filing of ZTO in favor of Lender dated the date hereof pursuant to which ZTO has granted to Lender a Lien on all of its rights, title and interests in and to the Westborough Property. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which any Obligor or any ERISA Affiliate (a) is making or accruing an obligation to make contributions, or (b) has within any of the preceding five plan years made or accrued an obligation to make contributions and has any Withdrawal Liability which has not been satisfied in full. "Net Income" means, for any period, the consolidated net income (or loss) for such period of the Obligors determined in accordance with GAAP, but excluding extraordinary or non-recurring gains or losses, as defined under GAAP, net of related tax effects. "Notes" means (a) the Revolving Loan Note, and (b) the Construction Loan Note. "Obligations" means all loans, advances, interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), Debt (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), liabilities, obligations, guaranties, indemnities, covenants and duties at any time owing by any of the Obligors to Lender, of every kind and description, whether or not evidenced by any note or other instrument, whether or not for the payment of money, whether direct or indirect, primary or secondary, absolute or contingent, due or to become due, now existing or hereafter arising, including, but not limited to, the Obligations arising under the Notes, the Bank Swap Agreements, the Reimbursement Agreements or any of the other Loan Documents, and all reasonable costs, expenses, fees, charges and attorneys' (both outside and in-house), paralegals' and professional fees incurred in connection with any of the foregoing, or in any way involving or relating to the preservation, enforcement, protection or defense of, or realization under this Agreement, any of the Notes, the Bank Swap Agreement, any of the Reimbursement Agreement or any of the other Loan Documents, any related agreement, document or instrument, and the rights and remedies hereunder or thereunder, including without limitation, all reasonable costs, expenses and fees incurred in connection with any "workout" or default resolution negotiations involving legal counsel or other professionals and further in connection with any re-negotiation or restructuring of the indebtedness evidenced by this Agreement, any of the Notes, the Bank Swap Agreement, any of the Reimbursement Agreements and/or any of the other Loan Documents. -13- "Obligors" has the meaning set forth in the beginning of this Agreement and shall include hereafter any Person who becomes a Guarantor after the date hereof pursuant to Section 5.14 hereof. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means any natural person, sole proprietorship, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, organization, joint venture, institution, Governmental Authority, or other entity of any nature whatsoever. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of ERISA or the Code, and in respect of which any Obligor or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA or Section 414 of the Code. "Prime Rate" means, at any time of reference, the variable per annum rate of interest so designated from time to time by the Lender as its prime rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. "Prime Rate Loan" means any Revolving Loan, any Construction Loan Advance or the Converted Construction Loan, or any portion or portions of any thereof, at such time as the same bears interest at a rate determined by reference to the Prime Rate. "Property" means each real property owned, leased or occupied by any Obligor, including, but not limited to, the Westborough Property. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System of the United States as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation G" means Regulation G of the Board of Governors of the Federal Reserve System of the United States as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System of the United States as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System of the United States as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System of the United States as from time to time in effect and all official rulings and interpretations thereunder or thereof. -15- "Reimbursement Agreement" means that term as defined in Section 2.5(a) hereof. "Release" means any spilling, leaking, migrating, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, emanating or migrating of any Contaminant in, into, onto or through the Environment. "Remedial Action" means (a) "remedial action" as such term is defined in CERCLA, 42 U.S.C. 9601(24), and (b) all other actions required by any Governmental Authority or voluntarily undertaken to (i) clean up, remove, treat, abate or in any way address any Contaminant in the Environment, (ii) prevent the Release or threat of Release, or minimize the further Release of any Contaminant so it does not migrate or endanger or threaten to endanger public health, welfare or the Environment, or (iii) perform studies and investigations in connection with, or as a precondition to, (i) or (ii) above. "Reserve Percentage" means, for any Interest Period for all LIBOR Loans, the maximum reserve percentage requirement (including all basic, supplemental, marginal and other reserves) which is imposed on member banks of the Federal Reserve System against "Euro-currency Liabilities" as defined in Regulation D (or in the case of the fallback rate under the Bank Swap Agreement, if applicable, for the type of deposits or liabilities on which the fallback rate is based). "Revolving Loan" means that term as defined in Section 2.1(a). "Revolving Loan Commitment" means Lender's commitment to make Revolving Loans to Zygo pursuant to Section 2.1(a) in an aggregate principal amount not to exceed at any time outstanding THREE MILLION AND NO/100 DOLLARS ($3,000,000). "Revolving Loan Note" means the Replacement Revolving Loan Promissory Note of Zygo payable to the order of Lender, a copy of which is attached hereto as Exhibit A attached hereto, evidencing the Obligations arising from the Revolving Loans, and any and all substitutions and replacements thereof, all as the same may be amended and/or modified from time to time, which Revolving Loan Note shall amend to the extent it amends, restate to the extent it restates, supersede and replace the Existing Revolving Loan Note in its entirety. The amendment and restatement of the Existing Revolving Loan Note shall in no way be construed as a novation of Zygo's indebtedness to Lender evidenced by the Existing Revolving Loan Note. "Revolving Loan Notice of Borrowing" means that term as defined in Section 2.3(a). "Rolling Period" means, with respect to any fiscal quarter of Zygo, such fiscal quarter and the three consecutive fiscal quarters immediately prior thereto. "Security Documents" means the Mortgage, the Collateral Assignment of Leases and Rentals, the Collateral Assignment of Architect's Contract, the Collateral Assignment of General Contractor's Contract and all other Loan Documents, contracts, assignments, instruments and the like now or hereafter securing all or a portion of the Obligations. "Senior Funded Debt" means Total Funded Debt minus Subordinated Debt. -15- "Solvent" means, as to any Person, that such Person (a) has capital sufficient to carry on its business and transactions in accordance with all material Legal Requirements and all business and transactions in which it is about to engage; (b) is able to pay its Debts as they mature; and (c) owns property whose fair salable value is greater than the amount required to pay its Debts. "Subordinated Debt" means any and all Debt of any of the Obligors which is fully and absolutely subordinated in right of payment to the full and final payment in cash of the Obligations pursuant to written agreements satisfactory to Lender as to form and substance, in its sole discretion, as evidenced by its written approval thereof. "Subsidiary" means, with respect to any Obligor, any corporation, partnership, association, limited liability company or other business entity of which securities or other ownership interests representing more than fifty percent (50%) of the equity or more than fifty percent (50%) of the ordinary voting power or more than fifty percent (50%) of the general partnership interests are, at the time any determination is being made, owned, Controlled, or held by such Obligor or one or more Subsidiaries of such Obligor. "Swap Agreement" means the ISDA Master Agreement or any other swap agreement (as defined in 11 United States Code Section 101), including the Schedules and all Confirmations related thereto (as such terms are defined in the ISDA Master Agreement). "Total Funded Debt" means the consolidated indebtedness and liability of the Obligors for borrowed money. "Type", when used in respect of any Loan, shall refer to the Rate by reference to which interest on such Loan is determined. For purposes hereof, the term "Rate" shall include the LIBOR Rate and the Prime Rate. "Unused Construction Loan Commitment" means, at any time, (a) the Construction Loan Commitment minus (b) the aggregate principal amount of all Construction Loan Advances outstanding at such time (without giving effect to the requested Construction Loan Advance). "Unused L/C Commitment" means, at any time, (a) the L/C Commitment minus (b) the sum of (i) the aggregate Available Amount of all Letters of Credit outstanding at such time (without giving effect to the requested Letter of Credit) and (ii) the aggregate amount of all unreimbursed L/C Disbursements at such time. "Unused Revolving Loan Commitment" means, at any time, (a) the Revolving Loan Commitment minus (b) the aggregate principal amount of all Revolving Loans outstanding at such time (without giving effect to the requested Revolving Loan) minus (c) the aggregate Available Amount of all Letters of Credit outstanding at such time minus (d) the aggregate amount of all unreimbursed L/C Disbursements at such time. "Welfare Plan" means any employee welfare benefit plan as such term is defined in Section 3(l) of ERISA and in respect of which any Obligor or any ERISA Affiliate is an "employer" as defined in Section 3(5) of ERISA. -16- "Westborough Property" means the real property and improvements thereon located at 20 Walkup Drive, Westborough, Massachusetts which is owned by ZTO and operated by TeraOptix. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "Yield Maintenance Fee", with respect to each repayment or prepayment of principal under any Loan which is then a LIBOR Loan (whether such repayment or prepayment is made pursuant to Section 2.13, as a result of acceleration following an Event of Default, or for any other reason), an amount computed as follows: the current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the maturity date of the Interest Period in effect for such LIBOR Loan at the time of such repayment or prepayment shall be subtracted from the LIBOR Rate component of the interest rate in effect under such LIBOR Loan at the time of such repayment. If the result is zero or a negative number, the Yield Maintenance Fee shall be zero. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining in such Interest Period. Said amount shall be reduced to present value calculated by using the above referenced United States Treasury securities rate and the number of days remaining in such Interest Period. Section 1.2 Terms Generally. (a) The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (i) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time (subject to the restrictions on such amendments, restatements, supplements or modifications set forth herein), and (ii) all terms of an accounting or financial nature be construed, and all computations or classifications of assets and liabilities and of income and expenses shall be made or determined in accordance with, GAAP. (b) The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The phrase "after the occurrence and during the continuance of an Event of Default" or words to that effect contained herein or in any other Loan Document shall not be construed, by implication or otherwise, to mean that any Obligor or any other Person shall have a right to cure any such Event of Default (unless otherwise expressly provided herein or therein). Section 1.3 Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" shall mean "from and including" and the words "to" and "until" each mean "to but excluding". -17- Section 1.4 Conflicting Terms. It being the express intention and agreement of the Obligors and Lender that the provisions of this Agreement shall control and govern the Obligations, including, but not limited to, the Obligations under the Existing Revolving Loan, in the event and to the extent that any term or provision of this Agreement conflicts with a similar term or provision contained in another Loan Document, including, but not limited to, any of the surviving Existing Loan and Security Documents, the term or provision of this Agreement shall govern and control. ARTICLE II AMOUNT AND TERMS OF THE CREDITS Section 2.1 The Loans. (a) The Revolving Loans. Subject to the terms and conditions contained in this Agreement, Lender agrees to make working capital loans (each, a "REVOLVING LOAN") to Zygo from time to time on any Business Day until the Maturity Date of the Revolving Loan Commitment in an amount for each such Revolving Loan not to exceed the Unused Revolving Loan Commitment on such Business Day. Within the limits of the Unused Revolving Loan Commitment, Zygo may request Revolving Loans pursuant to Section 2.3, repay all or a portion of outstanding Revolving Loans pursuant to Section 2.13, and request to re-borrow Revolving Loans pursuant to Section 2.3. (b) The Construction Loan Advances. Subject to the terms and conditions contained in this Agreement, Lender agrees to make construction loans (each, a "CONSTRUCTION LOAN ADVANCE") to ZTO from time to time on any Business Day during the period from the date hereof until the Construction Loan Conversion Date in an amount for each such Construction Loan Advance not to exceed the lesser of: (i) that amount which would be available pursuant to and in accordance with the Construction Loan Terms and Conditions Schedule, and (ii) the Unused Construction Loan Commitment Amount on such Business Day. Within the limits of the Construction Loan Terms and Conditions Schedule and the Unused Construction Loan Commitment Amount, ZTO may request Construction Loan Advances under Section 2.4 and repay all or a portion of outstanding Construction Loan Advances pursuant to Section 2.13. No Construction Loan Advance made and subsequently repaid, in whole or in part, may be re-borrowed by ZTO. Section 2.2 Letters of Credit. Subject to the terms and conditions of this Agreement, Zygo may from time to time while the Revolving Loan Commitment remains in effect, request the Lender to issue Letters of Credit for drawing in Dollars (or such other currency as shall be approved by the Lender) for the account of Zygo or to amend, renew or extend an existing Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended on any Business Day, PROVIDED that (a) no Letter of Credit shall be issued in an Available Amount which exceeds the Unused L/C Commitment on such Business Day, and (b) after giving effect to such issuance, amendment, renewal or extension, the sum of (i) the aggregate outstanding principal amount of all Revolving Loans on -18- such Business Day, (ii) the aggregate Available Amount of all outstanding Letters of Credit on such Business Day, and (iii) the aggregate outstanding unpaid L/C Disbursements on such Business Day does not exceed the Revolving Loan Commitment. Section 2.3 Procedure for Revolving Loans; Certain Conditions; the Revolving Loan Note. (a) Revolving Loan Notices of Borrowing. Requests for Revolving Loans may be made only once per Business Day, and shall be made on notice, given by Zygo to Lender not later than (i) 11:00 a.m. (Hartford, Connecticut time) on the proposed Drawdown Date, in the case of requests for Prime Rate Loans, and (ii) 10:00 a.m. (Hartford, Connecticut time) on the second London Business Day prior to the proposed Drawdown Date, in the case of requests for LIBOR Loans. Each such notice (which notice shall be irrevocable and binding on Zygo) of a proposed borrowing (each, a "REVOLVING LOAN NOTICE OF BORROWING") shall be by telephone, confirmed immediately in writing, or by telex, telecopier or other electronic mode of communication, specifying the proposed Drawdown Date (which shall be a Business Day), the amount to be borrowed, the Type of borrowing (which shall be either a Prime Rate Loan or a LIBOR Loan or any combination thereof). All LIBOR Loans which are Revolving Loans shall be for available Interest Periods of one (1) month. If no election as to the Type of Revolving Loan is specified in any such Revolving Loan Notice of Borrowing, then Zygo shall be deemed to have requested such Revolving Loan to be a Prime Rate Loan. In the event that written confirmation of a telephonic Revolving Loan Notice of Borrowing differs in any respect from the action taken by Lender, the records of Lender shall control absent manifest error. Subject to the fulfillment of the applicable conditions set forth in Article III hereof, Lender will, on the Drawdown Date, make the requested Revolving Loan in immediately available funds by crediting the amount thereof to an operating account of Zygo maintained with Lender or as Zygo may otherwise direct. (b) Revolving Loan Note, Evidence of Debt. The Revolving Loans shall be evidenced by, and repaid with interest in accordance with, the Revolving Loan Note. Zygo hereby authorizes Lender to record on the Revolving Loan Note or in its internal computerized records (i) the amount of each Revolving Loan made hereunder, the Type thereof and, for each LIBOR Loan, the Interest Period applicable thereto (which shall in all events be one (1) month), and (ii) the amount of any principal or interest received by Lender on account of the Revolving Loans; PROVIDED, HOWEVER, that the failure of Lender to make any such recordation or any error therein shall not in any manner limit or otherwise affect the obligations of Zygo under this Agreement or any Note, including without limitation, Zygo's obligation to repay the Loans in accordance with their terms. On a monthly basis, Lender may issue a statement to Zygo reflecting any such recordation, which statement, if rendered, shall be considered correct and accepted by Zygo and conclusively binding upon Zygo absent manifest error. Section 2.4 Procedure for Construction Loan Advances; Certain Conditions; Conversion to Converted Construction Loan; Construction Loan Note. (a) Construction Loan Notices of Borrowing. Requests for Construction Loan Advances may be made only once per Business Day, and shall be made on notice, given by ZTO to Lender not later than (i) 11:00 a.m. (Hartford, Connecticut time) on the proposed Drawdown -19- Date, in the case of requests for Prime Rate Loans, and (ii) 10:00 a.m. (Hartford, Connecticut time) on the second London Business Day prior to the proposed Drawdown Date, in the case of requests for LIBOR Loans. Each such notice (which notice shall be irrevocable and binding on ZTO) of a proposed borrowing (each, a "CONSTRUCTION LOAN NOTICE OF BORROWING") shall be by telephone, confirmed immediately in writing, or by telex, telecopier or other electronic mode of communication, specifying the proposed Drawdown Date (which shall be a Business Day), the amount to be borrowed (which in the case of requests for LIBOR Loans shall be in an amount equal to at least $50,000 or an integral multiple thereof), the Type of borrowing (which shall be either a Prime Rate Loan or a LIBOR Loan or any combination thereof). If a LIBOR Loan is being requested, the duration of the initial available Interest Period shall at all times be one (1) month. If no election as to the Type of Construction Loan Advance is specified in any such Construction Loan Notice of Borrowing, then ZTO shall be deemed to have requested such Construction Loan Advance to be a Prime Rate Loan. In the event that written confirmation of a telephonic Construction Loan Notice of Borrowing differs in any respect from the action taken by Lender, the records of Lender shall control absent manifest error. Subject to the fulfillment of the applicable conditions set forth in Article III hereof, Lender will, on the Drawdown Date, make the requested Construction Loan Advance in immediately available funds by crediting the amount thereof to an operating account of ZTO maintained with Lender or as ZTO may otherwise direct. (b) Construction Loan Terms and Conditions. In addition to the requirements set forth in subsection (a) above, each request for a Construction Loan Advance shall be requested pursuant to and in accordance with the Construction Loan Terms and Conditions Schedule. (c) Conversion to Converted Construction Loan. So long as ZTO is in compliance with all of the terms of the Loan Documents and no Default or Event of Default has occurred and is continuing, on the Construction Loan Conversion Date, the aggregate principal amount of all Construction Loan Advances outstanding on the Construction Loan Conversion Date shall convert into term indebtedness with a final maturity on the Maturity Date of the Converted Construction Loan (the "CONVERTED CONSTRUCTION LOAN"). On and after the Construction Loan Conversion Date, ZTO shall have no ability to request, and Lender shall have no obligation to make, any further Construction Loan Advances. (d) Construction Loan Note, Evidence of Debt. The Construction Loan Advances and the Converted Construction Loan, if applicable, shall be evidenced by, and repaid with interest in accordance with, the Construction Loan Note. ZTO hereby authorizes Lender to record on the Construction Loan Note or in its internal computerized records (i) the amount of each Construction Loan Advance made hereunder and the amount of the Converted Construction Loan, as the case may be, the Type thereof and, for each LIBOR Loan, the Interest Period applicable thereto (which shall in all events be one (1) month with respect to any Construction Loan Advance and one (1) month with respect to the Converted Construction Loan), (ii) the amount of any principal or interest received by Lender on account of the Construction Loan Advances and/or the Converted Construction Loan, PROVIDED, HOWEVER, that the failure of Lender to make any such recordation or any error therein shall not in any manner limit or otherwise affect the obligations of ZTO under this Agreement or any Note, including without limitation, ZTO's obligation to repay the Loans in accordance with their terms. On a monthly -20- basis, Lender may issue a statement to ZTO reflecting any such recordation, which statement, if rendered, shall be considered correct and accepted by ZTO and conclusively binding upon ZTO absent manifest error. Section 2.5 Procedure for Letters of Credit; Certain Conditions. (a) Notices of Issuance, Amendment, Renewal, Extension. Requests for the issuance of Letters of Credit (or to amend, renew or extend an existing Letter of Credit) may be made only once per Business Day and shall be made on notice, given not later than 1:00 p.m. (Hartford, Connecticut time) three (3) Business Days prior to the date of the proposed issuance or amendment, renewal or extension, by Zygo to the Lender. Each such notice (which notice shall be irrevocable and binding on Zygo) of a proposed issuance of a Letter of Credit or of an amendment, renewal or extension of an existing Letter of Credit (each, a "NOTICE OF ISSUANCE") shall be by telephone, confirmed immediately in writing, or by telex, telecopier or other electronic mode of communication, specifying therein the (i) requested date of issuance, amendment, renewal or extension (which shall be a Business Day), (ii) requested Available Amount of such Letter of Credit in Dollars, (iii) requested expiration date of such Letter of Credit (which shall comply with subsection (c) below), and (iv) the name and address of the beneficiary of such Letter of Credit, and shall be accompanied by such other information as shall be necessary to prepare such Letter of Credit and such application and agreement for letter of credit as the Lender may require Zygo to execute in connection with such requested Letter of Credit (each, a "REIMBURSEMENT AGREEMENT"). In the event that written confirmation of a telephonic Notice of Issuance differs in any material respect from the action taken by the Lender, the records of the Lender shall control absent manifest error. In the event and to the extent that the provisions of a Reimbursement Agreement shall conflict with this Agreement, the more stringent provisions of each shall govern. (b) Form of Letter of Credit. Each Letter of Credit shall, among other things, (i) be in a form acceptable to the Lender, and (ii) be governed by, and shall be construed in accordance with, the laws or rules designated in such Letter of Credit or the applicable Reimbursement Agreement, or if no such laws or rules are so designated, the Uniform Customs (in the case of commercial letters of credit) or ISP98 (in the case of standby letters of credit) and, as to matters not governed by the Uniform Customs or ISP98, as applicable, Article 5 of the Uniform Commercial Code as in effect from time to time in the State of Connecticut. (c) Expiry Dates. Each Letter of Credit shall expire at the close of business on the earlier of the date one (1) year after the date of the issuance of such Letter of Credit or the date that is five (5) Business Days prior to the Maturity Date of the L/C Commitment, unless such Letter of Credit expires by its terms on an earlier date. (d) Reimbursement; L/C Disbursements as Revolving Loans. If the Lender shall make any L/C Disbursement in respect of a Letter of Credit, Zygo shall pay to the Lender an amount equal to such L/C Disbursement on the date specified for reimbursement in the applicable Reimbursement Agreement. Notwithstanding the foregoing, the Lender shall have the right (but not the obligation), in its sole and absolute discretion, to treat as Revolving Loans any and all L/C Disbursements which are not reimbursed to the Lender on the date specified for reimbursement in the applicable Reimbursement Agreement and, in furtherance thereof, the Lender shall have the -21- right (but not the obligation) to effect payment thereof, together with payment of any of the fees, expenses and charges due and payable in connection therewith, immediately by a charge to Zygo's Revolving Loan account, notwithstanding that the Lender has, at such time, exercised any right it may have not to make Revolving Loans and further notwithstanding that additional Revolving Loans are not available for borrowing by Zygo. Such treatment shall not constitute a Default or an Event of Default. Any L/C Disbursement which Lender elects to treat as a Revolving Loan shall initially be a Prime Rate Loan, PROVIDED that Zygo shall have no right to request to borrow, and the Lender shall not be obligated to lend, any amounts contemplated by the immediately preceding sentence. (e) No Liability of the Lender. Zygo assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to the use of such Letter of Credit, and Zygo's obligations with respect to L/C Disbursements shall be absolute, unconditional and irrevocable, irrespective of: (i) any lack of validity or enforceability of any Letter of Credit, or any term or provision therein, (ii) the existence of any dispute, claim, setoff, defense or other right that Zygo or any other Person may have against the beneficiary under any Letter of Credit, the Lender or any other Person, whether in connection with this Agreement, any other Loan Document or any other related or unrelated agreement or transaction; (iii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Lender under a Letter of Credit against presentation of a draft or other documents that substantially complies in all material respects with the terms of such Letter of Credit; and (v) any error, omission, interruption or delay in any transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. The foregoing shall not be construed to excuse the Lender from liability to Zygo to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by Zygo to the extent permitted by law) suffered by Zygo that are caused by (x) the Lender's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms of the Letter of Credit, or (y) the Lender's willful failure to make lawful payment under a Letter of Credit after presentation to it of a draft or documents strictly complying with the terms and conditions of the Letter of Credit. It is understood that the Lender may, subject to the standard of gross negligence or willful misconduct, accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (1) the Lender's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (2) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute willful misconduct or gross negligence of the Lender. -22- (f) Interim Interest. If the Lender shall make any L/C Disbursement in respect of a Letter of Credit, then, unless Zygo shall reimburse such L/C Disbursement in full on the date specified for reimbursement in the applicable Reimbursement Agreement, the unpaid amount thereof shall bear interest for each day from and including the date of such L/C Disbursement to but excluding the date of payment, at the rate per annum that would apply to such amount if such amount were a Prime Rate Loan. (g) Cash Collateralization. If any Event of Default shall occur and be continuing, Zygo shall, on the third Business Day after receipt of notice from the Lender of the amount to be deposited (which notice shall also contain a description of the Event(s) of Default which shall have occurred), deposit in an account with the Lender an amount in cash equal to the aggregate Available Amount of all outstanding Letters of Credit as of such date. Such deposit shall be held by Lender as collateral for the payment and performance of the Obligations. The Lender shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Such deposits shall not bear interest. Moneys in such account shall (i) automatically be applied by the Lender to reimburse itself for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of Zygo for the Lender's exposure under undrawn Letters of Credit, and (iii) if the maturity of the Loans has been accelerated, be applied to satisfy any other Obligations. If Zygo is required to provide an amount of cash collateral under this subsection as a result of the occurrence of an Event of Default, such amount shall be returned to Zygo within three (3) Business Days after all Events of Default have been cured or waived. Section 2.6 Method of Payment, Direct Debits, Payment Date Adjustments, Application of Payments. (a) Method of Payment. Obligors shall make each payment due under their respective Notes and the other Loan Documents to Lender at its office at 777 Main Street, Hartford, Connecticut or such other place as Lender may from time to time specify in writing in Dollars in immediately available funds, without setoff, defense or counterclaim and free and clear of, and without any deduction or withholding for, any taxes or other payments. (b) Direct Debits. Notwithstanding subsection (a) above, the Obligors agree that Lender may directly debit any Obligor's demand deposit accounts held by Lender for any amount due under this Agreement, any of the Notes, any of the Reimbursement Agreements or the Bank Swap Agreement, including, without limitation, principal, interest, fees and charges, against any account of any Obligor with Lender if not otherwise paid on the due dates thereof. (c) Payment Date Adjustments. Whenever any payment of principal of, or interest on, any Prime Rate Loan shall be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. Whenever any payment of principal of, or interest on, any LIBOR Rate Loan shall be due on a day which is not a London Business Day, such payment shall be made on the next succeeding London Business Day unless such London Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding London Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest and fees thereon shall be payable for such extended time. -23- (d) Application of Payments. All payments by or on behalf of any Obligor under this Agreement or any of the Notes shall be applied first to the payment of all fees, expenses and other amounts due to Lender (excluding principal and interest), then to accrued interest, and the balance on account of outstanding principal; provided, however, that after the occurrence of an Event of Default, payments will be applied to the Obligations in such manner and order of priority as Lender determines in its sole discretion. Section 2.7 Use of Proceeds. The Obligors represent that (a) the proceeds of each Revolving Loan shall be used for general working capital requirements in the ordinary course of Zygo's business, and (b) the proceeds of each Construction Loan Advance shall be used to repay the Bridge Loan and to finance construction of certain improvements upon the Westborough Property. Section 2.8 Fees. (a) Commitment Fees. With respect to the Construction Loan Commitment, ZTO shall pay Lender on or before the date hereof a non-refundable commitment fee (the "COMMITMENT FEE") equal to 1% of $12,560,000. (b) Letter of Credit Fees. In connection with the issuance, extension or renewal of each Letter of Credit, Zygo shall pay to the Lender (i) a non-refundable fee equal to the applicable Letter of Credit Annual Fee as initially determined at the time of such issuance, extension or renewal, and (ii) all other standard negotiation and administrative fees and charges imposed by the Lender (collectively, the "LETTER OF CREDIT FEES"), in each case payable upon issuance, extension or renewal. (c) Annual Revolving Loan Fee In addition to any Letter of Credit Fees or any other fees due pursuant hereto, Zygo shall pay to the Lender an annual non-refundable revolving loan commitment fee of $7,500 which shall be due and payable on the date of any renewal or extension of the Revolving Loan Commitment; PROVIDED, that nothing herein shall be deemed to require the Lender to renew or extend the Revolving Loan Commitment and any such extension or renewal shall at all times be at the sole and absolute discretion of the Lender. -24- Section 2.9 Interest Rates. (a) Pre-default Rates. (i) Revolving Loans and Construction Loan Advances. Subject to the provisions of Sections 2.9(b), 2.14 and 2.16 hereof, during the period from the date made through and including the date of payment in full, each Revolving Loan and each Construction Loan Advance shall, at the election of the applicable Obligor subject to the terms of this Agreement, bear interest on the outstanding principal amount thereof at a rate per annum equal to: (i) the Prime Rate; or (ii) the LIBOR Rate (as determined for each available Interest Period) plus the Applicable Margin for available Interest Periods of one (1) month. (ii) Converted Construction Loan. Subject to the provisions of Sections 2.9(b), 2.14 and 2.16 hereof, during the period from the Construction Loan Conversion Date through and including the date of payment in full, the Converted Construction Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the LIBOR Rate (as determined for each available Interest Period) plus the Applicable Margin for available Interest Periods of one (1) month; PROVIDED, however, that in the event the Converted Construction Loan can no longer be a LIBOR Loan pursuant to Section 2.14 or Section 2.16 hereof, then, on the effective date of such determination, the Converted Construction Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the applicable floating rate payable by the Lender with respect thereto under the Bank Swap Agreement. (b) Default Interest. Notwithstanding the foregoing, at all times after the occurrence and during the continuance of an Event of Default and expiration of any applicable grace or cure period (whether or not Lender has accelerated payment of all or any portion of the Obligations) or after maturity (by acceleration or otherwise) or judgment, the right of any Obligor to select pricing options shall cease and interest on all Loans, and interest on all payments of interest that are not paid when due, shall accrue at a floating rate per annum equal to four percent (4%) above the Prime Rate (the "DEFAULT RATE"). (c) Calculation of Interest, Interest Rate Changes. Interest on each Loan and on any per annum fee charged hereunder which is not paid when due shall be calculated on the basis of a 360 day year and the actual number of days elapsed. With respect to each Prime Rate Loan, any change in the interest rate because of a change in the Prime Rate shall become effective, without notice or demand, immediately upon any change in the Prime Rate. With respect to each LIBOR Loan, any change in the interest rate because of a change in the Reserve Percentage shall become effective, without notice or demand, on the date on which such change in the Reserve Percentage becomes effective as to such LIBOR Loan. (d) Payment of Interest. (i) Prime Rate Loans. Interest on each Prime Rate Loan shall be payable monthly in arrears beginning on the first Business Day of the month immediately succeeding the month in which such Prime Rate Loan was made or converted from a LIBOR Loan and continuing on the first Business Day of each and every month thereafter, without -25- notice or demand, so long as such Prime Rate Loan remains outstanding or until such Prime Rate Loan is converted to a LIBOR Loan in accordance with the provisions of this Agreement. (ii) LIBOR Loans. Interest on each LIBOR Loan shall be payable on the last London Business Day of each applicable Interest Period. (e) Lawful Interest. All agreements between the Obligors or any of them and Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of any of the Obligations or otherwise, shall the amount paid or agreed to be paid to Lender for the use or the forbearance of the Obligations exceed the maximum permissible under applicable law. As used herein, "APPLICABLE LAW" shall mean the law in effect as of the date hereof provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Agreement, the Notes and the other Loan Documents shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of each Obligor and Lender in the execution, delivery and acceptance of the Loan Documents to contract in strict compliance with the laws of the State of Connecticut from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the other Loan Documents at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever Lender should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance of the Loans, in such manner and order of priority as Lender shall determine, in its sole discretion, and not to the payment of interest. This provision shall control every other provision of all agreements between the Obligors and Lender. Section 2.10 Interest Periods and Continuation of Interest Periods. (a) Interest Periods. The initial available Interest Period applicable to each Revolving Loan and each Construction Loan Advance, or any portion or portions thereof, which the applicable Obligor elects to bear interest with respect to the LIBOR Rate by its applicable Revolving Loan Notice of Borrowing or Construction Loan Notice of Borrowing given to Lender pursuant to Section 2.3(a) and Section 2.4(a) hereof, respectively shall be an Interest Period of one (1) month. The initial available Interest Period applicable to the Converted Construction Loan shall be one (1) month. (b) Continuation. (i) Revolving Loans and Construction Loan Advances. Each Revolving Loan and each Construction Loan Advance shall be a LIBOR Loan with available Interest Periods of one (1) month only, and shall be automatically continued as a one (1) month LIBOR Loan without further notice from or to Borrower, PROVIDED that no Revolving Loan or Construction Loan may be continued as a LIBOR Loan: (A) at a time when any Default or Event of Default has occurred and is continuing, or (B) in the event a LIBOR Loan is unavailable pursuant to Sections 2.14 or 2.16 hereof. If LIBOR Loans are unavailable pursuant to Sections 2.14 or 2.16 hereof, each outstanding Revolving Loan and Construction Loan Advance shall be -26- automatically converted, without notice, to a loan bearing interest at the per annum rate contemplated under Sections 4.1 and 4.3 hereof on the last day of the then expiring Interest Period. (ii) Converted Construction Loan. The Converted Construction Loan shall be a LIBOR Loan with available Interest Periods of one (1) month only, and shall be automatically continued as a one (1) month LIBOR Loan without further notice from or to Borrower, PROVIDED that the Converted Construction Loan may not be continued as a LIBOR Loan: (A) at a time when any Default or Event of Default has occurred and is continuing, or (B) in the event a LIBOR Loan is unavailable pursuant to Sections 2.14 or 2.16 hereof. If LIBOR Loans are unavailable pursuant to Sections 2.14 or 2.16 hereof, the Converted Construction Loan shall be automatically converted, without notice, to a loan bearing interest at the per annum rate contemplated under Sections 4.1 and 4.3 hereof on the last day of the then expiring Interest Period. Section 2.11 Conversion of Loans. The applicable Obligor may elect from time to time, subject to the provisions of this Agreement, to convert any outstanding Loan, or a portion or portions thereof, into a Loan of another available Type by giving Lender not less than two (2) Business Days' (or London Business Days in the case of a conversion to a LIBOR Loan) prior irrevocable written notice of such election, PROVIDED that any such conversion of a LIBOR Loan to a Prime Rate Loan may only be made on the last Business Day of an Interest Period with respect thereto; and PROVIDED FURTHER however that any such conversion of a Prime Rate Loan to a LIBOR Loan shall be in an amount equal to at least $50,000 or a whole multiple of $50,000 in excess thereof. Any such notice of conversion shall specify the amount of the Loan being converted. All or any part of any of the outstanding Loans may be converted as provided herein, PROVIDED that no Prime Rate Loan may be converted to a LIBOR Loan: (a) at a time when any Default or Event of Default has occurred and is continuing; (b) in the event a LIBOR Loan is unavailable pursuant to Sections 2.14 or 2.16 hereof; or (c) in the event the applicable Interest Period is an unavailable Interest Period. Section 2.12 Late Payment. If the entire amount of any required principal and/or interest is not paid in full within ten (10) days after the same it is due and payable, without in any way affecting Lender's right to declare an Event of Default to have occurred, the applicable Obligor shall pay to Lender a late charge equal to five percent (5%) of the required payment and such late charge shall be immediately due and payable without demand or notice of any kind. Section 2.13 Repayments and Prepayments of Loans. (a) Optional. The applicable Obligor may, at its option and upon three (3) Business Days' prior written notice, repay or prepay any Loan made to it at any time and from time to time, in whole or in part, on the following conditions: (i) such Obligor shall pay all accrued interest on the principal being paid to the date of the repayment or prepayment and, in the case of repayments or prepayments in full, all fees, charges, costs, expenses and other amounts then due under any of the Loans; and (ii) if such Loan (or portion thereof being repaid) is then a LIBOR Loan, such LIBOR Loan shall only be repaid on the last Business Day of the then current Interest Period with respect thereto (unless such repayment is accompanied by the required breakage and/or other make-whole amounts, if any, as provided in subsection (c) -27- below). In its notice, such Obligor shall specify the date and amount of the repayment, whether the Loan being repaid is a Prime Rate Loan, a LIBOR Rate Loan or a combination thereof, and, if a combination thereof, the amount allocable to each. (b) Mandatory. Unless sooner terminated and/or accelerated as a result of the occurrence of an Event of Default or otherwise, Zygo shall repay all outstanding Revolving Loans on the Maturity Date of the Revolving Loan Commitment. (c) Indemnity for Repayment or Prepayment of LIBOR Loans; Payment of Yield Maintenance Fee. In the event and on each occasion that a repayment or prepayment of a LIBOR Loan is made, required or permitted on a date other than the last Business Day of the then current Interest Period with respect thereto, the Obligors shall indemnify Lender therefor in accordance with Section 2.17 hereof, including, but not limited to, paying to Lender the applicable Yield Maintenance Fee, if any. (d) Effect of Repayment or Prepayments on Bank Swap Agreements. (i) Except as otherwise provided in subsection (d)(ii) below, the prepayment by ZTO of all or any portion of the Construction Loan Advances and/or the Converted Construction Loan shall not affect ZTO's obligation to continue to make payments to the Lender under the Bank Swap Agreement (and, if applicable, to pay any breakage or other make-whole amounts with respect thereto), and the Bank Swap Agreement and ZTO's obligations thereunder shall, at the option of the Lender, remain in full force and effect notwithstanding any such prepayment. (ii) The prepayment of the Construction Loan Advances and/or the Converted Construction Loan in full prior to the Maturity Date shall be deemed an "Additional Termination Event" (as such term is defined in the Bank Swap Agreement), the occurrence of which shall entitle the Lender, at its option, to terminate the transaction entered into under the Bank Swap Agreement relating to the Construction Loan Advances and the Converted Construction Loan. Upon any such termination, ZTO shall be liable to the Lender for all indebtedness and obligations arising under or in connection with such termination, including without limitation, all amounts due to the Lender, as swap counterparty, as a result of the occurrence of such an "Additional Termination Event". Section 2.14 Illegality. Notwithstanding any other provision of this Agreement, if, after the date hereof, any applicable law, regulation or directive, or any change therein or in the interpretation or application thereof after the date hereof shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for Lender to make or maintain any LIBOR Loan as contemplated by this Agreement or any of the Notes, then (a) the obligation of Lender to make such LIBOR Loan, continue such LIBOR Loan as such, convert a Prime Rate Loan to a LIBOR Loan shall forthwith be suspended until it becomes lawful for the Lender to make such LIBOR Loans, and (b) the LIBOR Loans shall instead be made as, or shall be converted automatically, without notice, on the last day of the then current Interest Period with respect thereto (or within such earlier period as required by law): (i) to, with respect to Revolving Loans and Construction Loan Advances which are LIBOR Loans, loans bearing interest at a floating per annum rate equal to the Prime Rate; (ii) to, with respect to the Converted -28- Construction Loan, so long as the Bank Swap Agreement is in effect, loans with interest rates equal to the applicable floating rates payable by the Lender under the Bank Swap Agreement, or (iii) to, with respect to the Converted Construction Loan, in the event the Bank Swap Agreement is no longer in effect, loans bearing interest at a floating per annum rate equal to the Prime Rate. If any such conversion of the LIBOR Loans is made or required on a day that is not the last Business Day of the then current Interest Period applicable thereto, the applicable Obligor shall pay the Lender such amount or amounts as may be required pursuant to Section 2.17 hereof, including, but not limited to, paying to Lender the applicable Yield Maintenance Fee, if any. Section 2.15 Intentionally Omitted. Section 2.16 Basis for Determining LIBOR Base Rate Inadequate or Unfair. In the event, and on each occasion, that Lender shall have determined in good faith (which determination shall be conclusive absent manifest error and binding upon the Obligors) that (a) by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for determining the LIBOR Base Rate, or (b) Dollar deposits in the relevant amount and for the relevant maturity are no longer available to Lender in the London interbank market, or (c) the making or continuation of LIBOR Loans has been made impractical or unlawful by the occurrence of a contingency that materially and adversely affects the London interbank market, the Lender shall give the Obligors notice of such determination as soon as practicable thereafter. If such notice is given any requested LIBOR Loan shall be made as or converted to: (i) with respect to Revolving Loans and Construction Loan Advances which are LIBOR Loans, loans bearing interest at a floating per annum rate equal to the Prime Rate; (ii) with respect to the Converted Construction Loan, so long as the Bank Swap Agreement is in effect with respect to the Converted Construction Loan, loans with interest rates equal to the applicable floating rates payable by the Lender under the Bank Swap Agreement, or (iii) with respect to the Converted Construction Loan, in the event the Bank Swap Agreement is no longer in effect with respect to the Converted Construction Loan, a loan bearing interest at a floating per annum rate equal to the Prime Rate. Until such notice has been withdrawn, the obligation of the Lender to make the LIBOR Loans and/or continue the LIBOR Loans as such shall forthwith be suspended. Section 2.17 Indemnity. In the event, and on each occasion, of (a) a default by any Obligor in the payment of principal of or interest on any LIBOR Loan, (b) the failure by any Obligor to complete a borrowing of, conversion into or continuation of a LIBOR Loan after notice thereof has been given, or (c) the making of a repayment or prepayment of a LIBOR Loan (whether such repayment or prepayment is made pursuant to Sections 2.13 hereof, as a result of termination and/or acceleration following an Event of Default, or for any other reason) on a day which is not the last day of the then current Interest Period applicable thereto, the Obligors agree to pay to Lender on demand, in addition to and not in lieu of Additional Costs, the required Yield Maintenance Fee, if any, and any other amount due hereunder and, without duplication, such amount or amounts as shall be sufficient in the reasonable opinion of Lender to compensate Lender for any loss (including loss of earnings and anticipated profits), cost or expense (including, without limitation, costs or losses associated with prepaying or redeploying deposits, whether or not Lender shall have actually funded a Loan with corresponding deposits) incurred as a result of the occurrence of any of the foregoing conditions (a), (b) or (c). Any demand by Lender for payment pursuant to this Section 2.17 shall be accompanied by a schedule in -29- reasonable detail setting forth its computation of any such loss, cost or expense, such schedule to be conclusive and binding on the Obligors absent manifest error. Section 2.18 Intentionally Omitted. Section 2.19 Obligations Absolute. The Obligations of the Obligors under this Agreement, the Notes and the other Loan Documents shall (a) be absolute, unconditional and irrevocable, (b) be paid strictly in accordance with the terms of this Agreement and such other Loan Document under all circumstances, and (c) not be affected, modified, released, discharged or impaired, in whole or in part under any circumstances, irrespective of, and each Obligor hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (i) any lack of validity or enforceability of all or any portion of this Agreement, any of the other Loan Documents or any other agreement or any instrument relating hereto; (ii) the failure to give notice to any Obligor or Guarantor (except as otherwise specifically provided herein) of the occurrence of a Default or an Event of Default; (iii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations; (iv) the existence of any claim, setoff, defense or other right that any Obligor may have (other than prior payment in full in cash); (v) any modification, amendment, rescission, or waiver of, or consent to departure from, any of the Loan Documents or all or any of the Obligations (except to the extent any such Loan Document or Obligation is so modified or amended); (vi) any exchange, release or non-perfection of any collateral security, or any release of any party primarily or secondarily liable on any of the Obligations, including without limitation, any Guarantor, or any amendment or waiver of or consent to departure from the Guaranty Agreement or any other guarantee of all or any of the Obligations; (vii) the dissolution or full or partial discharge of any Obligor in bankruptcy or similar proceeding or otherwise; or (viii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Obligor or of any other party primarily or secondarily liable on any of the Obligations. Section 2.20 Independent Obligations. In the exercise of any of its rights and remedies under this Agreement or under any other Loan Document, Lender, in its sole discretion, shall have the right to proceed first and directly against any one of the Obligors, without proceeding against or exhausting any other remedies which it may have against any other Obligor or any -30- other person primarily or secondarily liable for any of the Obligations and without resorting to any security held by the Lender. Section 2.21 Required Hedge. ZTO shall be required to hedge the Converted Construction Loan's floating interest expense for the entire term thereof by entering into a Swap Agreement with the Lender, or other counterparty acceptable to the Lender, which Swap Agreement shall: (i) provide for a notional amount equal to the outstanding principal balance of the Converted Construction Loan on the date of such SWAP Agreement; (ii) provide for a rate determined with reference to the LIBOR Rate for available Interest Periods of one (1) month; (iii) provide that ZTO shall receive a floating rate which is equal to the floating rate payable by ZTO under the Converted Construction Loan and shall pay a fixed rate; (iv) provide that the Swap Agreement shall remain in place for the full remaining term of the Converted Construction Loan, and (v) contain such other terms and conditions as shall be acceptable to the Lender. ZTO acknowledges and affirms its desire and election to enter into a separate interest rate protection arrangement with the Lender for the Converted Construction Loan pursuant to the Bank Swap Agreement. ARTICLE III CONDITIONS PRECEDENT Section 3.1 Conditions Precedent to Effectiveness. The effectiveness of this Agreement and the obligation of Lender to make the initial Loan under this Agreement and to issue any Letter of Credit shall be subject to the prior satisfaction of each of the following conditions: (a) Lender shall have received each of the following, in form and substance satisfactory to Lender and its counsel: (i) (A) this Agreement duly executed and delivered by each of the Obligors; (B) the Revolving Loan Note duly executed and delivered by Zygo; and (C) the Construction Loan Note duly executed and delivered by ZTO; (ii) a Guaranty Agreement duly executed and delivered by each Guarantor; (iii) the Security Documents to which any Obligor is a party, duly executed and delivered by such Obligor securing the payment and performance of its Obligations, together with: (A) copies of UCC-1 financing statements duly filed or to be duly filed against each Obligor, as debtor, under the Uniform Commercial Code of all jurisdictions desirable, in the opinion of Lender, to perfect the security interest created by the Security Agreements, and (B) copies of all of the UCC-1 financing statements (and, where applicable, related Form UCC-3s) on file with respect to each Obligor, as of dates acceptable to Lender, in all jurisdictions in which Collateral is or may be located, indicating as of the date hereof that no Person other than Lender has a Lien on any of the Collateral; (iv) the Mortgage duly executed and delivered by ZTO; -31- (v) copies of all corporate and company action taken by each of the Obligors, including resolutions of their Boards of Directors and/or members, as the case may be, authorizing the execution, delivery, and performance of the Loan Documents to which it is a party and each other document to be delivered pursuant to this Agreement, certified as of the date of this Agreement by the Secretary and/or managing member of each such Obligor, as the case may be; (vi) a certificate, dated as of the date of this Agreement, of the Secretary and/or Managing Member of each Obligor, as the case may be, certifying the names and true signatures of each officer or member of each such Obligor whom has been authorized to sign the Loan Documents to which each such Obligor is a party and the other documents to be delivered by each such Obligor under this Agreement; (vii) a favorable opinion of independent counsel for the Obligors satisfactory to Lender, dated the date of this Agreement which shall include, without limitation, a zoning compliance opinion; (viii) title insurance policies in such amounts and on such terms as are satisfactory to Lender in its sole but reasonable discretion which insures the lien and priority of the Mortgage on the Westborough Property; (ix) an ALTA Standard Survey of the Westborough Property; (x) the certificates of incorporation or articles of organization (certified by the Secretary of the State of the state of organization) and bylaws or operating agreement, as applicable, of each Obligor; (xi) a Certificate of Legal Existence issued by the Secretary of State of the states of organization and qualification of each Obligor, evidencing that each such Obligor is a corporation or limited liability company, as the case may be, legally existing in the state of its organization and in each state where it is qualified to do business; (xii) tax clearance letters (Sales and Use, Corporate and Labor) from the Department of Revenue or similar taxing Governmental Authority relating to each Obligor; (xiii) the completion by the Lender of a Planning Cost Evaluation, an appraisal and an environmental site assessment of the Westborough Property each of which shall show results which are satisfactory to the Lender in its sole and absolute discretion; (xiv) all other documents, instruments and agreements that the Lender shall reasonably require in connection with this Agreement, including, without limitation, architect's and general contractors waivers and consents, final project plans and specifications, general contractor's insurance, approved site plans, building permits and other governmental approvals and permits, pro forma budgets, certificates of occupancy, zoning compliance letters, and copies of all hazard and liability insurance policies naming Lender as loss payee/mortgagee and additional insured on all insurance relating to the Westborough Property; and (xv) the Commitment Fee in immediately available funds. -32- (b) All representations and warranties contained in this Agreement shall be true and correct in all material respects. Except as otherwise agree to in writing by the Lender and the Obligors, upon the funding or issuance by the Lender of the initial Loan or Letter of Credit hereunder, the conditions precedent set forth in this Section 3.1 shall be deemed to have been fully satisfied. Section 3.2 Conditions Precedent to Loans. The obligation of Lender to make each Loan (including the initial Loan) and to extend any Letter of Credit shall be subject to the prior satisfaction of each of the following additional conditions: (a) On each Drawdown Date, Lender shall have received a Revolving Loan Notice of Borrowing and/or a Construction Loan Notice of Borrowing (together with all required supporting documents). (b) The representations and warranties contained in Article IV of this Agreement and contained in each of the other Loan Documents containing representations and warranties shall be true and correct in all material respects on and as of such Drawdown Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each of the Obligors shall be in compliance with all of the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after giving effect to such Loan, no Default or Event of Default has occurred and is continuing. Each request by Zygo or ZTO for a Loan shall be deemed to constitute a representation and warranty by Zygo and ZTO, as the case may be, that as of the date of such request and as of the applicable Drawdown Date the matters specified in subsections (b) and (c) of this Section 3.2 have been satisfied. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, each of the Obligors represents and warrants to Lender that: Section 4.1 Incorporation, Good Standing, and Due Qualification. Each Obligor (a) is a corporation or limited liability company, duly organized and validly existing under the laws of the laws of the jurisdiction or country of its formation; (b) has all requisite power and authority necessary to own its properties and assets and to carry on the business in which it is now engaged or proposed to be engaged; and (c) is duly qualified and in good standing as a foreign corporation or company under the laws of each other jurisdiction in which such qualification is required, except where the failure to so qualify could not reasonably be expected to result in a Material Adverse Effect. -33- Section 4.2 Corporate Power and Authority. The execution, delivery and performance by each Obligor of the Loan Documents to which it is a party, and the borrowings contemplated hereunder and thereunder, are within the corporate and/or company powers and authority of such Obligor and have been duly authorized by all necessary action, and do not and will not (a) violate (i) the certificate of incorporation, bylaws, articles of organization or operating agreement of any Obligor, or (ii) any Legal Requirement, or (b) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any indenture or loan or credit agreement or any other material agreement, lease, or instrument to which any Obligor is a party or by which any Obligor or its properties may be bound or affected, or (c) result in the creation or imposition of any Lien (except in favor of Lender) upon or with respect to any property or assets now owned or hereafter acquired by any Obligor, except as contemplated by this Agreement. Section 4.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents to which any Obligor is a party when executed and delivered will be, legal, valid, and binding obligations of such Obligor, enforceable against such Obligor in accordance with their respective terms, except to the extent that enforcement thereof may be limited by the effect of general principles of equity and bankruptcy and similar laws affecting the rights and remedies of creditors generally. Section 4.4 Governmental Approvals. As of the date of this Agreement, no action, consent or approval of, registration or filing with or any other action by any Governmental Authority is required in connection with the transactions contemplated by this Agreement and the other Loan Documents, except for (a) the filing of UCC financing statements, (b) the recording of the applicable Security Documents, and (c) such as have been made or obtained and are in full force and effect or where the failure to obtain such could not reasonably be expected to result in a Material Adverse Effect. Section 4.5 Financial Statements and Condition: Full Disclosure. (a) Obligors have heretofore submitted to Lender the consolidated financial statements of the Obligors filed with Zygo's Form 10-K filed with the Securities and Exchange Commission for the Fiscal Year ended June 30, 2000 and the consolidated financial statements of the Obligors filed with the Obligor's Form 10-Q filed with the Securities and Exchange Commission for the fiscal quarter ended December 31, 2000. Obligors represents that all of said financial information is true and correct in all material respects; such financial information fairly presents the financial condition and the results of operations of the Obligors as of the dates thereof and for the periods indicated therein; that such financial statements disclose all material liabilities, direct or contingent of the Obligors as of the dates thereof and the periods indicated; that such financial statements have been prepared in accordance with GAAP consistently maintained throughout the periods involved; and that, as of the date of said financial information submitted, there were no material unrealized or unanticipated losses from any unfavorable commitments of the Obligors as of the dates; and that there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise of the Obligors as of the dates from that set forth in said financial statements. -34- (b) The Obligors are, and on the Drawdown Date of each Loan and on the date of the issuance of each Letter of Credit, will be, Solvent, on a consolidated basis. (c) To the best of each Obligor's knowledge, neither this Agreement nor any written information, exhibit, report, document, or certificate furnished to Lender by or on behalf of any Obligor in connection with this Agreement contained or contains any material misstatement of fact or omitted or omits to state a material fact necessary to make the statements contained herein or therein not misleading. There is no fact known to any Obligor that materially adversely affects or that, insofar as any Obligor can now reasonably foresee, may materially adversely affect, the condition, financial or otherwise, operations, properties, or prospects of any Obligor or its Subsidiaries or the ability of any Obligor or any of its Subsidiaries to carry out their respective obligations under any of the Loan Documents to which any of them is or will be a party. Section 4.6 Other Agreements, No Default. To the best of each Obligor's knowledge, no Obligor is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Debt, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, or is in violation of any Legal Requirement, where such default or violation could reasonably be expected to result in a Material Adverse Effect. Each Obligor enjoys peaceful and undisturbed possession under all leases to which it is a party. Section 4.7 Litigation. Except as disclosed on Schedule 4.7 attached hereto, there is no pending or, to the best knowledge of any Obligor, threatened action, suit or proceeding before any court, Governmental Authority, board of arbitration, or arbitrator against any Obligor or for or on behalf of any Obligor or in which any Obligor or any of its properties or assets are or may otherwise become involved, which is not otherwise fully covered by insurance and may, in any one case or in the aggregate, reasonably be expected to have a Material Adverse Effect, nor is there any basis therefor. No Obligor has received any summons, citation, directive, letter, or other communication from any Governmental Authority concerning any intentional or unintentional violation or alleged violation of any Environmental Laws which may, in any one case or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 4.8 Subsidiaries. As of the date hereof, no Obligor has any Subsidiaries other than as set forth on Schedule 4.8 hereto. Section 4.9 Operation of Business. (a) Each Obligor possesses all material licenses, Environmental Permits and other permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct its businesses substantially as now conducted, except where the failure to so possess any such license, Environmental Permit and/or other permit, franchise, patent, copyright, trademark, tradename or right thereto could not reasonably be expected to result in a Material Adverse Effect, and (b) no Obligor is in violation of any rights of others with respect to any of the foregoing, except where such violation could not reasonably be expected to result in a Material Adverse Effect. Nothing has come to the attention of any officer or member of any Obligor to the effect that (i) any product, process, method, substance, part or other material presently contemplated to be sold by or employed by any Obligor in connection with such business may infringe any patent, trademark, service marks, trade name, copyright, license -35- or other right owned by any other Person, or (ii) there is pending or threatened any claim or litigation against or affecting it contesting its right to sell or use any such product, process, method, substance, part or other material. Section 4.10 Taxes. Each Obligor has filed all tax returns (federal, state, and local) required to be filed and has paid all taxes, assessments, and governmental charges and levies shown thereon to be due, including interest and penalties, except taxes that are being contested in good faith by appropriate proceedings and for which the applicable Obligor shall have set aside on its books adequate reserves in accordance with GAAP. Section 4.11 Federal Reserve Regulations. No Obligor is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. No part of the proceeds of any Loan have been or will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System of the United States of America (the "BOARD"), including without limitation, Regulation G, Regulation T, Regulation U or Regulation X. No Obligor will take, nor permit any agent acting on its behalf to take, any action which might cause any transaction or obligation, or right created by this Agreement, or any document or instrument delivered pursuant hereto, to violate any Regulation of the Board. Section 4.12 Fiscal Year. The Fiscal Year for financial accounting purposes ends on June 30 of each calendar year. Section 4.13 No Broker's Fees, etc.. No Obligor is obligated to pay any brokerage commissions, finder's fees or appraisal fees (other than reimbursing Lender for such fees incurred by Lender) or in connection with the transactions contemplated by this Agreement. Section 4.14 Investment Company Act, Public Utility Holding Company Act. No Obligor is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. Section 4.15 Environmental Matters. Except as disclosed on Schedule 4.15 hereto: (a) To the best knowledge of the Obligors, none of the Properties contain any Contaminants in amounts or concentrations which (i) constitute, or constituted a violation of, (ii) require Remedial Action under, or (iii) could give rise to liability under, Environmental Laws, which violations, Remedial Actions and liabilities, in the aggregate, could reasonably be expected to result in a Material Adverse Effect. (b) To the best knowledge of the Obligors, the Properties and all operations of each Obligor are in compliance, and in the last five years have been in compliance, with all Environmental Laws and all necessary Environmental Permits have been obtained and are in effect, except to the extent that such non-compliance or failure to obtain any necessary permits, in the aggregate, could reasonably be expected to result in a Material Adverse Effect. -36- (c) To the best knowledge of the Obligors, there have been no Releases or threatened Releases at, from, under or proximate to any of the Properties or otherwise in connection with the operations of any Obligor, which Releases or threatened Releases, in the aggregate, could reasonably be expected to result in a Material Adverse Effect. (d) No Obligor has received any notice of an Environmental Claim in connection with any of the Properties or the operations of any Obligor or with regard to any person whose liabilities for environmental matters any Obligor has retained or assumed, in whole or in part, contractually, by operation of law or otherwise, which, in the aggregate, could reasonably be expected to result in a Material Adverse Effect, nor does any Obligor have reason to believe that any such notice will be received or is being threatened. (e) To the best knowledge of the Obligors, Contaminants have not been transported from any of the Properties, nor have Contaminants been generated, treated, stored or disposed of at, on or under any of the Properties in a manner that could give rise to liability under any Environmental Law, nor has any Obligor retained or assumed any liability, contractually, by operation of law or otherwise, with respect to the generation, treatment, storage or disposal of Contaminants, which transportation, generation, treatment, storage or disposal, or retained or assumed liabilities, in the aggregate could reasonably be expected to result in a Material Adverse Effect. Section 4.16 Compliance with Laws. No Obligor nor any of their respective Properties or assets is in material default or material violation of, nor to any such Obligor's knowledge will the continued operation of its Properties and assets as currently conducted be in material default or material violation of, any Legal Requirement. Section 4.17 Defaults, Events of Default and Material Adverse Effect. No Default or Event of Default has occurred and is continuing, and there has not occurred any event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect. Section 4.18 Labor Disputes and Acts of God. As of the date hereof, there are no strikes, lockouts or slowdowns against any Obligor pending or, to the knowledge of any Obligor, threatened. To each Obligor's knowledge, the hours worked by and payments made to employees of each Obligor have not been in material violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law, dealing with such matters. The business and Properties and other assets of the Obligors have not been affected by any fire, explosion, accident, drought, storm, hail, earthquake, embargo, act of God, or other casualty (whether or not covered by insurance) which could, in any one case or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 4.19 ERISA. Each Obligor and its ERISA Affiliates are in compliance in all material respects with all applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of any Obligor or any of its ERISA Affiliates. Each Obligor and its ERISA Affiliates have made or accrued all contributions due under the terms of any Plan, -37- Welfare Plan or under ERISA with respect to all of their respective Plans and the present fair market value of all Plan assets exceeds the present value of all vested benefits under each Plan on a plan termination basis (using PBGC actuarial assumptions), as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA. No Obligor nor any of its ERISA Affiliates has incurred any liability to the PBGC under ERISA, and with respect to any Plan that has been terminated, all Plan obligations have been settled and there exists no unfunded liability of any kind. No Obligor nor any ERISA Affiliate maintains any Welfare Plan providing coverage for any period of time beyond termination of employment (except to the extent required by Section 4980B of the Code). Section 4.20 Insurance. Schedule 4.20 sets forth a true, complete and correct description of all insurance maintained by each of the Obligors as of the date hereof. As of such date, such insurance is in full force and effect and all premiums have been duly paid. Each Obligor has insurance in such amounts and covering such risks and liabilities as are in accordance with normal industry practice. Section 4.21 Location of Real Property and Leased Premises. (a) Schedule 4.21(a) lists completely and correctly as of the date hereof all real property owned by any Obligor and the addresses thereof. (b) Schedule 4.21(b) lists completely and correctly as of the date hereof all real property leased by any Obligor and the addresses thereof. Each Obligor has valid leases in all of the real property that it leases as set forth on Schedule 4.21(b). Section 4.22 Mortgage and Collateral Assignment of Leases and Rentals. The Mortgage and Collateral Assignment of Leases and Rentals are effective to continue the creation in favor of Lender legal, valid and enforceable Liens in and to the Westborough Property and other Collateral described therein and constitute fully perfected Liens on, and security interests in, all right, title and interest of ZTO in such Westborough Property and other Collateral, in each case prior and superior in right to any other Person. Section 4.23 Public Filings. The Obligors have filed all financial reports and other information required to be filed with the Securities Exchange Commission and all other Governmental Authorities, including, without limitation, all Form 10K's and Form 10Q's. ARTICLE V AFFIRMATIVE COVENANTS Each of the Obligors covenants and agrees that so long as this Agreement shall remain in effect and until each of the Commitments, the L/C Commitment and the Bank Swap Agreement have been terminated and all of the Obligations shall have been paid and performed in full and all Letters of Credit have been cancelled or have expired and all L/C Disbursements thereunder have been reimbursed in full, unless Lender shall have otherwise consented in writing, which consent shall not unreasonably be withheld, each Obligor shall: -38- Section 5.1 Maintenance of Existence. Preserve and maintain its existence in its current form of organization in the jurisdiction of organization, and qualify and remain qualified as a foreign corporation or company, as the case may be, in each jurisdiction in which such qualification is required, except where the failure to remain so qualified would not have a Material Adverse Effect. Section 5.2 Maintenance of Records. Keep proper books of record and account, in which complete entries will be made substantially in accordance with GAAP consistently applied, reflecting all of their financial transactions. Section 5.3 Business and Properties. Except where the failure to do any of the following could not reasonably be expected to result in a Material Adverse Effect, (a) do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; (b) maintain and operate such business in substantially the manner in which it is presently conducted and operated; (c) comply in all material respects with all Legal Requirements; and (d) at all times maintain, keep and preserve all of its properties necessary or useful in the proper conduct of its businesses in good working order and condition, ordinary wear and tear excepted. Section 5.4 Maintenance of Insurance. (a) Keep its Properties and other assets insured against fire, theft and other hazards (so-called "ALL RISK" coverage) in amounts and with companies satisfactory to Lender to the same extent in covering such risks as is customary in the same or a similar business, but in no event in an amount less than the lesser of (i) the total Obligations or (ii) the amount necessary to avoid any co-insurance penalty, which policy shall name Lender as loss payee as its interest may appear with respect to the Westborough Property, (b) maintain public liability coverage against claims for personal injuries, death or property damage in amounts as are maintained by each Obligor as of the date hereof, which policy shall name Lender as an additional insured with respect to the Westborough Property, and (c) maintain all worker's compensation, employment or similar insurance as may be required by applicable law. Such All Risk property insurance coverage shall provide for a minimum of thirty (30) days' written cancellation notice to Lender. Obligors agree to deliver or cause to be delivered copies of all of the aforesaid insurance policies to Lender. In the event of any loss or damage to a material portion of any Obligor's assets, such Obligor shall give immediate written notice to Lender and to its insurers of such loss or damage and shall properly file its proofs of loss with said insurers. Each Obligor shall cause Lender to be endorsed as a loss payee with a long form Lender's Loss Payable Clause, in form and substance acceptable to Lender, on all such insurance relating to the Westborough Property. In the event of failure to provide and maintain insurance as herein provided, Lender may, at its option, provide such insurance and the amount thereof shall constitute Obligations. Each Obligor hereby irrevocably appoints Lender as its attorney-in-fact, coupled with an interest, to make proofs of loss and claims for insurance with respect to losses relating to the Westborough Property but only after consultation with the applicable Obligor, and to receive payments of the insurance and execute and endorse all documents, checks and drafts in connection with payment of the insurance; PROVIDED, HOWEVER, that in the case of loss and payment by any insurance company in an amount less than or equal to $50,000 and provided that no Default or Event of Default then exists, the amount of such insurance proceeds shall be promptly released directly to the applicable Obligor. Any proceeds of insurance received by -39- Lender shall be applied to the Obligations in such order and manner as Lender shall determine in its sole discretion. Section 5.5 Obligations and Taxes. Pay its obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default; PROVIDED, HOWEVER, that such payment or discharge shall not be required with respect to any tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the applicable Obligor shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien. Section 5.6 Right of Inspection. Permit Lender or any agent or representative of Lender, upon reasonable notice and during normal business hours, to examine and make copies of and abstracts from the records, including, without limitation, computer records and books of account of, and visit the properties of each Obligor as often as reasonably requested, and to discuss the affairs, finances, and accounts of each Obligor with any of its senior officers and directors and its independent accountants (who, by this reference, are authorized by each Obligor to discuss such matters with Lender or any agent or representative of Lender). After the occurrence and during the continuance of a Default or an Event of Default, Lender may undertake any of the foregoing rights of inspection at any time and at any frequency. Section 5.7 Reporting Requirements. Furnish or cause to be furnished to Lender: (a) (i) So long as any Obligor is a public reporting company, as soon as available (and in any event at the time of filing of any Obligor's Form 10-K with the Securities and Exchange Commission after the end of each Fiscal Year of such Obligor), the financial statements of such Obligor filed with such Form 10-K; and (ii) in the event that any Obligor is not subject to the reporting requirements of Section 12 or Section 15 of the Securities and Exchange Act of 1934, as amended, promptly as they are available (but in any event within ninety (90) days of the each Fiscal Year end of such Obligor), audited annual financial statements of such Obligor and such other financial information as Lender may request from time to time. (b) (i) So long as any Obligor is a public reporting company, as soon as available (and in any event at the time of filing of any Obligor's Form 10-Q with the Securities and Exchange Commission after the end of each of the first three fiscal quarters of such Obligor), the financial statements of such Obligor filed with such Form 10-Q; (ii) in the event that any Obligor is not subject to the reporting requirements of Section 12 or Section 15 of the Securities and Exchange Act of 1934, as amended, promptly as they are available (but in any event within forty five (45) days of the end of each of the first three fiscal quarters of such Obligor), the management prepared financial statements of such Obligor and such other financial information as Lender may request from time to time; and (iii) as soon as available (but in any event within forty five (45) days of the end of each fiscal quarter of such Obligor), a management prepared compliance certificate, certified by the chief financial officer of such -40- Obligor, containing detailed calculations of all financial covenants set forth in this Agreement and stating that such Obligor is in compliance with all such financial covenants. (c) Together with any of the financial statements required to be delivered to Lender pursuant to this Section 5.7, a certificate from Zygo signed by its chief financial officer, in his or her representative, and not individual, capacity, certifying that no Default or Event of Default exists. (d) Within thirty (30) days of filing with the Internal Revenue Service and applicable state taxing authorities, copies of the federal and state income tax returns of each Obligor, together with all schedules and exhibits attached thereto, each of which shall be signed and certified by the applicable Obligor to be true, correct and complete copies of such returns. (e) Such other information respecting the condition or operations, financial or otherwise, of any Obligor or any Guarantor as Lender may from time to time reasonably request. Section 5.8 Litigation and other Notices. Promptly advise Lender in writing (a) of the filing or commencement of, or any written threat or notice of intention of any Person to file or commence, any action, suit or proceeding, whether at law or in equity, including arbitration proceedings and any proceedings by or before any Governmental Authority, against any Obligor that could reasonably be expected to result in a Material Adverse Effect, or where the amount involved is $50,000 or more and not otherwise fully covered by insurance, (b) of the occurrence of any Default or Event of Default, specifying the nature and extent thereof and the corrective action (if any) which is being taken or proposed to be taken with respect thereto, and (c) any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect. Section 5.9 Collateral. (a) Preserve the Collateral in good condition and order and not permit it to be abused or misused, and (b) not allow any of the Collateral to be affixed to real estate unless such affixed Collateral is subject to a first priority Lien in favor of Lender. Section 5.10 Defend Collateral. Defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein and, in the event Lender's security interest in the Collateral and/or lien on, or any part thereof, would be impaired by an adverse decision, allow Lender to contest or defend any such claim or demand, at the sole cost of the Obligors, in the name of the applicable Obligor or Obligors and pay, upon demand, Lender's reasonable costs, charges and expenses, including, without limitation reasonable attorneys' fees in connection therewith. Section 5.11 Additional Guarantors. In the event that any Subsidiary of any Obligor shall be responsible for generating greater than 20% of the consolidated revenue or shall own greater than 20% of the consolidated assets of any Obligor and its Subsidiaries, cause such Subsidiary to promptly execute and deliver to the Lender: (i) a guaranty agreement in form and substance satisfactory to the Lender in its sole discretion and such Subsidiary shall, for purposes hereof, be considered a Guarantor hereunder; and (ii) an agreement in form and content satisfactory to the Lender in its sole discretion pursuant to which such Subsidiary shall agree to become a party to this Agreement and an Obligor hereunder. -41- Section 5.12 Further Assurances. Execute any and all further documents, agreements and instruments, and take all further action that may be required under applicable law, or that Lender may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents. Section 5.13 Comply with Bank Swap Agreement. Perform and observe all of its obligations under any Bank Swap Agreement; PROVIDED, HOWEVER, that in the event and to the extent that any representation, warranty, covenant, event of default or set-off right of the Lender contained in the Bank Swap Agreement conflicts with any similar representation, warranty, covenant, event of default or set-off right contained in this Agreement, the representation, warranty, covenant, event of default or set-off right contained in this Agreement shall govern. ARTICLE VI NEGATIVE COVENANTS Each Obligor covenants and agrees that so long as this Agreement shall remain in effect and until each of the Commitments, the L/C Commitment and the Bank Swap Agreement have been terminated and all of the Obligations shall have been paid and performed in full and all Letters of Credit have been cancelled or have expired and all L/C Disbursements thereunder have been reimbursed in full, unless Lender shall have otherwise consented in writing, no Obligor shall: Section 6.1 Mergers, Consolidations and Acquisitions. Merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or purchase, lease or otherwise acquire (whether in one transaction or in a series of transactions) all or a substantial part of the assets or business of any Person; PROVIDED, HOWEVER, that each Obligor shall be relieved from the restrictions of this covenant so long as (a) no Defaulting Event has occurred and is then continuing, (b) after giving effect to any such transaction, no Defaulting Event would occur and be continuing, (c) in the case of a merger or consolidation, the applicable Obligor is the surviving entity, and (d) the applicable Obligor shall have delivered to the Lender a pro forma balance sheet which shall take into account the effect on the applicable Obligor's financial condition resulting from such transaction. Section 6.2 Change Name; Location or State of Incorporation. (a) Change its legal name or conduct its business under any trade name other than as hereinabove set forth unless the applicable Obligor gives thirty (30) days prior written notice to Lender; (b) conduct business, locate assets or maintain an office at any location other than those locations set forth on Schedule 6.2 hereto unless the applicable Obligor gives thirty (30) days prior written notice to Lender; and (c) change its legal structure or State of incorporation or formation from its current legal structure or State of formation unless the applicable Obligor gives thirty (30) days prior written notice to Lender. Section 6.3 Fiscal Year. Change its Fiscal Year. -42- Section 6.4 Declaration of Negative Covenant. Enter into or permit to exist any undertaking by it or affecting any of its properties or assets (including without limitation, the accounts receivable or inventory of any Obligor), whether now owned or hereafter acquired or arising, whereby any such Obligor shall agree with any Person (other than Lender) not to create or suffer to exist any Liens on any such properties or assets in favor of Lender. ARTICLE VII FINANCIAL COVENANTS Each Obligor covenants and agrees that so long as this Agreement shall remain in effect and until each of the Commitments, the L/C Commitment and the Bank Swap Agreement have been terminated and all of the Obligations shall have been paid and performed in full and all Letters of Credit have been cancelled or have expired and all L/C Disbursements thereunder have been reimbursed in full, unless Lender shall have otherwise consented in writing, each Obligor shall on a consolidated basis: Section 7.1 Consolidated Fixed Charge Coverage Ratio. Maintain a Consolidated Fixed Charge Coverage Ratio of not less than 1.50-to-1.0 as of the end of each fiscal quarter for the then ended Rolling Period. Section 7.2 Consolidated Senior Funded Debt-to-EBITDA Ratio. Not permit its Consolidated Senior Funded Debt-to-EBITDA Ratio to exceed 2.0 to 1.0 as of the end of each fiscal quarter for the then ended Rolling Period. ARTICLE VIII SECURITY Section 8.1 Security. The Loans and other Obligations are and shall continue to be secured and guaranteed by and pursuant to the Security Documents. ARTICLE IX EVENTS OF DEFAULT Section 9.1 Events of Default. (a) Any one or more of the following events (whether voluntary or involuntary or effected by operation of law or otherwise) shall be an "EVENT OF DEFAULT": (i) Any Obligor shall fail to pay the principal of, premium, if any, or interest on any Loan, or any amount of any fee, or any other Obligation, in each case within ten (10) calendar days after its due date, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise. (ii) Any representation or warranty made or deemed made by or on behalf of any Obligor in or in connection with any Loan Document or the borrowings hereunder, -43- or any representation, warranty statement or information contained in any certificate, document, opinion, report, financial statement or other instrument furnished at any time on behalf of any Obligor in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished and, if capable of being cured, continue unremedied for a period of thirty (30) calendar days after the Obligors receives notice of such breach. (iii) Default in the due observance or performance by any Obligor of any covenant contained in Article VII herein. (iv) Default in the due observance or performance by any Obligor of any covenant or agreement contained in any Loan Document (other than those specified elsewhere in this Section 9.1) and each such default shall continue unremedied for a period of thirty (30) calendar days after the Obligors receives notice of such default. (v) Any Obligor shall (A) fail to pay any principal or interest, regardless of the amount, due in respect of Debt in the principal amount in excess of $1,000,000, when due and payable or within any grace period for the payment thereof, or (B) fail to perform or observe any other term, covenant, condition or agreement under any agreement or instrument evidencing, governing or relating to any such Debt (which is not waived by the holder or holders of such Debt) if the effect of any failure referred to in this clause (B) is to cause, or to permit the holder or holders of such Debt or a trustee on its or their behalf (with or without the giving of notice, or the lapse of time) to cause, such Debt to become due prior to its stated maturity or to permit the acceleration after the giving of notice or passage of time, or both, of the maturity. (vi) Any Obligor (A) shall generally not, or shall become unable to, or shall admit in writing its inability to pay its Debts as such Debts become due; or (B) shall make an assignment for the benefit of creditors; or (C) apply for or consent to the appointment of a custodian, receiver, trustee, sequestrator, conservator or similar official for it or a substantial part of its assets; or (D) shall voluntarily commence any proceeding or file any petition seeking relief under any Federal, state or foreign bankruptcy, insolvency, receivership, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar law or statute, whether now or hereafter in effect; or (E) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (vii) above, (F) file an answer admitting the material allegations of a petition filed against it in any such proceeding, or (G) take any action for the purpose of effecting any of the foregoing. (vii) An involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (A) relief in respect of any Obligor, or of a substantial part of the property or assets of any Obligor under any Federal, state or foreign bankruptcy, insolvency, receivership, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar law or statute, whether now or hereafter in effect, or (B) the appointment of a custodian, receiver, trustee, sequestrator, conservator or similar official for any Obligor or a substantial part of any Obligor's assets, (C) the winding up or liquidation of any Obligor; and such proceeding or petition shall continue undismissed for a period of sixty (60) calendar days or an order or decree approving or ordering any of the foregoing shall be entered. -44- (viii) One or more tax liens, writ of garnishment or attachment, judgments, decrees, or orders for the payment of money in excess of $100,000 shall be rendered against any Obligor and the same shall remain undischarged for a period of thirty (30) calendar days during which execution shall be effectively stayed, or any action shall be legally taken by any Person to garnish, levy or execute upon any assets or properties of any Obligor. (ix) The PBGC makes a determination that there has occurred an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or for the appointment of a Trustee to administer, any Plan of any Obligor and such determination shall remain unrevoked for a period of thirty (30) consecutive days. (x) There shall occur any uninsured damage to or loss, theft, or destruction of any Collateral in an aggregate amount or having an aggregate value in excess of $3,000,000 collectively. (xi) Any Guarantor shall revoke or attempt to revoke its Guaranty Agreement, or any Guaranty Agreement is otherwise terminated with respect to any Guarantor for any reason whatsoever. (xii) Any Security Document shall at any time after its execution and delivery and for any reason cease to create a valid and perfected first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in and to the property purported to be subject to such Security Document or otherwise to be in full force and effect, or any such Security Document shall be declared null and void, or the validity or enforceability thereof shall be contested by the any Obligor, or any Obligor shall deny it has any further liability or obligation under any Loan Document to which it is a party, or any Obligor shall fail to perform any of its obligations under any Security Document to which it is a party subject to any notice and cure provisions contained in any such Security Document; provided, however, that Lender's failure to file any continuation or other financing statement which is required by law to be filed to continue the first priority perfected Lien of Lender under any of the Security Documents shall not constitute an Event of Default hereunder. (xiii) There shall have occurred a default or event of default under or within the meaning of any other instruments or agreements between Lender and any Obligor which remains unremedied past any applicable grace or cure period. (b) Upon and after the occurrence of any Event of Default and the expiration of any applicable grace or cure period, Lender may (1) declare the Commitments to be terminated, whereupon the same shall forthwith terminate, and/or (2) declare all the outstanding Obligations to be forthwith due and payable, whereupon the Commitments shall be terminated and all Obligations shall become and be forthwith due and payable, without presentment, demand, protest, or any other notice of any kind, all of which are hereby expressly waived by each Obligor, anything contained herein or in any Loan Document to the contrary notwithstanding; PROVIDED, HOWEVER, that upon the occurrence of any Event of Default described in Section 9.1(a)(vi) and Section 9.1(a)(vii), the Commitments shall automatically and immediately terminate and the outstanding Obligations, all interest thereon, and all such other amounts payable under this Agreement shall automatically become immediately due and -45- payable, without presentment, demand, protest, or any other notice of any kind, all of which are hereby expressly waived by each Obligor, anything contained herein or in any Loan Document to the contrary notwithstanding. (c) Upon (i) the occurrence of any Event of Default and at any time thereafter during the continuance of such event, Lender may, at its option, terminate the Bank Swap Agreements with respect the Loans applicable thereto, or (ii) the prepayment in full of the any Loan which is subject to a Bank Swap Agreement for any reason whatsoever, Lender may, at its option, terminate the Bank Swap Agreement insofar as the same applies to such Loan. Upon any such termination of a Bank Swap Agreement, ZTO shall be liable to Lender for all Obligations arising under or in connection with such terminated Bank Swap Agreement, including without limitation, all amounts due to Lender as a result of an "Additional Termination Event" as such term is defined in such Bank Swap Agreement. (d) The occurrence of an Event of Default under this Agreement shall constitute an event of default under or within the meaning of any other Loan Documents, and vice versa, and shall entitle Lender to initiate and pursue, in Lender's sole discretion exercised on one or more occasions, and all any rights and remedies available to Lender hereunder and/or under any of the other Loan Documents, without notice to any Obligor, any requirement for which is hereby expressly waived by each Obligor, anything contained herein or in any Loan Document to the contrary notwithstanding. ARTICLE X GENERAL PROVISIONS Section 10.1 Expenses. Each Obligor agrees to pay on demand all expenses of Lender in connection with the preparation, default, collection, waiver or amendment of loan terms, or in connection with Lender's exercise, preservation or enforcement of any of its rights, remedies or options hereunder, under the Bank Swap Agreement, under any Reimbursement Agreement or under any of the other Loan Documents, including, without limitation, fees of outside counsel, accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with travel or other costs relating to any appraisals or examinations conducted in connection with any of the Loans, the Bank Swap Agreement, any Reimbursement Agreement or any Collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the highest rate applicable to the Loans (including any default rate, if applicable) and be an obligation secured by any Collateral. In addition, each Obligor shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing, and recording of any of the Loan Documents and the other documents to be delivered under any of the Loan Documents, and agrees to hold and save Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or failure to pay such taxes and fees. Section 10.2 Amendments, Etc. No amendment, modification, termination, or waiver of any provision of any Loan Document, or consent to any departure any Obligor from any terms of any Loan Document, shall in any event be effective unless the same shall be in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instance -46- and for the specific purpose for which given. No notice or demand on any Obligor in any case shall entitle any Obligor or any other Person to any other or further notice or demand in similar or other circumstances. Section 10.3 Notices, Etc. All notices, demands, requests, and other communications given under this Agreement shall only be effective if they are (a) in writing, (b) sent by hand delivery, by facsimile transmission, by reputable express delivery service, or by certified or registered mail, postage prepaid, and (c) (i) when delivered to the addressee by hand, (ii) when received by the addressee as evidenced by a return receipt signed by the addressee or its agent, and (iii) in the case of facsimile transmissions, when transmitted, answer back received: (i) If to Lender, to it at: Fleet National Bank 777 Main Street CT-EH-40224B Hartford, CT 06115 Attn: Matthew E. Hummel, Senior Vice President Telephone No: (860) 986-4923 Telecopier No.: (860) 986-3450 With a copy to: Robinson & Cole LLP 280 Trumbull Street Hartford, CT 06103-3597 Attn: Michael F. Maglio, Esq. Telephone No.: (860) 275-8274 Telecopier No.: (860) 275-8299 (ii) If to Zygo, to it at: Zygo Corporation Laurel Brook Road Middlefield, CT 06455 Attn: Richard M. Dressler Telephone No.: (860) 704-5162 Telecopier No.: (860) 347-8372 -47- With a copy to: LeClair & LeClair, P.C. 24 Lexington Street P.O. Box 602 Waltham, Massachusetts 02452 Attn: Richard LeClair, III, Esq. Telephone No.: (781) 893-5655 Telecopier No.: (781) 647-9346 (iii) If to ZTO or TeraOptix, to it at: 20 Walkup Drive Westborough, Massachusetts 01581 Attn: Richard M. Dressler Telephone No.: (860) 704-5162 Telecopier No.: (860) 347-8372 With a copy to: LeClair & LeClair, P.C. 24 Lexington Street P.O. Box 602 Waltham, Massachusetts 02452 Attn: Richard LeClair, III, Esq. Telephone No.: (781) 893-5655 Telecopier No.: (781) 647-9346 or to such other address (and/or facsimile transmission number) as any Obligor or Lender, as the case may be, shall have specified in the latest unrevoked notice sent to the other in accordance with this Section 10.3. Section 10.4 No Waiver; Remedies. No failure on the part of Lender to exercise, and no delay in exercising, any right, power, or remedy under any of the Loan Documents shall operate as a waiver of such right, power, or remedy, nor shall any single or partial exercise of any right, power, or remedy under any of the Loan Documents, or any abandonment or discontinuance of steps to enforce such a right, power or remedy, preclude any other or further exercise thereof or the exercise of any other right, power, or remedy. The rights, powers and remedies provided in the Loan Documents are cumulative and not exclusive of any rights, powers or remedies that Lender would otherwise have, whether under the Loan Documents, at law, in equity, or otherwise. Section 10.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of each Obligor and Lender and their respective successors and assigns; provided, however, that no Obligor shall (by agreement, operation of law, or otherwise) assign any of its rights, or delegate any of its obligations, under any of the Loan Documents to which it is a party -48- without the prior written consent of Lender, and any such assignment or delegation made without such consent shall be null and void. Section 10.6 Transfer of Lender's Interests. (a) Assignments. Each Obligor hereby agrees that Lender, in its sole discretion, shall have the unrestricted right at any time and from time to time, and without the consent of or notice to any Obligor, to assign all or a portion of its rights and obligations hereunder to one or more banks or other financial institutions (each, an "ASSIGNEE"), and in the event of any such assignment to an Assignee. At the request of Lender and any such Assignee, each Obligor shall issue one or more new Notes, as applicable, to any such Assignee and, if Lender has retained any of its rights and obligations following such assignment, to Lender, which new Notes shall be issued in replacement, but not shall be construed as a novation of the Obligations evidenced by the Notes held by Lender prior to such assignment which are being replaced and superseded by the new Notes and shall reflect the amount of the respective Commitments and Loans held by such Assignee and Lender after giving effect to such assignment. Upon the execution and delivery of appropriate assignment documentation, amendments and any other documentation required by Lender in connection with such assignment, and the payment by Assignee of the purchase price agreed to by Lender and such Assignee, such Assignee shall be a party to this Agreement and shall have all of the rights and obligations of Lender hereunder (and under any and all other Loan Documents) to the extent that such rights and obligations have been assigned by Lender pursuant to the assignment documentation between Lender and such Assignee, and Lender shall be released from its obligations hereunder and thereunder to a corresponding extent. Lender may furnish any information concerning any Obligor in its possession from time to time to prospective Assignees, PROVIDED that Lender shall require any such prospective Assignees to agree in writing to maintain the confidentiality of such information, except as required by applicable laws or Governmental Authorities. (b) Participations. Each Obligor hereby agrees that Lender, in its sole discretion, shall have the unrestricted right at any time and from time to time, and without the consent of or notice to any Obligor, to grant participating interests in its obligation to lend hereunder and/or all or any part of the Obligations to one or more banks or other financial institutions (each, a "PARTICIPANT"). In the event of any such grant by Lender of a participating interest to a Participant, Lender shall remain responsible for the performance of its obligations hereunder and each Obligor shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations hereunder. Lender may furnish any information concerning any Obligor in its possession from time to time to Participants and prospective Participants, PROVIDED that Lender shall require any such Participants and prospective Participants to agree in writing to maintain the confidentiality of such information, except as required by applicable laws or Governmental Authorities. (c) Pledge to Federal Reserve Banks. Lender and each Assignee shall have the unrestricted right at any time and from time to time, and without the consent of or notice to any Obligor, to pledge or assign all or any portion of its rights under this Agreement, any Note or any other Loan Document to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341, PROVIDED that no such pledge or -49- assignment or enforcement thereof shall release Lender or such Assignee from its obligations hereunder or thereunder. Section 10.7 Costs, Expenses, Indemnification. (a) Each Obligor agrees to pay on demand all reasonable costs and expenses incurred by Lender in connection with the preparation, execution, delivery, filing and recording of any of the Loan Documents or in connection with any amendments, modifications or waivers of any of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated), including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Lender with respect thereto and with respect to advising the Lender as to its rights and responsibilities under any of the Loan Documents including without limitation, ongoing advice relating to the administration, protection, collection and/or other enforcement of this Agreement or any of the other Loan Documents following the effectiveness of this Agreement and all costs and expenses, if any, in connection with the administration, protection, collection and/or other enforcement of this Agreement or any of the Loan Documents. In addition, each Obligor shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing, and recording of any of the Loan Documents and the other documents to be delivered under any of the Loan Documents, and agrees to hold and save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or failure to pay such taxes and fees. (b) To the fullest extent permitted by applicable law, each Obligor agrees to defend, indemnify and hold harmless Lender, any other holder of the Obligations and each of the present and future shareholders, partners, directors, officers, employees, agents, counsel and successors and assigns of each of them (collectively with Lender, the "LENDER PARTIES") from and against any and all loss, cost, expense, claim, liability (including strict liability) or asserted liability incurred from or out of the Loans made to any Obligor, the execution, delivery or performance of this Agreement, the Bank Swap Agreement or any Reimbursement Agreement any Obligor, or any of the documents or instruments to be executed and delivered hereunder by any Obligor, or otherwise arising out of the debtor/creditor relationship between any Obligor, Lender or Lender Parties relating to the Loans made to any Obligor, the Bank Swap Agreement, any Reimbursement Agreement or any of the other Obligations of any Obligor, the exercise of any of Lender's rights under the Loans made to any Obligor, the Bank Swap Agreement, any Reimbursement Agreement or any of the other Obligations of any Obligor any litigation or proceeding instituted or conducted by any Governmental Authority, any act or omission of Lender or otherwise, except to the extent (and only to the extent) that the same arises from the gross negligence or willful misconduct of Lender. Each Obligor shall have the right to choose counsel to defend any such action, provided that such counsel is acceptable to Lender and provided further that no Obligor nor such counsel shall settle or compromise any such claim with respect to Lender without the prior written consent of Lender. (c) Without limiting the generality of the preceding subparagraph (b) each Obligor agrees to defend, protect, indemnify and hold harmless Lender Parties from and against, and to reimburse Lender Parties on demand with respect to, any and all matters of any and every kind or character, known or unknown, fixed or contingent, asserted against or incurred by Lender -50- Parties at any time and from time to time by reason of or arising out of any violation of any Environmental Laws, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, Release or threatened Release of any Contaminant or any action, suit, proceeding or investigation brought or threatened with respect to any Contaminant (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case, including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. Each Obligor shall have the right to choose counsel to defend any such action, provided that such counsel is acceptable to Lender and provided further that no Obligor nor such counsel shall settle or compromise any such claim with respect to Lender without the prior written consent of Lender. (d) The obligations of the Obligors described in this Section 10.7 shall survive the closing of the transactions described in this Agreement for a period of two (2) years following the full and final payment in Dollars and satisfaction in full of the Notes, the Bank Swap Agreement, the Reimbursement Agreements and the other Obligations. Section 10.8 Right of Setoff. Each Obligor hereby grants to Lender a continuing lien, security interest and right of setoff as security for all of the Obligations and other liabilities of such Obligor to Lender, whether now existing or hereafter arising, upon and against all its deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Lender or any entity under common control of FleetBoston Financial Corporation and its successors and assigns or in transit to any of them. At any time and from time to time after the occurrence and during the continuance of an Event of Default, without demand or notice (any such demand or notice being expressly waived by each Obligor), Lender may setoff the same or any part thereof and apply the same to any Obligation or other liability of any Obligor to Lender, even though unmatured, irrespective of whether or not Lender shall have made any demand under this Agreement or any other Loan Document and regardless of the adequacy of any other collateral securing such Obligations and liabilities. ANY AND ALL RIGHTS TO REQUIRE LENDER TO MARSHAL OR OTHERWISE EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OR ALL OF SUCH OBLIGATIONS AND LIABILITIES PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF ANY OBLIGOR ARE HEREBY KNOWINGLY, VOLUNTARILY OR IRREVOCABLY WAIVED. The rights of the Lender under this Section 10.8 are in addition to other rights and remedies (including, without limitation, other rights of setoff) which Lender may have. -51- Section 10.9 Governing Law; Jurisdiction; Waivers. (a) This Agreement and the other Loan Documents shall be construed in accordance with and governed by the laws of the State of Connecticut (without regard to its conflict of laws rules). It is the express intention of Lender and each Obligor that the laws of the State of Connecticut (but not its conflict of laws rules) apply to the entirety of the transactions evidenced by the Loan Documents. (b) Each Obligor hereby irrevocably submits, for itself and its property, to the nonexclusive jurisdiction of any Connecticut State or United States Federal court sitting in the State of Connecticut, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each Obligor hereby irrevocably and unconditionally agrees that all claims in respect to such action or proceeding may be heard and determined in such Connecticut State or Federal court. Each Obligor irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the applicable Obligor at the address specified in Section 10.3. Each Obligor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (c) Nothing in this Section 10.9 shall affect the right of Lender to serve legal process in any other manner permitted by law or affect any right that Lender may otherwise have to bring an action or proceeding relating to this Agreement or the other Loan Documents against any Obligor or its properties in the courts of any jurisdiction, including without limitation, the courts (State and Federal) of or sitting in the Commonwealth of Massachusetts. (d) Each Obligor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any Connecticut State or Federal Court (or other State or Federal Court chosen by Lender as provided above). Each Obligor hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (e) To the extent that any Obligor has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether from service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise,) with respect to any Obligor or its property, each Obligor hereby irrevocably waives such immunity in respect of its obligations under this Agreement, the Notes and the other Loan Documents. (f) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH OBLIGOR HEREBY WAIVES DEMAND, PRESENTMENT FOR PAYMENT, PROTEST, NOTICE OF PROTEST, NOTICE OF DISHONOR, DILIGENCE IN COLLECTION, NOTICE OF NONPAYMENT OF THIS AGREEMENT AND ANY NOTES AND ANY AND ALL NOTICES OF A LIKE NATURE. FURTHER, TO THE EXTENT NOT OTHERWISE EXPRESSLY PROVIDED HEREIN, EACH OBLIGOR EXPRESSLY WAIVES ALL DEFENSES OF SURETYSHIP OR IMPAIRMENT OF -52- COLLATERAL. EACH OBLIGOR ACKNOWLEDGES AND STIPULATES THAT THE WAIVERS AND AUTHORIZATIONS GRANTED ABOVE ARE MADE KNOWINGLY AND FREELY AND AFTER FULL CONSULTATION WITH COUNSEL. Section 10.10 Payment Set-Aside. To the extent that any Obligor or any other Person makes a payment or payments to Lender (whether hereunder, under any Note or under any of the other Loan Documents) with respect to the Obligations, or Lender enforces its security interests or rights or exercises its right of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to any Obligor or such Person, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action) in each case in connection with any bankruptcy or similar proceeding involving any Obligor or such Person, then to the extent of any such restoration, the Obligations or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred, whereupon this Agreement shall be automatically reinstated without any further action by any Obligor and Lender and continue to be fully applicable to such Obligations to the same extent as though the payment so repaid or recovered had never been originally made on such Obligation. Section 10.11 Entire Agreement, Severability of Provisions. (a) This Agreement and the other Loan Documents are intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement and the other Loan Documents. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Agreement and the other Loan Documents, and no party is relying on any promise, agreement or understanding not set forth in this Agreement and/or the other Loan Documents. This Agreement and the other Loan Documents may not be amended or modified except by a written instrument describing such amendment or modification executed by the Obligors and Lender. Nothing in this Agreement or in the other Loan Documents, express or implied, is intended to confer upon any party other than the parties hereto and thereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. (b) If any one or more terms or provisions contained in this Agreement or in any of the other Loan Documents or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be held invalid, illegal or unenforceable, such terms or provisions shall be ineffective as to such jurisdiction only to the extent of such invalidity, illegality or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions hereof or thereof or the application of such term or provision to circumstances other than those as to which it is held invalid, illegal or unenforceable. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. -53- Section 10.12 Waivers of Jury Trial, Consequential Damages, Etc. (a) EACH OBLIGOR AND LENDER (BY ACCEPTANCE OF THE NOTES) MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF LENDER RELATING TO THE ADMINISTRATION OF ANY OF THE LOANS OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OBLIGOR AND LENDER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. (b) EACH OBLIGOR CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. EACH OBLIGOR ACKNOWLEDGES AND STIPULATES THAT THE WAIVERS AND AUTHORIZATIONS GRANTED ABOVE ARE MADE KNOWINGLY, VOLUNTARILY AND INTENTIONALLY AND AFTER FULL CONSULTATION WITH COUNSEL AND CONSTITUTE A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOANS. Section 10.13 Replacement of a Note or other Loan Document. Upon receipt by any Obligor of an affidavit of an officer of Lender as to the loss, theft, destruction, or mutilation of any Note of any Obligor or any other Loan Document to which any Obligor is a party which is not of public record, and, in the case of any such loss, theft, or destruction or mutilation, upon cancellation of such Note or other Loan Document, the applicable Obligor will issue and/or execute and deliver, in lieu thereof, a replacement note or other Loan Document in the same principal amount thereof and otherwise of like tenor. Section 10.14 Survival of Agreement. All covenants, agreements, representations and warranties made by any Obligor in this Agreement and in the certificates or other instruments prepared or delivered by it or on its behalf in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by Lender and shall survive the making by Lender of the Loans and delivery of this Agreement and the other Loan Documents, regardless of any investigation made by Lender or on its behalf, and shall continue in full force and effect as long as any Obligation is outstanding and so long as the Commitments and/or any Bank Swap Agreement have not been terminated. The provisions of Sections 2.17, 10.7 and 10.10 hereof shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated -54- hereby, the repayment of the Obligations, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of Lender. Section 10.15 Construction. Each covenant contained in Articles V, VI and VII of this Agreement shall be construed (absent an express contrary provision therein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Section 10.16 Captions. Article and Section titles in the Loan Documents are included for convenience only and do not define, limit, or describe the scope of the provisions thereof. Section 10.17 Counterparts. This Agreement may be executed and delivered in any number of counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute but one and the same agreement. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK THE NEXT PAGE IS THE SIGNATURE PAGE -55- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. WITNESSES (AS TO ALL): _______________________________ ZYGO CORPORATION _______________________________ By: /s/ RICHARD M. DRESSLER ---------------------------------------- Richard M. Dressler Its Treasurer ZTO PROPERTY HOLDINGS, LLC By: /s/ RICHARD M. DRESSLER --------------------------------------- Richard M. Dressler Its Treasurer ZYGO TERAOPTIX, INC. By: /s/ RICHARD M. DRESSLER ---------------------------------------- Richard M. Dressler Its Treasurer FLEET NATIONAL BANK By: /s/ MATTHEW E. HUMMEL ---------------------------------------- Matthew E. Hummel Its Senior Vice President -56- EX-10.22 4 e89840_ex10-22.txt MASTER REAFFIRMATION & AMEND TO LOAN DOCS EXHIBIT 10.22 MASTER REAFFIRMATION AND AMENDMENT TO LOAN DOCUMENTS THIS MASTER REAFFIRMATION AND AMENDMENT TO LOAN DOCUMENTS (this "AGREEMENT") is made as of the 22nd day of November, 2001, by and among ZYGO CORPORATION, a Delaware corporation with its principal place of business located at Laurel Brook Road, Middlefield, Connecticut 06455 ("ZYGO"), ZTO PROPERTY HOLDINGS, LLC, a Delaware limited liability company with its principal place of business located at 20 Walkup Drive, Westborough, Massachusetts 01581 ("ZTO"), ZYGO TERAOPTIX, INC., a Delaware corporation with its principal place of business located at 100 Kuniholm Drive, Holliston, Massachusetts 01746 ("TERAOPTIX" and together with Zygo and ZTO, the "OBLIGORS"), and FLEET NATIONAL BANK, a national bank with a place of business at 777 Main Street, Hartford, Connecticut 06115 ("LENDER"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement described below. W I T N E S S E T H: WHEREAS, Obligors and Lender are parties to that certain Amended and Restated Credit Agreement dated as of May 14, 2001 (as amended, modified, restated or otherwise supplemented from time to time, the "CREDIT AGREEMENT"), pursuant to which, among other things, Lender has extended to Zygo a commercial revolving loan/letter of credit facility in the original principal amount of up to $3,000,000 (the "REVOLVING CREDIT FACILITY"); and WHEREAS, ZTO and TeraOptix have each, among other things, unconditionally guaranteed payment and performance of the Obligations of Zygo under the Revolving Credit Facility, whether now existing or hereafter arising, pursuant and subject to the terms and conditions set forth in their respective Guaranty Agreements; and WHEREAS, Obligors have each requested Lender, and Lender has agreed, to extend the Maturity Dates of the Revolving Loan Commitment and L/C Commitment from November 22, 2001 to November 21, 2002; and WHEREAS, Lender is willing to extend the accommodations requested by Obligors subject to and in reliance upon the representations, warranties, acknowledgments, covenants and agreements of Obligors contained herein. NOW, THEREFORE, in consideration of the premises set forth herein (which are incorporated herein as though fully set forth below, by this reference thereto) and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned agrees as follows: 11. Amendments to Credit Agreement and other Loan Documents. a. Each reference in the Loan Documents to the Credit Agreement shall mean the Credit Agreement as modified by this Agreement. b. Section 1.1 of the Credit Agreement, entitled "Defined Terms", is hereby amended by deleting the definition of "Maturity Date" in its entirety and inserting the following in lieu thereof: "Maturity Date" means (a) with respect to the Revolving Loan Commitment, November 21, 2002, and any subsequent date to which such Maturity Date may be extended by Lender in writing in its sole and absolute discretion, (b) with respect to the L/C Commitment, November 21, 2002, and (c) with respect to the Converted Construction Loan, May 14, 2007. 12. Reaffirmation. Each of Obligors, as maker, debtor, grantor, pledgor, assignor, obligor, or in other similar capacity in which it incurs obligations to Lender or grants liens or security interests in its properties under any of the Loan Documents, hereby ratifies and reaffirms all of its Obligations, contingent or otherwise, under each of the Loan Documents to which it is a party and, to the extent it granted liens on or security interests in any of its properties pursuant to any Loan Document as security for the Obligations under or with respect to the Credit Agreement and the other Loan Documents, hereby ratifies and reaffirms such grant of liens and security interests and confirms and agrees that such liens and security interests hereafter secure all of the Obligations, including without limitation, the Obligations arising under the Revolving Credit Facility, as hereby amended, in each case as if each reference in such Loan Document to the obligations secured thereby are construed to hereafter mean and refer to such Obligations under the Credit Agreement and other Loan Documents, as hereby amended. Each of Obligors acknowledges that each of the Loan Documents to which it is a party remains in full force and effect, continues to apply to the Obligations, including, but not limited to, the Obligations arising under the Revolving Credit Facility as hereby amended, and is hereby ratified and confirmed. The execution of this Agreement shall not operate as a novation, waiver of any right, power or remedy of Lender nor constitute a waiver of any provision of any of the Loan Documents, except as expressly set forth herein and shall be limited to the particular instance expressly set forth. Each of Obligors confirms and agrees that the Loan Documents and each and every covenant, condition, obligation, representation (except those representations which relate only to a specific date, which are confirmed as of such date only), warranty and provisions set forth therein are, and shall continue to be, in full force and effect and are hereby confirmed, reaffirmed and ratified in all respects. 13. No Default or Event of Default, No Defenses. Each of Obligors hereby represents and warrants to, and covenants with Lender that, as of the date hereof, (a) no Default or Event of Default has occurred and is continuing, (b) it has no defense, offset or counterclaim of any kind or nature whatsoever against Lender with respect to the Revolving Credit Facility, the Obligations, or any of the Loan Documents to which it is a party, or any action previously taken or not taken by Lender with respect thereto or with respect to any security interest, encumbrance, lien or collateral in connection therewith to secure the Obligations, and (c) that Lender has fully performed all obligations to Obligors which it may have had or has on and as of the date hereof. 14. Fee. Simultaneously herewith, in consideration of the Lender's extension of the Maturity Dates of the Revolving Loan Commitment and L/C Commitment Termination Date, Zygo shall pay to Lender on the date hereof a non-refundable commitment fee in the amount of $7,500. 15. Successors and Assigns. This Agreement shall be binding upon each of Obligors and their respective successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. The successors and assigns of such entities shall include, without limitation, their respective receivers, trustees, or debtors-in-possession. 16. Further Assurances. Each of Obligors hereby agrees from time to time, as and when requested by Lender, to execute and deliver or cause to be executed and delivered all such documents, instruments and agreements and to take or cause to be taken such further or other action as Lender may reasonably deem necessary or desirable in order to carry out the intent and purposes of this Agreement and the Loan Documents. 17. Authorization. Each of Obligors is duly authorized to execute and deliver this Agreement and to perform its obligations under the Credit Agreement and the other Loan Documents to which it is a party, each as amended hereby. 18. No Conflicts. The execution and delivery of this Agreement, and the performance by each of Obligors of their respective obligations hereunder and under any Loan Documents to which any of them may be a party, each as amended hereby to the extent applicable, do not and will not conflict with any provision of law or of the charter or by-laws of any of them or of any agreement binding upon any of them. 19. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. -58- 20. Merger. This Agreement represents the final agreement of Obligors and Lender with respect to the matters contained herein and may not be contradicted by evidence of prior or contemporaneous agreements, or prior or subsequent oral agreements. 21. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 22. Section Headings. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 23. Governing Law. This Agreement shall be governed by the internal substantive laws of the State of Connecticut (without regard to its conflicts of law provisions). REMAINDER OF PAGE INTENTIONALLY LEFT BLANK THE NEXT PAGE IS THE SIGNATURE PAGE -59- IN WITNESS WHEREOF, this Agreement has been duly executed by the undersigned as of the day and year first set forth above. WITNESSES (AS TO OBLIGORS): _______________________________ ZYGO CORPORATION _______________________________ By:/s/Richard M. Dressler ------------------------- Richard M. Dressler Its Treasurer ZTO PROPERTY HOLDINGS, LLC By: /s/Richard M. Dressler ---------------------------------------- Richard M. Dressler Its Treasurer ZYGO TERAOPTIX, INC. By: /s/Richard M. Dressler --------------------------------------- Richard M. Dressler Its Treasurer WITNESSES (AS TO LENDER): _______________________________ FLEET NATIONAL BANK _______________________________ By: /s/Matthew E. Hummel --------------------------------------- Matthew E. Hummel Its Senior Vice President -60- EX-10.23 5 e89840_ex10-23.txt MASTER REAFFIRMATION & AMEND NO. 2 TO LOAN DOCS EXHIBIT 10.23 MASTER REAFFIRMATION AND AMENDMENT NO. 2 TO LOAN DOCUMENTS THIS MASTER REAFFIRMATION AND AMENDMENT NO. 2 TO LOAN DOCUMENTS (this "AGREEMENT") is made as of the 26th day of June, 2002, by and among ZYGO CORPORATION, a Delaware corporation with its principal place of business located at Laurel Brook Road, Middlefield, Connecticut 06455 ("ZYGO"), ZTO PROPERTY HOLDINGS, LLC, a Delaware limited liability company with its principal place of business located at 20 Walkup Drive, Westborough, Massachusetts 01581 ("ZTO"), ZYGO TERAOPTIX, INC., a Delaware corporation with its principal place of business located at 100 Kuniholm Drive, Holliston, Massachusetts 01746 ("TERAOPTIX" and together with Zygo and ZTO, the "OBLIGORS"), and FLEET NATIONAL BANK, a national bank with a place of business at 777 Main Street, Hartford, Connecticut 06115 ("LENDER"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement described below. W I T N E S S E T H: WHEREAS, Obligors and Lender are parties to that certain Amended and Restated Credit Agreement dated as of May 14, 2001 (as amended, modified, restated or otherwise supplemented from time to time, including, but not limited to, that certain Master Reaffirmation and Amendment to Loan Documents dated as of November 22, 2001, the "CREDIT AGREEMENT"), pursuant to which, among other things, Lender has extended to Zygo a commercial revolving loan/letter of credit facility in the original principal amount of up to $3,000,000 (the "REVOLVING CREDIT FACILITY"); and WHEREAS, ZTO and TeraOptix have each, among other things, unconditionally guaranteed payment and performance of the Obligations of Zygo under the Revolving Credit Facility, whether now existing or hereafter arising, pursuant and subject to the terms and conditions set forth in their respective Guaranty Agreements; and WHEREAS, Obligors have each requested Lender to amend the financial covenants of Obligors set forth in Sections 7.1 and 7.2 of the Credit Agreement; and WHEREAS, Lender is willing to make the accommodations requested by Obligors subject to and in reliance upon the representations, warranties, acknowledgments, covenants and agreements of Obligors contained herein. NOW, THEREFORE, in consideration of the premises set forth herein (which are incorporated herein as though fully set forth below, by this reference thereto) and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned agrees as follows: 24. Amendments to Credit Agreement and other Loan Documents. a. Each reference in the Loan Documents to the Credit Agreement shall mean the Credit Agreement as modified by this Agreement. b. Section 1.1 of the Credit Agreement, entitled "Defined Terms", is hereby amended by deleting the definition of "Applicable Margin" in its entirety and inserting the following in lieu thereof: "Applicable Margin" means for each LIBOR Loan then outstanding: (a) for the period commencing on the date hereof and ending on the day immediately preceding the Initial Adjustment Date, 1.0% above the applicable LIBOR Rate; and -61- (b) for each period commencing on an Adjustment Date (including, but not limited to, the Initial Adjustment Date) and ending on the day immediately preceding the next Adjustment Date, the percentage rate set forth below opposite the level of Zygo's consolidated financial performance as measured by its Consolidated Leverage Ratio as of the end of its most recent fiscal quarter for the then ended Rolling Period (as determined on the basis of the financial statements required to be delivered in respect of such Adjustment Date): - -------------------------------------------------------------------------------- LIBOR LEVEL CONSOLIDATED LEVERAGE RATIO MARGIN - -------------------------------------------------------------------------------- I <0.75x 1.00% - -------------------------------------------------------------------------------- II >0.75x, but < 1.25x 1.25% - - -------------------------------------------------------------------------------- III >1.25x, but < 2.00x 1.50% - - -------------------------------------------------------------------------------- IV >2.00but < 400x 2.00% - - -------------------------------------------------------------------------------- V >4.00 2.50% - - -------------------------------------------------------------------------------- By way of illustration, if Zygo's Consolidated Leverage Ratio on June 30, 2002 is 1.70 to 1.0, then, effective on the first day following the date upon which Zygo's June, 2002 quarterly compliance certificate and quarterly financial statements are received by Lender, the interest rate applicable to the LIBOR Loans shall be adjusted (if not the same) to be priced at the LIBOR Rate plus 1.50%. c. Section 1.1 of the Credit Agreement, entitled "Defined Terms", is hereby amended by adding the following definitions in the appropriate alphabetical order: "Consolidated Liquidity Ratio" means, as of each applicable date, the ratio of (a) the Liquid Asset Amount as of such date, to (b) Senior Funded Debt as of such date. "Liquid Asset Amount" means, as of each applicable date, the sum of all assets of the Obligors on such date consisting of cash, cash equivalents, marketable securities and accounts receivable (which shall be valued at ninety percent (90%) the face amount thereof less any and all rebates, discounts, credits or other allowances applicable thereto). "Net Worth" means, at a particular date, (a) Total Assets as of such date, minus (b) Total Liabilities as of such date. "Total Assets" means, as of any particular date, all assets of the Obligors that, in accordance with GAAP, would properly be classified as assets on the consolidated balance sheet of the Obligors as of such date. "Total Liabilities" means, as of any particular date, all Debt and other liabilities of the Obligors that, in accordance with GAAP, would properly be classified as liabilities on the consolidated balance sheet of the Obligors as of such date, but, in any event, shall exclude (if not otherwise excluded in accordance with GAAP) liabilities of an Obligor to another Obligor. d. Article VII of the Credit Agreement, entitled "FINANCIAL COVENANTS", is hereby amended by deleting Sections 7.1 and 7.2 their entirety and inserting the following in lieu thereof: -62- Section 7.1 Consolidated Fixed Charge Coverage Ratio. Maintain a Consolidated Fixed Charge Coverage Ratio of not less than 1.50-to-1.0 as of the end of each fiscal quarter for the then ended Rolling Period commencing with the fiscal quarter ending on June 30, 2004. Section 7.2 Consolidated Senior Funded Debt-to-EBITDA Ratio. Not permit its Consolidated Senior Funded Debt-to-EBITDA Ratio to exceed 2.0 to 1.0 as of the end of each fiscal quarter for the then ended Rolling Period commencing with the fiscal quarter ending on June 30, 2004. Section 7.3 Consolidated Liquidity Ratio. Maintain a Consolidated Liquidity Ratio of not less than 2.0-to-1.0 as of the end of each fiscal quarter. Section 7.4 Net Worth. Maintain a Net Worth of not less than (a) $135,000,000 as of June 30, 2002, (b) $131,000,000 as of September 30, 2002, (c) $128,000,000 as of December 31, 2002, (d) $125,000,000 as of March 31, 2003, and (e) the sum of (i) $125,000,000 as of each fiscal quarter thereafter, plus (ii) seventy-five percent of Net Income for each Fiscal Year commencing with the Fiscal Year ending June 30, 2003, on a cumulative basis; PROVIDED, HOWEVER, that in the event a reduction in the valuation of TeraOptix and/or ZTO is required to be made in accordance with GAAP during any particular period, the applicable Net Worth requirement hereunder shall be reduced by the aggregate amount of any such reduction. 25. Reaffirmation. Each of Obligors, as maker, debtor, grantor, pledgor, assignor, obligor, or in other similar capacity in which it incurs obligations to Lender or grants liens or security interests in its properties under any of the Loan Documents, hereby ratifies and reaffirms all of its Obligations, contingent or otherwise, under each of the Loan Documents to which it is a party and, to the extent it granted liens on or security interests in any of its properties pursuant to any Loan Document as security for the Obligations under or with respect to the Credit Agreement and the other Loan Documents, hereby ratifies and reaffirms such grant of liens and security interests and confirms and agrees that such liens and security interests hereafter secure all of the Obligations, including without limitation, the Obligations arising under the Revolving Credit Facility, as hereby amended, in each case as if each reference in such Loan Document to the obligations secured thereby are construed to hereafter mean and refer to such Obligations under the Credit Agreement and other Loan Documents, as hereby amended. Each of Obligors acknowledges that each of the Loan Documents to which it is a party remains in full force and effect, continues to apply to the Obligations, including, but not limited to, the Obligations arising under the Revolving Credit Facility as hereby amended, and is hereby ratified and confirmed. The execution of this Agreement shall not operate as a novation, waiver of any right, power or remedy of Lender nor constitute a waiver of any provision of any of the Loan Documents, except as expressly set forth herein and shall be limited to the particular instance expressly set forth. Each of Obligors confirms and agrees that the Loan Documents and each and every covenant, condition, obligation, representation (except those representations which relate only to a specific date, which are confirmed as of such date only), warranty and provisions set forth therein are, and shall continue to be, in full force and effect and are hereby confirmed, reaffirmed and ratified in all respects. 26. No Default or Event of Default, No Defenses. Each of Obligors hereby represents and warrants to, and covenants with Lender that, as of the date hereof, (a) no Default or Event of Default has occurred and is continuing, (b) it has no defense, offset or counterclaim of any kind or nature whatsoever against Lender with respect to the Revolving Credit Facility, the Obligations, or any of the Loan Documents to which it is a party, or any action previously taken or not taken by Lender with respect thereto or with respect to any security interest, encumbrance, lien or collateral in connection therewith to secure the Obligations, and (c) that Lender has fully performed all obligations to Obligors which it may have had or has on and as of the date hereof. 27. Fee. Simultaneously herewith, in consideration of the Lender's extension of the Maturity Dates of the Revolving Loan Commitment and L/C Commitment Termination Date, Zygo shall pay to Lender on the date hereof a non-refundable commitment fee in the amount of $7,500. 28. Successors and Assigns. This Agreement shall be binding upon each of Obligors and their respective successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. The successors and assigns of such entities shall include, without limitation, their respective receivers, trustees, or debtors-in-possession. -63- 29. Further Assurances. Each of Obligors hereby agrees from time to time, as and when requested by Lender, to execute and deliver or cause to be executed and delivered all such documents, instruments and agreements and to take or cause to be taken such further or other action as Lender may reasonably deem necessary or desirable in order to carry out the intent and purposes of this Agreement and the Loan Documents. 30. Authorization. Each of Obligors is duly authorized to execute and deliver this Agreement and to perform its obligations under the Credit Agreement and the other Loan Documents to which it is a party, each as amended hereby. 31. No Conflicts. The execution and delivery of this Agreement, and the performance by each of Obligors of their respective obligations hereunder and under any Loan Documents to which any of them may be a party, each as amended hereby to the extent applicable, do not and will not conflict with any provision of law or of the charter or by-laws of any of them or of any agreement binding upon any of them. 32. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 33. Merger. This Agreement represents the final agreement of Obligors and Lender with respect to the matters contained herein and may not be contradicted by evidence of prior or contemporaneous agreements, or prior or subsequent oral agreements. 34. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 35. Section Headings. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 36. Governing Law. This Agreement shall be governed by the internal substantive laws of the State of Connecticut (without regard to its conflicts of law provisions). REMAINDER OF PAGE INTENTIONALLY LEFT BLANK THE NEXT PAGE IS THE SIGNATURE PAGE -64- IN WITNESS WHEREOF, this Agreement has been duly executed by the undersigned as of the day and year first set forth above. WITNESSES (AS TO OBLIGORS): _______________________________ ZYGO CORPORATION _______________________________ By: /s/ Richard M. Dressler ---------------------------------------- Richard M. Dressler Its Treasurer ZTO PROPERTY HOLDINGS, LLC By: /s/ Richard M. Dressler ---------------------------------------- Richard M. Dressler Its Treasurer ZYGO TERAOPTIX, INC. By: /s/ Richard M. Dressler ---------------------------------------- Richard M. Dressler Its Treasurer WITNESSES (AS TO LENDER): _______________________________ FLEET NATIONAL BANK By: /s/ Matthew E. Hummel _______________________________ ----------------------------------------- Matthew E. Hummel Its Senior Vice President -65- EX-10.24 6 e89840_ex10-24.txt SUBCONTRACT NO. B514527 EXHIBIT 10.24 - -------------------------------------------------------------------------------- SUBCONTRACT University of California NO. B514527 Lawrence Livermore National Laboratory Procurement & Material P.O. Box 5012 Livermore, CA 94551 - -------------------------------------------------------------------------------- SUBCONTRACTOR: UNIVERSITY PROCUREMENT REPRESENTATIVE: ZYGO CORPORATION William V. Karleskind Attention: Karen DuPerry Subcontract Administrator Specialist P.O. Box 448 Middlefield, CT 06455-0448 PHONE #: (925) 422-7503 FAX #: (925) 422-9294 E-MAIL: karleskindl@llnl.gov - -------------------------------------------------------------------------------- INTRODUCTION This is a subcontract for the finishing of 460 NIF optics as further described herein. The parties to this Subcontract are The Regents of the University of California (hereinafter called "University") and the party identified above as the "Subcontractor." This is a subcontract under Prime Contract No. W-7405-ENG-48 between the University and the United States Government (hereinafter called "Government"), represented by the Department of Energy (hereinafter called "DOE"), for the management and operation of the Lawrence Livermore National Laboratory (hereinafter called "LLNL") and the performance of certain research and development work. AGREEMENT The parties agree to perform their respective obligations in accordance with the terms, conditions, and provisions of the attached SCHEDULE OF ARTICLES and any documents referenced or incorporated therein, which together with this Subcontract Signature Page shall collectively constitute the entire Subcontract and shall supersede all prior negotiations, representations, or agreements, whether verbal or written. ZYGO CORPORATION THE REGENTS OF THE UNIVERSITY OF CALIFORNIA BY: /s/ Peter B. Mumola BY: /s/ R.W. Callaghan -------------------------------- ------------------------------ R.W. Callaghan TITLE: Vice President - Optics TITLE: NIF Procurement Manager -------------------------------- ------------------------------ LLNL Procurement & Material DATE: 4/14/01 DATE: 4/13/01 -------------------------------- ------------------------------ -66- SCHEDULE OF ARTICLES FOR SUBCONTRACT NO. B514527 ARTICLE 1 - INCORPORATED DOCUMENTS The following documents and forms are hereby incorporated as a part of this Schedule of Articles of the Subcontract and are attached hereto: DOCUMENTS GENERAL PROVISIONS FOR FIXED PRICE SUPPLIES AND SERVICES (GPs #600C; Rev. 08/01/00) STATEMENT OF WORK (DATE 12/1/00) SUBCONTRACT PRODUCTION SCHEDULE ARTICLE 2 - SCOPE OF WORK A. The Subcontractor shall conduct certain work generally described as finishing of 460 NIF Optics. This work is more specifically described in the attached Statement of Work (SOW) and the applicable referenced LLNL drawings. B. The Subcontractor shall furnish all personnel, supervision, materials, supplies, equipment, tools, facilities, transportation, testing, and other incidental items and services necessary for performance of the work, except for Government Property specified herein to be furnished by the University. The Subcontractor shall deliver the materials, products, supplies, reports and residuals, as specified. C. The work shall be performed by the Subcontractor at the Subcontractor's facility located at Middlefield, Connecticut and at other locations approved by the University. D. This Subcontract is designated as a DX-E1 Rated Order. The Subcontractor shall comply with the provisions of the Defense Priorities and Allocations System Regulation (15 CFR Part 700) in obtaining controlled materials and other products and services needed to perform this Subcontract. ARTICLE 3 - PERIOD OF PERFORMANCE The work described in ARTICLE 2 - SCOPE OF WORK shall be completed on or before February 13, 2002, in accordance with the attached Subcontract Production Schedule. -67- ARTICLE 4 - PRICE, PAYMENT AND TRANSPORTATION A. Price The Subcontractor shall be paid as follows for the finishing of 460 NIF optics. These optics shall be finished in accordance with the technical specifications of the ARTICLE 2 - SCOPE OF WORK: 1. The Subcontractor shall be paid the fixed unit prices indicated for the finishing of the following 152 optics: --------------------------------------------------------------------------- Optic Type Drawing Number Quantity Fixed Extended price Unit price -------------------------------------------------------------------------- LM3 AAA96-105332-OE 25 $3,698 $92,450.00 -------------------------------------------------------------------------- LM7B AAA96-105462-I/c 9 $4,042 $36,378.00 -------------------------------------------------------------------------- LM7C AAA96-105472-OC 16 $4,042 $64,672.00 -------------------------------------------------------------------------- WIP Amplifier Slabs* AAA96-105113-OB 75 $4,617 $346,275.00 -------------------------------------------------------------------------- WIP Polarizers* AAA96-105114-OA 27 $3,673 $99,171.00 -------------------------------------------------------------------------- Total Firm Fixed Price 152 $638,946.00 -------------------------------------------------------------------------- * These shall be the first 75 amplifiers and 27 polarizers delivered under this Subcontract. The difference in value for these units shall be compensated for under Subcontract B507150. 2. The Subcontractor shall finish an additional 275 amplifier slabs and 33 Polarizers at the fixed unit prices indicated below. Each amplifier and polarizer shall be finished to one of two different specifications, depending on the homogeneity of the unfinished optics, provided by the University. The total price for all 308 optics shall be subject to a not-to-exceed ceiling amount of $2,075,348.00, which is based on the highest priced scenario. The following scenario, however, is a "best guess" estimate of what the actual mix may look like. As the final mix is not known, the Subcontractor shall be limited to the ceiling amount, a total quantity of 308, and the fixed unit prices indicated below: - -------------------------------------------------------------------------------- Estimated Fixed Extended price Optic Type Drawing Number Quantity Unit Price (Estimated) - -------------------------------------------------------------------------------- Amplifier Slab (full spec) AAA96-105113-OB 274* $6,916 $1,894,984.00* - -------------------------------------------------------------------------------- Polarizer (full spec) AAA96-105112-OD 12* $5,256 $63,072.00* - -------------------------------------------------------------------------------- Amplifier Slab (lower spec) AAA96-105514-OA 1* $6,647 $6,647.00* - -------------------------------------------------------------------------------- Polarizer (lower spec) AAA96-105114-OA 21* $5,051 $106,071.00* - -------------------------------------------------------------------------------- Total 308 $2,070,774.00* - -------------------------------------------------------------------------------- * Estimate Only -68- 3. The Subcontractor shall be paid an incentive for reduced breakage as follows: Amplifier Slabs: For the 350 amplifier slabs requiring finishing under this Subcontract, the Subcontractor shall be paid the incentive shown below for reduced breakage amounts achieved. The incentive for amplifier slabs shall be evaluated three times during this Subcontract, after the first 117 slabs are completed, after the next 117 and after the final 116. These periods shall be mutually exclusive with regard to determining breakage and incentive amounts. Number of Slabs: 117 117 116 *Number of Broken Slabs: Incentive Amount ------------------------- ------------------------------------------ 0 $40,000 $40,000 $40,000 1 $30,000 $30,000 $30,000 2 $20,000 $20,000 $20,000 3 $10,000 $10,000 $10,000 4 $ 0 $ 0 $ 0 Polarizers: For the 60 polarizers requiring finishing under this Subcontract, the Subcontractor shall be paid the incentive shown below for reduced breakage amounts achieved. The incentive for polarizers shall be evaluated once during this Subcontract, after completion of all units. Total Number of Polarizers 60 Number Broken: Incentive Amount -------------- ----------------------------------- 0 $15,000 1 $7,500 2 $ 0 For this Subcontract, the incentive amount paid for both amplifier slabs and polarizers shall be subject to a total ceiling amount of $135,000.00, which shall be the limit of the University's obligation. 4. The total not-to-exceed amount of this Subcontract is $2,849,294.00. -69- The prices stated above do not include, and the University shall not be charged for, any State Sales & Use Tax. The university holds California State Resale Permit No. SR-CHA 21-135323. B. Pricing of Adjustments When costs are a factor in any determination of a Subcontract price adjustment, pursuant to the "Changes" clause of the GENERAL PROVISIONS or any other provision of this Subcontract, such costs shall be in accordance with the contract cost principles and procedures in Part 31 of the Federal Acquisition Regulation (48 CFR Part 31), as supplemented or modified by DEAR Part 931 (48 CFR Part 931) in effect as of the date of award of this Subcontract. C. Invoices The Subcontractor shall submit its invoice upon completion of the work to the following address: University of California Lawrence Livermore National Laboratory Attn.: Bill Darleskind, L-443 P.O. Box 5001 Livermore, CA 94551 D. Payment and Shipment Payment shall be made within 30 days after receipt of the Subcontractor's invoice, upon the University's acceptance of any portion of the work delivered or rendered for which a price is separately stated or an invoice is allowed. Shipment of optics may occur as soon all specifications are achieved, prior acceptance of the metrology data is not required. Payment, however, will continue to be upon acceptance of the metrology data. E. Transportation Terms F.O.B point: Origin Shipping Point: Zygo Corporation, Middlefield, Connecticut Shipping Instructions: Burlington Express Mark airway bill: "Bill Recipient Account 411-288-721" ARTICLE 5 - COORDINATION AND ADMINISTRATION A. The University Procurement Representative for this Subcontract is Bill Karleskind. All matters relating to the administration, performance and non-technical interpretation of this Subcontract shall be referred to the University Procurement Representative. The Subcontractor shall direct all notices and requests for approval to the University Procurement Representative. The University Procurement Representative will issue any notices or non-technical approvals to the Subcontractor. -70- B. The University Technical Representative for this Subcontract is Chris Stolz. The University Technical Representative will provide technical direction in connection with the work to be performed under this Subcontract. The term "technical directions" is defined to include (1) direction to the Subcontractor which assist in the interpretation of drawings, specifications, or technical portions of the work description; and (2) the review and approval of technical reports, drawings, specifications, and information to be delivered by the Subcontractor under the Subcontract, where required. The University Technical Representative will issue all technical direction in writing. C. The University Technical Representative is not authorized to issue any technical direction which would (1) constitute an assignment of work outside the general scope of the work covered by this Subcontract; (2) change the description of the work to be performed or any applicable drawings, designs, and specifications; (3) change the time or place of performance; the method of shipment or packaging, or the place of inspection, delivery or acceptance; (4) increase the estimated cost for performance of the work or the time required for performance of the work; (5) change any expressed term or condition of the Subcontract; or (6) unreasonably interfere with the Subcontractor's ability to perform and complete the work. Any such change must first be authorized by a written modification to this Subcontract issued by the University Procurement Representative. ARTICLE 6 - REPORTS As indicated in the attached SOW, the Subcontractor shall submit weekly Inventory Tracking Sheet (ITS) reports to the University Technical Representative, consistent with the previous pilot production Subcontract B507150. Also required by the attached SOW is a requirement to maintain certain technical documentation and procedures consistent with the previous Subcontract B507150. These reports, documentation and procedures shall be coordinated on an informal basis with the University Technical Representative, no formal distribution shall be required. ARTICLE 7 - PROPERTY A. The Subcontractor shall acquire, and/or the University will furnish to the Subcontractor, the materials, equipment, supplies, and/or tangible personal property items identified below, for use under this Subcontract: Subcontractor Acquired Property: None -71- University Furnished Government Property: The property currently identifiable and accountable under Subcontract B507150 will be transferred to this Subcontract. At such time, the appropriate property will be identified and listed in this Subcontract. Until that time the Subcontractor is hereby authorized to use the University Furnished Government Property provided under B507150 in performance of this Subcontract. B. All property acquired by the Subcontractor and/or furnished by the University shall be identified, utilized, accounted for, and dispositioned in accordance with the clause of the General Provisions entitled GOVERNMENT PROPERTY (FIXED PRICE SUBCONTRACT). Disposition directions and authorization will be provided by the University's Property Management Department. C. Non-Subcontract Use of Government Owned Equipment: 1. Notwithstanding the limitation on Subcontractor use of Government property in the GENERAL PROVISION entitled GOVERNMENT PROPERTY, the Subcontractor may use the government owned equipment listed above without charge in the performance of, in order of preference: a. Subcontracts under Department of Energy Contract No. W -7405-ENG-48; b. Prime contracts with the Government that specifically authorize such use without charge; c. Subcontracts of any tier under Government prime contracts other than W-7405-ENG-48 if the Contracting Officer having cognizance of the prime contract (i) approves a Subcontract specifically authorizing such use or (ii) otherwise authorizes such use in writing; and d. Other work to the extent that such use does not interfere with work under a, b, and c above. 2. The Subcontractor agrees not to include in the price or prices of any such contracts or Subcontracts the cost of said listed property, or any allowance or charge to cover depreciation or amortization. The Subcontractor further agrees to allocate the cost of maintenance, upkeep, repairs and consumables to the appropriate indirect cost pool. In the case of the three ring polishers (RPs), the Subcontractor agrees to absorb the cost of normally scheduled maintenance, repairs and upkeep. If the RPs are used on non-Subcontract work, these costs may be allocated to the appropriate customer, provided the allocation does not include the University. In the case of RP consumables, the Subcontractor agrees to provide those utilized in the continuous operation of the RPs, -72- while those used in the actual processing of optics are to be properly allocated to the price of the optics themselves. 3. Nothing in this Subcontract shall abrogate any right of the University to withdraw Government Owned Equipment from the Subcontractor upon reasonable notice, subject to provision for equitable adjustment that may exist in an active University Subcontract affected by such withdrawal on any work being performed by the Subcontractor under any other contract or subcontract. ARTICLE 8 - APPROVAL OF TECHNICAL DATA If this Subcontract requires the Subcontractor to furnish any drawings, specifications, diagrams, layouts, schematics, descriptive literature, illustrations, schedules, performance or test data, or other technical data for approval by the University prior to Subcontractor performance, the approval of the data by the University shall not relieve the Subcontractor from responsibility for any errors or omissions in such data or from responsibility for complying with the requirements of this Subcontract, except as specified below. Any work done prior to such approval shall be at the Subcontractor's risk. If the data includes any variations from the Subcontract requirements, the Subcontractor shall describe such variations in writing at the time of submission of the data. If the University approves any such variation(s), a change order to the Subcontract shall be issued by the University and, if appropriate, a bilateral modification to the Subcontract shall be negotiated. ARTICLE 9 - ASSIGNMENT OF PERSONNEL It is understood and agreed that the Subcontractor's key technical personnel assigned to this work shall not be reassigned or replaced without prior University approval, except where such circumstances are beyond the reasonable control of the Subcontractor. The Subcontractor shall not employ unfit or unqualified personnel in the performance of this Subcontract. Should the University deem anyone employed on the work incompetent or unfit for his or her duties and so inform the Subcontractor, the Subcontractor shall remove such person from work under this Subcontract and he or she shall not again, without permission of the University, be assigned to work under this Subcontract. ARTICLE 10 - GENERAL PROVISIONS A. The clauses incorporated by reference in the attached GENERAL PROVISIONS shall be applicable to this Subcontract based on the value of the Subcontract, the status of the Subcontractor, and the nature and location of the work as indicated in the GENERAL PROVISIONS. As used therein, the term "Seller" shall mean "Subcontractor," and the terms "Purchase Order" and "PO" shall mean "Subcontract." -73- B. This Subcontract shall not involve access to or the generation of classified information or access to "limited" or "exclusion" security areas. Accordingly, the clauses listed in the GENERAL PROVISIONS related to such work shall not apply. C. This Subcontract is not for the conduct of research, development, or demonstration (RD&D) work, or design work involving non-standard types of construction. Accordingly, the clauses listed in the GENERAL PROVISIONS related to such work shall not apply. -74- EX-10.25 7 e89840_ex10-25.txt SUBCONTRACT NO. B519044 EXHIBIT 10.25 - -------------------------------------------------------------------------------- SUBCONTRACT University of California Lawrence Livermore National Laboratory NO. B519044 Procurement & Material P.O. Box 5012 Livermore, CA 94551 - -------------------------------------------------------------------------------- SUBCONTRACTOR: UNIVERSITY PROCUREMENT REPRESENTATIVE: ZYGO CORPORATION William V. Karleskind Attention: Karen DuPerry Subcontract Administrator Specialist P.O. Box 448 Middlefield, CT 06455-0448 Phone #: (925) 422-7503 Fax #: (925) 422-9294 E-Mail: karleskind1@llnl.gov - -------------------------------------------------------------------------------- INTRODUCTION This is a subcontract for the finishing of 588 NIF optics, as further described herein. The parties to this Subcontract are The Regents of the University of California (hereinafter called "University") and the party identified above as the "Subcontractor." This is a subcontract under Prime Contract No. W-7405-ENG-48 between the University and the United States Government (hereinafter called "Government"), represented by the Department of Energy (hereinafter called "DOE"), for the management and operation of the Lawrence Livermore National Laboratory (hereinafter called "LLNL"), and the performance of certain research and development work. AGREEMENT The parties agree to perform their respective obligations in accordance with the terms, conditions, and provisions of the attached SCHEDULE OF ARTICLES and any documents referenced or incorporated therein, which together with this Subcontract Signature Page shall collectively constitute the entire Subcontract and shall supersede all prior negotiations, representations, or agreements, whether verbal or written. ZYGO CORPORATION THE REGENTS OF THE UNIVERSITY OF CALIFORNIA BY: /s/ Peter B. Mumola BY: /s/ E.M. Moffet ------------------------- ------------------------------------- E.M. Moffet TITLE Vice President, Optics TITLE Deputy for Subcontracts ------------------------- ------------------------------------- LLNL Procurement & Material DATE: 1/14/02 DATE: 1-11-02 ------------------------- ------------------------------------- Signature Page -75- SCHEDULE OF ARTICLES FOR SUBCONTRACT NO. B519044 ARTICLE 1 - INCORPORATED DOCUMENTS The following documents and forms are hereby incorporated as a part of this Schedule of Articles of the Subcontract and are attached hereto: DOCUMENTS GENERAL PROVISIONS FOR FIXED PRICE SUPPLIES AND SERVICES (GPS#600C; REV 05/23/01) STATEMENT OF WORK (DATE 12/13/01) ARTICLE 2 - SCOPE OF WORK A. The Subcontractor shall conduct certain work generally described as finishing of 588 NIF Optics. This work is more specifically described in the attached Statement of Work (SOW) and the applicable referenced LLNL drawings. B. The Subcontractor shall furnish all personnel, supervision, materials, supplies, equipment, tools, facilities, transportation, testing, and other incidental items and services necessary for performance of the work, except for Government Property specified herein to be furnished by the University. The Subcontractor shall deliver the materials, products, supplies, reports, and residuals, as specified. C. The work shall be performed by the Subcontractor at the Subcontractor's facility located at Middlefield, Connecticut, and at other locations approved by the University. D. This Subcontract is designated as a DX-E1 Rated Order. The Subcontractor shall comply with the provisions of the Defense Priorities and Allocations System Regulation (15 CFR Part 700) in obtaining controlled materials and other products and services needed to perform this Subcontract. E. The University may, at its option, by written unilateral modification to this Subcontract, require the continued performance of the Scope of Work described herein for the option period specified in Article 3 - PERIOD OF PERFORMANCE. Exercise of the option will be at least 60 days prior to the completion of the initial Subcontract period of performance. ARTICLE 3 - PERIOD OF PERFORMANCE The work described in ARTICLE 2 - SCOPE OF WORK shall be completed on or before February 3, 2002, in accordance with the subcontract production schedule indicated in the SOW. -76- ARTICLE 4 - PRICE, PAYMENT, AND TRANSPORTATION A. Price 1. The Subcontractor shall be paid the following fixed prices for the finishing of 588 NIF optics in accordance with the schedule and technical specifications of the ARTICLE 2 - SCOPE OF WORK. YEAR 1 - -------------------------------------------------------------------------------- Optic Type Drawing Number Quantity Fixed Extended Unit Price Price - -------------------------------------------------------------------------------- Amplifier Slab (full spec) AAA96-105113-OC 432* $6,311 $2,726,352 - -------------------------------------------------------------------------------- Amplifier Slab (lower spec) AAA96-105115-QA TBD* $6,065* $TBD* - -------------------------------------------------------------------------------- Polarizer (lower spec) AAA96-105515-QA 19 $3,739 $71,041 - -------------------------------------------------------------------------------- LM1 Mirror AAA96-105312-OD 24 $8,304 $199,296 - -------------------------------------------------------------------------------- All other mirrors See Attached SOW 113 $3,883 $438,779 - -------------------------------------------------------------------------------- Total Maximum Fixed Price 588 $3,435,468 - -------------------------------------------------------------------------------- * The possibility of the Subcontractor having to finish an amplifier slab to the lower specification is dependent on the homogeneity of the unfinished optics provided by the University, however, it is considered unlikely. Unit pricing is included above in the event that this should occur. 2. The Subcontractor shall be paid an incentive for reduced breakage as follows: Amplifier Slabs: For the 432 amplifier slabs requiring finishing under this Subcontract, the Subcontractor shall be paid the incentive shown below for reduced breakage amounts achieved. The incentive for amplifier slabs shall be evaluated four times during this Subcontract, after each 108 slabs are completed. These periods shall be mutually exclusive with regard to determining breakage and incentive amounts. Number of Slabs: 108 108 108 108 *Number of Broken Slabs Incentive Amount ----------------------- --------------------------------------------- 0 $40,000 $40,000 $40,000 $40,000 1 $30,000 $30,000 $30,000 $30,000 2 $10,000 $10,000 $10,000 $10,000 3 $ 0 $ 0 $ 0 $ 0 -77- Polarizers: For the 19 polarizers requiring finishing under this Subcontract, the Subcontractor shall be paid the incentive shown below for reduced breakage amounts achieved. The incentive for polarizers shall be evaluated once during this Subcontract, after completion of all units. Total Number of Polarizers 19 Number Broken Incentive Amount ------------------------------- 0 $5,000 1 $ 0 For this Subcontract, the incentive amount paid for both amplifier slabs and polarizers shall be subject to a total ceiling amount of $165,000.00, which shall be the limit of the University's obligation. 3. The total maximum price is $3,600,468.00. 4. If exercised by a unilateral modification to this Subcontract, the Subcontractor shall finish an additional 690 optics at the fixed unit prices indicated below, consistent with the specifications and schedule of the ARTICLE 2 - SCOPE OF WORK. Delivery of these option quantities, if exercised, will be after successful completion of the initial 588 optics. OPTION (YEAR 2) - -------------------------------------------------------------------------------- Fixed Extended Optic Type Drawing Number Quantity Unit Price Price - -------------------------------------------------------------------------------- Amplifier Slab (full spec) AAA96-105113-OC 462 $6,311 $2,915,682 - -------------------------------------------------------------------------------- Amplifier Slab (lower spec) AAA96-105115-QA TBD* $6,065* $TBD - -------------------------------------------------------------------------------- LM1 Mirror AAA96-105312-OD 48 $8,304 $398,592 - -------------------------------------------------------------------------------- All other mirrors See Attached SOW 180 $3,883 $698,940 - -------------------------------------------------------------------------------- Total Maximum Fixed Price 690 $4,013,214 - -------------------------------------------------------------------------------- * The possibility of the Subcontractor having to finish an amplifier slab to the lower specification is dependent on the homogeneity of the unfinished optics provided by the University, however, it is considered unlikely. Unit pricing is included above in the event that this should occur. -78- Consistent with the incentive for the first year, the Subcontractor shall be paid the following incentive for reduced breakage on the 462 amplifier slabs under this option: Number of Slabs: 15 115 116 116 *Number of Broken Slabs Incentive Amount ----------------------- --------------------------------------------- 0 $40,000 $40,000 $40,000 $40,000 1 $30,000 $30,000 $30,000 $30,000 2 $10,000 $10,000 $10,000 $10,000 3 $ 0 $ 0 $ 0 $ 0 For this option, the incentive amount paid for amplifier slabs shall be subject to a total ceiling amount of $160,000.00, which shall be the limit of the University's obligation. If this option is exercised by the University per a unilateral modification, the total maximum price of this Subcontract will be $7,773,682.00. The prices stated above do not include, and the University shall not be charged for, any State Sales & Use Tax. The University holds California State Resale Permit No. SR-CHA 21-135323. B. Pricing of Adjustments When costs are a factor in any determination of a Subcontract price adjustment, pursuant to the "Changes" clause of the GENERAL PROVISIONS or any other provision of this Subcontract, such costs shall be in accordance with the contract cost principles and procedures in Part 31 of the Federal Acquisition Regulation (48 CFR Part 31), as supplemented or modified by DEAR Part 931 (48 CFR Part 931) in effect as of the date of award of this Subcontract. C. Invoices The Subcontractor shall submit its invoice upon completion of the work to the following address: University of California Lawrence Livermore National Laboratory Attn: Bill Karleskind, L-443 P.O. Box 5001 Livermore, CA 94551 -79- D. Payment and Shipment Payment shall be made within 30 days after receipt of the Subcontractor's invoice, upon the University's acceptance of any portion of the work delivered or rendered for which a piece is separately stated or an invoice is allowed. Shipment of optics may occur as soon as all specifications are achieved, prior acceptance of the metrology data is not required. Payment, however, will continue to be upon acceptance of the metrology data. E. Transportation Terms F.O.B. point: Origin Shipping Point: Zygo Corporation, Middlefield, Connecticut Shipping Instructions: Burlington Express Mark airway bill: "Bill Recipient Account 411-288-721" ARTICLE 5 - COORDINATION AND ADMINISTRATION A. The University Procurement Representative is Bill Karleskind. All matters relating to the administration, performance, and non-technical interpretation of this Subcontract shall be referred to the University Procurement Representative. The Subcontractor shall direct all notices and requests for approval to the University Procurement Representative. The University Procurement Representative will issue any notices or non-technical approvals to the Subcontractor. B. The University Technical Representative for this Subcontract is Joe Menapace. The University Technical Representative will provide technical direction in connection with the work to be performed under this Subcontract. The term "technical direction" is defined to include 91) direction to the Subcontractor which assist in the interpretation of drawings, specifications, or technical portions of the work description; and (2) the review and approval of technical reports, drawings, specifications, and information to be delivered by the Subcontractor under the Subcontract, where required. The University Technical Representative will issue all technical direction in writing. C. The University Technical Representative is not authorized to issue any technical direction which would (1) constitute an assignment of work outside the general scope of the work covered by this Subcontract; (2) change the description of the work to be performed or any applicable drawings, designs, and specifications; (3) change the time or place of performance; the method of shipment or packaging, or the place of inspection, delivery, or acceptance; (4) increase the estimated cost for performance of the work or the time required for performance of the work; (5) change any expressed term or condition of the Subcontract; or (6) unreasonably interfere with the Subcontractor's ability to perform and complete the work. Any such change must first be authorized by a written modification to this Subcontract issued by the University Procurement Representative. -80- ARTICLE 6 - REPORTS As indicated in the attached SOW, the Subcontractor shall submit weekly Inventory Tracking Sheet (ITS) reports to the University Technical Representative, consistent with the previous production subcontract B514527. Also required by the attached SOW is a requirement to maintain certain technical documentation and procedures consistent with the same previous subcontract. These reports, documentation, and procedures shall be coordinated on an informal basis with the University Technical Representative, no formal distribution shall be required. ARTICLE 7 - PROPERTY A. The Subcontractor shall acquire, and/or the University will furnish to the Subcontractor, the materials, equipment, supplies, and/or tangible personal property items identified below, for use under this Subcontract: Subcontractor Acquired Property: None University Furnished Government Property In addition to the material to be supplied by the University as indicated in the SOW, the property currently identifiable and accountable under Subcontract B514527 will be transferred to this Subcontract. At such time, the appropriate property will be identified and listed in this Subcontract. Until that time the Subcontractor is hereby authorized to use the University Furnished Government Property provided under B514527 in performance of this Subcontract. B. All property acquired by the Subcontractor and/or furnished by the University shall be identified, utilized, accounted for, and dispositioned in accordance with the clause of the General Provisions entitled GOVERNMENT PROPERTY (FIXED PRICE SUBCONTRACT). Disposition directions and authorization will be provided by the University's Property Management Department. C. Non-Subcontract Use of Government Owned Equipment: 1. Notwithstanding the limitation on Subcontractor use of Government property in the GENERAL PROVISION entitled GOVERNMENT PROPERTY, the Subcontractor may use the government owned equipment listed above without charge in the performance of, in order of preference: a. Subcontracts under Department of Energy Contract No. W-7405-ENG-48; -81- b. Prime contracts with the Government that specifically authorize such use without charge; c. Subcontracts of any tier under Government prime contracts other than W-7405-ENG-48 if the Contracting Officer having cognizance of the Prime contract (i) approves a Subcontract specifically authorizing such Use or (ii) otherwise authorizes such use in writing; and d. Other work to the extent that such use does not interfere with work under a, b, and c above. 2. The Subcontractor agrees not to include in the price or prices of any such contracts or Subcontracts the cost of said listed property, or any allowance or charge to cover depreciation or amortization. The Subcontractor further agrees to allocate the cost of maintenance, upkeep, repairs, and consumables to the appropriate customers as defined in paragraph C1 above, or to the appropriate indirect cost pool. In the case of the three ring polishers (RPs), the Subcontractor agrees to absorb the cost of normally scheduled maintenance, repairs, and upkeep. If the RPs are used on non-Subcontract work, these costs may be allocated to the appropriate customer, provided the allocation does not include the University. In the case of RP consumables,, the Subcontractor agrees to provide those utilized in the continuous operation of the RPs, while those used in the actual processing of optics are to be properly allocated to the price of the optics themselves. 3. Nothing in this Subcontract shall abrogate any right of the University to withdraw Government Owned Equipment from the Subcontractor upon reasonable notice, subject to provision for equitable adjustment that may exist in an active University Subcontract affected by such withdrawal. The University is not responsible for the effect of such withdrawal on any work being performed by the Subcontractor under any other contract or subcontract. ARTICLE 8 - APPROVAL OF TECHNICAL DATA If this Subcontract requires the Subcontractor to furnish any drawings, specifications, diagrams, layouts, schematics, descriptive literature, illustrations, schedules, performance or test data, or other technical data for approval by the University prior to Subcontractor performance, the approval of the data by the University shall not relieve the Subcontractor from responsibility for any errors or omissions in such data or from responsibility for complying with the requirements of this Subcontract, except as specified below. Any work done prior to such approval shall be at the Subcontractor's risk. If the data includes any variations from the Subcontract requirements, the Subcontractor shall describe such variations in writing at the time of submission of the data. If the University approves any such variation(s), a change order to the Subcontract shall be issued by the University and, if appropriate, a bilateral modification to the Subcontract shall be negotiated. -82- ARTICLE 9 - ASSIGNMENT OF PERSONNEL It is understood and agreed that the Subcontractor's key technical personnel assigned to this work shall not be reassigned or replaced without prior University approval, except where such circumstances are beyond the reasonable control of the Subcontractor. The Subcontractor shall not employ unfit or unqualified personnel in the performance of this Subcontract. Should the University deem anyone employed on the work incompetent or unfit for his or her duties and so inform the Subcontractor, the Subcontractor shall remove such person from work under this Subcontract and he or she shall not again, without written permission of the University, be assigned to work under this Subcontract. ARTICLE 9 - GENERAL PROVISIONS A. The clauses incorporated by reference in the attached GENERAL PROVISIONS shall be applicable to this Subcontract based on the value of the Subcontract, the status of the Subcontractor, and the nature and location of the work as indicated in the GENERAL PROVISIONS. As used therein, the term "Seller" shall mean "Subcontractor," and the terms "Purchase Order" and "PO" shall mean "Subcontract." B. This Subcontract shall not involve access to or the generation of classified information or access to "limited" or "exclusion" security areas. Accordingly, the clauses listed in the GENERAL PROVISIONS related to such work shall not apply. C. This Subcontract is not for the conduct of research, development, or demonstration (RD&D) work, or design work involving non-standard types of construction. Accordingly, the clauses listed in the GENERAL PROVISIONS related to such work shall not apply. END OF SCHEDULE OF ARTICLES -83- STATEMENT OF WORK Production (P3/P4) NID0075521 1. OBJECTIVE The objective of this Subcontract is to perform optical finishing on 588 production optics (amplifiers, polarizers, and mirrors) to support the National Ignition Facility (NIF), a 192 beam laser capable of fusion ignition. An option for an additional 690 optics is also included in this Subcontract. The Subcontractor shall utilize the technologies and facilities established by them under NIF/ICF development, facilitization, and pilot production for the manufacturing of these optics. 2. WORK REQUIREMENTS The Subcontractor shall provide all labor, facilities, equipment (other than that provided as GFE) and processes needed to finish the quantities of optics listed in section 3 of this SOW. Much of the equipment required to finish these optics has been provided as GFE. Consistent with ARTICLE 7 - PROPERTY of the Subcontract Schedule of Articles, the Subcontractor shall be responsible for the cost of maintenance and repairs of all GFE. However, no equipment modifications or upgrades shall be performed on GFE without the written approval of the University's Procurement Representative. In addition, the Subcontractor shall maintain a qualified workforce capable of manufacturing NIF optics with stringent specifications. The University shall provide all optical blanks for finishing under this Subcontract as well as the epoxy kits, shaped cladding strips for the laser slab assemblies, PET-G containers and shipping crates. The Subcontractor shall notify the University in writing sixty days in advance of their needs for this University supplied material. The University will ensure that all requests are met in a timely manner to avoid shortages that may impact the Subcontractor's production schedule. 3. QUANTITIES Table 1 shows the number and types of optics to be fabricated under this Subcontract that covers twelve months of what is referred to by the University as P3 Production. The numbers and types correspond to a baseline production scenario that represent the required production rate for this Subcontract. SOW -1- This document contains information proprietary to the Zygo Corporation -84- Table 2 shows those optics that the University requires as an additional one-year option (P4) with the quantities and optic mix shown. The University anticipates exercising this option at least sixty days prior to the completion of the baseline quantities. SOW -2- This document contains information proprietary to the Zygo Corporation -85- Table 1. Optics to be finished under this Subcontract: - -------------------------------------------------------------------------------- OPTIC Drawing number Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 - -------------------------------------------------------------------------------- LASER GLASS - -------------------------------------------------------------------------------- Amplifier slab AAA96-105113-OC 35 35 35 35 35 35 - -------------------------------------------------------------------------------- POLARIZER - -------------------------------------------------------------------------------- Polarizer AAA96-105112-OD - -------------------------------------------------------------------------------- MIRRORS - -------------------------------------------------------------------------------- LM1 AAA96-105312-OD 2 2 - -------------------------------------------------------------------------------- LM2 AAA96-105322-OE 1 11 11 5 - -------------------------------------------------------------------------------- LM3 AAA96-105332-OE - -------------------------------------------------------------------------------- LM4a AAA96-105412-OC - -------------------------------------------------------------------------------- LM4b AAA96-105422-OC - -------------------------------------------------------------------------------- LM5 AAA96-105432-OC 10 - -------------------------------------------------------------------------------- LM6 AAA96-105442-OC 6 9 9 - -------------------------------------------------------------------------------- LM7a AAA96-105452-OD - -------------------------------------------------------------------------------- LM7b AAA96-105462-OD - -------------------------------------------------------------------------------- LM7c AAA96-105472-OD - -------------------------------------------------------------------------------- LM7d AAA96-105342-OD - -------------------------------------------------------------------------------- LM7e AAA96-105352-OE - -------------------------------------------------------------------------------- LM8a AAA96-105482-OD - -------------------------------------------------------------------------------- LM8at AAA96-105362-OC - -------------------------------------------------------------------------------- LM8b AAA96-105492-OD - -------------------------------------------------------------------------------- LM8bt AAA96-105372-OC - -------------------------------------------------------------------------------- Total 46 46 46 46 46 46 - -------------------------------------------------------------------------------- LM1, LM2, LM3, and Polarizer are being revised per ECR 2031 (relaxation of roughness from 0.4 nm to 1.0 nm) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OPTIC Drawing number Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Total - -------------------------------------------------------------------------------- LASER GLASS - -------------------------------------------------------------------------------- Amplifier slab AAA96-105113-OC 37 37 37 37 37 37 432 - -------------------------------------------------------------------------------- POLARIZER - -------------------------------------------------------------------------------- Polarizer AAA96-105112-OD 12 7 19 - -------------------------------------------------------------------------------- MIRRORS - -------------------------------------------------------------------------------- LM1 AAA96-105312-OD 2 2 4 4 4 4 24 - -------------------------------------------------------------------------------- LM2 AAA96-105322-OE 28 - -------------------------------------------------------------------------------- LM3 AAA96-105332-OE 0 - -------------------------------------------------------------------------------- LM4a AAA96-105412-OC 1 11 11 11 34 - -------------------------------------------------------------------------------- LM4b AAA96-105422-OC 0 - -------------------------------------------------------------------------------- LM5 AAA96-105432-OC 10 - -------------------------------------------------------------------------------- LM6 AAA96-105442-OC 1 25 - -------------------------------------------------------------------------------- LM7a AAA96-105452-OD 0 - -------------------------------------------------------------------------------- LM7b AAA96-105462-OD 6 10 16 - -------------------------------------------------------------------------------- LM7c AAA96-105472-OD 0 - -------------------------------------------------------------------------------- LM7d AAA96-105342-OD 0 - -------------------------------------------------------------------------------- LM7e AAA96-105352-OE 0 - -------------------------------------------------------------------------------- LM8a AAA96-105482-OD 0 - -------------------------------------------------------------------------------- LM8at AAA96-105362-OC 0 - -------------------------------------------------------------------------------- LM8b AAA96-105492-OD 0 - -------------------------------------------------------------------------------- LM8bt AAA96-105372-OC 0 - -------------------------------------------------------------------------------- Total 52 52 52 52 52 52 588 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LM1, LM2, LM3, and Polarizer are being revised per ECR 2031 (relaxation of roughness from 0.4 nm to 1.0 nm) - -------------------------------------------------------------------------------- -86- Table 2. Optics to be finished as a follow-on option: - -------------------------------------------------------------------------------- OPTIC Drawing number Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 - -------------------------------------------------------------------------------- LASER GLASS - -------------------------------------------------------------------------------- Amplifier slab AAA96-105113-OC 38 38 38 38 38 38 - -------------------------------------------------------------------------------- POLARIZER - -------------------------------------------------------------------------------- Polarizer AAA96-105112-OD - -------------------------------------------------------------------------------- MIRRORS - -------------------------------------------------------------------------------- LM1 AAA96-105312-OD 4 4 4 4 4 4 - -------------------------------------------------------------------------------- LM2 AAA96-105322-OE - -------------------------------------------------------------------------------- LM3 AAA96-105332-OE - -------------------------------------------------------------------------------- LM4a AAA96-105412-OC 6 - -------------------------------------------------------------------------------- LM4b AAA96-105422-OC 8 14 14 11 - -------------------------------------------------------------------------------- LM5 AAA96-105432-OC 3 14 14 - -------------------------------------------------------------------------------- LM6 AAA96-105442-OC - -------------------------------------------------------------------------------- LM7a AAA96-105452-OD - -------------------------------------------------------------------------------- LM7b AAA96-105462-OD - -------------------------------------------------------------------------------- LM7c AAA96-105472-OD - -------------------------------------------------------------------------------- LM7d AAA96-105342-OD - -------------------------------------------------------------------------------- LM7e AAA96-105352-OE - -------------------------------------------------------------------------------- LM8a AAA96-105482-OD - -------------------------------------------------------------------------------- LM8at AAA96-105362-OC - -------------------------------------------------------------------------------- LM8b AAA96-105492-OD - -------------------------------------------------------------------------------- LM8bt AAA96-105372-OC - -------------------------------------------------------------------------------- Total 56 56 56 56 56 56 - -------------------------------------------------------------------------------- LM1, LM2, LM3, and Polarizer are being revised per ECR 2031 (relaxation of roughness from .4 nm to 1.0 nm) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OPTIC Drawing number Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Total - -------------------------------------------------------------------------------- LASER GLASS - -------------------------------------------------------------------------------- Amplifier slab AAA96-105113-OC 39 39 39 39 39 39 462 - -------------------------------------------------------------------------------- POLARIZER - -------------------------------------------------------------------------------- Polarizer AAA96-105112-OD 12 7 0 - -------------------------------------------------------------------------------- MIRRORS - -------------------------------------------------------------------------------- LM1 AAA96-105312-OD 4 4 4 4 4 4 48 - -------------------------------------------------------------------------------- LM2 AAA96-105322-OE 0 - -------------------------------------------------------------------------------- LM3 AAA96-105332-OE 10 16 26 - -------------------------------------------------------------------------------- LM4a AAA96-105412-OC 6 - -------------------------------------------------------------------------------- LM4b AAA96-105422-OC 47 - -------------------------------------------------------------------------------- LM5 AAA96-105432-OC 10 41 - -------------------------------------------------------------------------------- LM6 AAA96-105442-OC 0 - -------------------------------------------------------------------------------- LM7a AAA96-105452-OD 14 6 20 - -------------------------------------------------------------------------------- LM7b AAA96-105462-OD 6 16 2 24 - -------------------------------------------------------------------------------- LM7c AAA96-105472-OD 0 - -------------------------------------------------------------------------------- LM7d AAA96-105342-OD 0 - -------------------------------------------------------------------------------- LM7e AAA96-105352-OE 6 10 16 - -------------------------------------------------------------------------------- LM8a AAA96-105482-OD 0 - -------------------------------------------------------------------------------- LM8at AAA96-105362-OC 0 - -------------------------------------------------------------------------------- LM8b AAA96-105492-OD 0 - -------------------------------------------------------------------------------- LM8bt AAA96-105372-OC 0 - -------------------------------------------------------------------------------- Total 59 59 59 59 59 59 690 - -------------------------------------------------------------------------------- LM1, LM2, LM3, and Polarizer are being revised per ECR 2031 (relaxation of roughness from 0.4 nm to 1.0 nm) - -------------------------------------------------------------------------------- -87- 4. SPECIFICATIONS The specifications for each optical component are contained within the drawings that are listed in Appendix A. Prior to commencement of work the Subcontractor shall confirm with the University Technical Representative that they have the most current drawings. All drawings and appendices should already be in the Subcontractor's possession, however, any that are not will be sent upon request. Note that these drawings have been written in accordance with the ISO 10110 standard. The optics shall be finished to meet the specifications on the finished optics drawings listed in Appendix A. The corresponding material drawings and specifications are listed in Appendix B. The attachment "Detailed Cladding Guidance," Appendix D, provides details on cladding that augments the drawings and supersedes them in places. The ability of the Subcontractor to meet the transmitted wavefront requirements of polarizers is dependent on the material inhomogeneity. The best commercially available material may be insufficient to meet the transmitted wavefront specification. Any material that is unable to be finished, meaning a reasonable effort has been made by the Subcontractor to meet the transmitted wavefront specification, shall be finished to the prefigured specifications in drawing AAA96-105515. If after award of this Subcontract, the Subcontractor should develop the capability to preferentially figure optics to compensate for material inhomogeneity, then the additional cost for that effort will be negotiated as a separate subcontract action. Laser glass inhomogeneity will also impact finished transmitted wavefront performance. To address this issue amplifier slabs shall be divided into two classes of material as illustrated in the table below. Table 2: Finished amplifier slab RMS gradient specification For different grades of blank homogeneity ------------------------------------------------------------- Blank RMS gradient <=0.0083 >0.0083 specification (waves/cm @ 633nm) ------------------------------------------------------------- Finished RMS <=0.0111 >0.0111 Gradient specification (<1(lambda) p-v) (waves/cm @ 633nm) (<1.8 nm PSD1) ------------------------------------------------------------- For amplifier slabs with blank RMS gradient <=0.0065 waves/cm the vendor shall finish the parts to full specification as per drawing AAA96-105113-OC. For optics with blank RMS gradient 0.0065 <= X <= 0.0083, the vendor shall finish the optics under best effort to wavefront specifications as per drawing AAA96-105113-OC. For amplifiers with RMS gradient > 0.0083, the vendor shall finish the optics to the specifications as per drawing AAA96-105115-0A. SOW -5- This document contains information proprietary to the Zygo Corporation -88- 5. MANUFACTURING YIELD/BREAKAGE The optical blanks that are shaped by the Subcontractor have significant value, particularly amplifier slabs ($15K - $30K each) and polarizers ($11K - $15K each). Breakage of these optics results in a loss to the NIF program. Also, excessive breakage of amplifier slabs may force the University to initiate an additional melting campaign at an approximate cost of $10M - $15M. Given the value of these blanks, it is imperative that reasonable efforts be taken by the Subcontractor to protect these optics from damage during processing. Based on breakage rates from past ICF projects, the University expects the breakage rate not to exceed 2% over a quantity of at least 25 of each optic type (amplifier slab, polarizer, or mirror). A breakage rate from 2%-5% shall result in a report to the University Technical Representative to present the current issues and mitigation strategy. Breakage rates exceeding 5% may result in a STOP-WORK ORDER being issued by the University, consistent with the General Provisions of this Subcontract. If a STOP-WORK ORDER is issued the Subcontractor shall cease all work until a mitigation strategy aimed at solving the problem, is implemented. Mitigation measures could include such actions as improved training, fixture modifications, machine interlock systems, removal of an employee from this subcontract. Etc. Breakage shall be defined as damage caused by the Subcontractor that renders the optic useless. Non-Conformance Reports (NCRs) shall not apply against breakage determinations. 6. REPORTING REQUIREMENTS A) WEEKLY PROGRESS REPORTS - INVENTORY TRACKING SHEET (ITS) The Subcontractor shall send a status list of all optics within their Facility utilizing the established Excel compatible ITS spreadsheet Utilized in previous subcontracts B335188 and B514527. The following documents, while not specific deliverables under this Subcontract, shall be maintained by the Subcontractor and updated as necessary to reflect any changes or improvements. These documents were originally developed and approved as part of the scope of work under Subcontract B335188 and maintained under Subcontract B514527. The Subcontractor shall notify the University's Technical Representative if any changes are made to the QA/QC Plan or to any of the Process Materials and Procedures, providing appropriate details for the University to determine the impact to finished optics. A brief description of each document follows, though the complete requirement is contained in the statements of work for B335188 and B514527 and is incorporated by reference herein: SOW -6- This document contains information proprietary to the Zygo Corporation -89- B) QUALITY ASSURANCE PLAN The Subcontractor shall maintain and adhere to a documented Quality Assurance/Quality Control (QA/QC) plan and program. This plan and program shall provide for the control of the design, procurement, manufacturing, delivery, and test activities of the production of items, systems, and services required by this SOW and applicable Drawings. Procedures implementing the requirements of the Subcontractor's QA/QC program plan shall be maintained as well. The Subcontractor shall retain interferometric production data, surface quality maps and final inspection records on all finished optics delivered under this Subcontract for a minimum of seven years after expiration of this Subcontract. These records shall be made available to the University Technical Representative upon request. Within a reasonable time prior to the end of the retention period, the Subcontractor shall request disposition instructions of the records from the University Technical Representative. C) PROCESS MATERIALS AND PROCEDURES (PMP) The Subcontractor shall maintain PMP documentation, which shall contain: 1. A description of the process used to fabricate the optical components from material arrival at the Subcontractor through finishing, final cleaning, testing, and packaging (a flow chart); 2. A list of all materials including brand names and/or compositions of grinding and polishing compounds, blocking waxes, polishing pitch, in-process surface protectors, strip coatings, in-process surface identification markers, etc.; 3. A detailed description of the surface figure generation (grinding) and polishing procedures used to ensure no subsurface damage or surface microcracks remain in the finished optical surfaces, including grit sizes, dept of material removed during each step, acid etches, etc. (process sheets); 4. A detailed description of in-process procedures and solvents used for removing surface treatments, residues, etc.; 5. A description of steps taken to protect the optics from damage due to dirt and/or chemical contamination; SOW -7- This document contains information proprietary to the Zygo Corporation -90- 6. A description of any forms generated for internal use documenting immediate processing steps, etc. The detailed PMP shall be retained at the Subcontractor's facility for the duration of this Subcontract. The University does not need or desire copies of the detailed procedures. In the event that there are specific PMIs that could materially impact the performance of the laser system, the University will request access to the specific PMP(s) of interest. The Subcontractor shall either grant access to the University Technical Representative and/or his designee at the Subcontractor's facility or prepare a non-proprietary version with as much detail as possible. D) FINAL TEST PROCEDURES (FTP) The Subcontractor shall maintain an FTP document that shall include: 1. A list and detailed description of all test equipment; 2. A description of all test equipment calibration; 3. A list and description of all test equipment calibration references and a copy of their accuracy certification and/or traceability to another standard; 4. A sequence of steps required to check the compliance of each finished substrate to the physical and performance requirements as specified on the drawing. E) FINAL CLEANING PROCEDURES (FCP) The Finisher shall maintain an FCP document that shall contain: 1. A detailed description of each step in the final cleaning process, including the equipment used and the approximate duration of each step. 2. A list of brand names of all cleaning and drying agents used in the FCP, and 3. A detailed description of the final cleanliness inspection and packaging facilities. SOW -8- This document contains information proprietary to the Zygo Corporation -91- 7. ROUTINE/SCHEDULED MAINTENANCE AND UNFORESEEN/CATASTROPHIC FAILURE ON GFE Consistent with the previous production subcontract for P2 (B514527), the Subcontractor shall continue to be responsible for routine/schedule maintenance on all GFE, however, the cost of replacement parts, only, for unforeseen/catastrophic failures on GFE, will be the responsibility of the University. The cost of replacement parts for unforeseen/catastrophic failures will be managed under a separate blanket subcontract. The Subcontractor shall continue to provide its labor for replacement of these parts. 8. APPENDICES As stated above, all of the following appendices are already in the possession of the Subcontractor and are, therefore, incorporated by reference. Any additional copies will be supplied upon request. Appendix A Finished Optics Drawing Package Appendix B Material Drawings and Specifications Package Appendix C NIF Optics Production Plan - Rev 7/26/99 Appendix D Detailed Cladding Guidance - NIF OPT 97-0003373; Revision 2; May 1, 1999 Appendix E Guidance for Cleaning Pet-G Containers and Packaging and Handling Of Large NIF Optical Components - NIF 0026182 Appendix F Identification Requirements for NIF Large Optics - NIF 0017092A Appendix G Optical Inventory Tracking Procedure - Finishing Vendors Appendix H Scratch Dig Memo SOW -9- This document contains information proprietary to the Zygo Corporation -92- APPENDIX A: FINISHED OPTICS DRAWINGS The following drawings comprise this set: - -------------------------------------------------------------------------------- OPTIC TYPE DRAWING NUMBER REVISION NUMBER - -------------------------------------------------------------------------------- Slab, Amplifier AAA96-105113 OC - -------------------------------------------------------------------------------- Slab, Amplifier, Prefigured AAA96-105115 OA - -------------------------------------------------------------------------------- Polarizer AAA96-105512 OD - -------------------------------------------------------------------------------- Polarizer, Prefigured AAA96-105515 OA - -------------------------------------------------------------------------------- LM1 AAA96-105312 OE - -------------------------------------------------------------------------------- LM2 AAA96-105322 OF - -------------------------------------------------------------------------------- LM3 AAA96-105332 OF - -------------------------------------------------------------------------------- LM4A AAA96-105412 OC - -------------------------------------------------------------------------------- LM4B AAA96-105422 OC - -------------------------------------------------------------------------------- LM5 AAA96-105432 OC - -------------------------------------------------------------------------------- LM6 AAA96-105442 OC - -------------------------------------------------------------------------------- LM7A AAA96-105452 OD - -------------------------------------------------------------------------------- LM7B AAA96-105462 OE - -------------------------------------------------------------------------------- LM7C AAA96-105472 OD - -------------------------------------------------------------------------------- LM7D AAA96-105342 OD - -------------------------------------------------------------------------------- LM7E AAA96-105352 OE - -------------------------------------------------------------------------------- LM8A AAA96-105482 OD - -------------------------------------------------------------------------------- LM8AT AAA96-105362 OC - -------------------------------------------------------------------------------- LM8B AAA96-105492 OD - -------------------------------------------------------------------------------- LM8BT AAA96-105372 OC - -------------------------------------------------------------------------------- SOW -11- This document contains information proprietary to the Zygo Corporation -93- APPENDIX B: BLANK OPTICS DRAWINGS The following drawings comprise this set: - -------------------------------------------------------------------------------- OPTIC TYPE DRAWING NUMBER REVISION NUMBER - -------------------------------------------------------------------------------- Slab, Amplifier AAA96-10511 OD - -------------------------------------------------------------------------------- Polarizer AAA96-105511 OC - -------------------------------------------------------------------------------- LM1 AAA96-105311 OA - -------------------------------------------------------------------------------- LM2 AAA96-105321 OA - -------------------------------------------------------------------------------- LM3 AAA96-05331 OB - -------------------------------------------------------------------------------- LM4A AAA96-105411 OB - -------------------------------------------------------------------------------- LM4B AAA96-105421 OB - -------------------------------------------------------------------------------- LM5 AAA96-105431 OB - -------------------------------------------------------------------------------- LM6 AAA96-105441 OB - -------------------------------------------------------------------------------- LM7A AAA96-105451 OB - -------------------------------------------------------------------------------- LM7B AAA96-105461 OB - -------------------------------------------------------------------------------- LM7C AAA96-105471 OB - -------------------------------------------------------------------------------- LM7D AAA96-105341 OB - -------------------------------------------------------------------------------- LM7E AAA96-105351 OB - -------------------------------------------------------------------------------- LM8A AAA96-105481 OB - -------------------------------------------------------------------------------- LM8AT AAA96-105361 OA - -------------------------------------------------------------------------------- LM8B AAA96-105491 OB - -------------------------------------------------------------------------------- LM8BT AAA96-105371 OA - -------------------------------------------------------------------------------- SOW -12- This document contains information proprietary to the Zygo Corporation -94- EX-21 8 e89840_ex21.txt SUBSIDIARIES OF ZYGO CORP EXHIBIT 21 SUBSIDIARIES OF ZYGO CORPORATION (DELAWARE) Zygo International Sales Corporation (U.S. Virgin Islands) 100% owned by Registrant Technical Instrument Company (California) 100% owned by Registrant (effective as of August 8, 1996) Syncotec Neue Technologien und Instrumente GmbH 100% owned by Technical Instrument Company (effective as of September 1, 1997) NexStar Corporation (Colorado) 100% owned by Registrant (effective as of September 12, 1996) TechniStar Corporation (Delaware) 25% owned by NexStar Corporation Sight Systems, Inc. (California) 100% owned by Registrant (effective as of August 19, 1997) Zygo TeraOptix, Inc. (Delaware) 100% owned by Registrant (effective as of May 5, 2000) Zygo KK 100% owned by Registrant (effective as of October 1, 1999) Zygo PTE 100% owned by Registrant (effective as of January 1, 1998) ZygoLOT GmbH 60% owned by Registrant (effective as of October 2, 1999) Six Brookside Drive (Connecticut) 100% owned by Registrant (effective as of January 9, 1998) -95- EX-23 9 e89840_ex23.txt ACCOUNTANTS' CONSENT EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Zygo Corporation: We consent to incorporation by reference in Registration Statements No. 333-44333, No. 33-62087, No. 33-57060, No. 33-20880, and No. 33-34619 on Forms S-8 of Zygo Corporation of our reports dated August 16, 2002, with respect to the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended June 30, 2002, which reports appear in or are incorporated by reference into the June 30, 2002 Annual Report on Form 10-K405 of Zygo Corporation. KPMG LLP Hartford, Connecticut September 20, 2002 -96- EX-24 10 e89840_ex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Paul F. Forman, 15 Flying Point Road, Stony Creek, Connecticut 06405, do hereby appoint Richard M. Dressler, vice president, finance, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 17th day of July 2002. /s/ PAUL FORMAN -------------------------------------- Paul F. Forman STATE OF CONNECTICUT, COUNTY OF NEW HAVEN ss.: On the 17th day of July 2002, before me personally came Paul F. Forman to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same. /s/ JOYCE A. GOLDBERG ------------------------------------- Notary Public Joyce A. Goldberg Notary Public, State of Connecticut My commission expires 12/31/06 -97- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, R. Clark Harris, NorthEast Ventures Associates, LLC., One State Street, Suite 1720, Hartford, Connecticut 06103, do hereby appoint Richard M. Dressler, vice president, finance, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 20th day of August 2002. /s/ R. CLARK HARRIS ----------------------------- R. Clark Harris STATE OF CONNECTICUT, COUNTY OF MIDDLESEX: On the 20th day of August 2002, before me personally came R. Clark Harris to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same. /s/ JOYCE A. GOLDBERG ----------------------------- Notary Public Joyce A. Goldberg Notary Public, State of Connecticut My commission expires 12/31/06 -98- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Seymour E. Liebman, Canon U.S.A., One Canon Plaza, Lake Success, New York 11042, do hereby appoint Richard M. Dressler, vice president, finance, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 5th day of August 2002. /s/ SEYMOUR E. LIEBMAN ------------------------------------ Seymour E. Liebman STATE OF NEW YORK, COUNTY OF NASSAU ss.: On the 5th day of August 2002, before me personally came Seymour E. Liebman to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same. /s/ STEVEN B. BECKER ------------------------------------- Notary Public STEVEN B. BECKER Notary Public, State of New York No. 02BE6002184 Qualified in Nassau County Commission expires Feb. 2, 2006 -99- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Robert G. McKelvey, George McKelvey Co., Inc., 529 Washington Boulevard, Sea Girt, New Jersey 08759, do hereby appoint Richard M. Dressler, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 23rd day of July 2002. /s/ ROBERT G. McKELVEY ----------------------------------- Robert G. McKelvey STATE OF NEW JERSEY, COUNTY OF MONMOUTH ss.: On the 23rd day of July 2002, before me personally came Robert G. McKelvey to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same. /s/ ANDREA E. MAICHIN ----------------------------------- Notary Public ANDREA E. MAICHIN Notary Public of New Jersey Commission Expires April 19, 2006 -100- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Robert B. Taylor, Colonial Williamsburg Foundation, Goodwin Building, 134 North Henry Street, Williamsburg, VA 23187, do hereby appoint Richard M. Dressler, vice president, finance, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 23rd day of July 2002. /s/ ROBERT B. TAYLOR --------------------------------- Robert B. Taylor STATE OF VIRGINIA, CITY OF WILLIAMSBURG: On the 23rd day of July 2002, before me personally came Robert B. Taylor to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same. /s/ MARIE A. RANIERI --------------------------------- Notary Public My Commission Expires 10-31-04 -101- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Bruce Worster, 12320 Candy Court, Saratoga, CA 95070-3306, do hereby appoint Richard M. Dressler, vice president, finance, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 1st day of August 2002. /s/ BRUCE WORSTER ----------------------------- Bruce Worster STATE OF CALIFORNIA, COUNTY OF SANTA CLARA: On the 1st day of August 2002, before me personally came Bruce Worster to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same. /s/ TAN-YEL B. SHELTON ----------------------------- Notary Public OFFICIAL SEAL TAN-YEL B. SHELTON NOTARY PUBLIC-CALIFORNIA COMMISSION # 1261285 SANTA CLARA COUNTY My Commission Exp. April 20, 2004 -102- EX-99.1 11 e89840_ex99-1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), each of the undersigned officers of Zygo Corporation, a Delaware corporation (the "Company"), does hereby certify with respect to the Annual Report of the Company on Form 10-K for the year ended June 30, 2002 as filed with the Securities and Exchange Commission (the "10-K Report") that: (1) the 10-K Report fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the 10-K Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 13, 2002 /s/ J. Bruce Robinson - ------------------------------------ J. Bruce Robinson Chairman, President, and Chief Executive Officer of Zygo Corporation Dated: September 13, 2002 /s/ Richard M. Dressler - ------------------------------------ Richard M. Dressler Vice President, Finance, Chief Financial Officer of Zygo Corporation -103- -----END PRIVACY-ENHANCED MESSAGE-----