-----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, G8cpEb07EbyjM8DQrdoLjZDJl1pfe/2NiZKf9kIc/H9a/G/zN/rgGoMqjQ3+O6gu /9ZJQdHDk0Wb3goHaPsLfQ== 0000950110-97-001365.txt : 19970918 0000950110-97-001365.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950110-97-001365 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970916 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-12944 FILM NUMBER: 97681147 BUSINESS ADDRESS: STREET 1: LAUREL BROOK RD CITY: MIDDLEFIELD STATE: CT ZIP: 06455 BUSINESS PHONE: 2033478506 MAIL ADDRESS: STREET 1: LAUREL BROOK ROAD CITY: MIDDLEFIELD STATE: CT ZIP: 06455 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended June 30, 1997 Commission file number 0-12944 Zygo Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0864500 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) Laurel Brook Road, Middlefield, Connecticut 06455 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (860) 347-8506 -------------- Securities registered pursuant to Section 12(b) of the Act: None -------------- Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- 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 _X_ NO ___ 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-K405 or any amendment to this Form 10-K405. _______ State the aggregate market value of the voting stock held by nonaffiliates 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 August 29, 1997, was $254,126,530 *Solely for purposes of this calculation affiliates of the registrant have been deemed to include only Canon, Inc., and the directors and executive officers of the registrant, and members of their immediate families living in their homes. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 10,894,990 Shares of Common Stock, $.10 Par Value, at August 29, 1997 The following documents are incorporated by reference in this Form 10-K405. Part of the Document Form 10-K405 -------- ------------ 1997 Annual Report - (Specified Portions) Parts I and II Proxy Statement to be used in connection with the Registrant's 1997 Annual Meeting of Stockholders - (Specified Portions) Part III PART I ITEM 1. BUSINESS THE COMPANY Zygo Corporation, through its divisions and wholly owned subsidiaries, Middlefield, Technical Instrument Company (TIC), and NexStar Automation, Inc. (NexStar) designs, develops, manufactures and markets high performance noncontact electro-optical measuring instruments and systems, automation systems, and components. The Middlefield division also manufactures optical components to precise tolerances both for sale and for use as key elements in its own products. Utilizing proprietary laser and white light optical technology combined with advanced software and electronics, Zygo's precision noncontact measuring instruments and systems enable manufacturers in a variety of high technology industries, including data storage, semiconductor, and precision optics, to increase operating efficiencies and production yields by identifying and collecting quantitative data on product defects, both during and after the manufacturing process. Zygo's interferometric and confocal components are sold directly to OEMs for incorporation into their products. Zygo's optical components are used in many applications, including laser fusion research, semiconductor manufacturing equipment, and aerospace optical systems, as well as being an integral part of precision optical instruments. Predominantly all of Zygo's instruments and systems employ either a laser or white light source to make noncontact measurements. Zygo is a leader in interferometric and confocal metrology. Interferometric metrology, utilizing a process called interferometry, whereby a pattern of bright and dark lines (called fringes) results from an optical path difference between a reference and a measurement beam. Zygo's products then analyze these patterns through a series of steps and generate quantitative three-dimensional surface profiles, which are used to determine conformity to dimensional specification and, increasingly, to analyze and enhance manufacturing processes. Interferometric measurement instruments and systems are used by a variety of industries, including by the data storage industry to inspect and analyze the surface of computer hard disks and read/write heads, and by the semiconductor industry for high precision distance measurement and motion control. Confocal Scanning Optical Microscopy ("CSOM") is a key base technology employed in TIC's products. The majority of TIC's microscope systems and subsystems employ white light CSOM technology. In a microscope utilizing white light CSOM imaging, a high-intensity white light illuminates a section of a spinning disk containing pinholes arranged in multiple spiral patterns. Acting as point illumination sources, the pinholes direct light to points on the sample. The reflected light from the sample returns through the same section of the disk. Only light from points on the sample near the focal plane will pass through the pinholes for imaging. Zygo's NexStar Automation unit designs, develops, manufactures, and markets comprehensive automated system solutions to enable manufacturers in a variety of high technology industries, including the data storage, semiconductor, and electronics industries, to enhance operational efficiencies and product yields. NexStar's high speed production solutions reduce downtimes, especially in manufacturing processes adaptable to the manufacture of multiple products differing in size, features, and functionality. BACKGROUND Historically, measurement and inspection instrumentation has consisted of contact profiling devices and visual qualitative inspection systems. Advancing technologies have required manufacturers in a variety of industries to produce smaller products with more precise tolerances and decreased design geometries, not capable of adequately being measured by the devices and systems then being utilized. For example, contact profilers and visual qualitative inspection systems are inadequate for quantitative analysis of critical dimensions such as air bearing surface geometry and pole-tip recession necessary in high volume production of read/write heads. 1 The demands on these manufacturers to produce more powerful and smaller products with more precise tolerances have fueled demand for precision noncontact measuring instruments. In fact, high performance, noncontact metrology is an enabling technology for the semiconductor, data storage, and other vital high technology industries. 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, "nano technology scale" precision is necessitated. Disk drive manufacturers, for example, continue to increase drive capacity while reducing the size of drives. For this to happen, the recording head must fly closer to the disk and the head itself must be made smaller and to greater precision. In addition, until recently, noncontact measuring instruments have been limited almost exclusively to use by quality control laboratories for off-line inspection on a test basis only. The historical cyclical nature of the semiconductor industry, the data storage industry, and other capital goods sector industries, together with increased competitive forces in these industries, have forced these industries to no longer 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. These pressures on manufacturers to improve productivity and quality have required integration of process control technologies directly into the manufacturing process, allowing manufacturers to test a greater percentage of their components while in production. Instrumentation is increasingly being sought to more accurately measure the conformity of parts to their specifications and detect defects directly on the manufacturing line, and to address other specific needs of the manufacturers to improve production yields. As the data storage industry, semiconductor industry, and other high technology industries are forced to install more sophisticated and difficult to manage and control production and assembly processes, a greater degree of on-line, high precision, surface metrology and defect detection systems is required. THE ZYGO SOLUTION Zygo's instruments and systems provide critical productivity enhancement capability to the data storage, semiconductor, and other high technology markets. Zygo has worked closely with leaders of the data storage, semiconductor, and other capital goods sector industries to help these manufacturers meet the ever-increasing production demands of their industries. Utilizing proprietary laser and optical technology combined with advanced software and electronics, Zygo's precision noncontact measuring instruments and systems enable manufacturers in a variety of industries to increase operating efficiencies and product yields by identifying and collecting quantitative data on product defects, both during and after the manufacturing process. A wide range of operational features and data analysis capabilities are available on Zygo's measurement instruments. Instrumentation has been designed with maximum flexibility to satisfy a customer's existing needs and to be adaptable to satisfy expansion and growth. Certain measuring devices can be used in either the horizontal or vertical configuration, and on the production line or in the development lab. Certain of Zygo's instruments and systems utilize interferometry to accomplish precise measurement of a variety of surface geometries or to control motion and minute movements during the manufacturing process. In interferometry, a pattern of bright and dark lines (fringes) results from an optical path difference between a reference and a measurement beam. Incoming light is split inside an interferometer, one beam going to an internal reference surface and the other to a sample. After reflection, the beams recombine inside the interferometer, undergo constructive and destructive interference, and produce the light and dark fringe pattern. The number, shape, and position of the lines in the fringe patterns can be analyzed to provide quantitative surface structure analysis. Zygo's interferometric instruments and systems utilize highly sophisticated subsystems, including: precision optical components such as beamsplitters, reference optics, and transmission optics; stable and long-life laser or other light sources; piece part positioning stages; high-powered workstations or PCs for processing and analyzing fringe pattern data; and a variety of peripheral components such as monitors and printers. 2 Interferometry has certain inherent benefits over other forms of surface and distance measurement as it provides noncontact, quantitative, full field of view, ultra-high resolution surface analysis in three dimensions, which results in higher analysis throughput and lower cost of ownership for the user. Additionally, interferometric metrology is often an enabling technology as dimensions and tolerances of many parts in high technology applications have dimensions below 250 nanometers. The majority of TIC's microscope systems and subsystems employ white light confocal scanning optical microscopy ("CSOM") technology. Over the past several years, TIC has added other imaging systems to its product offering, including laser scanning confocal and atomic force microscopy. Today TIC specializes in integrating imaging modes, viewing accessories, and measurement tools within its microscopy systems and subsystems for customers in a wide variety of high technology fields. CSOM is a key base technology employed in TIC's products. In a microscope utilizing white light CSOM imaging, a high-intensity white light illuminates a section of a spinning disk containing pinholes arranged in multiple spiral patterns. Acting as point illumination sources, the pinholes direct light to points on the sample. The reflected light from the sample returns through the same section of the disk. Only light from points on the sample near the focal plane will pass through the pinholes for imaging. The advantage of the white light CSOM technology over other forms of imaging systems offering sub-micron definition include: high resolution in real time with no delay for image processing, transverse resolution, and extremely shallow depth-of-field provide precise imaging of sub-half micron structures and lower cost of ownership. CSOM imaging is used for both inspection and metrology measurement in TIC's systems. A laser confocal system employs a laser light source which causes a sample to fluoresce with the resulting light of a shorter wavelength which retraces its path to a pinhole. The fluorescent light is split into two spectral ranges. After an x/y scan the two channels are digitized and stored in the computer as separate images that can be displayed individually or overlaid to create a single color image. This results in high resolution and the ability to display many layers of translucent samples as a live overlay of bright, perfectly registered optical sections. Atomic force microscopy measures the atomic and molecular forces between a sample and an ultra-fine silicon tip mounted on a spring-loaded cantilever. A laser light is focused on the cantilever and measured by a position sensitive detector which converts cantilever deflection into an electrical signal. By keeping the deflection of the cantilever constant, a sensor scans the sample and measures its compensative movement. With no electrical conductivity requirement, virtually any sample can be examined in life size with superior image at fine resolution. NexStar's automated solutions integrate its own proprietary mechanical components and applications software with nonproprietary mechanical, software, and robotics subsystems produced by third parties. NexStar's automated solutions also enhance production control to ensure consistent high quality. NexStar's sophisticated automation products and equipment are utilized in many applications, including media manufacturing, disk drive assembly, semiconductor manufacturing, and packaging and assembly applications in medical disposables production. To meet the rapidly changing and increasing requirements of manufacturers, Zygo's business is transforming from that of an off-line quality control and quality assurance test and measurement instrument supplier to an on-line production improvement and yield management system provider. Since early 1995, Zygo has introduced several on-line yield improvement systems, including the AAB, NewView 200, KMS 400, automated disk flatness sorter, automated disk thickness sorter, and the Pegasus 2000 Flying Height tester. ZYGO STRATEGY Zygo's objective is to expand its position as a leading worldwide supplier of high performance, noncontact electro-optical measuring, production control, and yield management improvement instruments, systems and accessories that improve the performance, quality, reliability, yield and cost of automated manufacturing processes, and of optical components to precise tolerances. Zygo dedicates substantial resources to research and product development to enable it to compete effectively in its market areas. 3 Key elements of Zygo's strategy include: Maintain Enhanced Leadership Through Innovative Technical Solutions. By integrating its proprietary electro-optical technologies, proprietary applications software and unique system integration capabilities, Zygo provides leading edge automated optical inspection solutions in the shortest possible time. Zygo's core technologies of optical interferometry, optical metrology, confocal scanning optical metrology, system engineering integration, automation systems expertise, application software, and precision optical component fabrication and coating are directly applied to meet the higher measurement precision, accuracy, resolution, data acquisition and data analysis requirements in the most demanding manufacturing processes of its customers. Throughout its history, Zygo has met its customers' requirements through innovation and invention with 68 United States patents and 9 foreign patents, and has 14 United States patent applications and 7 foreign patent applications pending. Focus on New Market Segments. Zygo's products have applications for a wide variety of industries. In the development of these products, Zygo focuses on market segments which it believes have growth potential and in which Zygo can reasonably expect to become a leading manufacturer. Zygo seeks to adapt the noncontact inspection and process control technology it develops for one application to other markets. Broaden Customer Relationships. Zygo focuses on establishing the strongest relationship with major industry leaders in its served markets. This is accomplished by working closely with its customers and identifying increasing numbers of applications for automated optical inspection and yield improvement systems. Zygo also focuses on fully integrating its offerings into its customers' manufacturing processes through automated parts handling, enhanced product metrology and defect analysis, and by more complete integration into the customers' workcells by fully integrated process information networking, all geared to improve production. Zygo intends, by forming closer customer alliances, to better understand the evolving needs of its customers and, through the application of innovative technology, to provide high performance, high quality, cost effective solutions to the production improvement requirements in the shortest possible cycle time. Through this solution-sales cycle, which further promotes a closer and longer term partnership relationship between Zygo and its customers, Zygo intends to attain a preferred position with major industry leaders. Supply Quality Solutions Rapidly. Zygo seeks to deliver high quality and high reliability system solutions in a minimal cycle time. To this end, Zygo has installed an enterprise-wide total quality process where employee-led teams work to continuously improve the effectiveness and efficiency of its processes while searching out and removing areas of poor quality and waste. Zygo's operations strategy focuses on internally providing those manufacturing services that add unique value in a rapidly changing customer needs environment. Provide Uninterrupted Worldwide Service and Support. To support leading customers' continuous manufacturing processes, Zygo ensures optimal operation and reliable performance of its production control equipment through its worldwide customer support service group. Through a worldwide network of service representatives, Zygo provides 24-hour on-demand maintenance services. Its service engineers have a unique skill set, including optical and electrical component repair, software, application and system integration diagnostic and problem solution capabilities. Broaden Product Offerings and Markets Through Internal Developments and Acquisitions. Zygo has broadened its product offerings by continuing to internally develop additional products and by aggressively pursuing the acquisition of companies where synergies can be identified. In 1995, Zygo formed a start-up operation in Simi Valley, California, as a way to 4 broaden its product offering and participation in the data storage industry. Zygo has determined that these start-up operations can be an effective alternative to an acquisition when the technology resident in Zygo is complementary to the market knowledge and expertise resident in the individuals hired to manage the start-up. Zygo also maintains an active program of investigating and negotiating potential synergistic acquisitions which extend Zygo's product lines or markets. Zygo believes that its acquisition strategy is an important element of its total business strategy. In 1995, Zygo completed the acquisition of a small manufacturer of high precision laser tubes, which allowed Zygo to bring in-house a technology that is critical to the performance of its motion control products. Early in fiscal 1997, Zygo completed the acquisition of Technical Instrument Company, a manufacturer of confocal microscopy systems and modules, and the acquisition of NexStar Automation, Inc., a manufacturer of automation and parts handling equipment, and subsequent to the close of fiscal 1997, the Company completed the acquisition of Sight Systems, Inc., a manufacturer of precision application-specific vision metrology systems, and Syncotec Neue Technologien und Instrumente GmbH, a manufacturer of confocal modules and other custom metrology products in Germany. Zygo also announced the signing of a letter of intent to purchase Digital Instruments, Inc. and Digital Instruments GmbH, a leading manufacturer of scanning probe microscopes. PRODUCTS Zygo manufactures high performance, noncontact electro-optical measuring instruments and systems and accessories, and optical components to precise tolerances both for sale and for use as key elements in its own products. Zygo operates in a single business segment, electro-optics, and offers products which fall into two general categories: (1) instruments and systems and (2) modules and components. Instruments and Systems Zygo's product strategy is to develop its instruments and systems utilizing modular designs where entire product families share several, if not all, of the same components, modules and software. Since 1992, Zygo has redesigned all of its instruments and continues to upgrade its software and enhance its products by adding features such as automated stages and parts handling to many of its instruments and systems. All of Zygo's instrument products utilize powerful processors that facilitate high speed data acquisition and data analysis. Zygo's interferometric surface analysis microscopes and large aperture surface measurement interferometers utilize Zygo's proprietary MetroPro(R) software, which has a graphical user interface that makes the product very user friendly. The MetroPro(R) software, combined with super high-resolution graphics and pull-down menus, provides the user with engineering solutions without off-line processing. The software allows the user to record, print, and store measurement data locally as well as to distribute the data through networks for process management and further analysis. Zygo's proprietary software provides Zygo with comparative advantage because of its high speed, powerful analysis capability based on proprietary algorithms, easily configurable screens, powerful image analysis modules, and adaptability to new applications. 5 SURFACE ANALYSIS MICROSCOPES
PRODUCT PRICE RANGE TECHNOLOGY MEASUREMENT APPLICATION - ----------------------------------------------------------------------------------------------------------------------- Maxim*GP $50K Interferometric Roughness; Depths; Coplanarity; Product and Process Development NewView 100 NewView 200 Microscopy On-Line Process AAB System Micro-shape; Lengths; Widths; AMS 250 to Confocal Control/Product AMS 350 Inspection; KMS 350 KMS 400 $600K Microscopy Area; Volumes QC inspection - -----------------------------------------------------------------------------------------------------------------------
The surface characteristics of many products in industries such as semiconductor, data storage, fiber optics, and medical implants, and with increased applications in the paper, printing plates, coatings, and pharmaceuticals industries, controls the performance of the product. As a result, surface structure analysis is fundamental to many facets of research and industry. The Zygo Maxim*GP, the fully automated AAB System, and NewView microscopes combine advanced techniques of interferometry, microscopy, and precision translation stages, to enable high precision surface analysis. Unlike visual microscopes, Zygo's instruments provide measurement information as quantitative three-dimensional images, two- and three-dimensional surface maps with colors and shades representing relative heights of surface features, and numeric results. The Maxim*GP is based on phase shifting interferometry to provide very precise, fast measurements of specular ("Mirror-like") or near specular surfaces. The NewView 100 and NewView 200 use scanning white light interferometry to measure nonspecular surfaces. TIC's AMS and KMS microscope systems represent the majority of its sales. The KMS group of products are fully automated high-throughput confocal microscopy systems which provide measurement in three axes and real-time observation in color. Nondestructive confocal white light imaging permits measurements which are impossible with other types of critical dimension measurement instrumentation such as scanning electron microscopes. Positioning, measurement, and data collection are easily custom-configured and interface to most networks. The KMS products utilize powerful software which is menu and script-file driven to allow for ease in program generation. The AMS product is a manual version of the KMS which is typically used in development centers for low volume metrology and inspection requirements. The majority of these products are sold to manufacturers to optically transfer these images onto semiconductor wafers. As the demands for finer line width geometry's increases, mask manufacturers must utilize sophisticated metrology and inspection tools as a way to improve their manufacturing yields. LARGE APERTURE SURFACE MEASUREMENT INTERFEROMETERS
PRODUCT PRICE RANGE TECHNOLOGY MEASUREMENT APPLICATION - ------------------------------------------------------------------------------------------------------------------------ GPI LC $15K Large Flatness; Sphericity; Product and Process Development; Radius of Curvature; GPI ST to Aperture Optical System Off-Line Process Control/Product Quality; Transparent Material GPI XP $250k Interferometry Homogenity QC Inspection - ------------------------------------------------------------------------------------------------------------------------
Zygo's interferometers for large surface measurement, the Growth Potential Interferometer ("GPI") family of upgradable instruments, basically consist of enlarged versions of the three-dimensional microscope, designed to perform surface profile analysis on larger surface areas. Each 6 member of the GPI interferometer family is designed to address a specific level of measurement needs. While all GPI models have essentially the same purpose - noncontact measurement of flat or spherical surfaces and transmitted wavefront measurement of optics - they differ widely in operational features and data analysis capabilities. The GPI family of products is used extensively in the optics industry to measure glass or plastic optical components like flats, lenses and prisms, and more recently in a growing number of other situations to measure precision components such as hard disks, bearing and sealing surfaces, polished ceramics, and contact lens molds. FLYING HEIGHT TESTER
PRODUCT PRICE RANGE MEASUREMENT APPLICATION - ----------------------------------------------------------------------------------------------------------- Pegasus 2000 $200K Read/Write Head Gimbal Product Development; to Assembly Flying Height Off-Line Process Control; $250K QC Inspection - -----------------------------------------------------------------------------------------------------------
In September 1995, Zygo introduced the Pegasus 2000, a flying height tester. The flying height tester measures the height at which a read/write head flies over the surface of a magnetic disk within the disk drive. The industry demands for increased storage capacity are compelling manufacturers to reduce the flying height, as increased amounts of data can be stored on magnetic heads the closer they fly to the disk. The Pegasus 2000 offers several unique capabilities to the data storage industry. As flying heights are reduced, manufacturers require measurement instruments which can measure at near-contact. Zygo's flying height tester actually increases in accuracy the closer the read/write head flies over the surface of the disk. Additionally, due to significant increases in disk storage requirements, manufacturers require easy-to-use, high throughput testers. The Pegasus 2000 has been designed as a production oriented tester. For example, the system is capable of having a head loaded while a second head is being tested. Also, the tester automatically calibrates the sensor requirements of each head rather than requiring operator inputs. AUTOMATION SYSTEMS NexStar's automated solutions integrate its own proprietary mechanical components and applications software with mechanical, software, and robotics subsystems produced by third parties. NexStar's automated solutions also enhance production control to ensure consistent high quality. NexStar manufactures advanced automation systems to load and unload process equipment, enhance the operation of quality inspection equipment, convey component parts throughout the factory, and assemble complex products. It is usual for such systems to be built to stringent environmental requirements such as cleanroom standards, aseptic medical standards, and for resistance to corrosive conditions. NexStar products and services fall into four general categories: (1) process equipment automation, (2) quality inspection enhancement, (3) material transport, and (4) custom system integration. NexStar's sophisticated automation products and equipment are utilized in many applications, including media manufacturing, disk drive assembly, semiconductor manufacturing, and packaging and assembly applications in medical disposables production. The overall growth in high technology fields such as the data storage and semiconductor industries, combined with the need of manufacturers in those industries to produce products that are both smaller and more powerful and have more precise tolerances, has fueled capital expenditures for on-line automation equipment such as NexStar manufactures. In the data storage market, NexStar's focus has been the development of automated solutions used in cleanrooms for media handling, disk drive, and disk cartridge assembly. It has created proprietary components including robotic arms, parts handling, conveyor systems, and disk stack assemblies. Similar solutions have been developed for the semiconductor market. In the medical disposables market, NexStar has manufactured proprietary automated products to assemble disposables, subassemblies, and medical tube coiling devices with flexible designs that permit the handling in a sterile environment of various sizes of corrugated or smooth bore tubing and small diameter catheters and wires. 7 COMPONENTS PRECISION DISTANCE AND ANGLE MEASUREMENT INTERFEROMETERS
PRODUCT PRICE RANGE MEASUREMENT APPLICATION - ---------------------------------------------------------------------------------------------------------------- ZMI-1000 $15K Distance; Angle; Velocity; Semiconductor and Flat Panel and to Time/Position Display Manufacturing; ZMI-2000 $100K Product and Process Development; Precision Machine Tools - ----------------------------------------------------------------------------------------------------------------
Fast, precise control of machine motion is the primary challenge in many production processes. Industries as diverse as semiconductor and flat panel display production and optical component manufacturing require systems to measure the position of a tool relative to a part under fabrication. Zygo's ZMI family of Laser Interferometer systems provides the measurements that control the position of some of the world's most sophisticated machinery. Through the use of a directed laser beam reflecting from the moving portion of the machine, the ZMI-1000 can tell the machine's computer control systems about movements as small as 1.24 nanometers (billionths of a meter). This level of accuracy can be compared to the finest geometries of semiconductors, which are approximately 350 nanometers. Its design also accommodates fast motions and maintains its precision at speeds in excess of a meter per second. Applications for these interferometers include accurately measuring and controlling, while they are in motion, the x, y, and theta stages in photolithography equipment that is used in making semiconductors and flat-panel video displays. Although Zygo sells this instrumentation to a large number of customers, the majority of these interferometers are sold on an OEM basis to Canon. Zygo is Canon's sole-source provider of motion control devices for use in Canon's photolithography systems. These systems perform a critical function in the process of manufacturing semiconductors. CONFOCAL MODULES
PRODUCT PRICE RANGE MEASUREMENT APPLICATION - ---------------------------------------------------------------------------------------------------------------- ZMI-1000 $15K Distance; Angle; Velocity; Semiconductor and Flat Panel and to Time/Position Display Manufacturing; ZMI-2000 $100K Product and Process Development; Precision Machine Tools - ----------------------------------------------------------------------------------------------------------------
TIC's module products include the K-2 Industrial module, the NCM module and the PCM module. The K-2 module provides confocal scanning capability to nearly any modern upright white-light microscope. The product is fitted to the microscope as a replacement for the vertical illuminator and attaches to the microscope stand. The K-2 module provides two confocal modes and one brightfield imaging mode. TIC also offers an optional confocal software package with the K-2 module which makes it possible to precisely layer several two-dimensional confocal images to create an extremely accurate three-dimensional image. The K-2 module is primarily sold to OEMs. The NCM module is a confocal module, similar to the K-2 module, which is incorporated into the Nikon IC-200C microscope. The PCM module was recently developed for an OEM application in the biomedical field. The module utilizes TIC's laser scanning confocal technology where fluorescence is used to analyze the subject. This module is incorporated into an OEM product which is used in research work for analyzing cell structures and DNA. TIC's principal OEM accounts include Nikon, Leica, Reichert, and Nidek. 8 PRECISION OPTICAL COMPONENTS COMPONENT(S) APPLICATION - -------------------------------------------------------------------------------- Flats; Spheres; Laser and White Light Based Waveplates; Mirrors; Optical Instruments; Precision Mechanical Components; High Power Lasers; Aerospace Windows; Photolithography; Photolithographic Stages Military; Research - -------------------------------------------------------------------------------- Zygo believes it is a world leader in the design and manufacture of highly accurate "cosmetically excellent" surfaces and angles on plano components ranging in size from small prisms to large mirrors, scanners, aerospace windows and laser amplifier disks. Zygo's precision machining capability is used to make complex glass and ceramic parts such as stage mirrors and other lightweight structures. Operations at Zygo's state-of-the-art optical components manufacturing facility include machining, shaping, generating, grinding, polishing, and edging. Zygo utilizes technology that it has developed and incorporated into rotary polishing machines designed and built by Zygo. Zygo's thin film coating capability includes metallic and high-efficiency dielectric coatings for transmissive or reflective applications, in the ultraviolet, visible, and infrared regions of the spectrum. Zygo also applies polarization, beamsplitter, and anti-reflection coatings. Late in fiscal 1997, Zygo was selected by Lawrence Livermore National Laboratory to be a primary supplier of large plano optical components for the National Ignition Facility (NIF), a $1.2 billion Department of Energy project at Livermore to produce the world's largest laser for nuclear fusion research. The contract is another significant step in the NIF program for Zygo and provides for the Company to design, manufacture, and equip a world-class optical fabrication facility at its Middlefield, Connecticut, operations for a fixed price of nearly $10 million over an 18-month time period. The contract was funded to slightly in excess of $5.5 million in the fiscal year ended June 30, 1997. Subsequent to the end of fiscal 1997, the Company received an additional $4.3 million of funding. Consistent with similar government contracts, additional appropriations from the U.S. Congress are required prior to the Company's receiving additional funding. While there is no guarantee that the NIF program at Livermore will receive additional governmental funding in future government fiscal years or that the Company's project will be funded by LLNL beyond the initial $10 million, the contract contemplates the completion of the Middlefield NIF facility (fully funded) and provides for additional potential funding covering the increased capacity at the facility as well as pilot production beginning at the conclusion of the facilitization contract. The final aspect of the contract contemplates the negotiation, during the pilot production phase of the contract, of an optical components production contract which is expected to have a value to Zygo of approximately $15 million and cover several years. To ensure quality control of its products, Zygo maintains complete control over every facet of manufacturing, from grinding and polishing to mating and assembly. At each stage of production, opticians test and verify the components using sophisticated interferometric measuring instruments designed and manufactured by Zygo. Zygo believes that the production of its precision optical components gives Zygo a distinct competitive advantage over most of its competitors. 9 PERCENTAGE OF CONSOLIDATED SALES The following table shows the past three years of relative contributions of instruments and accessories and precision optical components to consolidated sales. Year ended June 30, 1997 1996 1995 ----------------------------------------------------------------------- Instruments and Systems 75% 65% 62% Modules and Components 25 35 38 ----------- ----------------------------------------------------------- Total 100% 100% 100% ===========================================================+=========== COMPETITION Although Zygo believes that its products are unique, competitors offer technologies, instrumentation, and systems that are capable of performing certain of the functions performed by Zygo's products. 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, Zygo may compete with the internal development efforts of its current and prospective customers. Zygo believes that its systems and components offer several advantages over competitive products in terms of accuracy, speed, flexibility, cost, and ease of use. Although Zygo has attempted to protect the proprietary nature of such products, it is possible that any of Zygo's products could be duplicated by other companies in the same general market. In addition, there can be no assurances that Zygo would be able to compete with similar products produced by a competitor. PRINCIPAL CUSTOMERS AND OPERATIONS BY GEOGRAPHIC AREA The growing need for dimensional control to the subnanometer level has created a growing need for Zygo's instruments and systems among both OEMs and end users. Traditionally, Zygo's largest market has been high precision optical components and systems. As the market demands for greater tolerance control in the manufacturing process has increased, particularly in the data storage and semiconductor markets, Zygo has been able to meet these demands with on-the-production-line process and quality control instruments and systems as well as with its off-line quality control instruments. As a result, the data storage and semiconductor industries are now Zygo's largest markets. Historically, a relatively limited number of customers have accounted for a substantial portion of Zygo's revenues. In fiscal years 1997, 1996, and 1995, sales to Zygo's top two customers accounted for approximately 25.5%, 50.3%, and 46.8%, respectively, of Zygo's net sales. During these fiscal years, sales to Canon, Zygo's largest customer, accounted for approximately 20.1%, 34.4%, and 29.6 %, respectively, of Zygo's net sales. Canon, one of the original investors in Zygo, is a valuable strategic partner of Zygo and the relationship is important to both companies for many reasons. Sales to Canon include products that Canon uses in its manufacturing facilities, such as Zygo's large aperture surface measurement interferometers, which are used to quantitatively analyze the surface of optics Canon produces for its photolithographic steppers, and Zygo's motion measurement components which are incorporated into Canon's steppers for controlling the x/y stage in that product. Zygo is Canon's sole source for motion control systems. Sales to Canon also include optical components and instruments, systems and accessories sold by Canon as a distributor for certain of the Company's products in Japan. In fiscal 1996 and 1995, Seagate, a leading manufacturer of computer disk drives and related hardware and software, accounted for an additional approximately 15.8% and 17.2%, respectively, of Zygo's net sales. No other customer accounted for greater than approximately 10% of Zygo's net sales in fiscal 1997, 1996, or 1995. 10 The following is a representative list of end users of Zygo's products:
INDUSTRIAL SURFACES & SEMICONDUCTOR DATA STORAGE OPTICS MACHINE CONTROL - ------------- ------------ ------ -------------------- Canon Akashic Bausch & Lomb Anorad DuPont Applied Magnetics Canon Cummins Engine ESI Hitachi Corning Dover Instruments ETEC Iomega Hughes General Motors IBM Komag Laboratory for Gerber Scientific Intel Maxtor Laser Energetics Martin Marietta KLA/Tencor Quantum Lawrence Livermore National Institute of Motorola Read-Rite National Laboratories Standards & Technology NEC SAE Magnetics Melles Griot Rank Taylor Hobson Photronics Seagate Nikon Saint-Gobain/Norton SVG Sony OCLI Sikorsky Aircraft Sematech TDK Perkin Elmer Stanadyne Texas Instruments Toshiba Schott Glass 3-M Toshiba Vistakon TRW Ultratech Stepper Zeiss
Zygo sells its products worldwide through a combination of direct sales staff and independent distributors and sales representatives. Zygo maintains a direct sales staff at its headquarters in Middlefield, Connecticut, and in California, Colorado, Georgia, and Washington for domestic sales. International sales are made through more than 10 representatives and distributors, covering sales and service in over 20 countries including Japan, Singapore, Malaysia, South Korea, Taiwan, Philippines, United Kingdom, Germany, Italy, and France. The following table sets forth the percentage of Zygo's total sales (including sales delivered through distributors) by location during the past three years: YEAR ENDED JUNE 30, ----------------------------------- 1997 1996 1995 ---- ---- ---- United States 54.7% 52.6% 53.5% Japan 24.9 34.4 29.9 Pacific Rim 14.5 8.3 10.2 Other (primarily Europe) 5.9 4.7 6.4 Substantially all of Zygo's export sales are negotiated, invoiced, and paid in United States dollars. International sales and foreign operations are subject to certain inherent risks. The selling process for Zygo's products frequently involves participation by sales, marketing, applications specialists, and engineering personnel. Zygo's marketing activities also include participation in international standards organizations, trade shows, publication of articles in trade journals, participation in industry forums, and distribution of sales literature. In addition, Zygo's strategic relationships with customers serve as highly visible references. Zygo believes that its strong commitment to service is essential, based on the growing complexity of the equipment used in the manufacturing process by Zygo's customers. At June 30, 1997, Zygo's customer support and service staff consisted of 23 persons. In addition, Zygo's distributors and sales representatives offer a worldwide network for customer support, providing 24-hour on-demand maintenance services. The service engineers are skilled in optical and electrical component repair, software, application and system integration, diagnostic and problem solving capabilities. Zygo also offers training programs and maintenance contracts for its customers. 11 BACKLOG The Company's backlog at June 30, 1997 and 1996, was approximately $38.7 million and $22.4 million, respectively. The significant increase from the prior year end resulted primarily from stronger demand for all of the Company's electro-optical instruments and systems, as well as an increase for custom optical components driven by the contract awarded to Zygo by Lawrence Livermore National Laboratory. The backlog of the Company's instruments and systems at June 30, 1997, increased $8,363,000 (61.3%) from that at June 30, 1996. The backlog of the Company's modules and components increased by $7,928,000 (90.5%) from the year earlier. Substantially all of the backlog as of June 30, 1997, is expected to be shipped in fiscal year 1998. Historically, cancellation or reduction of orders has not had a significant impact on the Company's results of operations. RESEARCH AND DEVELOPMENT COSTS Information regarding the Company's research and development costs is set forth in the Consolidated Statements of Earnings on page 15 of the Company's 1997 Annual Report, which statements are herein incorporated by reference. Zygo operates in an industry that is subject to rapid technological change and engineering innovation. Zygo distinguishes its instrument products on the basis of its unique electro-optical sensor technology, its software capability, and its skill in systems integration. Because Zygo believes that its ability to compete effectively with its instruments and systems in its markets depends in part on maintaining its expertise in applying new technologies and developing new products, Zygo dedicates substantial resources to research and development. At June 30, 1997, Zygo employed 60 individuals within its R&D operations, including 18 individuals with advanced degrees of which nine individuals have earned doctoral degrees. As an integral part of Zygo's product development strategy, Zygo has formed technical relationships with several customers. Zygo's strategy is to form close technical working relationships with the leading suppliers in its markets and thereby develop products and systems which have the greatest relevancy to the marketplace in general. In connection with its R&D operations, Zygo also maintains a close working relationship with various research groups and academic institutions in the United States as well as abroad. Zygo believes that continued enhancement, development, and commercialization of new and existing products and systems is essential to maintaining and improving its leadership position. Zygo intends to direct its research and development activities in several different areas. For example, Zygo continues to seek to develop products that have greater measurement range and precision to address new markets. Additionally, Zygo intends to continue to add products that are automated in-process instruments and systems. There can be no assurance that these efforts or any other product development efforts of Zygo will be successful in producing products that respond to technological changes or new products introduced by others. PATENTS, LICENSES, TRADEMARKS, AND PROPRIETARY INFORMATION Zygo relies on a combination of patent, copyright, trademark, and trade secret laws and license agreements to establish and protect its proprietary rights in its products. Zygo believes, however, that its success depends to a greater extent upon innovation, technological expertise, and distribution strength. Zygo requires each of its employees to enter into standard agreements pursuant to which the employee agrees to keep confidential all proprietary information of Zygo and to assign to Zygo all rights in any proprietary information or technology made or contributed by the employee during his or her employment or made thereafter as a result of any inventions conceived or work done during such employment. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use Zygo's products or technology without authorization or to develop similar technology independently. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries. 12 Zygo has been awarded 68 United States patents and 9 foreign patents since the Company was founded, and has 14 United States patent applications and 7 foreign patent applications pending. Zygo, the Zygo logo, NexStar, and Sight Systems are registered trademarks of Zygo Corporation. The Company also holds several nonregistered trademarks including AAB System, AMS, GAPii, GPI, Growth Potential Interferometer KMS, Maxim*GP, NewView 100, New View 200, Pegasus 2000, ROBOii, VAC, ZMI-1000, ZMI-2000. MANUFACTURING, RAW MATERIALS, AND SOURCES OF SUPPLY Zygo's principal manufacturing activities are conducted at its facilities in Middlefield, Connecticut; Sunnyvale, California; and Longmont, Colorado. Zygo maintains a state-of-the-art optical components manufacturing facility in Middlefield, specializing in the fabrication, polishing and coating of plano (flat) optics for sales to third parties, as well as the manufacturing of a wide variety of optics that are used in Zygo's instrument and automation products. Zygo's manufacturing activities for its instruments and system products consist primarily of assembling and testing components and subassemblies some of which are supplied from within Zygo and others are supplied by third party vendors and then integrated into Zygo's finished products. Many of the components and subassemblies are standard products, although certain items are made to Company specifications. Zygo also maintains Computer Numerical Control (CNC) metal fabrication equipment for in-house production of strategic metal formed components. Certain components and subassemblies incorporated into Zygo's systems are obtained from a single source or a limited group of suppliers. Management routinely monitors single or limited source supply parts, and Zygo endeavors to ensure that adequate inventory is available to maintain manufacturing schedules should the supply of any part be interrupted. Although Zygo seeks to reduce its dependence on sole and limited source suppliers, it has not qualified a second source for these products and the partial or complete loss of certain of these sources could have an adverse effect on Zygo's results of operations and damage customer relationships. To date, the Company has not experienced a significant production delay from a parts shortage or loss of a single-source component. At its Middlefield operations, Zygo also maintains a state-of-the-art fully integrated management information system which includes all business modules (capacity planning, materials requirements planning, order entry, financials, etc.) necessary to manage Zygo's growing operations there. Plans to expand the system to Zygo's other operations are being developed. EMPLOYEES At fiscal year end, Zygo employed 399 men and women, including 233 in manufacturing, 60 in research and development, 46 in sales and marketing, and 23 in customer service. To date, Zygo has been successful in attracting and retaining qualified technical personnel, although there can be no assurance that this success will continue. None of Zygo's employees are covered by collective bargaining agreements or are members of a union. Zygo has never experienced a work stoppage and believes that its relations with its employees are excellent. SUBSEQUENT EVENTS Subsequent to the close of its fiscal 1997, Zygo completed the acquisition of Sight Systems, Inc., a manufacturer of precision application-specific machine vision metrology systems and Syncotec Neue Technologien und Instrumente GmbH, a manufacturer of confocal components and custom metrology tools for the German market. Zygo also announced the signing of a letter of intent to acquire Digital Instruments, Inc. A brief description of these businesses follows: 13 SIGHT SYSTEMS, INC. ACQUISITION The Company completed its acquisition of Sight Systems, Inc. ("SSI"), a privately held California-based business, for 287,400 shares of the Company's common stock. The transaction will be accounted for as a pooling-of-interests. SSI is engaged in the business of designing, developing, manufacturing, and marketing application-specific machine vision systems. SSI serves the data storage industry and the semiconductor industry with application-specific vision systems which are primarily used in production by its customers. These vision systems are unique in that they are configured from a vast collection of software and hardware components into a system which meets specific customer requirements. Examples of such applications in the data storage industry where SSI has sold the majority of its systems to date include: pole geometry measurements and gap width on various types of read/write heads, straightness, and measurements of read/write heads mounted on row bars in the manufacturing process. SSI, located in Newbury Park, California, employs approximately 20 persons. Approximately 50% of SSI's employees are engineers and are actively involved in the design and development of configurable software and hardware components which are customized into vision systems specific to customer needs. SSI operates from a leased building where the manufacturing function is essentially a systems and components integration and assembly function. SSI has a number of suppliers for its hardware components and material availability has not been a problem for SSI. Sales are conducted on a direct basis to data storage industry customers and through selected representatives, primarily selected for their proximity to key geographic markets. Integration of the sales and marketing teams of Zygo and SSI is intended to be accomplished during fiscal 1998. SSI's sales in its fiscal year ended December 31, 1996 were approximately $3.5 million. SYNCOTEC NEUE TECHNOLOGIEN UND INSTRUMENTE GMBH ACQUISITION On June 30, 1997, TIC and Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), a German-based company, completed all necessary legal requirements allowing for the appropriate transfer and registration of a 50 percent ownership interest in Syncotec. The conclusion of this transaction completed commitments made by the former owners of TIC and enabled the Company to release $440,000 of contingent proceeds recorded as a liability at the time of the TIC acquisition by the Company. Effective September 1, 1997, the Company, through TIC, completed the purchase of the remaining 50 percent of Syncotec for approximately $2.0 million (subject to adjustment based on closing book value) in a combination of cash and the Company's common stock. Syncotec, located in Asslar, Germany, is a small manufacturer of confocal modules and systems principally for the European market. Syncotec has had a long-term relationship with TIC. Employing approximately 10 persons, the company is focused on designing solutions for local customers for their specific measurement problems utilizing the TIC confocal scanning optical microscopy components, as well as other locally designed hardware and software. Syncotec occupies a small leased facility in Asslar, near Frankfurt, Germany. Syncotec's sales in its fiscal year ended December 31, 1996 were approximately $2.9 million (DM4.9 million). DIGITAL INSTRUMENTS, INC. AND DIGITAL INSTRUMENTS GMBH On July 28, 1997, the Company announced the signing of a letter of intent providing for the Company's acquisition of Digital Instruments, Inc. ("Digital"), a privately held California-based entity that designs, develops, and manufactures high precision measurement products and systems which use scanning probe microscopy imaging and metrology technology. These systems are used in product research and development applications as well as to improve the production efficiency 14 and manufacturing yields within the data storage, semiconductor, and other high technology industries. It is expected that the Company will acquire all the outstanding stock of Digital and an affiliated corporation in exchange for 7,000,000 shares of the Company's common stock. Closing of the transaction will be subject to various conditions, including approval by the stockholders of the Company. The transaction is expected to be accounted for as a pooling-of-interests, and is expected to be completed prior to the end of the calendar year 1997. Digital's revenues for the year ended December 31, 1996 were approximately $50 million. The remainder of this 10-K405 does not include any information concerning Sight Systems, Inc., Syncotec, or Digital Instruments, Inc.. ITEM 2. PROPERTIES The Company maintains manufacturing facilities in Middlefield, Connecticut; Sunnyvale, California; and Longmont, Colorado, and maintains its corporate headquarters on Laurel Brook Road in Middlefield, Connecticut. The Middlefield facility consists of one 100,000-square-foot building on approximately 13 acres. This facility is currently being expanded by 35,000 square feet to provide additional optical fabrication capacity and new office area for sales, service, R&D, and administrative personnel. The Company also owns 50 acres of undeveloped land adjacent to its principal facility. TIC maintains its headquarters in a leased 20,000-square-foot building located in a high technology area in Sunnyvale, California. This facility was recently renovated to accommodate the additional manufacturing and office personnel. NexStar's manufacturing activities are carried on from Longmont, Colorado, where it occupies 21,000 square feet within a new leased facility. NexStar moved into the facility in April 1997. ITEM 3. LEGAL PROCEEDINGS On June 29, 1988, Zygo filed suit in the U.S. District Court in Arizona against WYKO Corporation for patent infringement based on the belief that the WYKO 6000 interferometer infringed certain patents owned by Zygo. On March 1, 1993, the United States District Court (District of Arizona) rendered a Memorandum Opinion and Findings of Fact and Conclusions of Law in the matter of the patent suit. The conclusions of the court were that Zygo's patent is valid, the WYKO Model 6000 interferometer infringes the Zygo patent, that WYKO Corporation is liable to Zygo for any damages suffered as a result of WYKO's infringement of Zygo's patents by making, selling, and using the WYKO Model 6000 interferometer, and that the amount of the monetary judgment and other relief shall be determined following a trial on the issue of damages. The damage phase of the trial was held from November 29, 1993 through December 6, 1993. The Court rendered its judgment on June 2, 1994, awarding Zygo approximately $2.7 million plus recovery of certain costs to be awarded by the Court which were incurred by Zygo in connection with the conduct of the trial and entered a permanent injunction prohibiting further sales of the WYKO Model 6000 interferometers found to infringe. An appeal of the District Court's decision was filed by WYKO on August 9, 1994 with the Court of Appeals for the Federal Circuit located in Washington, D.C. The oral argument of the appeal was heard by the Court of Appeals on March 9, 1995. On April 1, 1996, the Court of Appeals rendered an Opinion Announcing Judgment of the Court. The appellate court affirmed-in-part and reversed-in-part the District Court's earlier findings and remanded the case to the District Court for a redetermination of the damage award. In its Opinion, the appellate court reversed the District Court's opinion that certain WYKO units infringed the Zygo patent on the basis of the doctrine of equivalents, upheld the validity of Zygo's patent, and affirmed the District Court's opinion that the original WYKO model 6000 infringed Zygo's patent. Zygo has not recorded any gain from the District Court's earlier ruling and will not until a final determination of the award is made. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE REGISTRANT GARY K. WILLIS - age 52 President and Chief Executive Officer of the Company since August 1993; from February 1992 until August 1993, President and Chief Operating Officer Served as executive officer of the Company since February 1992 AHMAD AKRAMI - age 38 Vice President of the Company since August 1997; President of NexStar Corporation, a wholly-owned subsidiary of the Company since September 1996; President NexStar Automation, Inc. from January 4, 1993 to September 1996, consultant from October 1992 to January 1993; President of TechniStar Corporation from March 1989 until October 1992 Elected an executive officer of the Company in August 1997 subsequent to the end of fiscal 1996 WILLIAM H. BACON - age 48 Vice President, Director of Corporate Quality of the Company since January 1996; from November 1993 until January 1996, Director of Total Quality of the Company; from June 1987 until November 1993, Manager of Instrument Manufacturing Engineering of the Company Served as executive officer of the Company since January 1996 MARK J. BONNEY - age 43 Vice President, Finance and Administration and Chief Financial Officer of the Company since March 1993 and Treasurer of the Company since November 1993; from October 1990 until February 1993, Vice President European Operations and Managing Director, Dynapert Limited, a Black & Decker Company Served as executive officer of the Company since March 1993 FRANCIS E. LUNDY - age 59 Vice President of the Company since August 1997; President Technical Instrument Company from January 1985 to August 1996 Elected an executive officer of the Company in August 1997 subsequent to the end of fiscal 1996 ROBERT A. SMYTHE - age 46 Vice President, Director of Sales and Marketing of the Company since January 1996; from June 1993 until January 1996, Director of Sales and Marketing of the Company; and from April 1992 until June 1993, served as Manager, Industry Marketing of the Company Served as executive officer of the Company since January 1996 CARL A. ZANONI - age 56 Vice President, Research, Development and Engineering of the Company since April 1992 Served as executive officer of the Company since its inception in 1970 Of the above executive officers, Mr. Willis and Mr. 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. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is included on page 27 (Stock Data) and page 28 (Stockholder Information) and in note 1 on page 18 and note 13 on page 21 in the Notes to Consolidated Financial Statements included in, the Company's 1997 Annual Report and is herein incorporated by reference. The Company's common shares are traded over-the-counter and are quoted on the NASDAQ/National Market. The number of stockholders of record at June 30, 1997, was 514. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is included on page 9 (Five-Year Summary) of the Company's 1997 Annual Report and is herein incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is included on pages 10 through 13 (Management's Discussion and Analysis of Results of Operations and Financial Condition) of the Company's 1997 Annual Report and is herein incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is included on pages 14 through 27 (Consolidated Balance Sheets; Consolidated Statements of Earnings; Consolidated Statements of Stockholders' Equity; Consolidated Statements of Cash Flows; Notes to Consolidated Financial Statements; Report of Management; Report of Independent Auditors; and Selected Consolidated Quarterly Financial Data) of the Company's 1997 Annual Report and is herein incorporated by reference. The consolidated financial schedules of Zygo Corporation and Consolidated Subsidiaries are filed as part of Item 14 of this Annual Report on Form 10-K405. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 report, information required by this item is 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 1997 Annual Meeting of Stockholders ("the Proxy Statement") and is herein incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is included in the Proxy Statement under the caption "Executive Compensation" and is herein incorporated by reference. 17 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is included in the Proxy Statement under the captions "Election of Board of Directors" and "Principal Stockholders" and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is included in the Proxy Statement under the caption "Certain Relationships and Related Transactions" and is herein incorporated by reference. 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")* 4.1 Shareholders Agreement dated October 17, 1983, between Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, and Sol F. Laufer (Exhibit (4)(a) to Registration 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 Zygo Corporation Profit Sharing Plan, as amended effective June 30, 1985 (Exhibit 10.35 to the Company's Annual Report on Form 10-K for its year ended June 30, 1985)* *Incorporated herein by reference. 18 10.5 First Amendment to the Zygo Corporation Profit Sharing Plan (Exhibit 10.28 to the Company's Annual Report on Form 10-K for its year ended June 30, 1989)* 10.6 Second Amendment to the Zygo Corporation Profit Sharing Plan (Exhibit 10.29 to the Company's Annual Report on Form 10-K for its year ended June 30, 1989)* 10.7 Third Amendment to the Zygo Corporation Profit Sharing Plan (Exhibit 10.30 to the Company's Annual Report on Form 10-K for its year ended June 30, 1989)* 10.8 Fourth Amendment to the Zygo Corporation Profit Sharing Plan (Exhibit 10.31 to the Company's Annual Report on Form 10-K for its year ended June 30, 1989)* 10.9 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)* 10.10 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)* 10.11 Employment Agreement dated February 13, 1992, relating to the employment of Gary K. Willis by the Company (Exhibit 10.38 to the Company's Annual Report on Form 10-K for its year ended June 30, 1992)* 10.12 Amendment, dated August 26, 1993, to the Employment Agreement dated February 13, 1992, between Gary K. Willis and the Company (Exhibit 10.22 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)* 10.13 Second Amendment, dated March 10, 1995, to the Employment Agreement dated February 13, 1992, between Gary K. Willis and the Company (Exhibit 10.19 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 1996)* 10.14 Stock Purchase Agreement dated March 4, 1992, relating to the purchase of Company Common Stock by Gary K. Willis from Wesleyan University (Exhibit 10.39 to the Company's Annual Report on Form 10-K for its year ended June 30, 1992)* 10.15 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)* 10.16 Amendment Agreement dated as of December 31, 1996, between the Company and Paul F. Forman. 10.17 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)* 10.18 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)* *Incorporated herein by reference. 19 10.19 Employment Agreement dated March 1, 1993, between Mark J. Bonney and the Company (Exhibit 10.31 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)* 10.20 Amendment, dated March 12, 1996, to the Employment Agreement dated March 1, 1993, between Mark J. Bonney and the Company (Exhibit 10.21 to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1996)* 10.21 Termination Agreement dated November 30, 1993, covering the termination of the Shareholders' Agreement between Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, and Sol F. Laufer dated October 17, 1983 (Exhibit 10.33 to the Company's Annual Report on Form 10-K for its year ended June 30, 1994)* 10.22 Registration Rights Agreement dated November 30, 1993, between Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, Sol F. Laufer, and the Company (Exhibit 10.34 to the Company's Annual Report on Form 10-K for its year ended June 30, 1994)* 10.23 Renewal of Line of Credit dated June 3, 1997, between the Company and Fleet Bank Connecticut, N.A. 10.24 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)* 10.25 Agreement and Plan of Merger, dated as of August 7, 1996, by and among the Company, Technical Instrument Company, Zygo Acquisition Corporation, Francis E. Lundy, the Lundy 1996 Charitable Trust, The Sherman Family Living Trust, Frank J. Scheufele Trust, David Lytle, and Inspectron Development Partners L.P., a California Limited Partnership (Exhibit 2 to the Company's Current Report on Form 8-K dated August 19, 1996)* 10.26 Employment Agreement, dated August 7, 1996, between Technical Instrument Company and Francis E. Lundy (Exhibit 10.27 to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1996)* 10.27 Acquisition Agreement, dated August 12, 1996, among the Company, NX Acquisition Corporation, and NexStar Automation, Incorporated (Exhibit 2 to the Company's Current Report on Form 8-K dated September 27, 1996)* 10.28 Employment Agreement, dated September 12, 1996, between NexStar Corporation and Ahmad Akrami (Exhibit 10.29 to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1996)* 10.29 Acquisition Agreement dated August 19, 1997, by and among Zygo Corporation, Sight Systems, Inc., and the Shareholders of Sight Systems, Inc. 10.30 Stock Purchase Agreement dated September 1, 1997, between Technical Instrument Company and Syncotec Neue Technologien und Instrumente GmbH 10.31 Subcontract B335188 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated May 9, 1997 *Incorporated herein by reference. 20 10.32 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 10.33 Employment Agreement dated August 19, 1997, between Sight Systems, Inc. and David Grant 11. For computation of per share earnings see note 1 of the Notes to Consolidated Financial Statements in the 1997 Annual Report included herewith, which note is incorporated herein by reference 13. Specified portions of 1997 Annual Report to Stockholders (such portions are furnished solely for the information of the Commission and are not filed herewith, except for those portions expressly incorporated herein by reference.) 21. Subsidiaries of Registrant 23. Accountants' Consent 24. Power of Attorney 27. Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this report. *Incorporated herein by reference. 21 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/ Mark J. Bonney Date September 16, 1997 - --------------------------------- ------------------ Mark J. Bonney Vice President, Finance and Administration 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. Signature Title --------- ----- /s/ Gary K. Willis President, Chief Executive Date September 16, 1997 - ------------------------- Officer and Director ------------------ Gary K. Willis /s/ Mark J. Bonney Vice President, Finance and Date September 16, 1997 - ------------------------- Administration, Treasurer, ------------------ Mark J. Bonney and Chief Financial Officer /s/ Carl A. Zanoni Vice President, Research, Date September 16, 1997 - ------------------------- Development and Engineering ------------------ Carl A. Zanoni and Director Paul F. Forman* Chairman of the Board - ------------------------- (Paul F. Forman) Michael R. Corboy* Director - ------------------------- (Michael R. Corboy) Seymour E. Liebman* Director - ------------------------- (Seymour E. Liebman) Robert G. McKelvey* Director - ------------------------- (Robert G. McKelvey) Paul W. Murrill* Director - ------------------------- (Paul W. Murrill) John R. Rockwell* Director - ------------------------- (John R. Rockwell) Robert B. Taylor* Director - ------------------------- (Robert B. Taylor) *By /s/ Mark J. Bonney Date September 16, 1997 - ------------------------- ------------------ Mark J. Bonney Attorney-in-Fact 22 ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page * Independent Auditors' Report * Consolidated balance sheets at June 30, 1997, and 1996 * Consolidated statements of earnings for the years ended June 30, 1997, 1996, and 1995 * Consolidated statements of stockholders' equity for the years ended June 30, 1997, 1996, and 1995 * Consolidated statements of cash flows for the years ended June 30, 1997, 1996, and 1995 * Notes to consolidated financial statements * Selected consolidated quarterly financial data for the years ended June 30, 1997, and 1996 Consolidated Schedules F-2 Independent Auditors' Report on Schedule F-3 VIII - 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. *Incorporated herein by reference to Zygo Corporation 1997 Annual Report to Stockholders. F-1 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors Zygo Corporation: Under date of August 8, 1997, we reported on the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 1997, and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1997 as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K405 for the fiscal year ended June 30, 1997. 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 PEAT MARWICK LLP Hartford, Connecticut August 8, 1997 F-2 ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 Balance Balance at Beginning at End Description of Period Provision Write-Offs of Period - ----------- --------- --------- ---------- --------- YEAR ENDED JUNE 30, 1997*: ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 733,000 $ 15,146 $ 20,146 $ 728,000 INVENTORY RESERVE $1,321,850 $ 395,500 $ 239,900 $1,477,450 Year Ended June 30, 1996**: Allowance for Doubtful Accounts $ 137,655 $ 153,402 $ 24,057 $ 267,000 Inventory Reserve $ 419,147 $ 581,253 $ 85,350 $ 915,050 Year Ended June 30, 1995: Allowance for Doubtful Accounts $ 70,981 $ 74,584 $ 7,910 $ 137,655 Inventory Reserve $ 267,183 $ 248,576 $ 96,612 $ 419,147 *Includes opening balances of TIC corporation purchased August 8, 1996 Allowance for Doubtful Accounts $466,000 Inventory Reserves $406,800 **1996 restated to include NexStar activity 1996 F-3 EXHIBIT INDEX EXHIBIT TABLE FORM 10-K405 NUMBER PAGE NUMBER ------ ----------- 10.16 Amendment Agreement dated as of December 31, 1996, between the Company and Paul F. Forman. 10.23 Renewal of Line of Credit dated June 3, 1997, between the Company and Fleet Bank 10.29 Acquisition Agreement dated August 19, 1997, by and among Zygo Corporation, Sight Systems, Inc., and the Shareholders of Sight Systems, Inc. 10.30 Stock Purchase Agreement dated September 1, 1997, between Technical Instrument Company and Syncotec Neue Technologien und Instrumente GmbH 10.31 Subcontract B335188 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated May 9, 1997 10.32 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 10.33 Employment Agreement dated August 19, 1997, between Sight Systems, Inc. and David Grant 11. For computation of per share earnings, see note 1 of the Notes to Consolidated Financial Statements in the 1997 Annual Report included herewith, which note is incorporated herein by reference 13. Specified portions of 1997 Annual Report to Stockholders (such portions are furnished solely for the information of the Commission and are not filed herewith, except for those portions expressly incorporated herein by reference.) 21. Subsidiaries of Registrant 23. Accountants' Consent 24. Power of Attorney 27. Financial Data Schedule EX-10.16 2 AMENDMENT AGREEMENT AMENDMENT AGREEMENT AMENDMENT AGREEMENT, dated as December 31, 1996, between ZYGO CORPORATION, a Delaware corporation with an office at Laurel Brook Road, Middlefield, Connecticut 06455 (the "Company"), and PAUL F. FORMAN, residing at 15 Flying Point Road, Stony Creek, Connecticut 06405 ("Forman"). W I T N E S S E T H: WHEREAS, the Company and Forman are parties to that certain Services Agreement, dated as of August 26, 1993 (the "1993 Services Agreement"); and, WHEREAS, the parties hereto desire to amend the 1993 Services Agreement, as set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Section 3 of the 1993 Services Agreement is hereby amended by deleting the date "June 30, 1999" and substituting therefor the date "September 30, 1999". 2. Section 4(c) of the 1993 Services Agreement is hereby amended by deleting subsections (iv) and (v) thereof in their entirety and substituting therefor the following: "(iv) During each of the fourth and fifth years of the Consulting Period (i.e., July 1, 1997 through June 30, 1998 and July 1, 1998 through June 30, 1999), an amount equal to the sum of (x) 20% of the Base Amount plus (y) $20,000 (as a Stipend); and "(v) During the last three months of the Consulting Period (i.e., July 1, 1999 through September 30, 1999), an amount equal to 5% of the Base Amount." 3. Section 9(b) of the 1993 Services Agreement is hereby amended by deleting the last sentence of the first paragraph thereof in its entirety and substituting therefor the following: "Notwithstanding anything to the contrary contained herein, Forman shall not be required to render in excess of 32 hours, 24 hours, 16 hours, 8 hours, 8 hours and 8 hours per week (on the basis of a 45 week/year) of consulting services hereunder during the first, second, third, fourth, fifth and three-month period of the sixth years, respectively, of the Consulting Period." 4. From and after the execution of this Amendment Agreement, all references (x) in the 1993 Services Agreement to "this Agreement" and (y) in the Non-Competition Agreement, dated as of August 26, 1993 (the "1993 Non-Competition Agreement"), between the Company and Forman, to "the Services Agreement", shall refer to the 1993 Services Agreement as amended hereby. 5. Except as expressly amended hereby, all provisions of the 1993 Services Agreement and 1993 Non-Competition Agreement are and shall remain in full force and effect. 6. This Amendment Agreement shall be governed by the laws of the State of Connecticut applicable to agreements made and to be performed therein and both parties agree to submit to the jurisdiction of the laws of Connecticut. 7. This Amendment Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment Agreement as of the date and year first above written. ZYGO CORPORATION By: /s/ GARY K. WILLIS --------------------------- Gary K. Willis /s/ PAUL F. FORMAN ------------------------------ Paul F. Forman EX-10.23 3 LOAN AGREEMENT LOAN AGREEMENT This Agreement is dated this 3rd day of June, 1997, by and between FLEET NATIONAL BANK, a national banking association with an office at 777 Main Street Hartford, Connecticut, 06115 (the "LENDER") and ZYGO CORPORATION, P.O. Box 448, Middlefield, Connecticut 06445-0448 ("Borrower"). SECTION 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings specified below: a. "Affiliate" means (i) any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Borrower or any other obligor of the Obligations, as the case may be (including, without limitation, any respective director or officer of the Borrower or any other obligor of the Obligations, as the case may be), and (ii) any corporation or other organization of which the Borrower owns more than fifty percent (50%) of the voting securities of such entity. b. "Capital Assets" means assets that in accordance with GAAP are required or permitted to be depreciated or amortized on the Borrower's balance sheet. c. "Capital Leases" means capital leases, conditional sales contracts and other title retention agreements relating to the purchase or acquisition of Capital Assets. d. "Code" means the Internal Revenue Code of 1986, as amended, or any successor federal tax code, and any reference to any provision shall be deemed to include a reference to any successor provision or provisions. e. "Current Assets" means current assets as determined in accordance with GAAP. f. "Current Liabilities" means current liabilities as determined in accordance with GAAP. g. "Current Ratio" means Current Assets divided by Current Liabilities. h. "Date of Closing" means the date on which this Agreement and the Note are executed by Borrower. i. "Debt" means the Total Liabilities of the Borrower. j. "Environmental Laws" means any and all applicable federal, state and local environmental, health or safety statutes, laws, regulations, rules, ordinances, guidances, policies and rules or common law (whether now existing or hereafter -1- enacted or promulgated), of all governmental agencies, bureaus or departments which may now or hereafter have jurisdiction over Borrower or Borrower's property and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health or the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal of emissions, discharges, releases or threatened releases of Hazardous Materials, chemical substances, pollutants or contaminants whether solid, liquid or gaseous in nature, into the environment or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of such Hazardous Materials, chemical substances, pollutants or contaminants. k. "ERISA" means the Employee Retirement Income Security Act of 1974 and all rules and regulations promulgated pursuant thereto, as the same may from time to time be supplemented or amended. l. "Event of Default" shall have the meaning assigned in Section 6 hereof. m. "GAAP" means generally accepted accounting principles in the United States of America, as from time to time in effect. n. "Hazardous Material" means any substance: (i) the presence of which requires or may hereafter require notification, investigation, monitoring or remediation under any Environmental Law; (ii) which is or becomes defined as a "hazardous waste", "hazardous material" or "hazardous substance" or "toxic substance" or "pollutant" or "contaminant" under any present or future Environmental Law or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and any applicable local statutes and the regulations promulgated thereunder; (iii) which is toxic, explosive, corrosive, reactive, ignitable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of any foreign country, the United States, any state of the United States, or any political subdivision thereof to the extent any of the foregoing has or had jurisdiction over Borrower or of Borrower's property; or (iv) without limitation, which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls. o. "Indebtedness" of an entity means such entity's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of property other than accounts payable arising in the ordinary course of such entity's business on terms customary in the trade, (iii) obligations, whether or not assumed, secured by a lien on, or payable out of the proceeds or production from, property now or hereafter -2- owned or acquired by such entity, (iv) obligations which are evidenced by bonds, debentures, notes, acceptances, or other instruments and (v) Capital Lease obligations. p. "IRS" means the United States Internal Revenue Service. q. "Loan" means the Loan evidenced by the Note. r. "Loan Documents" shall have the meaning assigned in Section 3.3 hereof s. "Net Worth" means Total Assets less Total Liabilities. t. "Note" means promissory note of Borrower dated the same date as this Agreement in the original principal amount of $3,000,000. u. "Obligations" means and includes all loans, advances, interest, indebtedness, liabilities, obligations, guaranties, covenants and duties at any time owing by the Borrower 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, absolute or contingent, due or to become due, now existing or hereafter arising, including, but not limited to, the Loan and all other indebtedness, liabilities and obligations arising under this Agreement and the other Loan Documents and all costs, expenses, fees, charges and attorneys', paralegals' and professional fees incurred in connection with any of the foregoing, or in any way connected with, involving or relating to the preservation, enforcement, protection or defense of, or realization under this Agreement, the Note, any of the other Loan Documents, any related agreement, document or instrument and the rights and remedies hereunder or thereunder, and in connection with any "workout" or default resolution negotiations involving legal counsel or other professionals and any re-negotiation or restructuring of any of the Obligations. v. "PBGC" shall have the meaning assigned in Section 5.21a. w. "Plan" means any employee benefit plan or other plan maintained for employees of Borrower or any related entity covered by Title I of ERISA. x. "Property" shall have the meaning assigned in Section 5.5 hereof. y. "Total Assets" means total assets determined in accordance with GAAP. z. "Total Liabilities" means all liabilities determined in accordance with GAAP. -3- SECTION 2. The Loan Transaction. 2.1. The Loan. Lender shall lend to the Borrower the sum of $3,000,000. The Borrower's obligations to repay the Loan are as contained in this Agreement and the Note, a copy of which is attached to this Agreement as SCHEDULE 2.1. The Borrower shall pay an annual line of credit fee in the amount of $7,500 which shall be payable in quarterly installments of $1,875 on the first day of January, April, July and October of each year. The Loan shall be payable upon DEMAND. There shall be no principal amount outstanding on the Loan for a period of 30 consecutive days in each fiscal year of Borrower. The Loan shall terminate on November 26, 1997. 2.2. Advances. Lender shall make advances to Borrower under the Loan in an aggregate amount not to exceed $3,000,000 provided no defaults or Events of Default exist at the time of the advance. 2.3. Payments on the Loan. a. Regularly Scheduled Payments. Regularly scheduled payments on the Loan shall be made in accordance with the Note. b. Additional Payments. If Lender shall deem applicable to this Agreement, the Loan or the Note (including the borrowed and the unused portion thereof) any requirement of any law of the United States of America, any regulation, order, interpretation, ruling or official directive or guideline (whether or not having the force of law) of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation or any other board or governmental or administrative agency of the United States of America which shall impose, increase, modify or make applicable thereto or cause to be included in, any reserve, special deposit, capital adequacy, calculation used in the computation of regulatory capital standards, assessment or other requirement which imposes on Lender or any entity that controls Lender any cost that is attributable to the maintenance thereof, then, and in each such event, Borrower shall promptly pay Lender, upon its demand, such amount as will compensate Lender for any such cost, which determination may be based upon Lender's reasonable allocation of the aggregate of such costs resulting from such events. In the event any such cost is a continuing cost, a fee payable to Lender may be imposed upon Borrower periodically for so long as any such cost is deemed applicable by Lender, in an amount determined by Lender to be necessary to compensate Lender for any such cost. The determination by Lender of the existence and amount of any such cost shall, in the absence of manifest error, be conclusive. -4- SECTION 3. Representations, Warranties and General Covenants. In order to induce Lender to enter into this Agreement, Borrower represents, warrants and covenants the following: 3.1. Organization and Qualification. It is and will continue to be a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is and will continue to be duly qualified and licensed to do business in each other state in which it is required to be so qualified and/or licensed. 3.2. Corporate Records. The Certificate of Incorporation and all amendments thereto of the Borrower have been duly filed and are in proper order. All books and records of Borrower, including but not limited to its bylaws, minute books and books of account, are accurate and up to date and will be so maintained. 3.3. Power and Authority. Borrower has the power to execute, deliver and carry out the terms of this Agreement, the Note, and all other documents evidencing, securing and guarantying the Loan (the "Loan Documents") and to incur the Obligations and each has taken all necessary action to authorize the execution, delivery and performance of the Loan Documents. 3.4. No Legal Bar. The execution and delivery of the Loan Documents and compliance by Borrower with the terms and provisions thereof will not violate any provision of any existing law or regulation or any writ or decree of any court or governmental instrumentality, or any agreement or instrument to which it is a party or which is binding upon it or its assets, and will not result in the creation or imposition of any lien, security interest, charge or encumbrance of any nature whatsoever upon or in any of its assets, except as contemplated by the Loan Documents; and no consent of any other party, and no consent, license, approval or authorization of or registration or declaration with any governmental bureau or agency, is required in connection with the execution, delivery, performance, validity and enforceability of any of the Loan Documents. 3.5. Title. Borrower has good and marketable title to all of its property and assets (the "Property"). 3.6. No Material Litigation. There is no material litigation or administrative proceeding of or before any governmental body which is presently pending-or, to the knowledge of Borrower, threatened against it or any of its Property. 3.7. No Default. Borrower is not in default with respect to the payment or performance of any of its Obligations or in the performance of any covenants or conditions to be performed by it pursuant to the terms and provisions of any indenture, agreement or instrument to which it is a party or by which it is bound, and Borrower has not received a notice of default thereunder. -5- 3.8. Compliance with Laws. Borrower has complied with and will continue to comply with all applicable statutes and regulations of the United States of America, and all states, counties, municipalities and agencies of any governmental authority thereof. 3.9. Taxes. Borrower has filed or caused to be filed or obtained extensions for the filing of, and will continue to file and cause to be filed, all federal, state and local tax returns required by law to be filed, and has paid and will continue to pay all taxes shown to be due and payable on such returns or on any assessment made against it, except if being contested in good faith and adequate provision has been made therefor on Borrower's books of account. No claims are being asserted with respect to such taxes which are not reflected in the financial statements which have been furnished by Borrower to Lender. 3.10. Financial Condition. Borrower has submitted to Lender various financial statements and information as of September 30, 1996. Borrower represents that all of such financial information is true and correct; that such financial information fairly presents the financial condition and results of operations of Borrower as of the dates thereof and for the periods indicated therein; that such financial statements have been prepared in accordance with GAAP and practices consistently maintained throughout the periods involved; and that, as of the date of such financial information, there were no material unrealized or anticipated losses from any unfavorable commitments of Borrower and that there has been no material adverse change in the business or Property or in the condition, financial or otherwise, of Borrower from that set forth in such financial statements. Since the date of such financial statements there has not occurred any material adverse change in the condition, financial or otherwise, business, operations, properties or prospects of Borrower. 3.11. Accuracy of Representations. No representation, warranty or statement by Borrower contained in any Loan Document or certificate or other document furnished or to be furnished by Borrower pursuant to this Agreement or in connection with the transactions contemplated under this Agreement, contains, or at the time of delivery will contain, any untrue statement of material fact or omits or will omit to state a material fact necessary to make it not misleading. 3.12. Trade Names. Borrower operates its business under its name as set forth in this Agreement and has no other trade names. 3.13. Collective Bargaining Agreements. Borrower is not a party to any collective bargaining agreements. 3.14. Saleable Value of Assets. The fair saleable value of the assets of Borrower, after giving effect to the transactions contemplated by the Loan Documents, will not be -6- in excess of its debts (including contingent, subordinated, unmatured and unliquidated liabilities). 3.15. Sufficient Cash Flow. Borrower has, and after giving effect to the transactions contemplated by the Loan Documents will have, sufficient cash flow to continue to operate its business in the ordinary course as heretofore conducted, make the payments called for by the Loan Documents and pay all other debts, including but not limited to payments under the Note, supplier payments, pension and other employee benefit plan liabilities, business expenses and taxes, as the same shall become due. 3.16. No Hindrance. Borrower has no intent to hinder, delay or defraud any entity to which it is or will become indebted. 3.17. Ability to Pay Debts. Borrower, after giving effect to the transactions contemplated by the Loan Documents, does not intend to incur nor does it believe that it will incur debts beyond its ability to pay as they become due. 3.18. Ownership of Property. Borrower does not have in its possession any personal property of which it is not the actual owner, except as described on SCHEDULE 3.19. 3.19. Subsidiaries and Affiliates. Borrower has no subsidiaries or affiliates except as described on SCHEDULE 3.20 attached hereto. 3.20. Pension Plans. a. No event, including but not limited to any "reportable event", as that term is defined in Section 4043 of ERISA exists in connection with any of its Plans and any entities related to it under Section 414(b,), (c), (m), (n) or (o) of the Code has occurred which might constitute grounds for termination of any such Plan by the Pension Benefit Guaranty Corporation (the "PBGC"), or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan. A list of all of its Plans are attached hereto on SCHEDULE 3.21a; b. No "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code exists or will exist upon the execution and delivery of this Agreement and the other Loan Documents, or the performance by the Borrower of its duties and obligations hereunder and thereunder; c. It has no unfunded liability in contravention of ERISA and the Code; -7- d. Each of the Plans complies currently, and has complied in the past, both as to form and operation, with its terms and with the provisions of the Code and ERISA, and all applicable regulations thereunder and all applicable rules issued by the Internal Revenue Service, U.S. Department of Labor and the PBGC and as such, is and remains a "qualified" plan under the Code; e. No actions, suits or claims are pending (other than routine claims for benefits) against any Plan or the assets of any Plan; f. It has performed all obligations required to be performed by it under any Plan set forth in SCHEDULE 3.21a and it is not in default or in violation of any Plan, and has no knowledge of any such default or violation by any other party to any such Plans; g. It has incurred no liability to the PBGC or to participants or beneficiaries on account of any termination of a Plan subject to Title IV of ERISA, no notice of intent to terminate a Plan has been filed by (or on behalf of) it pursuant to Section 4041 of ERISA and no proceeding has been commenced by the PBGC pursuant to Section 4042 of ERISA; h. It is not subject to any reporting or disclosure provisions of the Securities Act of 1933 or the Securities Exchange Act of 1934 with respect to any Plan 3.21. Environmental Matters. Except as described on SCHEDULE 3.22 attached hereto: a. It has obtained all permits, licenses and other authorizations which are required under all Environmental Laws. It is in compliance with the terms and conditions of all such permits, licenses and authorizations, and is, to the best of its knowledge, also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. b. No notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or threatened by any governmental or other entity with respect to any alleged failure by it to have any permit, license or authorization required in connection with the conduct of its business or with respect to any Environmental Laws, including without limitation, Environmental Laws relating to the -8- generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Materials. c. There are no liens or encumbrances arising under or pursuant to any Environmental Laws on any of the property or properties owned by it, and no governmental actions have been taken or are in process which could subject any of such properties to such liens or encumbrances or, as a result of which it would be required to place any notice or restriction relating to the presence of Hazardous Materials at any property owned by it in any deed to such property. SECTION 4. Affirmative Covenants. Borrower covenants and agrees that, so long as any of the Obligations shall remain outstanding, it will perform and observe each and all of the covenants and agreements herein set forth. 4.1. Payments Under this Agreement and the other Loan Documents. It will make punctual payment of all monies and will faithfully and fully keep and perform all of the terms, conditions, covenants and agreements contained on its part to be paid, kept or performed hereunder, and will be bound in all respects as debtor under this Agreement and the other Loan Documents. 4.2. Information Access to Books, and Inspection. It will furnish to Lender such information regarding its business affairs and financial condition as Lender may reasonably request and give any representative of Lender access during normal business hours to, and permit him/her to examine and copy, and make extracts from, any and all books, records and documents in its possession relating to its affairs and to inspect any of the Property. 4.3. Payment of Liabilities. It will pay and discharge at or before their maturity all taxes, assessments, rents, claims, debts and charges, except where the same may be contested in good faith and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. 4.4. Existence, Properties, Insurance. It will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate or partnership existence, as the case may be, its rights and franchises, and will comply with all laws applicable thereto; and will at all times maintain, preserve and protect all franchises, patents, and trade names and will preserve all of the remainder of its Property used or useful in the conduct of its business and will keep the same in good condition and repair (normal wear and tear and obsolescence excepted), and from time to time will reasonably make, or cause to be made, all needful and proper repairs, renewals, replacements, betterments and improvements thereto, and will pay or cause to be paid, except when the same may be contested in good faith, all rent due on premises where any Property is held or may be held, so that the -9- business carried on in connection therewith may be continuously conducted. Borrower will have and maintain insurance at all times with respect to all Property against risks of fire (including so-called extended coverage), theft and such risks as Lender may reasonably require containing such terms, in such form, and for such periods, and written by such companies as may reasonably be satisfactory to Lender, such insurance to be payable to Lender and Borrower as their interests may appear; each policy of insurance shall have a loss payee endorsement providing: a. That, if the policy is cancelled at any time by the insurance carrier, in such case the policy shall continue in force for the benefit of Lender for not less than thirty (30) days after written notice of cancellation to Lender from the insurance carrier; and b. That the policy will not be reduced or cancelled at the request of the insured nor will said loss payee endorsement be amended or deleted without thirty (30) days' prior written notice to Lender from the insurance carrier. Borrower will furnish Lender with certificates or other evidence satisfactory to Lender of compliance with the foregoing insurance provisions. Borrower will also at all times maintain necessary workers' compensation insurance and such other insurance as may be required by law or as may be reasonably required in writing by Lender. 4.5. Notices. It will promptly give notice in writing to Lender of: (a) the occurrence of any event which constitutes or which with notice or lapse of time, or both, would constitute an Event of Default under this Agreement or any of the other Loan Documents; (b) the occurrence of any material adverse change in its business, properties or its condition or operations, financial or otherwise, setting forth a description of such material adverse change; and (c) any court or governmental orders, notices, claims, investigations, litigation and proceedings received by it in which the aggregate amount involved is $250,000 or more and not covered by insurance, and of any material dispute which may exist between it and any governmental regulatory body or any other party. 4.6. Financial Statements; Notice of Default. The Borrower shall deliver or cause to be delivered to Lender a. as soon as available and in any event within forty-five (45) days after the end of each of its first, second and third fiscal quarters, a balance sheet of the Borrower as of the close of each such fiscal quarter and statements of income and retained earnings for that portion of the fiscal year-to-date then ended, which shall be prepared in conformity with GAAP, applied on a -10- basis consistent with that of the preceding period, and which shall be certified by the president or Chief Financial Officer of the Borrower as being accurate and fairly presenting the financial condition of the Borrower. b. as soon as available and in any event within ninety (90) days after the close of each fiscal year of the Borrower, audited financial statements including a balance sheet as of the close of such fiscal year and statements of income and retained earnings and source and application of funds for the year then ended, all on a comparative basis with corresponding statements for the preceding fiscal year and prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year, and accompanied by an unqualified opinion of such accountants and a written statement from such accountants stating that they have reviewed such financial statements and the financial covenants set forth herein and have found no evidence of an Event of Default having occurred or of an event which with passage of time and/or giving of notice would constitute an Event of Default having occurred. c. together with the statements referred to in sub-paragraphs (i) and (ii) above, a written statement from the President or Chief Financial Officer of the Borrower certifying that there exists no Event of Default by Borrower in the performance of any obligations to Lender under the Loan Documents. d. from time to time, promptly upon Lender's written request, such other information about the financial condition and operations of Borrower as Lender may reasonably request. e. promptly on becoming aware of any Event of Default, or any event but for the giving of notice or the passage of time would constitute an Event of Default, notice thereof, in writing. 4.7. Pension Plans. It shall do all acts, including, but not limited to, making all contributions necessary to maintain compliance with ERISA and the Code, and agrees not to terminate any such Plan in a manner or do or fail to do any act which could result in the imposition of a lien on any of its properties pursuant to Section 4068 of ERISA; 4.8. Reports. Borrower shall deliver to Lender: a. as soon as available and in any event within forty-five (45) days after the end of each fiscal quarter of the Borrower, a report, in form satisfactory to Lender, setting forth the calculations of, and information as to compliance -11- with, the financial covenants of the Borrower contained in SECTION 5.8 of this Agreement, certified by the President or Chief Financial Officer of the Borrower to be complete and correct; b. as soon as available and in any event within a reasonable time after the close of each fiscal year of Borrower, copies of the portions of any and all auditors' letters, if any, to Borrower regarding any material changes in the accounting practices and control procedures used by Borrower; SECTION 5. Negative Covenants. So long as any Obligations remain outstanding and unpaid, Borrower covenants and agrees that it will not without the express written consent of Lender: 5.1. Limitation on Liens. Incur or permit to exist any liens, mortgages, security interests, pledges, charges or other encumbrances against any of its property or assets, whether now owned or hereafter acquired (including, without limitation, any lien or encumbrance relating to any response, removal or clean-up of any toxic substances or hazardous wastes) which in the aggregate exceed $250,000, except: (a) liens, mortgages, security interests, charges or other encumbrances in favor of Lender or specifically permitted in writing by Lender; (b) pledges or deposits in connection with or to secure workers' compensation or unemployment insurance; and (c) tax liens which are being contested in good faith with the prior written consent of Lender and against which, if requested by Lender, Borrower shall maintain reserves in amounts and in form (book, cash, bond or otherwise) satisfactory to Lender. 5.2. Covenant to Secure Equally and Ratably. Permit any other indebtedness incurred before or after the date hereof to be secured by any asset of Borrower without Lender's prior written consent, except liens securing indebtedness to any seller incurred in connection with the purchase of personal property for the business of such Borrower which is secured only by the property so financed. 5.3. Financial Covenants. Unless Lender otherwise consents in writing: a. Current Ratio. Borrower shall not permit its Current Ratio to be less than 1.00 to 1.00 at any time. b. Ratio of Total Liabilities to Net Worth. Borrower shall not permit the ratio of its Total Liabilities to Net Worth to exceed .75 to 1.0 at any time. c. Net Worth. Borrower shall not permit its Net Worth to be less than $25,000,000 at any time. -12- d. The financial covenants contained above shall be calculated in accordance with generally accepted accounting standards. SECTION 6. Default. 6.1. The occurrence of any of the following events will constitute an Event of Default under this Agreement: a. The failure to pay any installment of principal and/or interest due under the Loan or any fee when due and payable. b. The failure to pay taxes, if any, due on any indebtedness under the Loan or any tax or assessment upon any collateral securing the Obligations, on or before the same shall become due and payable. c. The failure by Borrower to observe or perform any other covenant contained in this Agreement or in any of the other Loan Documents. d. The occurrence of an Event of Default under any of the other Loan Documents. e. The filing by or against Borrower of any petition, arrangement, reorganization, or the like under any insolvency or bankruptcy law, or the adjudication of Borrower as a bankrupt (and if such filing is involuntary, the failure to have same dismissed within sixty (60) days from the date of filing), or the making of an assignment for the benefit of creditors, or the appointment of a receiver for any part of Borrower's properties or the admission in writing by Borrower of its inability to pay its debts as they become due. f. The breach in any material respect of any warranty or the untruth or inaccuracy in any material respect of any representation of Borrower contained in the Loan Documents or made or deemed made in connection with the making of the Loan hereunder. g. The occurrence of a default beyond any applicable grace period under or demand for the payment of any other note or obligation of Borrower. h. The failure by Borrower to make payment on any obligation for borrowed money or for the deferred purchase price of property or services due to any party other than Lender, beyond any grace period provided with respect thereto, or upon demand, or the failure to perform any other term, condition, or covenant contained in any agreement under which any such -13- obligation is created, the effect of which default is to cause such obligation to become due and payable prior to its date of maturity. i. The dissolution or termination of existence of Borrower. j. The passage or enforcement of any federal, state, or local law or the rendition of a final decision of any court (other than a law or decision with respect to a tax upon the general revenues of Lender) in any way directly changing or affecting the Loan or lessening the net income thereon in a fashion which is not corrected or reimbursed by Borrower. k. The passage or enforcement of any federal, state, or local law or the rendition of a final decision of any court in any way impairing Lender's ability to charge and collect the interest stated in the Note, including without limitation, the ability to vary the interest payable under the Note in accordance with its terms. l. A judgment or judgments for the payment of money aggregating more than $250,000 or more shall be rendered against Borrower and any such judgment shall remain unsatisfied and in effect for a period of thirty (30) consecutive days without a stay of execution. m. The occurrence of a material adverse change in any business, properties or the condition or operations, financial or otherwise, of Borrower. 6.2. Acceleration. Upon the happening of any Event of Default specified above, at Lender's option, the entire unpaid balance owed under the Loan, the Note and the Loan Documents and under any other note or other documents evidencing the same, plus any other sums owed hereunder, shall, at Lender's option, become and shall thereafter be immediately due and payable without presentment, demand, protest, notice of protest, or other notice of dishonor of any kind, all of which are hereby expressly waived by Borrower. Failure to exercise such option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. Upon the occurrence of any Event of Default, without in any way affecting Lender's other rights and remedies, or after maturity or judgment, the interest rate applicable to the Loan shall automatically change without notice to a floating rate per annum equal to two percentage points (2%) above the otherwise then applicable rate. 6.3. Rights of Lender. In the event of the occurrence of an Event of Default (a) Lender will have the right to enforce all of its rights under the Loan Documents and (b) Lender shall have, in addition to all other rights provided herein, the rights and remedies provided by law and (c) Lender shall make no further advances under the Note. Failure by Lender to exercise any right, remedy or option under this -14- Agreement or any of the other Loan Documents or in any other agreement between Borrower and Lender, or delay by Lender in exercising the same will not operate as a waiver by Lender. Neither Lender nor any party acting as Lender's attorney pursuant to this Agreement shall be liable for any error of judgment or mistake of fact or law. Lender's rights and remedies under this Agreement will be cumulative and not exclusive of any other right or remedy which Lender may have. SECTION 7. Miscellaneous. 7.1. Indemnification. In consideration of Lender's execution and delivery of this Agreement and Lender's making of the Loan hereunder and in addition to all other obligations of Borrower under this Agreement, Borrower hereby agree to defend, protect, indemnify and hold harmless Lender, its successors, assigns, officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitee") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to any action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnifiable Liabilities") incurred by the Indemnitee or any of them as a result of; or arising out of, or relating to (i) the execution, delivery, performance or enforcement of this Agreement and the other Loan Documents and any instrument, document or agreement executed pursuant hereto to any of the Indemnitee; (ii) Lender's status as lender to, or creditor of, Borrower; (iii) the operation of Borrower's business from and after the date hereof; or (iv) the enforcement of Lender's rights under the Loan Documents and/or the collection of the Obligations, provided that Borrower shall not be required to indemnify Indemnitee for any Indemnifiable Liabilities resulting from the gross negligence or willful misconduct of Lender or any of the other Indemnities in the collection of the Loan and in the liquidation of the collateral thereafter. To the extent that the foregoing undertaking by Borrower may be unenforceable for any reason, Borrower shall make the maximum contribution to the payment and satisfaction of each of the Indemnifiable Liabilities which is permissible under applicable law. 7.2. Setoff. In addition to and not in limitation of the above, with respect to any deposits or Property of Borrower in Lender's possession or control, now or in the future, Lender shall have the right, following the occurrence of an Event of Default, to setoff all or any portion thereof; at any time, against any Obligations hereunder, even though unmatured, without prior notice or demand to Borrower. -15- 7.3. WAIVER OF RIGHT TO PREJUDGMENT REMEDY NOTICE AND HEARING. BORROWER ACKNOWLEDGES THAT LENDER MAY HAVE RIGHTS AGAINST IT, NOW OR IN THE FUTURE, IN ITS CAPACITY AS CREDITOR OR IN ANY OTHER CAPACITY. SUCH RIGHTS MAY INCLUDE THE RIGHT TO DEPRIVE BORROWER OF OR AFFECT THE USE OF OR POSSESSION OR ENJOYMENT OF BORROWER'S PROPERTY; AND IN THE EVENT LENDER DEEMS IT NECESSARY TO EXERCISE ANY OF SUCH RIGHTS PRIOR TO THE RENDITION OF A FINAL JUDGMENT AGAINST BORROWER, OR OTHERWISE, BORROWER MAY BE ENTITLED TO NOTICE AND/OR HEARING UNDER THE CONSTITUTION OF THE UNITED STATES AND/OR STATE OF CONNECTICUT, CONNECTICUT STATUTES (TO DETERMINE WHETHER OR NOT LENDER HAS PROBABLE CAUSE TO SUSTAIN THE VALIDITY OF LENDER'S CLAIM), OR THE RIGHT TO NOTICE AND/OR HEARING UNDER OTHER APPLICABLE STATE OR FEDERAL LAWS PERTAINING TO PREJUDGMENT REMEDIES, PRIOR TO THE EXERCISE BY LENDER OF ANY SUCH RIGHTS. TO THE MAXIMUM EXTENT PERMITTED BY LAW, BORROWER EXPRESSLY WAIVES ANY SUCH RIGHT TO PREJUDGMENT REMEDY NOTICE OR HEARING TO WHICH BORROWER MAY BE ENTITLED. THIS SHALL BE A CONTINUING WAIVER AND REMAIN IN FULL FORCE AND EFFECT SO LONG AS BORROWER ARE OBLIGATED TO LENDER. 7.4. Waiver of Trial by Jury. Borrower hereby waives trial by jury in any court and in any suit, action, or proceeding on any matter arising in connection with, or in any way related to, this Agreement or the other Loan Documents and/or the enforcement of the Lender's rights and remedies hereunder or thereunder, including, without limitation, tort claims. 7.5. Additional Waivers. Borrower unconditionally waives to the fullest extent permitted by law (a) any requirement of diligence, (b))all defenses which may now or hereafter exist by virtue of any statute of limitations, stay, valuation, moratorium or similar law, except the sole defense of payment, (c) any and all claims and counterclaims for consequential and/or special damages, and (d) all demands upon Borrower and all other formalities the omission of any of which, or delay in the performance of which, might, but for the provisions of this section, by rule of law or otherwise, constitute grounds for relieving or discharging the Borrower in whole or in part from any of the Obligations, it being the intention of the Borrower that its Obligations shall not be discharged, except by performance and then only to the extent of such performance. 7.6. Waivers Made Knowingly. Borrower acknowledges that it makes all waivers contained in this Agreement and the other Loan Documents knowingly, voluntarily, without duress and only after consideration of the ramifications of -16- these waivers with its attorneys. Borrower further acknowledge that Lender has not agreed with or represented to it that the provisions of these waivers will not be fully enforced in all instances. 7.7. Consent to Jurisdiction. Borrower agree to submit to jurisdiction in the State of Connecticut in any action or proceeding arising out of this Agreement or any of the other Loan Documents, and in furtherance of such agreement, Borrower hereby agrees and consents that without limiting other methods of obtaining jurisdiction, jurisdiction over the Borrower in any action or proceeding may be obtained within or without the jurisdiction of any court located in the State of Connecticut and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon the Borrower by registered or certified mail to the last known address of the Borrower, whether such address is within or without the jurisdiction of any such court. 7.8. No Waiver. No course of dealing between Borrower and Lender and no failure to exercise or delay in exercising on the part of Lender any right, power or privilege under the terms of this Agreement or the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further privilege. The rights and remedies provided herein or in any other agreement are cumulative and not exclusive or in derogation of any rights or remedies provided in and thereof, by law or otherwise. 7.9. Cross-Default. Borrower acknowledge and agree that a default under any one of the Loan Documents shall constitute a default under each of the other Loan Documents. 7.10. Survival of Agreements. All agreements, representations and warranties made herein, in any agreement and in any statements, notices, invoices, certificates, schedules, documents or other instruments delivered to Lender in connection with this Agreement or any other agreement shall survive the making of the Loan and advances hereunder. 7.11. Further Documents. Borrower agrees that, at any time or from time to time upon written request of Lender, it will execute and deliver such further documents and do such other acts and things as Lender may reasonably request in order to fully effect the purposes of this Agreement and the other Loan Documents. 7.12. Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement of the parties and may not be amended orally and shall be construed and interpreted in accordance with the laws of the State of Connecticut, including its conflict of laws principles. -17- 7.13. Successors. All rights of Lender hereunder shall inure to the benefit of its successors and assigns, and all Obligations of Borrower shall bind its successors and assigns. 7.14. Payments. The acceptance of any check, draft or money order tendered in full or partial payment of any Obligation hereunder is conditioned upon and subject to the receipt of final payment in cash. 7.15. Schedules. All schedules referred to herein and annexed hereto are hereby incorporated into this Agreement and made a part hereof. 7.16. Acknowledgment of Copy, Use of Proceeds. Borrower acknowledges receipt of copies of the Note and attests, represents and warrants to Lender that advances made under the Loan are to be used for general commercial purposes and that no part of such proceeds will be used, in whole or in part, directly or indirectly, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are defined in Regulation U of the Board of Governors of the Federal Reserve System. 7.17. Descriptive Headings. The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 7.18. Notices. Any written notice required or permitted by this Agreement may be delivered by depositing it in the U.S. mail, postage prepaid, or by telegraph, charges prepaid, or facsimile addressed to Borrower or Lender at the addresses set forth at the beginning of this Agreement. If any notice is sent to Lender pursuant to this paragraph, it should be sent to the attention of: Robert Shettle. 7.19. Severability. If any provision of this Agreement or application thereof to any person or circumstance shall to any extent be invalid, the remainder of this Agreement or the application of such provision to persons, entities or circumstances other than those as to which it is held invalid, shall not be affected thereby and each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 7.20 Commitment Fee. Borrower agrees to pay to Lender a commitment fee payable on a quarterly basis equal to .25% of the amount of the Loan. -18- In Witness Whereof, the parties have caused this Agreement to be duly executed and delivered by the proper and duly authorized officers as of the date and year first above written. WITNESS: - --------------------------- FLEET NATIONAL BANK /s/ IRENE FRANKLIN By: /s/ MATT HUMMELL - --------------------------- ----------------------------- Title: Vice President /s/ MICHAEL E. BIELEWICZ ZYGO CORPORATION - --------------------------- By: /s/ MARK J. BONNEY ----------------------------- Title: Vice President - --------------------------- STATE OF CONNECTICUT ) )ss.: COUNTY OF HARTFORD ) The foregoing instrument was acknowledged before me this 4th day of June, 1997, by Irene Franklin, a employee of FLEET NATIONAL BANK, a national banking association, on behalf of the Lender. /s/ IRENE FRANKLIN ---------------------------------- Commissioner of the Superior Court Notary Public My Commission Expires: January 31, 2000 STATE OF CONNECTICUT ) )ss.: COUNTY OF HARTFORD ) The foregoing instrument was acknowledged before me this 3rd day of June, 1997, by Mark B. Bonney, Vice President of ZYGO CORPORATION, a Delaware corporation, on behalf of the corporation. /s/ JOYCE A. GOLDBERG ---------------------------------------- Commissioner of the Superior Court Notary Public My Commission Expires: December 31, 2001 -19- PROMISSORY NOTE --------------- $3,000,000.00 Hartford, Connecticut June 4, 1997 FOR VALUE RECEIVED, the undersigned, ZYGO CORPORATION, a Delaware corporation located at Laurel Brook Road, Box 448, Middlefield, Connecticut 06455-0448 (the "Borrower"), hereby promises to pay to the order of FLEET NATIONAL BANK, a national banking association, (the "Lender"), at its office at 777 Main Street Hartford, Connecticut 06115 or at such other place as the holder hereof may designate, ON DEMAND the principal amount advanced hereunder and remaining unpaid, up to a maximum amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) (the "Principal Amount") in lawful money of the United States, together with interest on the Principal Amount, beginning on the date hereof, before and after maturity or judgment, at a per annum rate determined as provided below. 1. Interest Rate: Each advance under this Note (each a "Loan Advance") shall bear interest at a per annum rate equal to either (a) a floating rate equal to Lender's Prime Rate (as hereinafter defined) or (b) a fixed rate equal to sixty (60) basis points above the LIBOR Rate (as determined for each Interest Period applicable thereto) for available Interest Periods of thirty (30), sixty (60) or ninety (90) days. The Borrower shall elect either option (a) or (b) as provided below. 2. Requests for Advances: Whenever Borrower desires an advance, Borrower shall notify Lender (which notice shall be irrevocable) by telephone, facsimile or in writing, of the desired borrowing. Such notice (the "Notice of Borrowing") shall specify the date of the proposed borrowing, the amount requested, whether the advance shall be a Prime Rate Loan or a LIBOR Rate Loan, and, if a LIBOR Rate Loan, the duration of the initial available Interest Period. Each Notice of Borrowing for advances which are Prime Rate Loans must be received by Lender no later than 11:00 a.m., Hartford, Connecticut time on the day such borrowing is requested, and each Notice of Borrowing for advances which are LIBOR Rate Loans must be received by Lender no later than 10:00 a.m., Hartford, Connecticut time at least three (3) Business Days' prior to the day such borrowing is requested. Any Notice of Borrowing that is not in writing shall be followed by a written confirmation by the Borrower, provided that if such written confirmation differs in any respect from the action taken by Lender, the records of Lender shall control, absent manifest error. Lender shall enter each Loan Advance as a debit on a loan account maintained by Borrower with Lender (the "Loan Account"). Lender may also record in the Loan Account, in accordance with customary banking procedures, all fees, accrued and unpaid interest, late fees, usual and customary bank charges for the maintenance and administration of accounts maintained by Borrower and other fees and charges which are properly chargeable to Borrower in connection with the Loan Advances and all payments, subject to collection, made by Borrower on account of or to Lender. Borrower may repay and reborrow advances that are made under this Note, subject, however, to the prepayment terms contained below. Borrower shall not have more than three (3) LIBOR Rate Loans outstanding at any one time. Borrower's right to request advances under this Note shall terminate on the Termination Date. Advances that are LIBOR Rate Loans shall be in the minimum amount of $l00,000 each. 3. Election and Continuation of Interest Periods. Any Prime Rate Loan shall continue as a Prime Rate Loan until the Borrower elects to convert it to a LIBOR Rate Loan as provided below. Any LIBOR Rate Loan may be continued as such upon the expiration of the then current Interest Period by the Borrower giving irrevocable written notice to Lender of the duration of the next available Interest Period to be applicable to any such LIBOR Rate Loan not less than three (3) Business Days prior to the last Business Day of the then current Interest Period with respect to such LIBOR Rate Loan, provided that no LIBOR Rate Loan may be continued as such: (i) at a time when any Event of Default (or event or condition which would constitute an Event of Default but for the giving of notice or passage of time or both) has occurred and is continuing and (ii) after the date that is thirty (30) days prior to the Termination Date. Unless Borrower elects to convert to a different interest rate as provided below, if a LIBOR Rate Loan is not continued as a LIBOR Rate Loan, all as provided above, then any such loan shall automatically be converted to a Prime Rate Loan on the last day of the then expiring Interest Period. 4. Conversion of Loans to a Different Interest Rate. The Borrower may elect from time to time to convert (a) a LIBOR Rate Loan to a Prime Rate Loan or (b) a Prime Rate Loan to a LIBOR Rate Loan as provided in this section. Borrower shall exercise such election by giving the Lender not less than three (3) Business Days prior irrevocable written notice of such election; provided that any such conversion of a LIBOR Rate Loan to a Prime Rate Loan shall only be made on the last Business Day of the then current Interest Period with respect thereto. Any such notice of conversion to a LIBOR Rate Loan shall specify the length of the available Interest Period applicable thereto. 5. Payments of Interest. Interest on this Note shall be calculated on the basis of a 360 day year and the actual number of days elapsed. Monthly payments of interest shall be due and payable in arrears on the first day of each month immediately following each and every month in which a Prime Rate Loan is outstanding and on the last day of each Interest Period for each and every LIBOR Rate Loan until this Note is paid in full. 6. Payments of Principal. If not sooner paid, the aggregate outstanding Principal Amount of this Note, together with all accrued and unpaid interest thereon and any other fees or charges then due, shall be due and payable on demand of the Lender but if not so demanded, all such amounts shall be due and payable on the Termination Date. 7. Definitions. As used in this Note and not defined elsewhere in this Note, the following terms shall have the following meanings: a. "Business Day" means any day other than a day on which commercial banks in Hartford, Connecticut are required or permitted by law to close. -2- b. "Interest Period" means with respect to advances bearing interest at the LIBOR Rate, an available period of thirty (30), sixty (60) or ninety (90) days, provided that: (1) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that begins on the last 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 Business Day of a calendar month; and (3) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date. c. "LIBOR Rate" means, with respect to any LIBOR Rate Loan for each applicable Interest Period, the rate per annum determined by the Lender to be equal to the quotient of (a) the London Interbank Offered Rate for such LIBOR Rate Loan for such Interest Period, divided by (b) one (1) minus the Reserve Percentage for such Interest Period, expressed as follows: LIBOR Rate = London Interbank Offered Rate ----------------------------- 1 - Reserve Percentage d. "LIBOR Rate Loan" means an advance that bears interest at a rate equal to the LIBOR Rate plus sixty (60) basis points. e. "London Interbank Offered Rate" means, with respect to any applicable Interest Period for a LIBOR Rate Loan, the rate per annum at which the Eurodollar office of the Lender is offered, in the London interbank Dollar deposits market, at or about 11:00 a.m. London time, two (2) business days prior to the first day of such Interest Period, Dollar deposits, for a period, and in an amount, comparable to such Interest Period and principal amount of the LIBOR Rate Loan which shall be made by the Lender and outstanding during such Interest Period. f. "Prime Rate" means the rate of interest announced from time to time by Lender at its office in Hartford, Connecticut as its prime rate. Such Prime Rate may not be the lowest or best rate that is made available by Lender to its commercial borrowers. g. "Prime Rate Loan" means an advance that bears interest at a rate equal to Lender's Prime Rate. The interest rate on each Prime Rate Loan shall change, without notice to Borrower, each time that Lender's Prime Rate changes so that the rate of interest on a Prime Rate Loan is at all times equal to Lender's Prime Rate. h. "Reserve Percentage" means the maximum marginal percentage as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirement for Lender in respect of eurodollar deposits having a maturity equal to the -3- Interest Period as the Borrower may elect pursuant to the terms of this Note. With respect to the LIBOR Rate, 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. i. "Termination Date" means November 26, 1997. 8. Illegality. Notwithstanding any other provisions hereof, if any applicable law or governmental regulation, guideline, order or directive, or any change therein or in the interpretation or application thereof by any governmental authority charged with the interpretation or the administration thereof (whether or not having the force of law) shall make it unlawful for the Lender to make or maintain LIBOR Rate Loans as contemplated by this Note: (i) the obligation of the Lender to continue LIBOR Rate Loans shall forthwith be cancelled, and (ii) such amounts then outstanding shall be automatically converted, without notice, to Prime Rate Loans on the last day of the then current Interest Period or within such earlier time as required by law. If any such conversion of LIBOR Rate Loans is made on a day that is not the last Business Day of the then current Interest Period applicable thereto, Borrower shall pay the Lender such amount or amounts required pursuant to Section 13 below. 9. Basis for Determining LIBOR Inadequate or Unfair. In the event that the Lender shall have determined (which determination, absent manifest error, shall be conclusive and binding upon Borrower) that (i) by reason of circumstances affecting the Interbank LIBOR market, adequate and reasonable means do not exist for determining the LIBOR Rate, or (ii) Dollar deposits in the relevant amount and for the relevant maturity are no longer available to the Lender in the Interbank LIBOR market, or (iii) the continuation of LIBOR Rate Loans has been made impractical or unlawful by the occurrence of a contingency that materially and adversely affects the Interbank LIBOR market, or (iv) the LIBOR Rate will not adequately and fairly reflect the cost to the Lender of maintaining LIBOR Rate Loans, or (v) the LIBOR Rate shall no longer represent the effective cost to the Lender of U.S. Dollar deposits in the relevant market for deposits in which it regularly participates, the Lender shall give the Borrower notice of such determination as soon as practicable. If such notice is given all LIBOR Rate Loans shall be automatically converted, without notice, to Prime Rate Loans effective on the last Business Day of the then current Interest Period applicable thereto. Until such notice has been withdrawn, the LIBOR Rate shall not be continued. 10. Costs and Expenses. The Borrower shall pay all taxes levied or assessed on this Note or the debt evidenced hereby against the Lender, together with all costs, expenses and attorneys' and other professional fees incurred in any action to collect and/or enforce this Note or to enforce the Loan Agreement between Borrower and Lender dated the same date as this Note (the "Loan Agreement") or any other agreement relating to this Note or the Loan Agreement or any other agreement or in any litigation or controversy arising from or connected with the Loan Agreement or any other agreement, or this Note. -4- 11. Increased Costs. In the event that applicable law, treaty or regulation or directive from any government, governmental agency or regulatory authority, or any change therein or in the interpretation or application thereof, or compliance by the Lender with any request or directive (whether or not having the force of law) from any central bank or government, governmental agency or regulatory authority, shall: a. subject the Lender to any tax of any kind whatsoever (except taxes on the overall net income of the Lender) with respect to the Loan Agreement, this Note or any of the loans made by it, or change the basis of taxation of payments to the Lender in respect thereof (except for changes in the rate of tax on the overall net income of the Lender); b. impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirements against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of the Lender, including (without limitation) pursuant to Regulations of the Board of Governors of the Federal Reserve System; or c. in the opinion of the Lender, cause this Note, any loan made under this Note or under the Loan Agreement to be included in any calculations used in the computation of regulatory capital standards; or d. impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Lender, by an amount that the Lender deems to be material, of making, converting into, continuing and/or maintaining the loans made pursuant to this Note (the "Loans") or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of such Loans, then, in any case, the Borrower shall promptly pay the Lender, upon its demand, such additional amounts necessary to compensate the Lender for such additional costs or such reduction in payment, as the case may be (collectively the "Additional Costs"). The Lender shall certify the amount of such Additional Costs to the Borrower, and such certification, absent manifest error, shall be deemed conclusive. 12. Capital Adequacy Protection. If, after the date hereof, the Lender shall have determined that the adoption of any applicable law, governmental rule, regulation or order regarding capital adequacy of banks or bank holding companies, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any request or directive regarding capital adequacy (whether or not having the force of law and whether or not failure to comply therewith would be unlawful, so long as the Lender believes in good faith that such has the force of law or that the failure to so comply would be unlawful) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on any of the Lender's capital as a consequence of the Lender's obligations hereunder to a level below that which the Lender could have achieved but for such adoption, change or compliance -5- (taking into consideration the Lender's policies with respect to capital adequacy immediately before such adoption, change or compliance and assuming that the Lender's capital was fully utilized prior to such adoption, change or compliance) by an amount deemed by the Lender in its judgment to be material, then, promptly upon demand, the Borrower shall immediately pay to the Lender, from time to time as specified by the Lender, such additional amounts as shall be sufficient to compensate the Lender for such reduced return, together with interest on each such amount from the date of such specification by the Lender until payment in full thereof at the highest rate of interest (other than the default rate of interest) due on the Loans. A certificate of the Lender setting forth the amount to be paid to the Lender shall, in the absence of manifest error, be deemed conclusive. In determining such amount, the Lender shall use any reasonable averaging and attribution methods. The Borrower may, however, avoid paying such amounts for future rate of return reductions if, within the maximum borrowings permitted herein, the Borrower borrows such amounts as will cause the Lender to avoid any such future rate of return reductions which would otherwise be caused by such changed capital adequacy requirements or the Borrower agrees to a reduction in the Loans to achieve the same result. 13. Indemnity. The Borrower agrees to indemnify the Lender and to hold the Lender harmless from any loss (including any of the additional costs referred to above and any lost profits) or expense that it may sustain or incur as a consequence of (i) a default by the Borrower in the payment of the principal of or interest due on this Note, or (ii) the making of a prepayment of the Principal Amount bearing interest at the LIBOR Rate on a day which is not the last day of the then current Interest Period applicable thereto, including, but not limited to, in each case any such loss or expense arising from the reemployment of funds obtained by it or from fees, interest or other amounts payable to terminate the deposits from which such funds were obtained. The Lender shall prepare a certificate as to any additional amounts payable to it pursuant to this Section 13, which certificate shall be submitted by the Lender to the Borrower and shall, absent manifest error, be deemed conclusive. 14. Lawful Interest. Notwithstanding any provisions of this Note, it is the understanding and agreement of the Borrower and Lender that the maximum rate of interest to be paid by the Borrower to the Lender shall not exceed the highest or the maximum rate of interest permissible to be charged by a commercial lender such as the Lender to a commercial borrower such as the Borrower under the laws of the State of Connecticut. Any amount paid in excess of such rate shall be considered to have been payments in reduction of principal. 15. Late Charge. Without limiting the Lender's rights and remedies with respect to the Event of Default that will have occurred, the Borrower hereby agrees to pay a "late charge" equal to five percent (5%) of any installment of interest or other amount due to the Lender which is not paid within fifteen (15) days of the due date and is not due to the Lender's failure to debit Borrower's account on a timely basis. Thereof to defray the extra expense involved in handling such delinquent payment. -6- 16. Prepayments. a. The Borrower may, at its option and upon two (2) Business Days' prior written notice (which notice shall be irrevocable), prepay the Principal Amount of a LIBOR Rate Loan or a Prime Rate Loan on the following conditions: (a) the Borrower shall pay all accrued interest on the Principal Amount being paid to the date of the prepayment and, in the case of prepayments in full, all fees, charges, costs, expenses and other amounts then due hereunder; and (b) such Principal Amount of a LIBOR Rate Loan shall only be prepaid on the last Business Day of the then current Interest Period with respect thereto. In its notice, the Borrower shall specify the date and amount of the prepayment. In the event that any prepayment of the Principal Amount of a LIBOR Rate Loan is required or permitted on a date other than the last Business Day of the then current Interest Period with respect thereto, the Borrower shall indemnify the Lender therefore as provided in this Note. b. In the event that Borrower makes a prepayment and does not specify in its notice of prepayment whether the prepayment is to be applied to a LIBOR Rate Loan or a Prime Rate Loan, then Lender shall apply such prepayment in such order as Lender in its sole discretion shall determine. 17. Events of Default. The Borrower agrees that the occurrence of an Event of Default under the Loan Agreement shall constitute an Event of Default under this Note. Reference is hereby made to the Loan Agreement for the other terms and conditions relating to the loan evidenced by this Note which are incorporated in this Note by reference. Upon demand of the amounts due hereunder by the Lender or upon the occurrence of any Event of Default, the availability of advances hereunder shall, at the option of the Lender, be automatically terminated and the Lender, at its option, may declare all advances outstanding hereunder, together with accrued interest thereon and all applicable late charges, other amounts due under this Note and all other liabilities and obligations of the Borrower to the Lender to be immediately due and payable, whereupon the same shall become immediately due and payable; all of the foregoing without demand, presentment, protest or notice or any kind, all of which are hereby expressly waived by the Borrower. Failure to exercise such option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. Upon the occurrence of any Event of Default, without in any way affecting the Lender's other rights and remedies, or after maturity or judgment, the interest rate applicable to the outstanding principal balance of this Note shall automatically change without notice to a floating per annum rate equal to two percentage points (2.0%) above the otherwise applicable rate. 18. Lien and Right of Setoff. The Borrower hereby gives the Lender a right of setoff for all liabilities arising hereunder upon and against all the deposits, credits and property of Borrower now or hereafter in the possession, custody, safekeeping or control of the Lender or in transit to it. Lender may, upon the occurrence of an Event of Default, without notice and without first resorting to any collateral which may now or hereafter secure this Note, apply or set off the same, or any part thereof, to any liability of the Borrower, even though unmatured. -7- 19. No Waiver. Failure by the Lender to insist upon the strict performance by Borrower of any terms and provisions herein shall not be deemed to be a waiver of any terms and provisions herein, and the Lender shall retain the right thereafter to insist upon strict performance by the Borrower of any and all terms and provisions of this Note or any agreement securing the repayment of this Note. 20. Governing Law. This Note shall be governed by the laws of the State of Connecticut. 21. Prejudgment Remedy and Other Waivers. THE BORROWER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL TRANSACTION AND WAIVES ITS RIGHT TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH LENDER MAY DESIRE TO USE, AND FURTHER, WAVES DILIGENCE, DEMAND, PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST AND NOTICE OF PROTEST, AND NOTICE OF ANY RENEWALS OR EXTENSIONS OF THIS NOTE, AND ALL RIGHTS UNDER ANY STATUTE OF LIMITATION. THE BORROWER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. 22. Jury Waiver. THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR THE ENFORCEMENT OF ANY OF THE LENDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT LIMITATION, TORT CLAIMS. THE BORROWER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed this 4th day of June, 1997. ZYGO CORPORATION By /s/ MARK J. BONNEY ----------------------- Title: Vice President -8- EX-10.29 4 ACQUISITION AGREEMENT EXECUTION COPY ACQUISITION AGREEMENT by and among ZYGO CORPORATION, SIGHT SYSTEMS, INC. and THE SHAREHOLDERS OF SIGHT SYSTEMS, INC. dated as of August 19, 1997 TABLE OF CONTENTS Page ---- RECITALS ................................................................... 1 ARTICLE I. DEFINITIONS.................................................... 1 ARTICLE II. ACQUISITION ................................................... 3 Section 2.01. Acquisition ............................................ 3 Section 2.02. Status of Zygo Shares................................... 3 Section 2.03. Deliveries; Escrow...................................... 3 Section 2.04. Closing................................................. 4 ARTICLE III. REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY.......... 4 Section 3.01. Organization, Etc....................................... 4 Section 3.02. Other Company Interests................................. 4 Section 3.03. Capitalization.......................................... 4 Section 3.04. Authorization........................................... 5 Section 3.05. No Violation............................................ 5 Section 3.06. Approvals............................................... 5 Section 3.07. Financial Statements and Other Information.............. 6 Section 3.08. No Undisclosed Liabilities.............................. 7 Section 3.09. Corporate Action........................................ 7 Section 3.10. Certain Events.......................................... 7 Section 3.11. Taxes................................................... 8 Section 3.12. Litigation.............................................. 9 Section 3.13. Compliance with Laws.................................... 9 Section 3.14. Title to and Condition of Property...................... 9 Section 3.15. Environmental Matters................................... 10 Section 3.16. Contracts............................................... 10 Section 3.17. Employee and Labor Matters and Plans.................... 11 Section 3.18. Insurance Policies...................................... 11 Section 3.19. Brokerage Fees.......................................... 12 Section 3.20. No Product Liabilities; Product Warranties.............. 12 Section 3.21. Suppliers and Customers................................. 12 Section 3.22. Intellectual Properties................................. 13 Section 3.23. Licenses................................................ 14 Section 3.24. Restrictive Documents and Territorial Restrictions...... 14 Section 3.25. Bank Accounts........................................... 14 Section 3.26. Accounting Matters...................................... 14 Section 3.27. No Misleading Statements................................ 14 -i- Page ---- ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.............. 15 Section 4.01. Authorization; Ownership of Company Shares.............. 15 Section 4.02. No Violation............................................ 15 Section 4.03. Approvals............................................... 16 Section 4.04. Securities Act Matters.................................. 16 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF ACQUIROR....................... 17 Section 5.01. Organization, Etc....................................... 17 Section 5.02. Capitalization.......................................... 17 Section 5.03. Authorization........................................... 17 Section 5.04. No Violation............................................ 18 Section 5.05. Approvals............................................... 18 Section 5.06. Commission Filings...................................... 18 Section 5.07. Financial Statement and Other Information............... 19 Section 5.08. Compliance with Laws.................................... 19 Section 5.09. Brokerage Fees.......................................... 19 ARTICLE VI. COVENANTS AND AGREEMENTS........................................ 20 Section 6.01. Confidentiality......................................... 20 Section 6.02. Public Announcements.................................... 20 Section 6.03. Certain Tax Matters..................................... 20 (a) Sales and Transfer Taxes........................... 20 (b) Tax Returns and Payment of Taxes for Periods through the Closing Date........................... 20 (c) Indemnification for Taxes.......................... 21 (d) Tax Audits......................................... 22 (e) Mutual Cooperation................................. 22 Section 6.04. Issuance of Options to Acquire Zygo Common Stock........ 23 Section 6.05. Benefits Arrangements................................... 23 Section 6.06. Pooling Affiliates' Letters............................. 23 Section 6.07. Further Assurances...................................... 23 Section 6.08. Opinions of the Company's Counsel....................... 24 ARTICLE VII. CONDITIONS OF CLOSING.......................................... 24 Section 7.01. Conditions to All Parties' Obligations................. 24 (a) Illegality or Legal Constraint..................... 24 (b) Governmental Authorizations........................ 24 (c) Escrow Agreement................................... 24 (d) Registration Agreement............................. 24 (e) Employment and Non-Compete Agreements.............. 24 -ii- Page ---- Section 7.02. Conditions to the Obligations of Acquiror to Effect the Acquisition.................................. 24 (a) Representations and Warranties Accurate............ 24 (b) Performance by the Company and the Shareholders.... 25 (c) Consents........................................... 25 (d) Opinion of Counsel................................. 25 (e) Proceedings; Receipt of Documents.................. 25 (f) Due Diligence...................................... 25 (g) No Material Adverse Effect......................... 25 (h) Pooling Affiliate Letters.......................... 25 (i) Pooling of Interests............................... 25 (j) Fairness Opinion................................... 25 (k) Supporting Documents............................... 26 Section 7.03. Conditions to the Obligations of the Company and the Shareholders to Effect the Acquisition.............. 26 (a) Representations and Warranties Accurate............ 26 (b) Performance by Acquiror............................ 26 (c) Proceedings........................................ 26 (d) Opinion of Counsel................................. 26 ARTICLE VIII. INDEMNIFICATION............................................... 26 Section 8.01. Indemnification by the Shareholders..................... 26 (a) Joint Indemnification.............................. 26 (b) Several Indemnification............................ 27 Section 8.02. Indemnification by Acquiror............................. 27 Section 8.03. Limitations............................................. 27 Section 8.04. Notice and Defense of Claims............................ 28 Section 8.05. Non-Exclusive Remedy.................................... 28 Section 8.06. Survival of Representations and Warranties.............. 28 Section 8.07. Reimbursement........................................... 29 Section 8.08. Other Indemnification Provision......................... 30 ARTICLE IX. GENERAL PROVISIONS.............................................. 30 Section 9.01. Effect of Due Diligence................................. 30 Section 9.02. Expenses................................................ 30 Section 9.03. Successors and Assigns.................................. 30 Section 9.04. Entire Agreement........................................ 30 Section 9.05. Notices................................................. 31 Section 9.06. Applicable Law.......................................... 31 Section 9.07. No Third Party Beneficiaries............................ 31 Section 9.08. Amendments and Waivers.................................. 31 Section 9.09. Severability............................................ 31 Section 9.10. Construction............................................ 31 Section 9.11. Counterparts............................................ 32 Section 9.12. Headings................................................ 32 -iii- EXHIBITS Exhibit 6.06 Form of Pooling Affiliates' Letter Exhibit 7.01(c) Escrow Agreement Exhibit 7.01(d) Registration Agreement Exhibit 7.01(e)(1) Form of Employment and Non-Compete Agreement -- Grant Exhibit 7.01(e)(2) Form of Employment and Non-Compete Agreement -- Mahoney Exhibit 7.01(e)(3) Form of Employment and Non-Compete Agreement -- Chan Exhibit 7.02(d) Legal Opinion of Gee & Sunada Exhibit 7.03(d) Legal Opinion of Fulbright & Jaworski L.L.P. SCHEDULES Schedule 1 Shareholders and Company Stock Information Schedule 2 Company's Disclosure Schedule -iv- ACQUISITION AGREEMENT ACQUISITION AGREEMENT, dated as of August 19, 1997 (this "AGREEMENT"), by and among Sight Systems, Inc., a California corporation (the "COMPANY"), Zygo Corporation, a Delaware corporation ("ACQUIROR" or "ZYGO"), and the individuals listed on Schedule 1 hereto, constituting all the holders of capital stock of the Company (each, a "SHAREHOLDER" and collectively, the "SHAREHOLDERS"). RECITALS WHEREAS, Acquiror desires to acquire, and the Shareholders and the Company desire that the Shareholders transfer, all of the issued and outstanding shares (the "COMPANY SHARES") of common stock, no par value per share, of the Company ("COMPANY STOCK"), owned by the Shareholders, in a transaction which is intended to qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code"), all upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, the representations, warranties and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the terms and conditions set forth herein, the parties hereto agree as follows: ARTICLE I. DEFINITIONS In this Agreement the following words and phrases shall have the meanings hereinafter set forth: "Acquisition" shall mean the acquisition of the Company Shares pursuant to the terms of this Agreement. "Affiliate" or "affiliate" shall mean, with respect to any Person, any other Person that, directly or indirectly, controls or is controlled by or is under common control with such Person. As used in this definition of "Affiliate", the term "control" and any derivatives thereof mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract, or otherwise. "Agreement" shall mean this Acquisition Agreement. "Business" shall mean the business conducted and contemplated to be conducted by the Company. "Escrow Agreement" shall mean that certain escrow agreement, dated as of the Closing Date, by and among Acquiror, the Shareholders, the Company and Continental Stock Transfer & Trust Company, as escrow agent, in the form of Exhibit 7.01(c) hereto. "Governmental Entity" shall mean any court, administrative agency or commission or other federal, state or local government or governmental authority or instrumentality. "Hazardous Materials" shall mean any (a) toxic or hazardous materials or substances; (b) solid wastes, including asbestos, buried contaminants, chemicals, flammable or explosive materials; (c) radioactive materials; (d) petroleum wastes and spills or releases of petroleum products; and (e) any other chemical, pollutant, contaminant, substance or waste that is regulated by any Governmental Entity under any Environmental Law (as hereinafter defined). "Knowledge" shall mean, with respect to the Company, the actual present knowledge of any of the Shareholders or any officer of the Company, and with respect to Acquiror, the actual present knowledge of any executive officer of Acquiror. "Liens" shall mean all liens, charges, security interests, pledges, rights or claims of others, restraints on transfer or other encumbrances. "Material Adverse Effect" shall mean, with respect to any Person, a material adverse effect on the business, prospects, results of operations, financial condition or assets of such Person and its subsidiaries, if any, taken as a whole. "Person" shall mean an individual, corporation, partnership, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Registration Agreement" shall mean that certain registration agreement, dated as of the Closing Date, by and among Acquiror and each of the Shareholders. "Regulatory Authority" shall mean any foreign, federal, state or local government or governmental authority the approval of which, or filing with, is legally required or permitted for consummation of the transactions contemplated by this Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended. "Unregistered Shares" shall mean shares of stock issued in a transaction which has not been registered under the Securities Act. "Zygo Subsidiary" shall mean any corporation of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by Acquiror. -2- ARTICLE II. ACQUISITION AND SALE Section 2.01. Acquisition and Sale. At the Closing (as hereinafter defined), upon the terms and subject to the conditions contained herein, each of the Shareholders shall sell, transfer and deliver to Acquiror the number of Company Shares indicated opposite his name on Schedule 1 hereto, and Acquiror shall purchase and acquire from each such Shareholder, all right, title and interest of such Shareholder in and to all of the Company Shares to be sold by such Shareholder (as indicated on Schedule 1 hereto), free and clear of all Liens, in consideration of the issuance by Acquiror to each of the Shareholders of the number of Unregistered Shares (collectively, the "ZYGO SHARES") of Common Stock, $.10 par value per share, of Acquiror ("ZYGO COMMON STOCK") indicated opposite his name on Schedule 1 hereto. Section 2.02. Status of Zygo Shares. The Zygo Shares being issued to the Shareholders at the Closing shall consist in their entirety, at the time of their issuance, of Unregistered Shares of Zygo Common Stock, pursuant to the exemption from registration contained in Section 4(2) of the Securities Act. As promptly as practicable subsequent to the Closing, Acquiror will file with the Securities and Exchange Commission (the "COMMISSION") a registration statement covering the public resale of the Zygo Shares by the Shareholders and will use its reasonable good faith efforts to have such registration statement declared effective by the Commission as promptly as practicable thereafter, all in accordance with the terms of the Registration Agreement. Section 2.03. Deliveries; Escrow. (a) At the Closing, each Shareholder shall deliver to Acquiror certificate(s) representing the number of Company Shares indicated opposite his name on Schedule 1 hereto, in each case accompanied by stock power(s) duly executed in blank, with signatures appropriately notarized, and with all necessary stock transfer and other documentary stamps attached. (b) At the Closing, Acquiror shall (i) deposit with the Escrow Agent stock certificates representing 15,000 Zygo Shares (the "ESCROWED ZYGO SHARES") pursuant to the terms of the Escrow Agreement (which Escrowed Zygo Shares shall be deposited with the Escrow Agent on behalf of the Shareholders in the respective amounts indicated under the column heading "Escrowed Zygo Shares" on Schedule 1 hereto) and (ii) deliver to each of the Shareholders stock certificates representing the number of Zygo Shares indicated opposite such Shareholder's name on Schedule 1 hereto under the column heading "Net Zygo Shares Being Issued to the Shareholder at Closing." The Escrowed Shares shall serve as security for the indemnification obligations of the Shareholders as provided in Section 6.03(c) and Article VIII hereof. Section 2.04. Closing. The closing (the "CLOSING") of the Acquisition shall take place at the offices of Acquiror, Middlefield, Connecticut, as soon as practicable following the time all conditions to the respective obligations of the parties have been satisfied or waived. Each party hereto agrees to use its reasonable efforts to satisfy -3- promptly the conditions to the obligations of the respective parties hereto in order to expedite the Closing. The date of the Closing is the "CLOSING DATE." ARTICLE III. REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY Except as set forth (by reference to the applicable Section of this Agreement) in the disclosure schedule delivered by the Company to Acquiror on the date hereof (the "DISCLOSURE SCHEDULE"), a copy of which is attached hereto as Schedule 2, the Company and each Shareholder hereby jointly and severally represent and warrant to Acquiror as follows: Section 3.01. Organization, Etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has full corporate power and authority to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease. The Company is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its business or the nature of its properties makes such qualification or licensing necessary, except where the failure to so qualify or be licensed would not have a Material Adverse Effect on the Company. All of the jurisdictions in which the Company is qualified or licensed to do business are set forth on the Disclosure Schedule. The Company has heretofore delivered to Acquiror true and correct copies of the Articles of Incorporation and By-laws of the Company as in effect on the date hereof. Section 3.02. Other Company Interests. The Company has no legal or beneficial equity interest, directly or indirectly, in any corporation, partnership, joint venture or other entity. Section 3.03. Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth on the Disclosure Schedule. All of the issued and outstanding shares of capital stock of the Company are owned of record by the Shareholders, in the respective amounts indicated on Schedule 1 hereto. The Company does not hold any shares in its own capital. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of authorized capital stock of the Company are as set forth in the Company's Articles of Incorporation, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable corporate laws. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. All of the outstanding securities of the Company were issued in compliance with all applicable federal and state securities and corporate laws. None of the outstanding securities has been issued in violation of any preemptive rights, rights of first refusal or similar rights. There are no outstanding options, warrants, convertible securities, calls, rights, commitments, preemptive rights or agreements or instruments or understandings of any character to which the Company or any Shareholder is a party or by which the Company or any Shareholder is bound, obligating the Company or any -4- Shareholder to issue, deliver or sell, or cause to be issued, delivered or sold, contingently or otherwise, additional shares of capital stock of the Company or any securities or obligations convertible into or exchangeable for such shares or to grant, extend or enter into any such option, warrant, convertible security, call, right, commitment, preemptive right or agreement. There are no outstanding obligations, contingent or other, of the Company or any Shareholder to purchase, redeem or otherwise acquire any shares of capital stock of the Company. Neither the Company nor any Shareholder is a party to any voting trust agreement or other contract, agreement, arrangement, commitment, plan or understanding restricting or otherwise relating to voting, dividend or other rights with respect to any of the capital stock of the Company. Section 3.04. Authorization. The Company has all requisite corporate power and authority to enter into this Agreement and each of the other agreements contemplated hereby, to carry out its obligations under this Agreement and each of the other agreements contemplated hereby and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the other agreements contemplated hereby, the consummation of the transactions contemplated hereby and thereby and the performance by the Company of its obligations hereunder and thereunder have been duly authorized by all necessary corporate action on the part of the Company and its shareholders. Each of this Agreement and the other agreements contemplated hereby has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether enforceability is considered in equity or at law). Section 3.05. No Violation. The execution and delivery of this Agreement and each of the other agreements contemplated hereby by the Company does not, and the consummation by the Company of the transactions contemplated hereby and thereby, and compliance with the terms hereof and thereof will not, (a) conflict with, or result in any violation of or default or loss of any benefit under, any provision of the Company's Articles of Incorporation or By-laws; (b) conflict with, or result in any violation of or default or loss of any benefit under, any License, grant, statute, law, rule or regulation, or any judgment, decree or order of any Governmental Entity to which the Company is a party or to which any of its property is subject; (c) conflict with, or result in a breach or violation of, or accelerate the performance required by, the terms of any agreement, contract, indenture or other instrument to which the Company is a party or to which any of its property is subject, or constitute a default or loss of any right thereunder or an event which, with the lapse of time or notice or both, might result in a default or loss of any right thereunder or the creation of any Lien upon any of the assets or properties of the Company; or (d) result in any suspension, revocation, impairment, forfeiture or nonrenewal of any License. Section 3.06. Approvals. The execution and delivery of this Agreement and each of the other agreements contemplated hereby and the consummation of the transactions contemplated hereby and thereby by the Company will not require the consent, -5- approval, order or authorization of any Governmental Entity or Regulatory Authority or any other Person under any statute, law, rule, regulation, permit, license, agreement, indenture or other instrument to which the Company is a party or to which any of its property is subject, and no declaration, filing or registration with any Governmental Entity or Regulatory Authority is required or advisable by the Company in connection with the execution and delivery of this Agreement and each of the other agreements contemplated hereby, the consummation by the Company of the transactions contemplated hereby and thereby, or the performance by the Company of its obligations hereunder and thereunder. Section 3.07. Financial Statements and Other Information. (a) The Company has delivered to Acquiror true, correct and complete copies of the Company's unaudited balance sheet (the "BALANCE SHEET") as at June 30, 1997 (the "BALANCE SHEET DATE"), and unaudited balance sheets as at September 30, 1996, December 31, 1996 and March 31, 1997, and the related statement of income for each of the three month periods ended September 30, 1996, December 31, 1996, March 31, 1997 and June 30, 1997 (all of such balance sheets and statements of income being referred to collectively as the "FINANCIAL STATEMENTS"). (b) The Financial Statements are in accordance with the books and records of the Company and have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby, and the balance sheets included therein present fairly as of their respective dates the financial condition of the Company. All liabilities and obligations, whether absolute, accrued, contingent or otherwise, whether direct or indirect, and whether due or to become due, which existed at the date of such Financial Statements have been disclosed in the balance sheets included in the Financial Statements (or in notes, if any, to the Financial Statements) to the extent such liabilities were required, under generally accepted accounting principles, to be so disclosed. The liabilities on the Balance Sheet consist solely of accrued obligations and liabilities incurred by the Company in the ordinary course of its business to Persons which are not Affiliates of the Company. The statements of income included in the Financial Statements provided hereunder present fairly the results of operations of the Company for the periods indicated, and the notes, if any, included in the Financial Statements present fairly the information purported to be shown thereby. (c) Since the Balance Sheet Date there has been no change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations of the Company, which has had or is reasonably likely to have a Material Adverse Effect on the Company. (d) All properties, investments, tangible assets and deferred costs reflected in the Balance Sheet, collectively, have a fair market or realizable value at least equal to the value thereof as reflected therein. (e) The accounts receivable of the Company included in the Balance Sheet are collectible in full over the period of usual trade terms (by use of the -6- Company's normal collection methods without resort to litigation or reference to a collection agency), and there do not exist any defenses, counterclaims and set-offs which would materially adversely affect such receivables, and all such receivables are actual and bona fide receivables representing obligations for the total dollar amount thereof shown on the books of the Company. The Company has fully performed all obligations with respect thereto which it was obligated to perform to the date hereof. The Company has delivered to Acquiror a true and complete aging schedule of the Company's accounts receivable as of July 31, 1997. (f) The Company has records that accurately and validly reflect its transactions and accounting controls that are reasonably designed to insure that such transactions are (i) in all material respects executed in accordance with its management's general or specific authorization and (ii) recorded in conformity with generally accepted accounting principles. Section 3.08. No Undisclosed Liabilities. There are no liabilities of the Company of any kind whatsoever, whether or not accrued and whether or not contingent or absolute, determined or determinable or otherwise, and whether direct or indirect, and no existing condition, situation or set of circumstances that could reasonably result in such a liability, other than (a) liabilities disclosed in the Balance Sheet, (b) liabilities which have arisen in the ordinary course of business and consistent with past practice (none of which is a liability for breach of contract, breach of warranty, tort, infringement claim or lawsuit) which, individually or in the aggregate, have not had or would not reasonably be expected to have a Material Adverse Effect on the Company and (c) liabilities incurred subsequent to the Balance Sheet Date for accounting, brokerage and legal fees in connection with the negotiation and preparation of this Agreement and the consummation of the transactions contemplated hereby. Section 3.09. Corporate Action. All corporate action of the Board of Directors and of the shareholders of the Company taken on or prior to the date hereof has been duly authorized, adopted or ratified in accordance with applicable law and the Articles of Incorporation and By-laws of the Company and has been duly recorded in its corporate minute books (true, correct and complete copies of which have been delivered to or made available for inspection by Acquiror). Section 3.10. Certain Events. Since the Balance Sheet Date, the Company has not (a) sold, assigned or transferred any of its tangible assets except in the ordinary course of business, or canceled any debt or claim, (b) sold, assigned, transferred or granted any license with respect to any patent, trademark, trade name, service mark, copyright, trade secret or other intangible asset, (c) suffered any loss of property or waived any right of substantial value whether or not in the ordinary course of business, (d)(I) granted any severance or termination pay to any of its directors, officers, employees or consultants, (II) increased any benefits payable under any existing severance or termination pay policies or employment agreements, or (III) increased the compensation, bonus or other benefits payable to any of its directors, officers, consultants or employees, (e) made any material change in the manner of its business or operations, (f) entered into any transaction except in the ordinary course of business -7- or as otherwise contemplated hereby or (g) entered into any commitment (contingent or otherwise) to do any of the foregoing. Section 3.11. Taxes. (a) Except as set forth on the Disclosure Schedule, (i) all tax returns (including, without limitation, income, profit, franchise, sales and use, excise, severance, occupation, property, gross receipts, payroll and withholding tax returns and information returns), deposits and reports (all such returns, deposits and reports herein referred to collectively as "TAX RETURNS" or singularly as a "TAX RETURN"), including without limitation the Tax Returns for the years ended December 31, 1994, 1995 and 1996, of or relating to any federal, state, local or foreign or other governmental tax (all, together with any penalties, additions to tax, fines and interest thereon or related thereto, herein referred to collectively as "TAXES" or singularly as a "TAX") that are required to be filed or deposited for, by, on behalf of or with respect to the Company have been filed or deposited duly and on a timely basis and all Taxes and filing fees shown to be due and payable on such Tax Returns have been paid in full and all installments, assessments and charges of which the Company is aware or has received notice and which are due and payable by the Company have been paid in full; (ii) true, correct and complete copies of all such Tax Returns relating to Taxes due from or with respect to the Company, its income, assets or operations, have been delivered to Acquiror, and all such Tax Returns and the information and data contained therein have been properly and accurately compiled and completed, fairly present the information purported to be shown therein and reflect all liabilities for Taxes for the periods covered by such Tax Returns; (iii) all Taxes imposed on the Company (or for which the Company is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements)), for all periods up to the Closing Date which are due and payable on or before the Closing Date, have been paid; (iv) none of such Tax Returns are now under audit or examination by any federal, state, local or foreign or other Governmental Entity and there are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment or collection of any Tax or deficiency of any nature against the Company or with respect to any such Tax Return; (v) the Company has withheld and remitted all amounts required to be withheld and have paid such amounts due to the appropriate authority on a timely basis and in the form required under the appropriate legislation; (vi) the Company has not been, and is currently not, required to file a Tax Return in any jurisdiction other than the United States and the State of California; (vii) neither the Company nor any other person (including any of the Shareholders) on behalf of the Company has (A) filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Company, (B) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or has any knowledge that the Internal Revenue Service has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company, (C) executed or entered into any closing agreement pursuant to Section 7121 of the Code or any predecessor provisions thereof or any similar provision of state, local or foreign law with respect to the Company, or (D) requested any extension of time -8- within which to file any Tax Return, which Tax Return has since not been filed; (viii) there is no contract, agreement plan or arrangement covering any person that, individually or collectively, could give rise to the payment of any amount that would not be deductible by Zygo, the Company or any of their respective Affiliates by reason of Section 280G of the Code, or would constitute compensation in excess of the limitation set forth in Section 162(m) of the Code; and (ix) there are no liens as a result of any unpaid Taxes upon any of the assets of the Company. (b) No Shareholder is a foreign person within the meaning of Section 1445 of the Code. The Company has never made an election under Section 1362 of the Code, or under any analogous or similar provision of state or local law, to be treated as an "S" corporation. The Company has never owned any Subsidiaries and has never been a member of any consolidated, combined or affiliated group of corporations for any Tax purposes. After the date hereof, no election or consent with respect to any Tax (or the computation thereof) affecting the Company will be made without the written consent of Acquiror. Section 3.12. Litigation. There is no action, suit, investigation, arbitration or proceeding (whether by any Governmental Entity or other Person) pending or, to the Knowledge of the Company, threatened or any basis in fact therefor, against or involving the Company or any of its officers, directors, employees, shareholders or consultants (in all instances, in their capacity as such), assets, business or products, whether at law or in equity. Section 3.13. Compliance with Laws. The Company has complied with all applicable laws (including rules, regulation, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of any Governmental Entity relating to or affecting the operation, conduct or ownership of its properties or business, except where the failure to so comply has not had, and would not have, a Material Adverse Effect on the Company. There is no existing law, rule, regulation or order, whether federal, state, local or foreign, which would prohibit or materially restrict the Company from, or otherwise materially adversely affect the Company in, conducting its business in the manner in which it is conducted as of the date hereof in any jurisdiction in which it is now conducting business or in which it currently proposes to conduct business. Section 3.14. Title to and Condition of Property. (a) The Company does not own any real property. The Disclosure Schedule identifies all of the rights and interests in leasehold estates owned by the Company as of the date hereof, and the nature and amount of its interest therein. To the Knowledge of the Company, the Company has valid, subsisting and enforceable leases to all leasehold estates identified and reflected in the Disclosure Schedule and either good and marketable title or rights as lessee to all personalty of any kind or nature owned or used by the Company in connection with the Business, in each case free and clear of all Liens except for (i) Liens, defects or irregularities of title identified on the Disclosure Schedule which, individually or in the aggregate, do not detract from or materially interfere with the present or reasonably foreseeable use or value of the properties subject thereto or otherwise have or reasonably could have a Material -9- Adverse Effect on the Company, and (ii) Liens for non-delinquent Taxes and non-delinquent statutory liens arising other than by reason of default by the Company. The assets and properties owned or leased by the Company are sufficient to operate and conduct the Business in a manner consistent with at least the same standards of quality and reliability as have been achieved as of the date hereof. The Company's possession of such property has not been disturbed and no claim has been asserted, whether oral or in writing, against the Company adverse to its rights in such leasehold interests. (b) All buildings, structures, appurtenances and material items of machinery, equipment and other material tangible assets used by the Company in connection with the Business are in good operating condition and repair, normal wear and tear excepted, are usable in the ordinary course of business, are adequate and suitable for the uses to which they are being put and conform in all material respects to all applicable laws, ordinances, codes, rules, regulations and authorizations relating to their construction, use and operation, except where such non-compliance would not have a Material Adverse Effect on the Company. Section 3.15. Environmental Matters. (a) The business of the Company as currently being conducted does not violate any applicable law or regulation relating to pollution, the environment, human safety and health, transportation or the production, storage, labeling or disposition of Hazardous Materials (collectively, "ENVIRONMENTAL LAWS"); (b) the Company has timely filed all reports required to be filed, has obtained all required approvals and permits and has generated and maintained all required data, documentation, and records under Environmental Laws; (c) the Company has not (and no other Person has) placed, held, located, stored, buried, dumped, disposed, spilled or released any Hazardous Materials on, beneath or about any of the properties used, owned or leased by the Company; and (d) the Company has not received any notice from any Governmental Entity or private or public entity advising it that it is responsible for or potentially responsible for corrective action or investigation or response costs with respect to a release, a threatened release or clean up of Hazardous Materials and has no reason to believe that such notice may be forthcoming. Section 3.16. Contracts. The Disclosure Schedule contains a complete list of all currently effective written or oral contracts, agreements, commitments or arrangements of the Company (i) involving $5,000 or more, individually or in the aggregate, (ii) which may not be immediately terminated without penalty (or any augmentation or acceleration of benefits); (iii) relating to the borrowing of money, or the guarantee of any obligation (third party or otherwise) for the borrowing of money; (iv) providing for any covenant not to compete by the Company or otherwise restricting in any way the Company's engaging in any business activity (including a description of the businesses to which the covenant not to compete applies); (v) relating to consultancies, professional retentions, agency, sales or distributorship arrangements pertaining to the Business or its products or activities; (vi) involving contracts, agreements or commitments requiring the Company to indemnify or hold harmless any Person; or (vii) which could reasonably be -10- considered material to the Business (all contracts, agreements, arrangements or commitments to which the Company is a party relating to the Business, whether or not listed on the Disclosure Schedule, being hereinafter referred to as "CONTRACTS"). True and correct copies of all the Contracts listed on the Disclosure Schedule have been furnished to Acquiror. All Contracts are valid and binding obligations of the Company and, to the Knowledge of the Company, of the other respective parties thereto. The Company has duly performed its obligations under all Contracts in all material respects to the extent such obligations have accrued, and no breach or default thereunder by the Company or, to the Knowledge of the Company, any other party thereto has occurred that could impair the ability of the Company to enforce any material rights thereunder. Section 3.17. Employee and Labor Matters and Plans. (a) The Company does not maintain (i) any "employee benefit plan," as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), whether or not subject to the provisions of ERISA; (ii) any personnel policy; or (iii) any other employment, consulting, collective bargaining, stock option, stock bonus, stock purchase, phantom stock, incentive, bonus, deferred compensation, retirement, severance, vacation, dependent care, employee assistance, material fringe benefit, medical, dental, sick leave, death benefit, golden parachute or other compensatory plan, contract, policy or arrangement which is not an employee benefit plan as defined in Section 3(3) of ERISA (each such plan, contract, policy and arrangement being herein referred to as an "EMPLOYEE PLAN"). (b) The Disclosure Schedule sets forth a complete and accurate list showing the names, the rate of compensation (and the portions thereof attributable to salary and bonuses, respectively) and location of all employees of or consultants to the Company (each an "EMPLOYEE"). There are no covenants, agreements or restrictions, including but not limited to employee non-compete agreements, prohibiting, limiting or in any way restricting any Employee from engaging in any types of business activity in any location. (c) The Disclosure Schedule sets forth all outstanding loans and other advances made by the Company to any of its officers, directors, employees, shareholders or consultants. Section 3.18. Insurance Policies. The Disclosure Schedule identifies all insurance policies covering the Company and its business, employees, agents and assets, copies of which have been provided to Acquiror. Each such policy is in full force and effect and is adequate in coverage and amount to insure fully against risks to which the Company and its employees, businesses, properties and other assets may be exposed in the operation of its business prior to the Closing. None of such policies shall, pursuant to their terms, in any way be affected by, or terminate or lapse by reason of, this Agreement. All premiums with respect to such insurance policies have been paid on a timely basis, and no notice of cancellation or termination has been received with respect to any such policy. There are no pending claims against such insurance by or on behalf of the Company. The Company has not been refused any insurance with respect to its -11- assets or operations, nor has its coverage been limited, by any insurance carrier to which it has applied for any such insurance. Section 3.19. Brokerage Fees. Neither the Company, the Shareholders nor any of their respective Affiliates has retained any financial advisor, broker, agent or finder or paid or agreed to pay any financial advisor, broker, agent or finder on account of this Agreement or any of the agreements contemplated hereby or any transaction contemplated hereby or thereby or any transaction of like nature that would be required to be paid by the Company or any Shareholder, except for the retention of D.J. Callaghan & Company pursuant to the agreement previously delivered to Acquiror. Section 3.20. No Product Liabilities; Product Warranties. (a) The Company has not incurred, and to the Knowledge of the Company there is no reason to believe there is any basis for alleging, any liability, damage, loss, cost or expense as a result of any defect or other deficiency (whether of design, materials, workmanship, labeling, instructions or otherwise) ("PRODUCT LIABILITY") with respect to any product sold or service rendered by the Company, whether such Product Liability is incurred by reason of any express or implied warranty (including, without limitation, any warranty of merchantability or fitness), any doctrine of common law (tort, contract or other), any statutory provision or otherwise and irrespective of whether such Product Liability is covered by insurance, other than chargebacks incurred in the ordinary course of business and consistent with past practice and none of which have, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company. (b) The Company has furnished Acquiror with the standard forms of purchase orders for its products and services that are in effect or proposed to be used by the Company, which forms contain all warranties and guarantees given by the Company to its customers with respect to their products and services, except for those warranties imposed by law. There are no pending or, to the Knowledge of the Company, threatened claims under any warranty or guaranty against the Company. No credits have been given in respect of any such warranty or guaranty (including without limitation any returns or allowances). Section 3.21. Suppliers and Customers. (a) The Disclosure Schedule lists (i) all suppliers of the Business to which the Company (x) made payments during the period from January 1, 1997 through July 31, 1997, or (y) made or expects to make payments, in excess of five percent of the cost of sales of the Company, during the year ending December 31, 1997, (ii) all customers of the Business that paid the Company during the year ended December 31, 1996, or that has paid or the Company expects will pay to the Company during the year ending December 31, 1997, more than five percent of the sales revenues of the Company for such periods and (iii) all other suppliers and customers of the Business the loss of any of which, individually or in the aggregate with all other suppliers or customers affiliated with such supplier or customer, would reasonably be expected to have a Material Adverse Effect on the Company. -12- (b) To the Knowledge of the Company, none of the customers or suppliers of the Company listed on the Disclosure Schedule in Section 3.21 have expressed an intention to cease purchasing from, selling to or dealing with the Company nor has any information been brought to its attention by such customer or supplier which would reasonably lead it to believe any such customer or supplier intends to alter in any material respect the amount of such purchases, sales or the extent of dealings with the Company (including in the event of the consummation of the Acquisition). To the Knowledge of the Company, all suppliers to the Business will be able to fulfill outstanding or currently anticipated purchase orders placed by the Company which, individually or in the aggregate, exceed $25,000. The Company has no information which might reasonably indicate, nor has any information been brought to its attention which might reasonably lead it to believe that, any customer of the Business will cancel any outstanding or currently anticipated purchase orders placed with the Company which, individually or in the aggregate, exceed $25,000. (c) Neither the Company nor, to the Knowledge of the Company, any of its officers, directors, shareholders or Affiliates, nor any relative or spouse (or relative of such spouse) of any such officer, director, shareholder or Affiliate, nor any entity controlled by one or more of the foregoing: (i) owns, directly or indirectly, any interest in (excepting less than 2% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any Person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent, customer or client of the Business; (ii) owns, directly or indirectly, in whole or in part, any tangible or intangible property that the Business uses in the conduct of its business; or (iii) has any cause of action or other claim whatsoever against, or owes any amount to, the Company, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof. Section 3.22. Intellectual Properties. The Disclosure Schedule contains an accurate and complete list of all domestic and foreign patents, patent applications, patent licenses, software licenses (other than generally available pre-packaged "off-the- shelf" software) and know-how licenses, trade names, trademarks, copyrights, service marks, trademark registrations and applications, service mark registrations and applications, and copyright registrations and applications owned (in whole or in part), licensed to any extent or used or anticipated to be used by the Company in the conduct of the Business, whether in the name of the Company, any employee or otherwise (collectively, the "INTELLECTUAL PROPERTY"). The Company either owns all right, title and interest in and to, or possesses the exclusive right to use, the Intellectual Property used in the conduct of the Business and each item constituting part of the Intellectual Property in which the Company has an ownership or license interest has been, to the extent indicated on the Disclosure Schedule, duly registered with, filed in or issued by, as the case may be, the United States Patent and Trademark Office or such other Governmental Entities as are indicated on the Disclosure Schedule and such registrations, filings and issuances remain in full force and effect. No claim of infringement or misappropriation of any Intellectual Property of any other Person has been made nor, to the Knowledge of the Company, threatened against the Company and the Company is not infringing or misappropriating any Intellectual Property of any -13- other Person. Without limiting any other provisions hereof, the Company has not granted any license, franchise or permit to any Person to use any of the Intellectual Property of the Company and no other Person has the right to use the same trademarks, service marks or trade names used by the Company or any similar trademarks, service marks or trade names likely to lead to confusion. Section 3.23. Licenses. The Company has all licenses, permits, consents and other governmental certificates, authorizations and approvals required by every federal, state, local and foreign Governmental Entity for the conduct of the Business and the use of its properties as presently conducted or used, other than those the failure of which to hold has not had and would not have a Material Adverse Effect on the Company (collectively, "LICENSES"). The Disclosure Schedule contains a true and complete list of the Licenses. All of the Licenses are in full force and effect and no action or claim is pending nor, to the Knowledge of the Company, is threatened to revoke or terminate any License or declare any License invalid in any material respect. The Company has taken all necessary action to maintain such Licenses. The Disclosure Schedule contains a true and complete list of all federal, state, local and foreign governmental or judicial consents, orders, decrees and other compliance agreements relating to the Company or any of its assets or business under which the Company is operating or bound. Section 3.24. Restrictive Documents and Territorial Restrictions. The Company is not subject to, or a party to, any charter, by-law, mortgage, Lien, lease, license, permit, agreement, contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which could, to the Knowledge of the Company, (i) materially adversely affect the business, prospects, operations or condition (financial or otherwise) of the Business or any of its assets or property, or the continued operation of the Business after the date hereof on substantially the same basis as heretofore operated or (ii) restrict the ability of the Company to acquire any property or conduct business in any area. Section 3.25. Bank Accounts. The Disclosure Schedule contains a true, correct and complete list of the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company maintains safe deposit boxes or accounts of any nature and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto. Section 3.26. Accounting Matters. Neither the Company, any Shareholder nor any of their Affiliates has taken or agreed to take any action that would prevent Acquiror from accounting for the Acquisition as a "pooling of interests" under generally accepted accounting principles. It is understood that KPMG Peat Marwick LLP ("KPMG"), in part, will rely upon this representation for the purposes of issuing the opinion required pursuant to section 7.02(i) hereof. Section 3.27. No Misleading Statements. This Agreement, the information and schedules referred to herein and the certificates that have been furnished to Acquiror in connection with the transactions contemplated hereby do not include any untrue statement of a material fact and do not omit to state any material fact necessary to -14- make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. To the Knowledge of the Company, there is no fact relating to the Company which materially adversely affects or in the future would be reasonably likely (so far as the Company can now reasonably foresee) to materially adversely affect the business, condition (financial or otherwise), property or assets of the Company which is not referred to herein or in this corresponding section of the Disclosure Schedule. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS Each Shareholder hereby severally agrees and represents and warrants to Acquiror as follows: Section 4.01. Authorization; Ownership of Company Shares. (a) Such Shareholder has all requisite power and authority to enter into this Agreement and each of the other agreements contemplated hereby to which he is a party, and to carry out his obligations under this Agreement and each of the other agreements contemplated hereby to which he is a party, and to consummate the transactions contemplated hereby and thereby. Each of this Agreement and the other agreements contemplated hereby to which such Shareholder is a party has been duly executed and delivered by such Shareholder and constitutes the legal, valid and binding obligation of such Shareholder enforceable against such Shareholder in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). (b) Such Shareholder has, and immediately prior to the transfer of the Company Shares being sold by such Shareholder hereunder to Acquiror will have, good and marketable title to the Company Shares being sold by such Shareholder hereunder, free and clear of any Liens. Upon the delivery of and payment for such Company Shares hereunder, Acquiror will acquire good and marketable title to, and all of such Shareholder's rights in, such Company Shares, free and clear of any Liens. Section 4.02. No Violation. The execution and delivery of this Agreement and each of the other agreements contemplated hereby to which such Shareholder is a party by such Shareholder does not, and the consummation by such Shareholder of the transactions contemplated hereby and thereby, and compliance with the terms hereof and thereof will not, conflict with, or result in a breach or violation of or default or loss of any benefit under, or accelerate the performance required by, the terms of any law, statute, regulation, order, judgment or decree or any agreement, contract, indenture or other instrument to which such Shareholder is a party or to which any of such Shareholder's properties are subject, or constitute a default or loss of any right thereunder or an event which, with the lapse of time or notice or both, might result in -15- a default or loss of any right thereunder or the creation of any Lien upon any of the assets or properties of such Shareholder. Section 4.03. Approvals. The execution and delivery of this Agreement and each of the other agreements contemplated hereby to which such Shareholder is a party and the consummation of the transactions contemplated hereby and thereby by such Shareholder will not require the consent, approval, order or authorization of any Governmental Entity or Regulatory Authority or any other Person under any statute, law, rule, regulation, permit, license, agreement, indenture or other instrument to which such Shareholder is a party or to which any of his properties are subject, and no declaration, filing or registration with any Governmental Entity or Regulatory Authority is required by such Shareholder in connection with the execution and delivery of this Agreement and each of the other agreements contemplated hereby to which such Shareholder is a party, the consummation by such Shareholder of the transactions contemplated hereby and thereby or the performance by such Shareholder of his obligations hereunder and thereunder. Section 4.04. Securities Act Matters. (a) Such Shareholder understands that the Zygo Shares, at the time of their original issuance by Zygo, will not have been registered under the Securities Act or any state securities laws by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act and applicable state securities laws and that such Zygo Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt from such registration. Zygo has undertaken to so file a registration statement with the Commission as promptly as practicable after the Closing Date and to use its reasonable good faith efforts to have the Zygo Shares so registered for resale as promptly as practicable thereafter, as provided in Section 2.02 hereof. (b) Such Shareholder is acquiring the Zygo Shares for such Shareholder's own account and not with a view to, or for sale in connection with, directly or indirectly, any distribution thereof that would require registration under the Securities Act or applicable state securities laws. (c) Such Shareholder and such Shareholder's, attorneys, accountants, investment and financial advisors, if any, have had the opportunity to review the books and records of Acquiror and have been provided access to such information as such Shareholder or such Shareholder's advisors, if any, have requested. (d) Such Shareholder understands that the Zygo Shares, until they are registered as contemplated by Section 2.02 hereof, will bear the following legend (or a substantially similar legend): "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, APPLIES. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE -16- SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT SUCH REGISTRATION OR THE DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH DISPOSITION WILL NOT REQUIRE REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED." ARTICLE V. REPRESENTATIONS AND WARRANTIES OF ACQUIROR Acquiror hereby agrees and represents and warrants to the Shareholders as follows: Section 5.01. Organization, Etc. Acquiror is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease. Acquiror is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its business or the nature of its properties makes such qualification or licensing necessary, except where the failure to so qualify or be licensed would not have a Material Adverse Effect on Acquiror. Acquiror has heretofore made available to the Company true and correct copies of its Certificate of Incorporation and By-laws as in effect on the date hereof. Section 5.02. Capitalization. The authorized capital stock of Acquiror consists of 15,000,000 shares of Zygo Common Stock, of which 10,558,340 shares are issued and outstanding as of June 30, 1997 and 207,600 are held in treasury. The Zygo Shares, when issued pursuant to this Agreement, will be duly authorized, validly issued, fully paid and nonassessable and will not have been issued in violation of any preemptive rights or of any federal or state law. Section 5.03. Authorization. Acquiror has all requisite corporate power and authority to enter into this Agreement and each of the other agreements contemplated hereby, to carry out its obligations under this Agreement and each of the other agreements contemplated hereby and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Acquiror of this Agreement and each of the other agreements contemplated hereby, the consummation of the transactions contemplated hereby and thereby and the performance by Acquiror of its obligations hereunder and thereunder have been duly authorized by all necessary corporate action on the part of Acquiror. Each of this Agreement and the other agreements contemplated hereby has been duly executed and delivered by Acquiror and constitutes the legal, valid and binding obligation of Acquiror, enforceable against Acquiror in accordance with its terms (except as the enforceability thereof may be -17- limited by any applicable bankruptcy, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Section 5.04. No Violation. The execution and delivery of this Agreement and each of the other agreements contemplated hereby by Acquiror does not, and the consummation by Acquiror of the transactions contemplated hereby and thereby, and compliance with the terms hereof and thereof will not, (a) conflict with, or result in any violation of or default or loss of any benefit under, any provision of the Certificate of Incorporation or By-laws of Acquiror; (b) conflict with, or result in any violation of any statute, law, rule or regulation, or any judgment, decree or order of any Governmental Entity to which Acquiror is a party or to which any of its properties is subject; (c) conflict with, or result in a breach or violation of, or accelerate the performance required by, the terms of any material agreement, contract, indenture or other instrument to which Acquiror is a party or to which any of its properties is subject, or constitute a default or loss of any right thereunder or an event which, with the lapse of time or notice or both, might result in a material default or loss of any material right thereunder or the creation of any Lien upon any of the assets or properties of Acquiror; or (d) result in any suspension, revocation, impairment, forfeiture or nonrenewal of any License of Acquiror. Section 5.05. Approvals. The execution and delivery by Acquiror of this Agreement and each of the agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby will not require the consent, approval, order or authorization of any Governmental Entity or Regulatory Authority or any other Person under any statute, law, rule, regulation, permit, license, agreement, indenture or other instrument to which Acquiror is a party or to which any of its properties are subject, and no declaration, filing or registration with any Governmental Entity or Regulatory Authority is required or advisable by Acquiror in connection with the execution and delivery of this Agreement and each of the other agreements contemplated hereby, the consummation by Acquiror of the transactions contemplated hereby and thereby or the performance by Acquiror of its obligations hereunder and thereunder, other than compliance with any applicable requirements under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the Securities Act and state securities and "blue sky" laws. Section 5.06. Commission Filings. Acquiror has delivered to the Company true, correct and complete copies of Acquiror's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (the "ZYGO 10-K"), Acquiror's Quarterly Reports on Form 10-Q for the quarters ended September 30, 1996, December 31, 1996 and March 31, 1997 (the "ZYGO 10-QS"), Acquiror's Current Reports on Form 8-K dated August 30, 1996 and September 27, 1996, Acquiror's Current Reports on Form 8-K/A dated November 4, 1996 and November 14, 1996, and Acquiror's Proxy Statement dated October 8, 1996 (collectively, the "ZYGO EXCHANGE ACT FILINGS"), which are the only reports, schedules and definitive proxy statements filed by Acquiror with the Commission on or after June 30, 1996. Acquiror has timely filed in the preceding twelve (12) months all the material required to be filed by it pursuant to the applicable provisions of the Securities Act and pursuant to Sections 13, 14 and 15(d) of the -18- Exchange Act. The Zygo Exchange Act Filings (including the documents incorporated by reference therein), as of their respective filing dates, did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, and the Zygo Exchange Act Filings were timely filed and complied when filed in all material respects with the applicable requirements of the Exchange Act. Section 5.07. Financial Statement and Other Information. (a) The audited balance sheet and any related notes and schedules included or incorporated by reference in the Zygo 10-K and the unaudited balance sheet and any related notes and schedules included in the Zygo 10-Q for the quarter ended March 31, 1997 each presents fairly the consolidated financial position of Acquiror and the Zygo Subsidiaries as of its respective date and the other financial statements included in the Zygo 10-K and such Zygo 10-Q present fairly the consolidated results of operations or other information included therein of Acquiror and the Zygo Subsidiaries for the respective periods or as of the respective dates therein set forth, subject, in the case of unaudited statements, to normal year end adjustments which are not material in amount or effect, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved (except as otherwise stated therein). (b) Except as disclosed in the Zygo Exchange Act Filings, since March 31, 1997, there has been no change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations of Acquiror and the Zygo Subsidiaries, taken as a whole, which has had or is reasonably likely to have a Material Adverse Effect on Acquiror. Section 5.08. Compliance with Laws. The business of Acquiror and the Zygo Subsidiaries has not been conducted in violation of any law or any ordinance or regulation of any Governmental Entity, except for violations that individually or in the aggregate would not and, insofar as may reasonably be foreseen, in the future will not, have a Material Adverse Effect on Acquiror. Neither Acquiror nor any Zygo Subsidiary is in default with respect to any order, writ, injunction or decree known to or served upon Acquiror or any Zygo Subsidiary of any Governmental Entity, which default would have a Material Adverse Effect on Acquiror. Section 5.09. Brokerage Fees. Neither Acquiror, any Zygo Subsidiary nor any of their respective Affiliates has retained any financial advisor, broker, agent or finder or paid or agreed to pay any financial advisor, broker, agent or finder on account of this Agreement or any transaction contemplated hereby or any transaction of like nature that would be required to be paid by Acquiror or any Zygo Subsidiary, except for the financial advisor referred to in Section 7.02(j) hereof. -19- ARTICLE VI. COVENANTS AND AGREEMENTS Section 6.01. Confidentiality. Each of Acquiror, the Company and the Shareholders will hold, and shall cause their counsel, independent certified public accountants, appraisers, investment bankers and other advisors to hold in confidence any confidential data or information made available to it by the other in connection with this Agreement using the same standard of care to protect such confidential data or information as is used to protect its own confidential information. Each party hereto recognizes and acknowledges that a breach by it of this Section 6.01 will cause irreparable and material loss and damage to the other parties hereto as to which they will not have adequate remedy at law or in damages. Accordingly, each party acknowledges and agrees that the issuance of an injunction or other equitable remedy is an appropriate remedy for any such breach. Section 6.02. Public Announcements. Acquiror must agree in advance prior to the issuance of any press release or the making of any public statement with respect to this Agreement and the transactions contemplated hereby by any party hereto. Section 6.03. Certain Tax Matters. The following provisions shall govern the allocation of responsibility as among Acquiror, the Company and the Shareholders for certain tax matters following the Closing Date: (a) Sales and Transfer Taxes. All sales and transfer Taxes (including stock and real estate transfer Taxes), if any, incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Shareholders. Shareholders shall, at their own expense, file or prepare for filing all necessary Tax Returns and other documentation with respect to all such sales or transfer Taxes, and, if required by applicable law or if necessary to secure any applicable exemption, Acquiror shall join in the execution of any such Tax Returns or other documentation. (b) Tax Returns and Payment of Taxes for Periods through the Closing Date. The Shareholders and the Company shall be responsible for, and shall cause to be prepared and timely filed, all tax returns for the Company for all Tax periods ending on or before the Closing Date, and the Shareholders and the Company (but only to the extent then wholly-owned by the Shareholders) shall cause to be paid when due all Taxes in respect of such Tax periods. The cost of the preparation of such tax returns shall be borne by the Company. All Tax Returns described in this Section 6.02(b) shall be prepared in a manner consistent with prior practice unless a past practice has been finally determined to be incorrect by the applicable taxing authority or a contrary treatment is required by applicable tax laws (or judicial or administrative interpretations thereof). The Shareholders shall cause the Company to provide Acquiror with copies of such completed Tax Returns at least 10 days prior to the filing date, and Acquiror shall be provided an opportunity to review such Tax Returns and supporting workpapers and schedules prior to the filing of such Tax Returns. In the event that the amount of any Taxes for Tax periods ending on or before the Closing -20- Date, or for which the Shareholders are otherwise responsible pursuant to Section 6.03(c)(iii), exceeds the amount accrued on the Balance Sheet, the Shareholders, jointly and severally, shall pay to Acquiror such excess within ten (10) days after written notice thereof by Acquiror. Acquiror shall prepare or cause to be prepared and filed all Tax Returns for the Company for all Tax periods ending after the Closing Date. (c) Indemnification for Taxes. (i) The Shareholders shall, subject to the provisions of Section 8.03, jointly and severally indemnify, defend and hold harmless Acquiror and the Company against (A) all Taxes attributable to the Company with respect to any Tax period ending on or prior to the Closing Date and the cost of preparation of all associated tax returns, (B) all Taxes attributable to the Company with respect to the portion of any Tax period which begins before and ends after the Closing Date for which the Shareholders are responsible, pursuant to Section 6.03(c)(iii) and (C) any Taxes arising by reason of any breach by the Shareholders or inaccuracy of any of the representations contained in Section 3.11 hereof, less in each case any amount previously reserved or accrued for Taxes on the Balance Sheet Date. Notwithstanding any other provision of this Agreement, the obligation of the Shareholders to indemnify and hold harmless Acquiror and the Company from Taxes under this Section 6.03 shall begin on the Closing Date and end upon the expiration of the statute of limitations (including any extensions thereof) applicable to the assessment and collection of any Taxes for and against which Acquiror and the Company are indemnified and held harmless by the Shareholders hereunder, to the extent that a claim for indemnification hereunder has not theretofore been made in writing. Notwithstanding the first sentence of this Section 6.03(c), the indemnification obligation of the Shareholders set forth in this Section 6.03(c) shall not be subject to the "basket" limitation contained in Section 8.03 hereof. Any indemnification obligation owed to the Acquiror or the Company pursuant to this Section 6.03(c) shall be satisfied first with the Escrowed Shares, if any, in accordance with the terms of the Escrow Agreement. (ii) In determining the amount of any indemnification payment by the Shareholders pursuant to this Section 6.03(c), there shall be deducted or added, respectively, from or to the amount to be paid an amount equal to (A) the present value of any net Tax benefit (federal, state, local or foreign) realized, or reasonably expected to be realized, by Zygo or the Company as a consequence of an event giving rise to any payment pursuant to this Section 6.03(c), or (B) the present value of any net Tax detriment (federal, state, local or foreign) realized, or reasonably expected to be realized, by Zygo or the Company as a consequence of an event giving rise to any payment pursuant to this Section 6.03(c) or the receipt of any such payment. For purposes of this Section 6.03(c)(ii), "present value" shall be calculated using the applicable annual Federal mid-term rate, as that term is defined in the Code, as in effect for the month in which the payment is to be made. For purposes of this Section 6.03(c)(ii), the amount of any "Tax benefit" and "Tax detriment" shall be calculated using the highest effective Tax rate applicable or known to be applicable with respect to the Tax period or periods for which the Tax benefit or the Tax detriment, as the case may be, is reasonably expected to be realized or incurred. -21- (iii) For federal income tax purposes, the taxable year of the Company shall end as of the close of the Closing Date and, with respect to all other Taxes, the Shareholders and Acquiror will, unless prohibited by applicable law, close the taxable period of the Company as of the close of the Closing Date. Neither the Shareholders nor Acquiror shall take any position inconsistent with the preceding sentence on any Tax Return. In any case where applicable law does not permit the Company to close its taxable year on the Closing Date or in any case in which a Tax is assessed with respect to a taxable period which includes the Closing Date (but does not begin or end on that day), then Taxes, if any, attributable to the taxable period of the Company beginning before and ending after the Closing Date shall be allocated (i) to the Shareholders for the period up to and including the Closing Date, and (ii) to Acquiror for the period subsequent to the Closing Date. (d) Tax Audits. Acquiror shall notify the Shareholders in writing of any pending or threatened audit or examination by any Tax authority (a "TAX AUDIT") or a Tax assessment for which the Shareholders may be liable for indemnification under this Agreement within thirty (30) days after Acquiror's receipt of notice of such pending or threatened Tax Audit or assessment. A majority in interest of the Shareholders shall have the right, at their own expense, to control any Tax Audit, initiate any claim for refund, contest, resolve and defend against any assessment, notice of deficiency, or other adjustment or proposed adjustment relating to any and all Taxes for any Tax period of the Company ending on or before the Closing Date, provided, however, that the Shareholders shall in no event take any position in any such proceeding which would subject Acquiror or the Company to any civil fraud or any civil or criminal penalty, and provided, further, that the Shareholders shall not consent, without the prior written approval of Acquiror, to any change in the treatment of any item which would in any material respect affect the Tax liability of Acquiror or the Company for a period subsequent to the Closing Date. Acquiror shall have the right, at its expense, to control any other Tax Audit, initiate any other claim for refund, and contest, resolve and defend against any other assessment, notice of deficiency, or other adjustment or proposed adjustment relating to Taxes for any Tax period ending after the Closing Date with respect to the Company. (e) Mutual Cooperation. The parties shall provide each other with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax Return, any Tax Audit or other examination by any Tax authority, or any judicial or administrative proceedings relating to liability for Taxes, and each will retain and provide the other with any records or information that may be relevant to such Tax Return, Tax Audit or examination, proceedings or determination. Such assistance shall include making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder and shall include providing copies of any relevant Tax Returns and supporting work schedules. The party requesting assistance hereunder shall reimburse the other for reasonable expenses incurred in providing such assistance. Without limiting in any way the foregoing provisions of this Section 6.03, Acquiror hereby agrees to retain, until the appropriate statutes of limitation (including any extensions) expire, copies of all Tax Returns, supporting work schedules and other records or information that may be relevant to such Tax Returns of the Company for all Tax -22- periods that include the dates from January 1, 1991 to the Closing Date, inclusive, and that it will not destroy or otherwise dispose of such records without first providing the Shareholders with a reasonable opportunity to review and copy such records. Section 6.04. Issuance of Options to Acquire Zygo Common Stock. Zygo agrees that it shall, in consultation with and based upon the recommendations of David Grant, on or immediately after the Closing Date, grant options to purchase up to an aggregate of 60,000 shares of Zygo Common Stock to executive officers and key employees of the Company, under Zygo's existing stock option plan, at an exercise price equal to the last reported sale price on the Nasdaq National Market per share of Zygo Common Stock on the Closing Date (or, if later, on the first day of any such executive officer's or key employee's employment with the Company or Zygo). Section 6.05. Benefits Arrangements. It is Acquiror's present intention that from and after the Closing, Acquiror shall, or shall cause the Company to, provide all of the employees of the Company with salary and wages at not less than their current levels and Acquiror shall, or shall cause the Company to, continue in effect all employee benefit plans, programs, policies or arrangements as are currently provided by the Company to its employees. It is the Acquiror's further intention to provide the employees of the Company, over a phase-in period, with benefits which are generally comparable in the aggregate to the benefits provided to other similarly situated employees of Acquiror and Zygo Subsidiaries. Section 6.06. Pooling Affiliates' Letters. The Company shall cause each person who is an "affiliate," as that term is used in paragraphs (c) and (d) of rule 145 under the U.S. Securities Act, of the Company to deliver to Acquiror on or prior to the Closing Date a written agreement, substantially in the form of Exhibit 6.06 hereto (the "POOLING AFFILIATE LETTERS"). The Company shall use its commercially reasonable efforts to provide Acquiror with such information as Acquiror shall reasonably request for purposes of making its own determination of persons who may be deemed to be affiliates of the Company. Section 6.07. Further Assurances. The Company and the Shareholders from time to time after the Closing, at Acquiror's request, will execute, acknowledge and deliver to Acquiror such other instruments of conveyance and transfer and will take such other actions and execute and deliver such other documents, certifications and further assurances, all at Acquiror's expense, as Acquiror may reasonably require in order to vest more effectively in Acquiror, or to put Acquiror more fully in possession of, the Company Shares. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties hereto agrees, subject to applicable laws, to use all reasonable efforts promptly to take or cause to be taken all further action and promptly to do or cause to be done all further things (including the execution and delivery of such further instruments and documents) as any party reasonably may request. Section 6.08. Opinions of the Company's Counsel. The Company shall use its best efforts to cause to be delivered to Zygo at the Closing Date the opinions of the Company's counsel required by Section 7.02(d) hereof. -23- ARTICLE VII. CONDITIONS OF CLOSING Section 7.01. Conditions to All Parties' Obligations. The obligations of all the parties to this Agreement to effect the Acquisition shall be subject to the fulfillment or satisfaction, at or prior to the Closing of the following conditions or the mutual written waiver by the parties: (a) Illegality or Legal Constraint. No temporary restraining order, preliminary or permanent injunction or other order or restraint issued by any court of competent jurisdiction, no statute, rule, regulation, order, decree, restraint or pronouncement by any Governmental Entity, and no other legal restraint or prohibition which would prevent or have the effect of preventing the consummation of the Acquisition shall have been issued or adopted or be in effect. (b) Governmental Authorizations. All permits, approvals, filings and consents required or advisable to be obtained or made prior to the consummation of the Acquisition under applicable federal laws or applicable laws of any state or foreign country having jurisdiction over the Acquisition and the other transactions contemplated herein shall have been obtained or made, as the case may be, on terms and conditions satisfactory to the Company, the Shareholders and Acquiror, acting reasonably. (c) Escrow Agreement. The Company, Acquiror, the Shareholders and the Escrow Agent shall have executed and delivered the Escrow Agreement. (d) Registration Agreement. Acquiror and the Shareholders shall have executed and delivered the Registration Agreement. (e) Employment and Non-Compete Agreements. David Grant, Michael Mahoney and Steven Chan shall have entered into an employment and non-compete agreement with the Company substantially in the form of Exhibit 7.01(e)(1), (2) and (3), respectively. Section 7.02. Conditions to the Obligations of Acquiror to Effect the Acquisition. The obligations of Acquiror under this Agreement to effect the Acquisition shall be subject to the fulfillment or satisfaction, at or prior to the Closing, of the following conditions, unless waived by Acquiror in its sole discretion: (a) Representations and Warranties Accurate. All representations and warranties of the Company and the Shareholders contained in this Agreement (including the Disclosure Schedule hereto), and all written information required to be delivered to Acquiror by the Company or any Shareholder on or prior to the Closing Date pursuant to this Agreement, shall be true in all respects as of the date when made and on and as of the Closing Date. -24- (b) Performance by the Company and the Shareholders. The Company and each of the Shareholders shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed and complied with by the Company or any Shareholder prior to or on the Closing Date. (c) Consents. Any consent required for the consummation of the Acquisition under any Contract or material License shall have been delivered to Acquiror. (d) Opinion of Counsel. Acquiror shall have received the opinion of Gee & Sunada, counsel to the Company and the Shareholders, dated as of the Closing Date, in the form of Exhibit 7.02(d) hereto. (e) Proceedings; Receipt of Documents. All corporate and other proceedings taken or required to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to Acquiror and its counsel, and counsel to Acquiror shall have received all such information and such counterpart originals or certified or other copies of such documents as Acquiror or its counsel may reasonably request. Acquiror shall have received such other instruments, approvals and other documents as it may reasonably request to make effective the transactions contemplated hereby. (f) Due Diligence. Acquiror shall have completed its legal, financial and business investigation of the Business, the Company's assets and the liabilities of the Company to its satisfaction, in its sole discretion. (g) No Material Adverse Effect. Since the Balance Sheet Date, there shall have been no change in the Business, assets, liabilities, prospects, results of operations or financial condition of the Company which has had or is reasonably likely to have a Material Adverse Effect on the Company. (h) Pooling Affiliate Letters. Acquiror shall have received the Pooling Affiliate Letters referred to in Section 6.06. (i) Pooling of Interests. Acquiror shall have received an opinion from KPMG, in form reasonably satisfactory to Acquiror, to the effect that the Acquisition would be properly accounted for as a "pooling of interests" in accordance with generally accepted accounting principles and all published rules, regulations and policies of the U.S. Commission. (j) Fairness Opinion. Acquiror shall have received from Alex. Brown & Sons, Inc., its financial advisor, an opinion to the effect that, as of the date hereof, the consideration to be paid in the Acquisition is fair, from a financial point of view, to Zygo and its stockholders, and Alex. Brown & Sons, Inc. shall not have withdrawn such opinion on or prior to the Closing Date. -25- (k) Supporting Documents. Acquiror and its counsel shall have received a certificate of the President and Treasurer of the Company dated the Closing Date and certifying that the conditions set forth in Sections 7.02(a), 7.02(b) and 7.02(g) hereof have been satisfied, and certificates of the Secretary or other officer of the Company and other information with respect to the corporate proceedings and operations and affairs of the Company as Acquiror or counsel to Acquiror may reasonably request. All such documents shall be satisfactory in form and substance to Acquiror and its counsel. Section 7.03. Conditions to the Obligations of the Company and the Shareholders to Effect the Acquisition. The obligations of the Company and the Shareholders under this Agreement to effect the Acquisition shall be subject to the fulfillment or satisfaction, at or prior to the Closing of the following conditions, unless waived by the Company in its sole discretion: (a) Representations and Warranties Accurate. All representations and warranties of Acquiror contained in this Agreement, and all written information required to be delivered to the Company by Acquiror on or prior to the Closing Date pursuant to this Agreement, shall be true in all respects as of the date when made and on and as of the Closing Date. (b) Performance by Acquiror. Acquiror shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date. (c) Proceedings. All corporate and other proceedings taken or required to be taken by Acquiror in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Company and the Shareholders and counsel to the Company and the Shareholders. (d) Opinion of Counsel. The Company shall have received the opinion of Fulbright & Jaworski L.L.P., counsel to Acquiror, dated as of the Closing Date, in the form of Exhibit 7.03(d) hereto. ARTICLE VIII. INDEMNIFICATION Section 8.01. Indemnification by the Shareholders. (a) Joint Indemnification. Subject to the provisions of Section 8.03, the Shareholders shall jointly and severally indemnify, defend and hold harmless Acquiror and its officers, directors, employees, agents and representatives from and against and in respect of any and all losses, damages, expenses, liabilities, claims, settlements, assessments and judgments (including reasonable costs and attorney's fees and other expenses arising out of any claim, or the defense, settlement or investigation thereof, made with respect to any of the foregoing) (collectively, "LOSSES") incurred or suffered -26- by Acquiror, arising out of, based upon or resulting from any inaccuracy, misrepresentation or breach of representation and warranty contained in Article III of this Agreement or non-fulfillment of any covenant or agreement of the Company or any Shareholder contained in this Agreement or any certificate or instrument furnished pursuant hereto; provided, however, that for purposes of determining the amount of any Losses incurred or suffered by Acquiror under this subsection 8.01(a) (but not as to whether there is any inaccuracy, misrepresentation or breach of representation and warranty), all such representations and warranties shall be deemed to have been made without any qualification as to materiality or Knowledge. (b) Several Indemnification. Subject to the provisions of Section 8.03, each Shareholder shall severally indemnify, defend and hold harmless Acquiror and its officers, directors, employees, agents and representatives from and against and in respect of any and all Losses incurred or suffered by Acquiror, arising out of, based upon or resulting from any inaccuracy, misrepresentation or breach by such Shareholder of any of his representations and warranties contained in Article IV of this Agreement or any certificate or instrument furnished pursuant hereto. Section 8.02. Indemnification by Acquiror. Subject to the provisions of Section 8.03, Acquiror shall indemnify, defend and hold harmless each of the Shareholders and his successors and assigns, from and against and in respect of any Losses incurred or suffered by such Shareholder or his successors and assigns, arising out of, based upon or resulting from any inaccuracy, misrepresentation or breach by Acquiror of any of its representations and warranties or non-fulfillment of any of its respective covenants or agreements contained in this Agreement or any certificate or instrument furnished pursuant hereto. Section 8.03. Limitations. (a) No party hereto shall be entitled to make any claim for indemnification under this Article VIII with respect to the inaccuracy, misrepresentation or breach of any representation and warranty or non-fulfillment of any covenant or agreement contained in this Agreement after the date on which such representation, warranty, covenant or agreement ceases to survive pursuant to Section 8.06. (b) Notwithstanding anything to the contrary contained herein, Acquiror shall not be entitled to indemnification from the Company or any Shareholder pursuant to either Section 8.01 or 8.02 hereof, until the aggregate losses suffered by Acquiror (from actions or inactions of any of the Company, the Shareholder(s), or any combination of any of them) and for which indemnification is available to Acquiror hereunder exceed $250,000, whereupon Acquiror shall be entitled to claim indemnification for all losses suffered by it and for which indemnification is available to it hereunder. (c) Any claim by one party to this Agreement against any other party to this Agreement for breach of any covenant or representation and warranty in this Agreement shall be subject to the limitations set forth in this Article VIII; provided, however, that such limitations shall not apply to any fraud claim. -27- Section 8.04. Notice and Defense of Claims. Each party entitled to indemnification under this Article VIII (the "INDEMNIFIED PARTY") shall give written notice to the party or parties required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and, in the event of any claim or demand asserted by a third party; but the failure of any Indemnified Party to timely give written notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless such failure to give notice materially adversely affected the ability of the Indemnifying Party to defend such claim. Upon receipt of any such notice, the Indemnifying Party may elect to defend the Indemnified Party against such claim, suit, action or proceeding, at its own expense, through counsel of its own choice that is reasonably acceptable to the Indemnified Party, and from and after such election and for so long as the Indemnifying Party is diligently prosecuting such defense, the Indemnifying Party shall not be responsible for any legal fees or expenses of the Indemnified Party, other than reasonable costs of investigation and subject to Section 8.03 hereof. Failing such election or reasonably diligent prosecution, the Indemnified Party shall have the right to (but shall not be obligated to) pay, compromise or defend the same. In any claim, suit, action or proceeding defended by the Indemnifying Party, the Indemnified Party may participate, at its expense, in the defense of the same. The Indemnifying Party in the defense of any such claim, suit, action or proceeding shall not, except with the consent of the Indemnified Party, consent to the entry of any judgment or entry into any settlement which (i) does not include as an unconditional term thereof the giving by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect to such claim, suit, action or proceeding or (ii) requires the performance of any act (other than the payment of moneys for which such Indemnified Party is held harmless hereunder) or the agreement not to perform any act by the Indemnified Party. The Indemnified Party shall not settle or compromise any such claim without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. The Indemnified Party shall furnish such information regarding itself or the claim in question as the Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim, suit, action or proceeding resulting therefrom. Section 8.05. Non-Exclusive Remedy. Indemnification pursuant to this Agreement shall not preclude Acquiror or any of the Shareholders from exercising any other remedies it or such Shareholder may have, including, without limitation, in the case of Acquiror, pursuant to the Escrow Agreement, subject to the limitations set forth in Sections 8.03 and 8.04 hereof. Section 8.06. Survival of Representations and Warranties. All of the representations, warranties and agreements contained in this Agreement shall survive the Closing and shall remain in full force and effect until the earlier of (i) the date on which KPMG's report on their audit of Acquiror's financial statements for the fiscal year during which the Closing occurs or (ii) the first anniversary of the Closing Date (such earlier date being referred to as the "Termination Date") and, thereafter, to the extent a claim, in writing and setting forth the specific facts giving rise to such claim, is made prior to such expiration with respect to any breach of such representation, warranty or agreement, until such claim is finally determined or settled; provided, -28- however, that the representations, warranties and agreements of the Company and the Shareholders relating to Taxes and governmental assessments shall remain in full force and effect until the expiration of the applicable statute of limitations (including any extensions thereof); and, provided further, that the representations and warranties set forth in Sections 3.03, 3.05, 3.17, 3.19, 4.01, 4.02 and 5.04 shall survive and remain in full force and effect forever. Section 8.07. Reimbursement. Subject to Section 8.03 hereof, at the time that the Indemnified Party shall suffer a loss because of a breach of any warranty, representation or covenant by the Indemnifying Party or at the time the amount of any liability on the part of the Indemnifying Party under this Agreement is determined (which in the case of payment to third persons shall be the earlier of (i) the date of such payment, provided that the Indemnified Party has fully complied with Section 8.04, or (ii) the date that a court of competent jurisdiction shall enter a final judgment, order or decree (after exhaustion or expiration of appeal rights) establishing such liability) (such loss or amount being hereinafter referred to as the "INDEMNITY CLAIM")), the Indemnifying Party shall forthwith, upon notice from the Indemnified Party, pay to the Indemnified Party the amount of the Indemnity Claim. The Indemnity Claim shall be paid first from the Escrow Fund (as such term is defined in the Escrow Agreement), to the extent then remaining, as provided in the Escrow Agreement. If such amount is not paid forthwith, then the Indemnified Party may, at its option, take legal action against the Indemnifying Party for reimbursement in the amount of its Indemnity Claim. For purposes hereof the Indemnity Claim shall include the amounts so paid, or determined to be owing by the Indemnified Party together with costs and reasonable attorney's fees and interest on the foregoing items (but only to the extent pre-judgment interest due the Indemnified Party is not already included within such items) at the rate of ten percent (10%) per annum from the date the Indemnity Claim is due from the Indemnifying Party to the Indemnified Party as hereinabove provided until the Indemnity Claim shall be paid. In addition to its other obligations under this Section 8.07, the Indemnifying Party agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding for which indemnification may be required pursuant to this Article VIII, it will, if it does not assume the defense thereof, reimburse the Indemnified Party on a monthly basis for all reasonable legal fees or the out-of-pocket expenses reasonably incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Indemnifying Party's obligation to indemnify the Indemnifying Party for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Indemnified Party shall promptly return it to the Indemnifying Party, together with interest at the rate of ten percent (10%) per annum. Any such interim reimbursement payments which are not made to the Indemnified Party within thirty (30) days of a request for reimbursement shall bear interest at the rate of ten percent (10%) per annum from the date of such request. -29- Section 8.08. Other Indemnification Provision. Each of the Shareholders hereby agrees that such Shareholder will not make any claim for indemnification against the Company by reason of the fact that he was a shareholder, director, officer, employee or agent of the Company or was serving at the request of the Company as a director, officer, employee or agent of another entity (whether such claim is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses or otherwise and whether such claim is pursuant to any statute, charter document, by-law, agreement or otherwise) with respect to any action, suit, proceeding, complaint, claim or demand brought by Acquiror against such Shareholder (whether such action, suit, proceeding, complaint, claim or demand is pursuant to this Agreement, applicable law or otherwise). ARTICLE IX. GENERAL PROVISIONS Section 9.01. Effect of Due Diligence. No investigation by or on behalf of Acquiror into the business, operations, prospects, assets or condition (financial or otherwise) of the Company shall diminish in any way the effect of any representations or warranties made by the Company or any of the Shareholders in this Agreement or shall relieve the Company or any of the Shareholders of any of their respective obligations under this Agreement. No investigation by or on behalf of the Company or the Shareholders into the business, operations, prospects, assets or condition (financial or otherwise) of Acquiror and the Zygo Subsidiaries shall diminish in any way the effect of any representations or warranties made by Acquiror in this Agreement or shall relieve Acquiror of any of its obligations under this Agreement. Section 9.02. Expenses. Except as hereinafter provided, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring the same. All costs and expenses incurred by the Company or the Shareholders shall be paid prior to the Closing Date or other suitable arrangements acceptable to Acquiror with respect thereto shall be made. Section 9.03. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns, heirs, executors, administrators and legal representatives. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties hereto. Section 9.04. Entire Agreement. This Agreement and the other documents referred to herein contain the entire agreement among the parties hereto with respect to the transactions contemplated hereby, and controls and supersedes any prior understandings, agreements or representations by or between the parties, written or oral, which conflicts with, or may have related to, the subject matter hereof in any way. Section 9.05. Notices. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent -30- by telefax communication, by recognized overnight courier marked for overnight delivery, or by registered or certified mail, postage prepaid, addressed as follows: (a) If to the Company or the Shareholders, 3541 Old Conejo Road #119, Newbury Park, CA 91320-2158, Attention: David Grant (telefax number (805) 498-5237); with a copy to Richard Gee, Esq., Gee & Sunada, 655 Deep Valley Drive, Suite 125, Rolling Hills Estates, California 90274 (telefax number (310) 544-7162), (b) If to Acquiror, Laurel Brook Road, Middlefield, Connecticut 06455- 0448, Attention: Gary K. Willis (telefax number 860-347-8372); with a copy to: Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New York 10103, Attention: Paul Jacobs, Esq. (telefax number 212-752-5958), or such other addresses as shall be furnished by like notice by such party. All such notices and communications shall, when telefaxed (immediately thereafter confirmed by telephone), be effective when telefaxed, or if sent by nationally recognized overnight courier service, be effective one business day after the same has been delivered to such courier service marked for overnight delivery, or, if mailed, be effective when received. Section 9.06. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Connecticut, without reference to or application of any conflicts of laws principles. Section 9.07. No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the parties and their respective successors and permitted assigns. Section 9.08. Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company, Acquiror and Shareholders owning a majority-in-interest of the outstanding shares of Company Stock. No waiver by any party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. Section 9.09. Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. Section 9.10. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. -31- Section 9.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 9.12. Headings. The headings used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. -32- IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first written above. ZYGO CORPORATION By: /s/ GARY K. WILLIS --------------------------------- Name: Gary K. Willis Title: President SIGHT SYSTEMS, INC. By: /s/ DAVID GRANT --------------------------------- Name: David Grant Title: President SHAREHOLDERS: /s/ DAVID GRANT --------------------------------- David Grant /s/ MICHAEL A. MAHONEY --------------------------------- Michael A. Mahoney /s/ STEVEN CHAN --------------------------------- Steven Chan /s/ FRED M. HOUSTON --------------------------------- Fred M. Houston -33- SCHEDULE 1
Net Zygo Shares of Shares Being Shareholder's Company Stock Total Zygo Escrowed Issued to the Name Owned (and Shares Zygo Shareholder and Address Being Sold) Being Issued Shares at Closing ----------- ----------- ------------ ------ ---------- David Grant ................... 2002 201,180 10,500 190,680 3032 Camino Del Zuro Thousand Oaks, CA. 91360 Michael A. Mahoney ............ 286 28,740 1,500 27,240 10101 Desoto Avenue #6 Chatsworth, CA. 91311 Steven Chan ................... 286 28,740 1,500 27,240 1348 E. Hillcrest Drive #78 Thousand Oaks, CA. 91360 Fred M. Houston ............... 286 28,740 1,500 27,240 3266 Valewood Circle Thousand Oaks, CA. 91360 ----- ------- ------ ------- Totals ............... 2,860 287,400 15,000 272,400 ===== ======= ====== =======
EX-10.30 5 SHARE PURCHASE AND TRANSFER AGREEMENT SHARE PURCHASE AND TRANSFER AGREEMENT between 1. Dipl. Phys. Heiko Wasmund, born on October 15, 1940 in Flensburg, residing at Lessingstrasse 17, 35614 A(beta)lar, Germany hereinafter referred to as "Seller", and 2. Technical Instrument Company with its business address at 650 North Mary Avenue, Sunnydale, California 94086, USA hereinafter referred to as "Buyer" 3. Syncotec Neue Technologien und Instrumente GmbH, Loherstrasse 4, 35614 A(beta)lar, a company registered in the Commercial Register of Wetzlar under HRB Nr. 750, Germany hereinafter referred to as the "GmbH" 4. Helga Wasmund, born on March 13, 1940 in A(beta)lar, Germany residing at Lessingstrasse 17 35614 A(beta)lar, Germany hereinafter referred to as "Mrs. Wasmund" WHEREAS, the GmbH was established by Seller in 1983 for the purpose of developing, manufacturing and distributing high technology products in Europe; and WHEREAS, the GmbH has a stated capital of one hundred thousand (DM100,000) Deutsche Mark, consisting of two shares with a par value of fifty thousand (DM50,000) Deutsche Mark each; and WHEREAS, pursuant to a Share Purchase and Transfer Agreement made between Seller and Buyer on June 30, 1997, by notarial deed, recorded at notary Roger Zatzsch, Frankfurt/ Main, No Z434/ 1997, Buyer acquired from Seller one share with a par value of fifty thousand (DM50,000) Deutsche Mark, representing fifty (50%) percent of the equity of GmbH; and WHEREAS, Seller remains the owner of one (1) GmbH share with a par value of fifty thousand (DM50,000) Deutsche Mark, representing fifty (50%) percent of the total equity of GmbH (hereinafter the "Share"); and WHEREAS, Seller is interested to sell the Share and the Buyer which is a wholly owned subsidiary of Zygo Corporation ("Zygo"), based on the representations and warranties made by Seller and in accordance with the provisions of this Agreement, is interested in acquiring the Share; and -2- WHEREAS, Seller and Buyer are desirous to consummate this Share Purchase and Transfer Agreement simultaneously herewith. NOW, THEREFORE, the parties agree as follows: I. Takeover Accounts; Indemnification 1. Buyer and Seller will cause the GmbH after June 30, 1997, in cooperation with the tax adviser Steuerburo Scheid, An der Limpseit 26 D - 35630 Ehringshausen, Germany ("Seller's Accountant"), to prepare its financial tax statements (balance sheet and profit and loss account) as of June 30, 1997 ("Balance Sheet Date"). These financial statements ("Takeover Accounts") shall be prepared in accordance with accounting and valuation principles generally accepted in the Federal Republic of Germany and such accounting and valuation principles generally accepted in the Federal Republic of Germany shall be applied consistently and without change as used in the December 31, 1996 year-end accounts of the GmbH including without limitation adjustments and depreciation. 2. Buyer will instruct the Accounting Department of its parent company (the "Accounting Department") and in co-operation with KPMG Deutsche Treuhand-Gesellschaft ("Buyer's Accountant") to review the Takeover Accounts. Seller and the GmbH will permit the Accounting Department and Buyer's Accountant to -3- carry out this review and will give them access to all books, records and information as is necessary to carry out such review. In particular, they shall permit the Accounting Department and the Buyer's Accountant to participate in a physical inventory taking as of July 31, 1997. The Managing Director of the GmbH will give the customary declaration of completeness for the Takeover Accounts. 3. If the Accounting Department cannot agree with the Seller's Accountant on the Takeover Accounts prepared by the GmbH, the points at issue shall be decided with binding effect on both Parties hereto by an arbitrator expert (Schiedsgutachter). If the Parties cannot agree on the arbitrator to be appointed, he or she shall be appointed, at the request of either Party, by the Institut der Wirtschaftsprufer e.V., Dusseldorf. The fees of such arbitration shall be evenly split among the Parties. It is understood and agreed that the decision of the arbitrator experts shall be binding solely for the purposes of the computation of the consideration for the Shares, as provided in s. IV. hereof. 4. The Seller undertakes to indemnify (a) the GmbH and the Buyer against any and all (i) liabilities (whether accrued or contingent and including tax liabilities) and risks existing on the Balance Sheet Date or arising from acts, omissions, events or circumstances occurring at any time up to and including the date of the execution of this Share Purchase and Transfer Agreement (the "Closing Date") to the extent that such liabilities or risks are not shown or reserved against in the Takeover Accounts, except those risks which are -4- fully covered by the GmbH's insurance policies and have been acknowledged by such insurers or (ii) any misrepresentation or breach of covenant by or on the part of the GmbH hereunder; (b) the GmbH and Buyer from and against all personal liabilities (including tax liabilities) of Seller to the extent that the GmbH or Buyer should, for any reason whatsoever be held responsible for such liabilities or such responsibility should be asserted. The indemnification provided for in subsection 4(a)(i) above is limited to 50% (which represent the Seller's pro-rata-share in GmbH's capital) of such liabilities. II. Sale and Transfer of Share 1. Seller hereby sells, transfers and assigns to Buyer all right, title and interest in his GmbH share as defined in the Recitals above with a par value of fifty thousand (DM50,000) Deutsche Mark, which share represents fifty (50%) percent in the stated capital of GmbH, including all and any rights attached and connected with the ownership of such Share. Buyer accepts such sale, transfer and assignment of the Share. The transfer of the Share and its assignment as well shall take place simultaneously herewith. -5- The transfer shall be deemed between the parties effective as of September 1, 1997. 2. The shareholders' meeting of GmbH has approved and GmbH approves the sale and transfer pursuant to Sect. 9 of the Articles of Association. A certified copy of the resolution shall be attached hereto as Exhibit 1. 3. The GmbH hereby acknowledges the transfer pursuant to Sect. 16 para. 1 German GmbH-Law. 4. Buyer and Seller as well as GmbH acting through its managing director, by waiving all formalities under statutory laws and under the Articles of Incorporation, hereby approve the sale and transfer of the Share as described above to the Buyer. 5. Seller represents and warrants to Buyer that the Share represents fifty (50%) percent of the entire share capital of the GmbH and that the Share is fully paid up in an amount equal to the nominal value and not repaid and not subject to assessments of any kind, free and clear from all liens, charges and encumbrances and that Seller is free to make this disposition of the Share to Buyer, and that all required corporate action has been duly taken. There are no options, warrants, agreements or other rights outstanding to acquire any shares of GmbH. -6- III. Management Commencing on September 1, 1997, Seller shall continue to serve as managing director of GmbH pursuant to a new three (3) year employment agreement. The Draft Employment Agreement is attached to this Share Purchase and Transfer Agreement as Exhibit 2 for evidentiary purposes. IV. Consideration 1. The entire consideration (the "Consideration") for the sale and transfer of the Share of GmbH sold to Buyer pursuant to Part II above, and all transactions described above in the recitals and all other obligations undertaken by Seller hereunder shall be the purchase price (the "Purchase Price") for the Share. 2. The Purchase Price shall be the aggregate of the amount of two million six hundred fifty thousand (DM 2,650,000) Deutsche Mark, plus fifty (50%) percent of the net book value (net value of assets less net value of liabilities) of GmbH as of June 30, 1997 as reported on the Takeover Accounts (the "Aggregate Closing Cash Purchase Price"). -7- 3. Except as provided in Part VII, Section 6, within five (5) days from the execution of this Share Purchase and Transfer Agreement, Buyer shall pay two thirds (2/3) of the Purchase Price in the form of a wire transfer to Seller at his bank account No. 9449358 00 with Dresdner Bank AG in Giessen/Wetzlar (SWIFT DRESD DE FF 513/BLZ 513 800 40); and shall pay the remaining third by delivery of registered shares of common stock of Zygo Corporation to Seller. The calculation of the number of Zygo shares to be so delivered shall be based upon the average closing price on the NASDAQ during the ten (10) business days immediately preceding the Closing Date, converted to DM at the exchange rate published in the Wall Street Journal on the business day immediately preceding the Closing Date. 4. With respect to the Aggregate Closing Cash Purchase Price the parties agree as follows: (a) As soon as practicable and in any event no later than ninety (90) days after the Closing Date, the Buyer shall deliver to the Seller a proposed actual balance sheet of the Company as of the Closing Date, in accordance with accounting and valuation principles generally accepted in the Federal Republic of Germany and on a basis consistent with the Takeover Accounts (the "Closing Date Balance Sheet"). (b) As soon as practicable but in no event more than thirty (30) days after receipt of the proposed Closing Date Balance Sheet, the Seller shall inform the Buyer in writing that either the proposed Closing Date Balance Sheet is acceptable or object to the proposed Closing Date Balance -8- Sheet in writing setting forth a specific description of the Seller's objections (it being agreed that the failure of the Seller to deliver such written notice to the Buyer within such thirty (30) day period shall be deemed acceptance by the Seller). If the Seller objects as provided above and if the Buyer does not agree with the Seller's objections, if any (it being agreed that the failure of the Buyer to deliver written notice to the Seller of the Buyer's disagreement with the Seller's objections shall be deemed acceptance by the Buyer), or such objections are not resolved on a mutually agreeable basis within thirty (30) days after the Buyer's receipt of the Seller's objections, any such disagreement shall be promptly submitted to a mutually acceptable accounting firm not employed by any of the parties to this Agreement (the "Unaffiliated Firm"). The Unaffiliated Firm shall resolve within thirty (30) days after said Unaffiliated Firm's engagement by the parties the differences regarding the proposed Closing Date Balance Sheet in accordance with accounting and valuation principles generally accepted in the Federal Republic of Germany and on a basis consistent with the Takeover Accounts and this Agreement. The decision of such Unaffiliated Firm shall be final and binding upon, and its fees, costs and expenses shall be shared equally by the Buyer and the Seller. The Buyer and the Seller shall each bear the fees, costs and expenses of its own accountants, if any. Upon resolution of any such dispute, the determination of the Closing Date Balance Sheet shall be deemed to be final. -9- (c) If the Closing Date Balance Sheet as finally determined pursuant to this Section 4. shows that the "net book value" of the Company (i.e., the book value of the assets acquired less the book value of liabilities assumed) as at the Closing Date is greater than or less than DM1,485,410.00, then the Aggregate Cash Closing Purchase Price shall be increased or reduced, as applicable, in the aggregate, for fifty (50%) percent of the change. Such amount shall, promptly, but in no event later than five (5) Business Days after final determination of the Closing Date Balance Sheet, be paid by the Seller to the Buyer or returned by the Buyer to the Seller, as applicable. V. Representations and Warranties In the execution of this Share Purchase and Transfer Agreement, the Buyer relies on the accuracy of the representations and warranties made by Seller in the agreement and hereinafter. Seller herewith expressly represents and warrants as guaranteed qualities of the GmbH that on today's date and, if different, on and as of the date of the Closing, the following representations and warranties are correct: 1. (a) The information given in the Preamble hereto is complete and accurate in all respects. -10- (b) Persons and companies other than Seller and Buyer do not hold directly or indirectly any share or other interest in the GmbH of any nature whatsoever, nor do they have a right to any such interest (including the right to purchase or otherwise acquire an interest in the GmbH). The Share is not subject to any rights of third parties. (c) Seller and his relatives (Angehorige) within the meaning of Section 15 of the German Tax Code (Abgabenordnung) - "Relatives" - do not hold any interest whatsoever in any other business entity engaged in a business in which GmbH is active except for publicly listed shares quoted at a stock exchange. (d) The execution and consummation of this Agreement and the transactions and agreements contemplated hereby is valid and binding on Seller and does not require the consent or authorization of any third party or of any court or administrative authority. 2. Seller has permitted the Accounting Department and Buyer's Accountant on behalf of Buyer to review and analyze the tax accounts of the GmbH since December 31, 1993. These accounts submitted by Seller to the Accounting Department have been prepared with the care of a conscientious businessman in accordance with accounting and valuation principles generally accepted in the Federal Republic of Germany and these principles have been applied consistently and without change as in prior fiscal years of the GmbH, respectively. All ascertainable risks, devaluations and losses have been reflected by sufficient depreciation, adjustment in value and reserves. The said material is complete -11- and accurate and presents fairly and completely the financial condition of the GmbH respectively at the respective dates and the results of the operations of their business for the periods thereby covered. All other information given to the Accounting Department was true and accurate and was not incomplete in a way as to make any information given misleading. 3. Since December 31, 1996, there has not been in the GmbH (a) any change in the business operations or the financial conditions or the manner of conducting the business other than changes arising in the ordinary course of business, none of which has had a material adverse effect on the business operations or the financial condition of the GmbH; (b) any damage, including financial damage or loss (whether covered by insurance or not) materially adversely affecting any material asset or the business operations of the GmbH; (c) the termination or a material change of any material contract of the GmbH. 4. The GmbH has good, unrestricted and unencumbered title to, and possession of, all the personal property reflected in the accounts, and such property which has been acquired since then. All inventory is in good and saleable condition. All property is in good working order and condition. The GmbH has all necessary assets to conduct business in a manner similar to that conducted in the past and as contemplated to be conducted. 5. There is no litigation, arbitration or administrative proceeding or investigation pending or threatened against the GmbH nor are circumstances known to exist -12- which reasonably might be expected to result in such litigation, arbitration, administrative proceedings or investigation, nor is the GmbH a party to any other litigation or contentious proceeding. 6. The GmbH is holding such trademarks, patents and other industrial property rights necessary for the conduct of the GmbH's business in the manner currently conducted by it. There do not exist any rights of third parties, and in particular no industrial property rights of third parties which any of the GmbH infringes by its firm name or any part thereof or by any name used by it or the conduct of its business or any other act within its business. The Seller does not own any industrial rights, especially no patent rights, which belong to the business of the GmbH or is related thereto. 7. The GmbH had not significant problems in obtaining in a timely manner and at reasonable costs any and all materials (raw, finished and otherwise) used or to be used in the business of the GmbH, nor does the GmbH have any reason to believe that it will have any significant problems in obtaining such materials in future. The GmbH has not received written notice of intent to terminate any material contracts or agreements for the purchase of the products of the GmbH nor does the GmbH have knowledge of any circumstances which are likely to result in a material decrease of GmbH's forecasted annual sales for the fiscal year ending December 31, 1997. 8. The GmbH has (a) duly filed all tax returns up to and including fiscal year 1996 and other reports required under the applicable laws with tax and other authorities, -13- (b) made all current tax prepayments for all applicable taxes, (c) withheld all taxes, social security charges and other charges to be withheld and have paid them to the respective recipient. 9. Seller and his Relatives and companies and partnerships directly or indirectly controlled by Seller and/or his Relatives do not have any claims, other than from the existing employment contract of Heiko Wasmund, from the property lease agreement of Helga Wasmund, or other rights against the GmbH or in any tangible or intangible asset which is used or destined to be used in the business of the GmbH. 10. (a) The GmbH is not in default under any law or ordinance, or under any order of any court or federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality wherever located (other than as may be described elsewhere herein). (b) The GmbH has operated from its inception, and will continue to operate through the Closing Date, legally and in compliance with all conditions and requirements of all applicable zoning laws, federal, state and local statutes, ordinances, rules, regulations, permits, policies, guidelines, orders, franchises, authorizations and consents, and neither the GmbH nor the Seller have received notice of any asserted past or present failure to comply with any law, ordinance, regulation, permit, order or requirement. The Seller knows of no other facts or circumstances which may result in any future civil, administrative or criminal proceedings against the GmbH. -14- (c) The GmbH has not transported, stored, treated or disposed, nor has it allowed or arranged for any third person to transport, store, treat or dispose hazardous waste to or at (1) any location other than a site lawfully permitted to receive such waste for such purposes or (2) any location designated for remedial action pursuant to the applicable laws, as from time to time amended, or any similar federal or state statute assigning responsibility for the cost of investigating or remediating releases of contaminants into the environment; nor has the GmbH performed, arranged for or allowed, by any method or procedure, such transportation or disposal in contravention of state or federal laws and regulations or in any other manner which gives rise to any liability whatsoever; and the GmbH has not disposed of nor has it allowed or arranged for third parties to dispose of hazardous waste upon property owned or leased by it, except as permitted by law. 11. The GmbH's performances of services have been conducted in accordance with standards of practice ordinarily exercised at the time and within the locality where the services were performed, including, without limitation, compliance with applicable laws, regulations and standards governing the provision of services to the public. 12. The GmbH leases all of its land and buildings whereon it operates and conducts its business and affairs from Seller's spouse, Helga Wasmund. This lease contract is valid and binding on the parties thereto until June 30, 2003. Neither the GmbH nor Helga Wasmund has breached or is in default under any material -15- obligation contained in this lease contract. The execution and consummation of this Agreement does not give to Helga Wasmund a right of termination or the right to an amendment of such contract. Notwithstanding anything to the contrary contained in the lease, Helga Wasmund hereby expressly agrees to maintain this lease with GmbH for the remaining term of the current lease and, thereafter at the option of GmbH, to renew it for another five (5) year term on substantially the same terms as currently provided for. In case of such a renewal Helga Wasmund shall be entitled to adjustment of the rent equivalent to the inflation increase. The parties hereto agree to amend the lease to provide for the foregoing. GmbH owns no real property. VI. Period until the Closing Date 1. Seller will give Buyer and its respective representatives access to the GmbH's files including all its books and records. 2. Seller guarantees that until the Closing Date, the GmbH will operate its business in the normal manner consistent with past practice and that, without the prior written consent of Buyer the GmbH will not enter into any contract or assume any liability other than contemplated herein or in the ordinary course of business. -16- 3. Seller agrees not to make or to let any person or company or partnership make any withdrawals from the GmbH for any purpose whatsoever. For this purpose the term "withdrawals" includes the declaration or payment of a dividend or interim dividend, any payment to Seller or Relatives under lease, employment, advisory or similar contracts and the repayment of, or the payment of interest for, any balances on capital, loan or other accounts of Seller to the GmbH. Heiko and Helga Wasmund as well as Annette Wasmund shall be entitled to withdraw any loan amounts prior to the Closing Date, which GmbH received from them prior to the Closing Date. VII. Liability, Full Implementation 1. Any inspection, audit, investigation or review made by Buyer before the execution of this Agreement, shall in no way affect the representations and warranties of Seller contained herein or made in pursuance hereof. 2. The statute of limitations for any claims hereunder shall be eighteen (18) months from the date of the Closing Date unless a longer period is provided for the respective claim by the laws of the Federal Republic of Germany. Notwithstanding the foregoing, the statute of limitations shall expire, with respect to tax liabilities, six months after final assessment following the tax audits for the respective periods, of all taxes of the GmbH. -17- 3. With respect to the handling of tax matters and changes, if any, which may result from a tax audit the following shall apply: (a) Buyer will notify Seller promptly of any tax audit relating to the period until the Closing Date. Seller is entitled to participate in such tax audit and to comment thereon irrespective of whether the respective tax audit concerns business taxes or personal taxes of Seller. (b) If as a result of such tax audit there should be an increase of the taxes of the GmbH payable for the period up to the Closing Date, these taxes shall be borne by Seller and Seller will, if applicable, hold the GmbH harmless and indemnified from and against the respective tax liabilities. Seller shall not be required to bear an increase of taxes and to hold the GmbH harmless and indemnified to the extent such increase of taxes results from timing differences and GmbH will benefit from a reverse effect during the time after the Closing Date. In any event the liability of the Seller shall be limited to 50% (Seller's pro-rata-share in GmbH's capital) of the respective amounts. (c) The result of the tax audit shall have no other effects on the present Agreement except those described in Paragraph (b) above. In particular, profit increases or profit decreases determined by the tax office shall neither affect the Purchase Price nor the obligation of indemnification in accordance with Paragraph (b). The representations and warranties in accordance with Part V above shall be absolute and effective, as drafted, and shall not be affected by any tax audit or the results thereof. -18- 4. Buyer will grant Seller the right to inspect all business records of the GmbH relating to the period prior and up to the Closing Date if this inspection is requested for tax reasons or for reasons of defense against claims or for other legitimate reasons connected with Seller's former interests in the GmbH (but always in a manner of time so as to avoid any business interruption or interference with GmbH or Buyer). 5. Seller undertakes to execute in due form and delivers at the request of Buyer also at any time after today's date and without additional remuneration any documents and to perform any acts which may be necessary in order to comply fully with the purpose of this Agreement. 6. Buyer shall retain from the Purchase Price an amount of three hundred thousand (DM300,000) Deutsche Mark during the above mentioned period of eighteen (18) months to secure the faithful performance of the provisions in this Paragraph VII and the indemnifications provided hereunder, such amount (the "Escrow Amount") to be held in escrow by the acting Notary. The Notary shall release the Escrow Amount so held or parts thereof only upon mutual instruction to be signed by Seller and Buyer to the bank account named in that instruction. Until the expiration of the above mentioned eighteen (18) month period, the Notary shall deposit the Escrow Amount on a month to month basis on time deposit. The interest on the Escrow Amount shall become part of the escrow. After expiration of the above mentioned eighteen (18) month period and provided that Buyer and Seller have not instructed the Notary otherwise, the Notary shall extend the escrow for any amount in dispute until the dispute -19- between the parties has been finally and irrevocably resolved. The Notary shall be entitled to deduct the notarial fees from the amount to be paid. VIII. NON-COMPETITION 1. Seller agrees that during his employment by the GmbH and throughout the period ending on the third anniversary of the last day of the scheduled term of his Employment Agreement with the GmbH dated September 1, 1997 (including any extensions thereof) (the "Non-Competitive Period"), Seller shall not, directly or indirectly, as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any capacity whatsoever engage in, become financially interested in, be employed by, render any consultation or business advice with respect to, or have any connection with, any business engaged in the research, development, testing, design, manufacture, sale, lease, marketing, utilization or exploitation of any products or services which are designed for the same purpose as, are similar to, or are otherwise competitive with, products or services of the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates, in any geographic area where, at the time of the termination or expiration of his employment hereunder, the business of the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates was being conducted or was proposed to be conducted in any manner whatsoever -20- worldwide; provided, however, that Seller may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time one percent (1%) of any class of stock or securities of such corporation. In addition, Seller shall not, directly or indirectly, during the Non-Competitive Period, request or cause contracting parties, suppliers or customers with whom the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates has a business relationship to cancel or terminate any such business relationship with the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates or solicit, interfere with or entice from the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates any employee (or former employee) of the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates. 2. If any portion of the restrictions set forth in this Section VIII should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected. 3. Seller acknowledges that the GmbH, Buyer and/or Zygo conducts business on a world-wide basis, that its sales and marketing prospects are for continued expansion into world markets and that, therefore, the territorial and time limitations set forth in this Section VIII are reasonable and properly required for the adequate protection of the business of the GmbH, Buyer, Zygo and their respective subsidiaries. In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Seller agrees to -21- the reduction of the territorial or time limitation to the area or period which such court deems reasonable. 4. The existence of any claim or cause of action by Seller against the GmbH, Buyer, Zygo or any of their respective subsidiaries or affiliates shall not constitute a defense to the enforcement by the GmbH, Buyer, Zygo or any such subsidiary or affiliate of the foregoing restrictive covenants, but such claim or cause of action shall be litigated separately. IX. General 1. The costs of GmbH's Accountant shall be borne by GmbH, and those of the Accounting Department and Buyer's Accountant shall be borne by Buyer. The notary's and court fees as well as transfer taxes and taxes on stock exchange dealings, connected with this Agreement shall be borne by Buyer. Apart therefrom, each party shall bear the costs of its advisors and auditors. 2. Any changes and amendments to this Agreement shall only be valid if made in writing or, if necessary, in notarized form. Declarations to be made under this Agreement shall be made in writing unless expressly provided otherwise. 3. Should any provision of this Agreement be or become invalid in whole or in part, the validity of the other provisions shall not be affected thereby. To the extent -22- legally possible, the invalid provision shall be replaced by a provision corresponding to the meaning and purpose of this Agreement. 4. This Agreement shall be governed by German law. The courts of Frankfurt/am Main shall have exclusive jurisdiction for all disputes arising hereunder, except relating to the agreement on the June 30, 1997 Takeover Accounts, pursuant to Paragraph I(3) hereof. 5. The English version of this Agreement shall be binding. -23- EX-10.31 6 SUBCONTRACT B335L88 SUBCONTRACT B335l88 between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA LAWRENCE LIVERMORE NATIONAL LABORATORY and ZYGO CORPORATION INTRODUCTION ------------ This is a hybrid subcontract, with fixed price and cost plus fixed fee sections. The parties to this Subcontract are The Regents of the University of California, a California corporation, hereinafter called "University," and Zygo Corporation, hereinafter called "Subcontractor." The Regents of the University of California have entered into Prime Contract No. W-7405-ENG-48 with 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 and the performance of certain research and development work. This Subcontract is entered into as a subcontract in furtherance of the work provided for under the Prime Contract. 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. This Signature Page and the SCHEDULE OF ARTICLES collectively constitute the entire Subcontract and shall supersede all prior proposals, negotiations, representations, or agreements, whether written or oral. ZYGO CORPORATION THE REGENTS OF THE UNIVERSITY OF CALIFORNIA BY: /s/ GARY K. WILLIS BY: /s/ JOHN S. HUNT ---------------------------- ------------------------------------- Gary K. Willis John S. Hunt TITLE: President and CEO TITLE: Laboratory Business Manager ------------------------- ------------------------------------- DATE: 5/9/97 DATE: 5-8-97 -------------------------- ------------------------------------- University Procurement Representative: Margaret C. Cooke, (510) 423-2178 SCHEDULE OF ARTICLES FOR SUBCONTRACT B335188 ARTICLE 1.-- SCOPE OF WORK - -------------------------- A. The Subcontractor shall conduct certain work generally described as Amplifier Finishing Lead Facilitization and Initial Production of Flat Optics. The work is more specifically described in the Statement of Work as Facilitization (F). B. The University may, at its unilateral option, by written notification to the Subcontractor require the continued performance of the work described in the Statement of Work as Pilot Production (P0), hereafter known as Option 1". This option must be exercised no later than 60 days prior to the completion of the work defined in paragraph A above. C. The University may, by written notification to the Subcontractor require the continued performance of the work described in the Statement of Work as Initial Production (P1), hereafter known as "Option 2". Written notification of the University's desire to exercise this option and price it accordingly must be given no later than 120 days prior to the completion of the work defined in paragraph B above. D. The University may, by unilateral modification to the Subcontract, purchase a 24-inch interferometer for the price shown in Article 3 below. This interferometer is to be essentially the same as the two to be provided by the Subcontractor at no additional cost to the University. This option is hereafter known as Option 3". The decision to purchase this additional unit will be based, in part, on the input and recommendation of the Subcontractor and the results of efforts to provide this capability through other means. This option may be exercised at any time during any exercised option (F, P0 or P1). E. The Subcontractor shall furnish all personnel, supervision, materials, supplies, equipment (including two 24-inch interferometers), 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, and reports specified, and all residuals. F. The work shall be performed by the Subcontractor at the Subcontractor's facility located at Middlefield, CT and at other locations approved by the University. G. Acceptance of the work under this Subcontract shall be based on the Subcontractor's performance and completion of the work in consonance with high professional standards and compliance with the delivery and reporting requirements specified herein. H. This Subcontract is a DX-E1 Rated Order, certified for national defense use under the DEFENSE PRIORITIES AND ALLOCATIONS SYSTEM. The Subcontractor shall comply with the requirements of the Defense Priorities and Allocations System regulation (15 CFR Part 700). ARTICLE 2 -- PERIOD OF PERFORMANCE - ---------------------------------- A. The work authorized and described in ARTICLE 1 - SCOPE OF WORK, Paragraph A shall be completed by October 31, 1998 unless completely performed prior thereto or sooner terminated in accordance with the clause of the GENERAL PROVISIONS entitled TERMINATION FOR -1- CONVENIENCE OF THE GOVERNMENT (FIXED PRICE) for fixed price work, or Termination (COST REIMBURSEMENT) for all cost reimbursement work. B. The University may extend the period of performance by written notice to the Subcontractor, unilaterally exercising any or all of the following options: 1. Option No. 1 (P0): Inclusive period of performance of 18 months. 2. Option No. 2 (P1): Inclusive period of performance of 6 months. 3. Option No. 3 (Interferometer): To be completed during the inclusive period of performance defined at the time this option is exercised. The total period of performance of this Subcontract, inclusive of all optional periods, shall not exceed 41 months. ARTICLE 3 -- FIXED PRICE AND LIMITATION OF OBLIGATION - ----------------------------------------------------- (For fixed price work only) A. Fixed Price -- Authorized Work ------------------------------ The Subcontractor shall perform this Subcontract for the total fixed price of NINE MILLION, EIGHT HUNDRED SEVENTY-ONE THOUSAND, EIGHT HUNDRED TEN and NO/l00 DOLLARS ($9,871,810.00). The fixed price stated above does not include, and the University shall not be charged for, any State Sales & Use Tax, as the University holds California Seller's State Resale Permit No. SR-CHA 21-135323. B. Fixed Price -- Option 2 (if exercised) ----------------------- The fixed price for the work defined as Option 2 in Article 1 above shall be negotiated and defined if and when this option is exercised. C. Fixed Price -- Option 3 (if exercised) ----------------------- The Subcontractor shall perform the work defined as Option 3 in Article 1 for the total fixed price of THREE HUNDRED Fifty THOUSAND AND NO/1OO DOLLARS ($350,000.00). D. Pricing of Adjustments: When costs are a factor in any determination of a Subcontract price adjustment pursuant to the "Changes" clause 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 on the effective date of this Subcontract. E. Limitation Of Obligation -- Available Funds ------------------------------------------- 1. Funds appropriated by the U. S. Congress and made available to the University by the Government's obligation of funds to the prime contract are the sole source for payment of all work to be done and all claims of any type that may be made pursuant to the Subcontract. The project will be funded in increments as annual appropriations are made by Congress to the Department of Energy for obligation to the project by the University. For FY 1997, $5,542,504.00 has been appropriated and is presently available for payment ("Available Funds"). These funds are expected to cover the period through September 30, 1997. For FY 1998, $4,329,306.00 are anticipated to be appropriated to cover the balance -2- of the work from October 1, 1997 through October 31, 1998. While it is anticipated that subsequent year appropriations will be made, there is no assurance or obligation on the part of the University that this will occur. The University has no obligation under this Subcontract to make any payments in excess of Available Funds. Should such appropriations be made, the University will notify the Subcontractor in writing and reserves the unilateral right to modify the amount of Available Funds specified in this Subcontract. The University shall have no liability whatsoever to the Subcontractor arising out of or in any way connected with the Subcontract work or claims arising therefrom, save and except such liability as may be paid from funds appropriated by the U.S. Congress. 2. The Subcontractor is obligated to continue performance of the work until such time as the Available Funds are insufficient to pay for the work and any claims related thereto. The subcontractor shall give notice 30 days in advance of the date upon which the costs of the work (defined as actuals plus commitments) constitute 75% of the Available Funds. Such notice will be based on review of progress payments made to date, monthly status reports, periodic site visits/inspections, on-site reviews, etc. 3. Upon receipt of such notice, the University within 30 days may elect to stop the work pursuant to the General Provision entitled "STOP WORK ORDER". At or before the end of that period, the University may elect to rescind the stop work order or terminate the Subcontract pursuant to the General Provision entitled "TERMINATION FOR CONVENIENCE". This Article does not restrict the University's rights to modify the Subcontract pursuant to the "CHANGES" Clause. 4. Should the Subcontract be amended to allocate additional funds for continued performance of the work under this Subcontract, the provisions of the preceding paragraphs above shall apply in like manner to such additional allotted funds and subsequent dates pertaining thereto. 5. After notice of termination, the University may at any time prior to the effective date of termination, allot additional funds for this Subcontract and, with the consent of the Subcontractor, rescind said termination. 6. The provisions of this Clause with respect to termination shall in no way be deemed to limit the rights of the University under the Clause hereof entitled "DEFAULT." The provisions of this Clause are limited to the allotment of funds for performance of the work of this Subcontract. ARTICLE 4 -- ESTIMATED COST AND FIXED FEE (Option No. 1) - ----------------------------------------- (For cost reimbursement work only, if the option is exercised through formal modification to the subcontract.) A. Estimate of Cost and Fixed Fee ------------------------------ 1. The estimated cost for the Subcontractor's performance of this Subcontract, exclusive of the Subcontractor's fixed fee, is TWO MILLION, FOUR HUNDRED THIRTY-ONE THOUSAND, THIRTY AND NO/100 DOLLARS ($2,431,030.00). 2. The Subcontractor's fixed fee for performance of this Subcontract shall be TWO HUNDRED FORTY-THREE THOUSAND, SIXTY AND NO/100 DOLLARS ($243,060.00). 3. The aggregate of the estimated cost and fixed fee is TWO MILLION SIX HUNDRED SEVENTY-FOUR THOUSAND, NINETY AND NO/100 DOLLARS ($2,674,090.00). -3- B. Limitation of Costs ------------------- 1. The aggregate of the estimated cost and fixed fee specified in Paragraph A.3, above, is allocated to this Subcontract for work under this option. 2. Pursuant to the clause of the GENERAL PROVISIONS for Cost Plus Fixed Fee Subcontracts entitled LIMITATION OF COST, the estimated cost specified in Paragraph A. 1, above, shall be the limit of the University's cost liability under this Subcontract, and shall not be exceeded by the Subcontractor. 3. The Subcontractor shall notify the University's Subcontract Administrator in writing at least five (5) working days prior to stopping the work to avoid exceeding the estimated cost specified in Paragraph A. 1, above. C. Revised Estimate of Cost -- The estimated cost for this Subcontract may be increased or decreased by a written modification to this Subcontract issued by the University's Subcontract Administrator. Modifications shall not be considered as authorization to exceed the estimated cost unless they contain a statement increasing the estimated cost. D. Cost Information -- The Subcontractor shall maintain, at all times while the work is in progress, current cost information adequate to reflect the cost of performance of this Subcontract and shall prepare and furnish to the University such written estimates of cost and information in support thereof as the University may request. ARTICLE 5 -- PRICE AND PAYMENT PROVISIONS (For fixed price work only.) - ----------------------------------------- A. The University will make progress payments as the work proceeds. Progress payments shall be based on estimates of work accomplished which meets the standards of quality established in the Subcontract and approved by the University. Progress payments will be made monthly. The Subcontractor shall furnish a breakdown of the progress payment showing the amount included therein for each principal category of the work (labor, equipment and facilities) which shall substantiate the payment amount requested, in such detail as requested by the University. B. When the University approves a request for a progress payment, the University will retain five (5) percent of the payment amount. However, if satisfactory progress has not been made, the University may retain up to ten (10) percent of the amount of any payment until satisfactory progress is achieved. When satisfactory progress has been re-established, the University may release the excess retention for payment. C. When the work is substantially complete, the University may retain from previously withheld amounts or future progress payments that amount the University considers adequate for protection of the University and may release to the Subcontractor all the remaining withheld funds. The University will pay the total fixed price, including any retention, after: 1. Completion and acceptance of all work in accordance to the following Facility Acceptance Principles: a. On-site reviews to be held no less than quarterly. These sessions will review progress to date and projected progress for the next quarter. Laboratory representatives will observe the physical plant and all equipment assembled as of that point. b. Review of the Subcontractor's equipment check-out results. The Laboratory representatives may review the actual equipment, any testing data, etc. -4- c. A final on-site review to be held no later than one month after Facility completion. This review will include a walk-through, demonstration of major equipment as requested by the Laboratory representatives, and inspection of the entire facility as deemed appropriate. 2. Presentation of a properly executed voucher; and 3. Presentation of an executed Assignment and Release, releasing all claims against the University and Government arising by virtue of this Subcontract other than claims, in stated amounts, that the Subcontractor has specifically excepted from the operation of the release. Another Assignment and Release may be required of the assignee if the Subcontractor's claim to amounts payable under this Subcontract has been assigned. ARTICLE 6 -- REIMBURSEMENT OF COSTS (For cost reimbursement work only.) - ----------------------------------- A. Allowability ------------ 1. Costs incurred by the Subcontractor for performance of this Subcontract shall be allowable to the extent they are reasonable, allocable, and determined to be allowable in accordance with the provisions of this Subcontract and the cost principles and procedures of Subpart 31.2 of the Federal Acquisition Regulations (48 CFR Part 31.2), as modified by Subpart 931.2 the DOE Acquisition Regulations (DEAR) (48 CFR 931.2). 2. Nothing contained in this article shall authorize the estimated cost amount stipulated in ARTICLE 4 -- ESTIMATED COST AND FIXED FEE to be exceeded. 3. Any audit conducted hereunder shall be in accordance with the provisions of this Subcontract and the cost principles and procedures specified in A.1, above. The University will endeavor to arrange for any audit conducted hereunder to be performed by the cognizant government audit agency, through the DOE, though reserves the right to request that a University Cost/Price Analyst perform that audit if agreeable to the Subcontractor. B. Provisional Indirect Costs Rates -------------------------------- 1. Pending final audit and determination of indirect costs, the Subcontractor shall be paid in accordance with the following provisional indirect cost rates, which rates may be revised from time to time, but not more frequently than every six (6) months, by a unilateral modification to this Subcontract, as recommended or approved by the cognizant government audit agency and accepted by the University: G&A 15.62% Duration of P0 (Option No. 1) 2. When the actual indirect rates and costs have been determined pursuant to the provisions of this Subcontract and the cost principles and procedures specified in paragraph A.1 of this article, the difference between the actual indirect costs and the provisional payments shall be paid; provided, however, that any such payment shall not cause the estimated cost amount stipulated in ARTICLE 4 -- ESTIMATED COST AND FIXED FEE to be exceeded. C. Waiver Of Facilities Capital Cost Of Money ------------------------------------------ The Subcontractor is aware that facilities capital cost of money is an allowable cost but waives the right to claim it under this Subcontract. -5- ARTICLE 7 -- INVOICES AND PAYMENT PROCESSING - -------------------------------------------- A. Invoices for Fixed Price Work ----------------------------- All invoices shall be submitted to the LLNL Procurement & Materiel's Subcontract Administration Support Section ("SASS") at the following address: University of California Lawrence Livermore National Laboratory Attention: SASS Group, L-650 P.O. Box 5012 Livermore, CA 94551 B. Payment Terms for Fixed Price Work ---------------------------------- 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. Payments made thereafter shall not he subject to any interest or late charges. (See also Articles 5 and 10.) C. Invoices for Cost Reimbursement Work ------------------------------------ The invoicing and payment of costs incurred shall be in accordance with the clause of the GENERAL PROVISIONS for Cost Plus Fixed Fee subcontracts entitled ALLOWABLE COST AND PAYMENT. Payment of the fixed fee shall he made in monthly installments based upon the percentage of completion of the work, as determined or approved by the University's Subcontract Administrator, and shall be subject to a 15% fee retention until a reserve is set aside in an amount that the University considers necessary to protect the University's interest. The reserve shall not exceed 15% of the total fixed fee or $100,000.00, whichever is less. D. Payment Terms for Cost Reimbursement Work All invoices shall substantially comply with the requirements of the attached VOUCHER FORM & INSTRUCTONS. All invoices except the completion invoice shall be processed for payment within thirty (30) days of receipt; provided, however, that payments made thereafter shall not he subject to any interest or late charges. E. All invoices shall be submitted to the LLNL Procurement & Materiel's Subcontract Administration Support Section ("SASS") at the following address: University of California Lawrence Livermore National Laboratory Attention: SASS Group, L-650 P.O. Box 5012 Livermore, CA 94551 F. All invoices requesting reimbursement for any property acquired by the Subcontractor shall either include a completed copy of the attached PROPERTY IDENTIFICATION LIST for the following classes of property or a certification that such property does not include any of the reportable classes of property: CONTROLLED PROPERTY: Any property purchased for $5,000.00 or more. ATTRACTIVE PROPERTY: My attractive property, as defined in the attached Property Identification List -6- ARTICLE 8 -- COORDINATION AND ADMINISTRATION - -------------------------------------------- A. THE University's Subcontract Administrator for this Subcontract is Margaret C. Cooke or her designee. All matters relating to the non-technical interpretation; administration, and performance of this Subcontract shall be reserved to the University's Subcontract Administrator. The Subcontractor shall direct all notices and requests for approval to the University's Subcontract Administrator, and any notices or approvals from the University to the Subcontractor shall be issued by the University's Subcontract Administrator. B. The University's Technical Representative under this Subcontract is Dave Aikens or his designee, who shall represent the University in matters relating to the technical performance of the Scope of Work described herein. The University's Technical Representative shall interpret the technical requirements of the Scope of Work and determine the emphasis and direction of the Subcontractor in the conduct of the work. ARTICLE 9 -- TECHNICAL DIRECTION AND CHANGES - -------------------------------------------- A. Performance of the work under this Subcontract shall be subject to the technical direction of the University's Technical Representative. The term "technical direction" is defined to include, without limitation: 1. Directions to the Subcontractor which redirect the Subcontract effort, shift work emphasis between work areas or tasks, require pursuit of certain lines of inquiry, fill in details or otherwise serve to accomplish the Subcontract Statement of Work; 2. Provision of written information to the Subcontractor which assists in the interpretation of drawings, specifications, or technical portions of the work description; and 3. Review and, where required by the Subcontract, approval of technical reports, drawings, specifications, and information to be delivered by the Subcontractor to the University under the Subcontract. B. All technical direction must be within the scope of work stated in the Subcontract and shall be issued in writing by the University's Technical Representative. C. The Subcontractor shall proceed promptly with the performance of technical direction of the nature prescribed by this section issued by the University's Technical Representative. D. The University's Technical Representative is not authorized to issue, and the Subcontractor shall not comply with, any technical direction which would: 1. Constitute a change within the general scope of work, affecting the description of the work to be performed, (including applicable drawings, designs, and specifications), the time of performance, or the place of performance. 2. Constitute an assignment of work outside the general scope of the work covered by this Subcontract; 3. Increase the price for performance of the work or the time required for performance of the work; 4. Change any expressed term or condition of the Subcontract; or 5. Unreasonably interfere with the Subcontractor's ability to perform and complete the work, as required under the Subcontract. -7- Any such technical direction must first be authorized by a written change order to this Subcontract issued by the University's Subcontract Administrator, as provided in the clause of the GENERAL PROVISIONS entitled CHANGES-FIXED PRICE for all fixed price work, or the clause entitled CHANGES-COST REIMBURSEMENT for all cost reimbursable work. E. If any instruction or direction by the University's Technical Representative falls within one of the types described in paragraph D, above, the Subcontractor shall not proceed, and shall promptly notify the University's Subcontract Administrator in writing, and shall request the University's Subcontract Administrator to modify the Subcontract accordingly. Upon receipt of the notification from the Subcontractor, the University's Subcontract Administrator shall promptly: 1. Advise the Subcontractor in writing that the technical direction is within the scope of the Subcontract effort and does not constitute a change under the clause of the GENERAL PROVISIONS entitled CHANGES-FIXED PRlCE for all fixed price work, or the clause entitled CHANGES-COST REIMBURSEMENT for all cost reimbursable work; or 2. Issue a written change order. ARTICLE 10 -- REPORTS - --------------------- A. Type of Reports The Subcontractor shall prepare and submit the following reports to the University: 1. Monthly Progress Reports -- (Type A) -- Monthly technical and financial progress reports shall be submitted by the fifth working day after the close of the Subcontractor's accounting month. The first monthly report shall establish time-phased work schedules and budgetary baselines against which progress can be measured. It should also include an updated discussion of the subcontractor's approach to executing this subcontract, specifically in terms of the facilitization plan as negotiated. Subsequent monthly progress reports shall contain a description of technical progress to date by task and technical status charted against the baseline schedule, and the work planned for the succeeding period. Monthly financial status reports shall include all actual costs incurred plus outstanding commitments to the end of the month, and projected costs for the next reporting period. Variances between the baselines and actual experience shall be briefly addressed to explain the cause of the variance and identify corrective action as appropriate. The financial status report shall support any invoicing submitted for the month. 2. Statement of Work Required Reporting (Type B) -- These reports shall be submitted in accordance with the Statement of Work. The form and content of these reports shall be acceptable to the University's Technical Representative. If so requested, a draft copy of the reports shall be provided to the University's Technical Representative for review prior to final submittal. B. Distribution of Reports ----------------------- Reports shall be separately addressed and transmitted to: -8- University of California Lawrence Livermore National Laboratory Attention: (Intended Recipient; see below) P.O. Box 808 7000 East Avenue Livermore, CA 94551 Type Report No. of Copies Recipient ----------- ------------- --------- A & B 2 Dave Aikens, L-487 A & B 1 Margaret Cooke L-443 The Subcontractor shall not distribute reports of work under this Subcontract to any individual or organization other than those indicated above or an authorized representative of the U. S. Department of Energy without prior written approval of the University's Subcontract Administrator. C. Interim Reports It is understood that there will be other information exchanged between the parties from time to time. These data may be exchanged directly between the parties concerned; formal reporting and distribution is not required in these cases. ARTICLE 11 -- PROPERTY - ---------------------- A. The Subcontractor shall acquire, and the University shall furnish to the Subcontractor, the materials, equipment, supplies, and/or tangible personal property items identified below, if any, for use under this Subcontract: Subcontractor Acquired Property: -------------------------------- See attached Government Property Listing University Furnished Government Property: ----------------------------------------- See attached Government Property Listing B. All property furnished by the University under this Subcontract shall be identified, controlled, and dispositioned in accordance with the clause incorporated in the SUPPLEMENT TO GENERAL PROVISIONS entitled GOVERNMENT FURNISHED PROPERTY -- FIXED PRICE for all property under fixed price work, and in accordance with the clause entitled GOVERNMENT PROPERTY (COST REIMBURSEMENT) for all CPFF work. Disposition directions and authorization shall be provided by the University's Subcontract Administrator or a University property representative. C. Title to all property acquired by the Subcontractor under this Subcontract shall vest in the Government upon the vendor's delivery of such property to the Subcontractor. The Subcontractor shall assume the risk and responsibility for its loss or damage, except: (1) for reasonable wear and tear; (2) to the extent it is consumed in performing this Subcontract; or (3) as otherwise provided in this Subcontract. D. All property acquired by the Subcontractor or furnished by the University under this Subcontract shall be used only for performing this Subcontract and shall not be utilized after the completion, expiration or termination of this Subcontract, for any reason, unless otherwise provided in this Subcontract or approved by the University's Subcontract Administrator or a University property representative. -9- E. The work described herein is based upon the University furnishing optical materials to the Subcontractor. The Subcontractor shall not be liable for any loss or damage to this optical material while it is in process, except if the loss or damage is the result of negligence or willful acts on the part of the Subcontractor. The Subcontractor shall not be obligated to insure optical material furnished to the Subcontractor by the University. F. Non-subcontract Use of Government Owned Equipment: 1. Not withstanding the limitation on subcontractor use of Government property in the GENERAL PROVISION entitled GOVERNMENT FURNISHED 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 customers as defined in paragraph 1 above, or to the appropriate indirect cost pool. In the case of the three ring polishers (RPs) (Reference Subcontract No. B334926), the Subcontractor agrees to absorb the cost of normally scheduled maintenance, repairs and upkeep during the facilitization and initial production phases. 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 12 -- 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. -10- 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 13 -- ASSIGNMENT OF PERSONNEL The personnel specified below are considered to be essential to the work being performed hereunder. Prior to diverting any of the specified individuals to other programs, the Subcontractor shall notify the University's Subcontract Administrator reasonably in advance and shall submit justification (including proposed substitutions) in sufficient detail to permit evaluation of the impact on the performance of this Subcontract. No diversion shall be made by the Subcontractor without the written consent of the University's Subcontract Administrator, provided, however, that the University's Subcontract Administrator may ratify in writing such diversion and that such ratification shall constitute the consent of the University's Subcontract Administrator. The list of key personnel may be modified from time to time during the course of this Subcontract to either add or delete personnel, as appropriate. NAME TITLE ---- ------ Rich Boland Manufacturing Engineer Kevin Grobsky Optics Engineer (Part-time to NIF) Jim Hopkins Mechanical Engineer Fleming Tinker Optics Engineer (Part-time to NIF) Al Slomba NIF Program Manager Key Consultants: Doug Hoon Sol Laufer Paul Forman The Subcontractor shall not employ on the work any unfit person or anyone not skilled in the work assigned to him or her and shall devote only qualified personnel to work under 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 14 -- QUALITY OF SUPPLIES Any supplies furnished by the Subcontractor in performance of the work shall, as a minimum: (1) be new, (2) be as warranted (including used equipment that has been refurbished), and (3) not contain any counterfeit or suspect materials, parts, or components. Types of counterfeit or suspect materials, parts and components include, but are not limited to: electrical components, piping, fittings, flanges, and fasteners. The University will not accept any work involving the furnishing of any supplies found by the University to not conform to these minimum requirements, notwithstanding any inspection or acceptance of delivery by the University, unless such condition is specifically approved in writing by the University's Subcontract Administrator. - 11 - ARTICLE IS -- WARRANTY A. The Subcontractor agrees that the materials, supplies and services furnished under this Subcontract shall be covered by the most favorable commercial warranties the Subcontractor gives to any customer for the same or substantially similar materials, supplies or services. Such warranties shall include performance, workmanship, labor, materials, Subcontractor's design or engineering contributions, and the Subcontractor shall furnish copies of same to the University, upon request. Notwithstanding any other provisions of this Subcontract, the Subcontractor also warrants that the materials, supplies or services furnished shall be of the most suitable grade and exactly as specified in this Subcontract. The rights and remedies provided by such warranties shall be in addition to and shall not limit any rights afforded to the University by any other provision of this Subcontract. B. If a defect is discovered in any item of materials, supplies or services covered in this Subcontract, the Subcontractor shall correct at its expense such defects as are reported within one (1) year of final acceptance. Upon expiration of the applicable warranty period, all such liability shall terminate except for fraud, or such gross mistakes as amount to fraud, latent defects, or specific failure to comply with the terms of this Subcontract. ARTICLE 16 -- RELEASE OF INFORMATION Information regarding this Subcontract or the undertaking or any data developed hereunder shall not be released, and the name of the University, the Lawrence Livermore National Laboratory, or the Government shall not be used, in any publications, news releases, advertising, speeches, technical papers, photographs and other releases of information, without prior written approval from the University's Subcontract Administrator. ARTICLE 17 -- ORDER OF PRECEDENCE Any inconsistencies in the documents comprising this Subcontract shall be resolved by giving precedence in the following order: (a) the Subcontract Signature Page; (b) this SCHEDULE OF ARTICLES; (c) the GENERAL PROVISIONS; (d) the SUPPLEMENT TO GENERAL PROVISIONS, if any (e) any referenced specification or statement of work; and (f) and other documents, exhibits, and attachments. ARTICLE 18 -- ASSIGNMENTS A. This Subcontract may be assigned by the University to the U.S. Government or a successor-in-interest. B. Except as to the assignment of payments due hereunder, the Subcontractor shall have no right, power or authority to sell, mortgage, transfer or assign this Subcontract, any portion hereof, any interest herein or any claim hereunder, nor allow or permit any other party or parties to have any interest in or use any part of the rights or obligations granted hereunder for any purpose whatsoever without the prior written consent of the University. ARTICLE 19 -- DISPUTES A. Except as otherwise provided in this Subcontract, any non-routine claim under this Subcontract not resolved in the ordinary course of business shall be referred in writing to the University's Procurement Representative and the executive management of the Subcontractor with the authority to settle the dispute. The representatives of the parties, or their designees, shall then attempt in good faith to resolve the dispute by negotiations. All negotiations shall be confidential and shall be treated as compromise and settlement negotiations, for the purposes of application of rules of evidence. -12- B. If the parties still have not been able to resolve the dispute, they may thereafter pursue any remedy they may have, at law or in equity, in any court of competent jurisdiction. Pending resolution of the dispute, the Subcontractor shall proceed diligently with the performance of this Subcontract, in accordance with its terms. ARTICLE 20 -- NOTICES -- LITIGATION AND CLAIM: INABILITY TO PERFORM A. The Subcontractor shall immediately notify the University's Subcontract Administrator in writing of (1) any action, including any proceeding before an administrative agency, filed against the Subcontractor arising out of the performance of this Subcontract, and (2) any claim against the Subcontractor, the cost or expense of which is allowable under the terms of this Subcontract. B. If, at any time during the performance of this Subcontract, the Subcontractor becomes aware of any circumstances whatsoever which may jeopardize its performance of all or any portion of this Subcontract, it shall immediately notify the University's Subcontract Administrator in writing of such circumstances, and the Subcontractor shall take whatever action is necessary to enable the Subcontractor to fulfill its performance obligations under this Subcontract. ARTICLE 21 -- GENERAL PROVISIONS A. The clauses listed in the attached GENERAL PROVISIONS shall be applicable to this Subcontract, based on the value of the Subcontract, the fixed price versus CPFF nature of the work in question, the status of the Subcontractor, and the nature and location of the work, as indicated in the GENERAL PROVISIONS. B. This Subcontract is for the conduct of research, development, or demonstration work or design work involving non-standard types of construction. Accordingly, the Authorization and Consent, Alternate I, Patent Rights, and Additional Data Requirements clauses listed in the GENERAL PROVISIONS for such work shall apply. The applicable Patent Rights clause of the GENERAL PROVISIONS shall be the clause entitled PATENT RIGHTS-RETENTION BY THE CONTRACTOR. ARTICLE 22 -- INCORPORATED DOCUMENTS The following documents are hereby incorporated as a part of this Schedule of Articles of the Subcontract, and are attached hereto. o STATEMENT OF WORK o GOVERNMENT PROPERTY LISTING o GENERAL PROVISIONS FOR FIXED PRICE SUPPLIES & SERVICES (List 600A; Rev. 1/15/97) - This GP set applies only to the fixed price portions of this subcontract. o GENERAL PROVISIONS FOR COST PLUS FIXED FEE SUBCONTRACTS (List 400; Rev. 8/19/96) - This GP set applies only to the cost reimbursement portions of this subcontract. o SUPPLEMENT TO GENERAL PROVISIONS, SUBCONTRACT NO. B335188 o VOUCHER FORM AND INSTRUCTIONS o PROPERTY IDENTIFICATION LIST (END OF SCHEDULE) - 13- EX-10.32 7 STANDARD FORM OF AGREEMENT STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONTRACTOR WHERE THE BASIS OF PAYMENT IS THE COST OF THE WORK PLUS A FEE WITH OR WITHOUT A GUARANTEED MAXIMUM PRICE AIA DOCUMENT A111 -- ELECTRONIC FORMAT - -------------------------------------------------------------------------------- THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION OF THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT D401. THE 1987 EDITION OF AIA DOCUMENT A201, GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION, IS ADOPTED IN THIS DOCUMENT BY REFERENCE. DO NOT USE WITH OTHER GENERAL CONDITIONS UNLESS THIS DOCUMENT IS MODIFIED. THIS DOCUMENT HAS BEEN APPROVED AND ENDORSED BY THE ASSOCIATED GENERAL CONTRACTORS OF AMERICA. COPYRIGHT 1920, 1925, 1951, 1958, 1961, 1967, 1974, 1978, 1987 BY THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE N.W., WASHINGTON D.C. 20006-5292. REPRODUCTION OF THE MATERIAL HEREIN OR SUBSTANTIAL QUOTATION OF ITS PROVISIONS WITHOUT WRITTEN PERMISSION OF THE AIA VIOLATES THE COPYRIGHT LAWS OF THE UNITED STATES AND WILL BE SUBJECT TO LEGAL PROSECUTION. - -------------------------------------------------------------------------------- AGREEMENT made as of the 7th day of April in the year of Nineteen Hundred and Ninety Seven BETWEEN the Owner: (Name and address) Zygo Corporation, Laurel Brook Road, P.O. Box 448, Middlefield, Connecticut 06455-0448 (860) 347-8506 and the Contractor: (Name and address) Dacon Corporation, 16 Huron Drive, Natick, Massachusetts 01760-1337 (508) 651-3600 the Project is: (Name and address) Zygo Corporation Office Building Addition -- Project No. 1774 N.I.F. Manufacturing Renovation -- Project No. 1842 Laurel Brook Road, Middlefield, Connecticut 06455-0448 the Architect is: (Name and address) PDA Incorporated, 16 Huron Drive, Natick, Massachusetts 01760-1337 (508) 651-3600 The Owner and Contractor agree as set forth below. ARTICLE I THE CONTRACT DOCUMENTS 1.1 The Contract Documents consist of this Agreement, Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement; these form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the Parties hereto and supercedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Contract Documents, other than Modifications, appears in Article 16. If anything in the other Contract Documents is inconsistent with this Agreement, this Agreement shall govern. ARTICLE 2 THE WORK OF THIS CONTRACT 2.1 The Contractor shall execute the entire Work described in the Contract Documents, except to the extent specifically indicated in the Contract Documents to be the responsibility of others, or as follows: N/A ARTICLE 3 RELATIONSHIP OF THE PARTIES 3.1 The Contractor accepts the relationship of trust and confidence established by this Agreement and covenants with the Owner to cooperate with the Architect and utilize the Contractor's best skill, efforts and judgment in furthering the interests of the Owner; to furnish efficient business administration and supervision; to make best efforts to furnish at all times an adequate supply of workers and materials; and to perform the Work in the best way and most expeditious and economical manner consistent with the interests of the Owner. The Owner agrees to exercise best efforts to enable the Contractor to perform the Work in the best way and most expeditious manner by furnishing and approving in a timely way information required by the Contractor and making payments to the Contractor in accordance with requirements of the Contract Documents. ARTICLE 4 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION 4.1 The date of commencement is the date from which the Contract Time of Subparagraph 4.2 is measured; it shall be the date of this Agreement, as first written above, unless a different date is stated below or provision is made for the date to be fixed in a notice to proceed issued by the Owner. (Insert the date of commencement, if it differs from the date of this Agreement or, if applicable, state that the date will be fixed in a notice to proceed.) April 7, 1997 Unless the date of commencement is established by a notice to proceed issued by the Owner, the Contractor shall notify the Owner in writing not less than five days before commencing the Work to permit timely filing of mortgages, mechanic's liens and other security interests. 4.2 The Contractor shall achieve Substantial Completion of the entire Work not later than (Insert the calendar date or number of calendar days the date of commencement. Also insert any requirements for earlier Substantial Completion of certain portions of the Work, if not stated elsewhere in the Contract Documents) December 5. 1997; and Final Completion shall be no later than December 26, 1997. , subject to adjustments of this Contract Time as provided in the Contract Documents. (Insert provisions. if any, for final liquidated damages relating to failure to complete on time) ARTICLE 5 CONTRACT SUM 5.1 The Owner shall pay the Contractor in current funds for the Contractor's performance of the Contract the Contract Sum consisting of the Cost of the Work as defined in Article 7 and the Contractor's Fee determined as follows: (State a lump sum, percentage of Cost of the Work or other provision for determining the Contractor's Fee, and explain how the Contractor's Fee is to be adjusted for changes in the Work.) The Lump Sum Fee shall be Two Hundred Ninety Five Thousand and 00/100 Dollars ($295,000.00). The Fee for all Change Order Work which increases the Guaranteed Maximum Price will be five percent (5%) of such increase. In addition for all such Change Orders, the Contractor shall be entitled to be paid ten percent (10%) of the increase in the Guaranteed Maximum Price for general conditions services. 5.2 GUARANTEED MAXIMUM PRICE (IF APPLICABLE) 5.2.1 The sum of the Cost of the Work and the Contractor's Fee is guaranteed by the Contractor not to exceed Six Million Ninety Six Thousand Six Hundred and 00/100 Dollars ($6,096,600.00), subject to additions and deductions by Change Order as provided in the Contract Documents. Such maximum sum is referred to in the Contract Documents as the Guaranteed Maximum Price. Costs which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Contractor without reimbursement by the Owner. (Insert specific provisions if the Contractor is to participate in any savings) 5.2.2 The Guaranteed Maximum Price is based upon the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner: (State the numbers or other identification of accepted alternates, but only if a Guaranteed Maximum Price is inserted in Subparagraph 5.2.1. If decisions on other alternates are to be made by the Owner subsequent to the execution of this Agreement, attach a schedule of such other alternates showing the amount for each and the date until which that amount is valid.) N/A 5.2.3 The amounts agreed to for unit prices, if any, are as follows: (State unit prices only if a Guaranteed Maximum Price is inserted in Subparagraph 5.2.1) N/A ARTICLE 6 CHANGES IN THE WORK 6.1 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE 6.1.1 Adjustments to the Guaranteed Maximum Price on account of changes in the Work may be determined by any of the methods listed in Subparagraph 7.3.3 of the General Conditions. 6.1.2 In calculating adjustments to subcontracts (except those awarded with the Owner's prior consent on the basis of cost plus a fee), the terms "cost" and "fee" as used in Clause 7.3.3.3 of the General Conditions and the terms "costs" and "a reasonable allowance for overhead and profit" as used in Subparagraph 7.3.6 of the General Conditions shall have the meanings assigned to them in the General Conditions and shall not be modified by Articles 5, 7 and 8 of this Agreement. Adjustments to subcontracts awarded with the Owner's prior consent on the basis of cost plus a fee shall be calculated in accordance with the terms of those subcontracts. 6.1.3 In calculating adjustments to this Contract, the terms "cost" and "costs" as used in the above-referenced provisions of the General Conditions shall mean the Cost of the Work as defined in Article 7 of this Agreement and the terms "fee" and "a reasonable allowance for overhead and profit" shall mean the Contractor's Fee as defined in Paragraph 5.1 of this Agreement. 6.2 CONTRACTS WITHOUT A GUARANTEED MAXIMUM PRICE 6.2.1 NONE 6.3 ALL CONTRACTS 6.3.1 NONE ARTICLE 7 COSTS TO BE REIMBURSED 7.1 The term Cost of the Work shall mean costs necessarily incurred by the Contractor in the proper performance of the Work. Such costs shall be at rates not higher than the standard paid at the place of the Project except with prior consent of the Owner. The Cost of the Work shall include only the items set forth in this Article 7. 7.1.1 LABOR COSTS 7.1.1.1 Compensation of construction workers directly employed by the Contractor to perform the construction of the Work at the site or, with the Owner's agreement, at off-site workshops. at the rates set forth on Schedule 1 attached hereto. 7.1.1.2 Compensation or salaries of the Contractor's supervisory and administrative personnel when stationed at the site with the Owner's agreement at the rates set forth on Schedule 1 attached hereto. (If it is Intended that the wages or salaries of certain personnel stationed at the Contractor's principal or other offices shall be included in the Cost of the Work, identify in Article 14 the personnel to be included and whether for all or only part of their time.) 7.1.1.3 Comensation and salaries of the Contractor's supervisory or administrative personnel engaged, at factories, workshops or on the road, in expediting the production or transportation of materials or equipment required for the Work, but only for that portion of their time required for the Work. at the rates set forth on Schedule 1 attached hereto. 7.1.5.4 Fees of testing laboratories for tests required by the Contract Documents, except those related to defective or nonconforming Work for which reimbursement is excluded by Subparagraph 13.5.3 of the General Conditions or other provisions of the Contract Documents and which do not fall within the scope of Subparagraphs 7.2.2 through 7.2.4 below. 7.1.5.5 Royalties and license fees paid for the use of a particular design, process or product required by the Contract Documents; the cost of defending suits or claims for infringement of patent rights arising from such requirement by the Contract Documents; payments made in accordance with legal judgments against the Contractor resulting from such suits or claims and payments of settlements made with the Owner's consent; provided, however, that such costs of legal defenses, judgment and settlements shall not be included in the calculation of the Contractor's Fee or of a Guaranteed Maximum Price, if any, and provided that such royalties, fees and costs are not excluded by the last sentence of Subparagraph 3.17.1 of the General Conditions or other provisions of the Contract Documents. 7.1.5.6 Deposits lost for causes other than the Contractor's fault or negligence. 7.1.6 OTHER COSTS 7.1.6.1 Other costs incurred in the performance of the Work if and to the extent approved in advance in writing by the Owner. 7.2 EMERGENCIES: REPAIRS TO DAMAGED, DEFECTIVE OR NONCONFORMING WORK The Cost of the Work shall also include costs described in Paragraph 7.1 which are incurred by the Contractor: 7.2.1 In taking action to prevent threatened damage, injury or loss in case of an emergency affecting the safety of persons and property, as provided in Paragraph 10.3 of the General Conditions. 7.2.2 In repairing or correcting Work damaged or improperly executed by construction workers in the employ of the Contractor, provided such damage or improper execution did not result from the fault or negligence of the Contractor or the Contractor's foremen, engineers or superintendents, or other supervisory, administrative or managerial personnel of the Contractor. 7.2.3 In repairing damaged Work other than that described in Subparagraph 7.2.2, provided such damage did not result from the fault or negligence of the Contractor or the Contractor's personnel, and only to the extent that the cost of such repairs is not recoverable by the Contractor from others and the Contractor is not compensated therefor by insurance or otherwise. 7.2.4 In correcting defective or nonconforming Work performed or supplied by a Subcontractor or material supplier and not corrected by them, provided such defective or nonconforming Work did not result from the fault or neglect of the Contractor or the Contractor's personnel adequately to supervise and direct the Work of the Subcontractor or material supplier, and only to the extent that the cost of correcting the defective or nonconforming Work is not recoverable by the Contractor from the Subcontractor or material supplier. ARTICLE 8 COSTS NOT TO BE REIMBURSED 8.1 The Cost of the Work shall not include: 8.1.1 Salaries and other compensation of the Contractor's personnel stationed at the Contractor's principal office or offices other than the site office, except as specifically provided in Clauses 7.1.1.2 and 7.1.1.3 or as may be provided in Article 14. 8.1.2 Expenses of the Contractor's principal office and offices other than the site office. 8.1.3 Overhead and general expenses, except as may be expressly included in Article 7. 8.1.4 The Contractor's capital expenses, including interest on the Contractor's capital employed for the Work. 8.1.5 Rental costs of machinery and equipment, except as specifically provided in Clause 7.1.4.2. 8.1.6 Except as provided in Subparagraphs 7.2.2 through 7.2.4 and Paragraph 13.5 of this Agreement, costs due to the fault or negligence of the Contractor, Subcontractors, anyone directly or indirectly employed by any of them, or for whose acts any of them may be liable, including but not limited to costs for the correction of damaged, defective or nonconforming Work, disposal and replacement of materials and equipment incorrectly ordered or supplied, and making good damage to property not forming part of the Work. 8.1.7 Any cost not specifically and expressly described in Article 7. 8.1.8 Costs which would cause the Guaranteed Maximum Price, if any, to be exceeded. ARTICLE 9 DISCOUNTS, REBATES AND REFUNDS 9.1 Cash discounts obtained on payments made by the Contractor shall accrue to the Owner if (1) before making the payment, the Contractor included them in an Application for Payment and received payment therefor from the Owner, or (2) the Owner has deposited funds with the Contractor with which to make payments; otherwise, cash discounts shall accrue to the Contractor. Trade discounts, rebates, refunds and amounts received from sales of surplus materials and equipment shall accrue to the Owner, and the Contractor shall make provisions so that they can be secured. 9.2 Amounts which accrue to the Owner in accordance with the provisions of Paragraph 9.1 shall be credited to the Owner as a deduction from the Cost of the Work and accounted for at the time of final payment. ARTICLE 10 SUBCONTRACTS AND OTHER AGREEMENTS 10.1 Those portions of the Work that the Contractor does not customarily perform with the Contractor's own personnel shall be performed under subcontracts or by other appropriate agreements with the Contractor. The Contractor shall obtain bids from Subcontractors and from suppliers of materials or equipment fabricated especially for the Work. The Contractor shall not use any subcontractor to whom the Owner has reasonable objection. The Owner may request specific persons or entities from whom the Contractor shall solicit bids. The Contractor shall not be required to contract with anyone to whom the Contractor has reasonable objection. 10.2 If a Guaranteed Maximum Price has been established and a specific bidder among those whose bids (1) is recommended to the Owner by the Contractor; (2) is qualified to perform that portion of the Work; and (3) has submitted a bid which conforms to the requirements of the Contract Documents without reservations or exceptions, but the Owner requires that another bid be accepted; then the Contractor will require that a Change Order be issued to adjust the Guaranteed Maximum Price by the difference between the bid of the person or entity selected by the Contractor and the amount of the subcontract or other agreement actually signed with the person or entity reguested by the Owner prior to the execution of the work of the subcontractor. 10.3 NONE ARTICLE 11 ACCOUNTING RECORDS 11.1 The Contractor shall keep full and detailed accounts and exercise such controls as may he necessary for proper financial management under this Contract; the accounting and control Systems Shall be in accordance with generally accepted accounting priciples and construction industry standards. The Owner and the Owner's accountants shall be afforded access to the Contractor's records, books, correspondence, instructions, drawings, receipts, subcontracts, purchase orders, vouchers, memoranda and other data relating to this Contract, and the Contractor shall preserve these for a period of three years after final payment, or for such longer period as may be required by law. ARTICLE 12 PROGRESS PAYMENTS 12.1 Based upon Applications for Payment including all supporting documentation reasonably required by the Owner submitted to the Owner by the Contractor and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents. 12.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: 12.3 Provided an Application for Payment is received by the Owner not later than the last day of a month, the Owner shall make payment to the Contractor not later than the 21st day of the following month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than twenty-one (21) days after the Owner receives the Application for Payment. 12.4 With each Application for Payment the Contractor shall provide waivers of liens as evidence of payment together with a detailed summary of all labor and materials provided by Contractor by category of work, all invoices and supporting materials provided to Contractor by subcontractors, and a schedule of values setting forth the percentage of completion of each line item set forth in the Construction Budget. 12.5 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE 12.5.1 Each Application for Payment shall he based upon the most recent schedule of values submitted by the Contractor in accordance with the Contract Documents. The schedule of values shall allocate the entire Guaranteed Maximum Price among the various portions of the Work, except that the Contractor's Fee shall he shown as a single separate item. The schedule of values shall he prepared in such form and supported by such data to substantiate its accuracy as the Owner may reasonably require. This schedule, shall be used as a basis for reviewing the Contractor's Applications for Payment. 12.5.2 Applications for Payment shall show the percentage completion of each portion of the Work as of the end of the period covered by the Application for Payment. The percentage completion shall be the lesser of (1) the percentage of that portion of the Work which has actually been completed or (2) the percentage obtained by dividing (a) the expense which has actually been incurred by the Contractor on account of that portion of the Work for which the Contractor has made or intends to make actual payment prior to the next Application for Payment by (b) the share of the Guaranteed Maximum Price allocated to that portion of the Work in the schedule of values. 12.5.3 Subject to other provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: 12.5.3.1 Take that portion of the Guaranteed Maximum Price properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the Guaranteed Maximum Price allocated to that portion of the Work in the schedule of values. Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute may be included as provided in Subparagraph 7.3.7 of the General Conditions, even though the Guaranteed Maximum Price has not yet been adjusted by Change Order. 12.5.3.2 Add that portion of the Guaranteed Maximum Price properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the Work or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing. 12.5.3.3 Add the Contractor's Fee, less retainage of ten percent (10%). Upon satisfactory completion of work having a value equal to 50% of the Guaranteed Maximum Price, no further retainage shall be deducted from the Contractor's Fee. The Contractor's Fee shall be computed upon the Cost of the Work described in the two preceding Clauses at the rate stated in Paragraph 5.1 or, if the Contractor's Fee is stated as a fixed sum in that Paragraph, shall be an amount which bears the same ratio to that fixed-sum Fee as the Cost of the Work in the two preceding Clauses bears to a reasonable estimate of the probable Cost of the Work upon its completion. 12.5.3.4 Subtract the aggregate of previous payments made by the Owner. 12.5.3.5 Subtract the shortfall, if any, indicated by the Contractor in the documentation required by Paragraph 12.4 to substantiate prior Applications for Payment, or resulting from errors subsequently discovered by the Owner's accountants in such documentation. 12.5.3.6 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in Paragraph 9.5 of the General Conditions. 12.5.4 Additional retainage, if any, shall be as follows: Subtract retainage of ten percent (10%) on General Conditions and other changes for services, labor and materials provided by Contractor or Contractor's own employees. Upon satisfactory completion of work having a value equal to 50% of the Guaranteed Maximum Price, no further retainage shall be deducted from the Contractor's Fee. (If it is intended to retain additional amounts from progress payments to the Contractor beyond (1) the retainage from the Contractor's Fee provided in Clause 12.5.3.3, (2) the retainage from Subcontractors provided in Paragraph 12.7 below, and (3) the retainage, if any, provided by other provisions of the Contract, insert provision for such additional retainage here. Such provision, if made, should also describe any arrangement for limiting or reducing the amount retained after the Work reaches a certain state of completion.) 12.6 CONTRACTS WITHOUT A GUARANTEED MAXIMUM PRICE 12.6.1 NONE. 12.6.2 NONE. 12.6.2.1 NONE. 12.6.2.2 NONE. 12.6.2.3 NONE. 12.6.2.4 NONE. 12.6.2.5 NONE. 12.6.3 NONE. 12.7 Except with the Owner's prior approval, payments to Subcontractors included in the Contractor's Applications for Payment shall not exceed an amount for each Subcontractor calculated as follows: (other than materials only vendors who shall be paid in full). 12.7.1 Take that portion of the Subcontract Sum properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Subcontractor's Work by the share of the total Subcontract Sum allocated to that portion in the Subcontractor's schedule of values, less retainage of ten percent (10%). Pending final determination of amounts to be paid to the Subcontractor for changes in the Work, amounts not in dispute may be included as provided in Subparagraph 7.3.7 of the General Conditions even though the Subcontract Sum has not yet been adjusted by Change Order. Upon satisfactory completion of work having a value equal to 50% of the subcontract sum, no further retainage shall be deducted for such subcontractor. 12.7.2 Add that portion of the Subcontract Sum properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the Work or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing, less retainage of ten percent (10%). Upon satisfactory completion of work having a value equal to 50% of the subcontract sum, no further retainage shall be deducted for such subcontractor. 12.7.3 Subtract the aggregate of previous payments made by the Contractor to the Subcontractor. 12.7.4 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment by the Owner to the Contractor for reasons which are the fault of the Subcontractor. 12.7.5 Add, upon Substantial Completion of the entire Work of the Contractor, a sum sufficient to increase the total payments to the Subcontractor to one hundred percent (100%) of the Subcontract Sum, less one hundred twenty-five percent (125%) of amounts, if any, for incomplete Work and unsettled claims; and, if final completion of the entire Work is thereafter materially delayed through no fault of the Subcontractor, add any additional amounts payable on account of Work of the Subcontractor in accordance with Subparagraph 9.10.3 of the General Conditions. (If it is intended, prior to Substantial Completion of the entire Work of the Contractor, to reduce or limit the retainage from Subcontractors resulting from the percentages inserted in Subparagraphs 12.7.1 and 12.7.2 above, and this is not explained elsewhere in the Contract Documents, insert here provisions for such reduction or limitation.) If, in the Owner's sole discretion, the work is progressing satisfactorily and subject to the approval of any Lender of the Owner, retainage held on account of the Work of those Subcontractors whose work is fully and satisfactorily completed during the early stages of construction, may be released the Owner to the Contractor for Payment to those Subcontractors. The Subcontract Sum is the total amount stipulated in the subcontract to he paid by the Contractor to the Subcontractor for the Subcontractor's performance of the subcontract. 12.8 Except with the Owner's prior approval, the Contractor shall not make advance payments to suppliers for materials or equipment which have not been delivered and stored at the site. 12.9 NONE. ARTICLE 13 FINAL PAYMENT 13.1 Final payment shall be made by the Owner to the Contractor when (1) the Contract has been fully performed by the Contractor except for the Contractor's responsibility to correct defective or nonconforming Work, as provided in Subparagraph 12.2.2 of the General Conditions, and to satisfy other requirements, if any, which necessarily survive final payment; (2) a final Application for Payment and a final accounting for the Cost of the Work have been submitted by the Contractor and reviewed by the Owner's accountants; and (3) a final Certificate for Payment has then been issued by the Architect; such final payment shall he made by the Owner not more than fifteen (15) days after the issuance of the Architect's final Certificate for Payment, or as follows: N/A 13.2 The amount of the final payment shall be calculated as follows: 13.2.1 Take the sum of the Cost of the Work substantiated by the Contractor's final accounting and the Contractor's Fee; but not more than the Guaranteed Maximum Price, if any. 13.2.2 Subtract amounts, if any, for which the Architect or Owner withholds, in whole or in part, a final Certificate for Payment as provided in Subparagraph 9.5.1 of the General Conditions or other provisions of the Contract Documents. 13.2.3 Subtract the aggregate of previous payments made by the Owner. If the aggregate of previous payments made by the Owner exceeds the amount due the Contractor, the Contractor shall reimburse the difference to the Owner. 13.3 The Owner's accountants will review and report in writing on the Contractor's final accounting within 30 days after delivery of the final accounting to the Owner by the Contractor. Based upon such Cost of the Work as the Owner's accountants report to be substantiated by the Contractor's final accounting, and provided the other conditions of Paragraph 13.1 have been met, the Architect will, within seven days after receipt of the written report of the Owner's accountants, either issue to the Owner a final Certificate for Payment with a copy to the Contractor, or notify the Contractor and Owner in writing of the Architect's reasons for withholding a certificate as provided in Subparagraph 9.5.1 of the General Conditions. The time periods stated in this Paragraph 13.3 supersede those stated in Subparagraph 9.4.1 of the General Conditions. 13.4 If the Owner's accountants report the Cost of the Work as substantiated by the Contractor's final accounting to be less than claimed by the Contractor, the Contractor shall be entitled to demand arbitration of the disputed amount without a further decision of the Architect. Such demand for arbitration shall be made by the Contractor within 30 days after the Contractor's receipt of a copy of the Architect's final Certificate for Payment; failure to demand arbitration within this 30-day period shall result in the substantiated amount reported by the Owner's accountants becoming binding on the Contractor. Pending a final resolution by arbitration, the Owner shall pay the Contractor all amounts owing Contractor which are not in dispute. 13.5 if subsequent to final payment and at the Owner's request, the Contractor incurs costs described in Article 7 and not excluded by Article 8 to correct defective or nonconforming Work, the Owner shall reimburse the Contractor such costs and the Contractor's Fee applicable thereto on the same basis as if such costs had been incurred prior to final payment, but not in excess of the Guaranteed Maximum Price, if any. If the Contractor has participated in savings as provided in Paragraph 5.2, the amount of such savings shall be recalculated and appropriate credit given to the Owner in determining the net amount to be paid by the Owner to the Contractor. ARTICLE 14 MISCELLANEOUS PROVISIONS 14.1 Where reference is made in this Agreement to a provision of the General Conditions or another Contract Document, the reference refers to that provision as amended or supplemented by other provisions of the Contract Documents. 14.2 Payments due and unpaid under the Contract shall bear interest from the date payment is due at the rate stated below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. (Insert rate of interest agreed upon, if any) The rate of interest from time to time announced by USTrust as its prime lending rate plus two percent (2%). (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owner's and Contractor's principal places of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect to deletions or modifications, and also regarding requirements such as written disclosures or waivers.) 14.3 Other provisions: Home office support: such as, purchasing, planning, project management, secretarial and accounting activities associated with day to day activities of the Work solely with respect to the pro rata portion of the cost of these activities related to the Work, shall be included as a reimbursable expense, at the rates set forth on Schedule 1 attached hereto. 14.4 Contractor acknowledges that Owner has entered into various contracts to provide directly or indirectly, to the United States Government, certain goods and services relating to the national defense which contracts constitute DX-E1 Rated Orders, certified for national defense use under the Defense Priorities and Allocations System. Contractor agrees to comply with the requirements of the Defense Priorities and Allocations System regulations (15 CFR Part 700) to the extent such requirements are applicable to Owner. In addition, Contractor shall require each of its Subcontractors to acknowledge, in writing, in its Subcontract, that such subcontractor will comply with the requirements of the Defense Priorities and Allocations System Regulations (15 CFR Part 700), to the extent such requirements are applicable to Owner. ARTICLE 15 TERMINATION OR SUSPENSION 15.1 The Contract may be terminated by the Contractor as provided in Article 14 of the General Conditions; however, the amount to be paid to the Contractor under Subparagraph 14.1.2 of the General Conditions shall not exceed the amount the Contractor would be entitled to receive under Paragraph 15.3 below, except that the Contractor's Fee shall be calculated as if the Work had been fully completed by the Contractor, including a reasonable estimate of the Cost of the Work for Work not actually completed. 15.2 If a Guaranteed Maximum Price is established in Article 5, the Contract may be terminated by the Owner for cause as provided in Article 14 of the General Conditions; however, the amount, if any, to be paid to the Contractor under Subparagraph 14.2.4 of the General Conditions shall not cause the Guaranteed Maximum Price to be exceeded, nor shall it exceed the amount the Contractor would be entitled to receive under Paragraph 15.3 below. 15.3 If no Guaranteed Maximum Price is established in Article 5, the Contract may be terminated by the Owner for cause as provided in Article 14 of the General Conditions; however, the Owner shall then pay the Contractor an amount calculated as follows: 15.3.1 Take the Cost of the Work incurred by the Contractor to the date of termination including reasonable/direct out-of-pocket costs for expenses directly related to the termination and related fees for demobilization. 15.3.2 Add the Contractor's Fee computed upon the Cost of the Work to the date of termination at the rate stated in Paragraph 5.1 or, if the Contractor's Fee is stated as a fixed sum in that Paragraph, an amount which bears the same ratio to that fixed-sum Fee as the Cost of the Work at the time of termination bears to a reasonable estimate of the probable Cost of the Work upon its completion. 15.3.3 Subtract the aggregate of previous payments made by the Owner. The Owner shall also pay the Contractor fair compensation, either by purchase or rental at the election of the Owner, for any equipment owned by the Contractor which the Owner elects to retain and which is not otherwise included in the Cost of the Work under Subparagraph 15.3.1. To the extent that the Owner elects to take legal assignment of subcontracts and purchase orders (including rental agreements), the Contractor shall, as a condition of receiving the payments referred to in this Article 15, execute and deliver all such papers and take all such steps, including the legal assignment of such subcontracts and other contractual rights of the Contractor, as the Owner may require for the purpose of fully vesting in the Owner the rights and benefits of the Contractor under such subcontracts or purchase orders. 15.4 The Work may be suspended by the Owner as provided in Article 14 of the General Conditions; in such case, the Guaranteed Maximum Price, if any, shall be increased as provided in Subparagraph 14.3.2 of the General Conditions except that the term "cost of performance of the Contract" in that Subparagraph shall be understood to mean the Cost of the Work and the term "profit" shall be understood to mean the Contractor's Fee as described in Paragraphs 5.1 and 6.3 of this Agreement. Insert A: 15.5. In addition to Owner's right to remove Builder from any part of Work pursuant to the Contract Documents. Owner may, at any time, at will and without cause, terminate any part of Work or any subcontract or all remaining Work for any reason whatsoever by giving seven (7) days' prior written notice to Builder specifying the part of Work or subcontract to be terminated and the effective date of termination. Builder shall continue to prosecute the part of Work not terminated. If any part of the Work or subcontract is so terminated. Builder shall be entitled to payment for any and all Work properly executed in accordance with the Contract Documents relating to such part of the Work which has been cancelled (the basis for such payment shall be as provided in the Contract) and for costs directly related to Work thereafter performed by Builder in terminating such Work or subcontract including reasonable demobilization and cancellation charges provided said Work is authorized in advance by Architect and Owner. No payment shall be made by Owner, however, to the extent that such Work or subcontract is, was or could have been terminated under the Contract Documents or an equitable adjustment is made or denied under another provision of the Contract. In case of such termination, Owner will issue a Construction Change Directive or authorize a Change Order making any required adjustment to the Date of Substantial Completion and/or Guaranteed Maximum Price. For the remainder of the Work, the Contract Documents shall remain in full force and effect. Insert B: 15.6 The Owner will pay for Work executed and for proven loss with respect to materials, equipment, tools, and construction equipment and machinery, including reasonable overhead and profit. ARTICLE 16 ENUMERATION OF CONTRACT DOCUMENTS 16.1 The Contract Documents, except for Modifications issued after execution of this Agreement, are enumerated as follows: 16.1.1 The Agreement is this executed Standard Form of Agreement Between Owner and Contractor, AIA Document A111, 1987 Edition. 16.1.2 The General Conditions are the General Conditions of the Contract for Construction, AIA Document A20l, 1987 Edition. 16.1.3 NONE. Document Title Pages - -------- ----- ----- 16.1.4 The Specifications are as follows: (Either list the Specifications here or refer to an exhibit attached to this Agreement.) Section Title Pages - ------- ----- ----- See Exhibit "A", Section 5, attached hereto and incorporated by reference herein. 16.1.5 The Drawings are dated as set forth in Exhibit "A", Section 5, attached hereto and incorporated by reference herein: (Either list the Drawings here or refer to an exhibit attached to this Agreement.) Number Title Date - ------ ----- ---- See Exhibit "A". Section 5. attached hereto and incorporated by reference herein. 16.1.6 The Addenda, if any, are as follows: Number Date Pages - ------ ---- ----- Portions of Addenda relating to bidding requirements are not part of the Contract Documents unless the bidding requirements are also enumerated in this Article 16. 16.1.7 Other Documents, if any, forming part of the Contract Documents are as follows: (List here any additional documents which are intended to form part of the Contract Documents. The General Conditions provide that bidding requirements such as advertisement or invitation to bid, Instructions to Bidders, sample forms and the Contractor's bid are not part of the Contract Documents unless enumerated in this Agreement. They should be listed here only if intended to be part of the Contract Documents.) Exhibit A Project Summary dated January 6, 1997 Exhibit B Contractor's Certificate of Insurance Exhibit C1 AIA Document G702 (Application and Certificate for Payment) Exhibit C2 AIA Document G703 (Continuation Sheet) Exhibit D1 General Contractor's Final Waiver of Liens & Indemnity Agreement Exhibit D2 General Contractor's Partial Waiver of Liens & Indemnity Agreement Exhibit D3 Subcontractor's Partial Waiver of Liens & Indemnity Agreement (Office) Exhibit D4 Subcontractor's Final Waiver of Liens & Indemnity Agreement (Office) Exhibit D5 Subcontractor's Partial Waiver of Liens & Indemnity Agreement (N.I.F.) Exhibit D6 Subcontractor's Final Waiver of Liens & Indemnity Agreement (N.I.F.) Exhibit E1 List of Specifications (Office) Exhibit E2 List of Specifications (N.I.F.) Exhibit F1 List of Drawings (Office) Exhibit F2 List of Drawings (N.I.F.) This Agreement is entered into as of the day and year first written above and is executed in at least three original copies of which one is to he delivered to the Contractor, one to the Architect for use in the administration of the Contract, and the remainder to the Owner. OWNER CONTRACTOR /s/ GARY K. WILLIS /s/ RICHARD M. KUCHINSKY, AIA - ------------------------------------ ------------------------------------ (Signature) (Signature) ZYGO CORPORATION, DACON CORPORATION, Gary K. Willis, Richard M. Kuchinsky, AIA President and Chief Executive Officer Chief Executive Officer (Printed name and title) (Printed name and title) EX-10.33 8 EMPLOYMENT AGREEMENT - DAVID GRANT EMPLOYMENT AGREEMENT AGREEMENT, made as of August 19, 1997, between SIGHT SYSTEMS, INC., a California corporation with an office at 3541 Old Conejo Road, Suite 119, Newbury Park, California 91320-2158 (the "Company" or "SSI"), and DAVID GRANT, residing at 3032 Camino Del Zuro, Thousand Oaks, California 91360 ("Employee"). W I T N E S S E T H: WHEREAS, SSI is engaged in the business of designing and manufacturing high accuracy production vision systems performing numerous alignment and measurement applications; and WHEREAS, the Company, Employee and certain other specified entities and individuals have entered into an Acquisition Agreement (the "Acquisition Agreement"), dated as of August 19, 1997, with Zygo Corporation ("Zygo"), pursuant to which Zygo is acquiring all the outstanding capital stock of the Company for an aggregate of 287,400 shares of Zygo common stock (the "Acquisition"); and WHEREAS, prior to the consummation of the Acquisition Agreement, the Shareholder was an employee and a principal shareholder of SSI and, as such, possesses confidential and proprietary information regarding SSI; and WHEREAS, as a principal stockholder of the Company, Employee will receive a significant number of shares of Zygo common stock upon the consummation of the Acquisition; and WHEREAS, the execution and delivery of this Agreement, including without limitation the provisions of Section 9 hereof, is a condition of Zygo's consummation of the Acquisition and of Employee's agreement to sell his shares of common stock of SSI to Zygo, all pursuant to the Acquisition Agreement; and WHEREAS, the Company desires that Employee be employed by the Company, and Employee desires to be so employed by the Company upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and of the mutual promises, representations and covenants herein contained, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby accepts such employment, subject to the terms and conditions herein set forth. Employee shall hold the position of President of SSI, a business unit initially being operated in the form of a subsidiary of Zygo Corporation ("Zygo"). Employee will not be required to relocate outside of a 25 mile radius from his current place of employment in order to satisfy the terms and conditions of employment herein set forth. 2. TERM. The initial term of employment under this Agreement shall begin on August 19, 1997 (the "Employment Date") and shall continue for a period of three (3) years from that date, subject to prior termination in accordance with the terms hereof. Thereafter, this Agreement shall automatically be renewed for successive one year terms unless either party shall give the other sixty (60) days' prior written notice of its or his intent not to renew this Agreement. The initial term together with all such additional one-year period(s) of employment, if any, are collectively referred to herein as the "term" of this Agreement. 3. COMPENSATION. As compensation for the employment services to be rendered by Employee hereunder, the Company agrees to pay, or cause to be paid, to Employee, and Employee agrees to accept, an annual salary of $120,000 or such higher amount as the President of Zygo may determine from time to time, subject to such payroll deductions as are required by law and deductions for applicable employee contributions to the normal benefit programs of the Company. The annual salary provided for hereunder shall be payable in equal installments commencing at the Employment Date, in accordance with the Company's practice. In addition, Employee shall be entitled to additional incentive compensation from time to time. Such compensation will be based on the Company's overall performance and will be awarded at the discretion of the President of Zygo with the approval of the Board of Directors of the Company or Zygo. On August 19, 1997, Employee shall receive a grant of options to purchase 10,000 shares of Common Stock of Zygo with an exercise price equal to the fair market value on the date of grant, vesting in four equal annual installments and otherwise in accordance with the terms of Zygo's Amended and Restated Non-Qualified Stock Option Plan. 4. EXPENSES. The Company shall pay or reimburse Employee, upon presentment of suitable vouchers, for all reasonable business and travel expenses which may be incurred or paid by Employee in connection with his employment hereunder. Employee shall comply -2- with restrictions and shall keep records in compliance with the Company's policy and procedure related to travel and entertainment expenses. 5. INSURANCE AND OTHER BENEFITS. (a) Employee shall be entitled to such vacations and to participate in and receive any other health and welfare (including insurance) benefits customarily provided by the Company for its employees generally, all as determined from time to time by the Board of Directors of the Company or Zygo or appropriate committee thereof; provided that the health and welfare benefits in the aggregate, provided to Employee, are at least substantially comparable to the benefits provided by the Company to Employee prior to the date hereof, all of which benefits Employee represents are set forth in Schedule 5(a) attached hereto. The Company currently intends to initially afford Employee the same health and welfare benefits as are set forth in said Schedule 5(a); i.e., those benefits provided by the Company to Employee prior to the date hereof. Unused annual vacations may be carried over to the extent permitted by Company policy. (b) Employee acknowledges and agrees that notwithstanding anything to the contrary contained in any health or welfare benefit plan maintained by Zygo, except as may be otherwise agreed to by Employee and Zygo, Employee shall not be entitled to participate in any of Zygo's employee benefit plans by virtue of his being employed by the Company or by Zygo (if and when applicable). 6. DUTIES. (a) Employee shall perform such duties and functions as the President, Chief Executive Officer or Chief Operating Officer of Zygo and the Board of Directors of the Company or Zygo shall from time to time determine and Employee shall comply in the performance of his duties with the policies of, and be subject to, the direction of such officers and such Boards of Directors. (b) Employee agrees to devote his entire working time, attention and energies to the performance of the business of the Company and of any of its subsidiaries or affiliates by which he may be employed; and Employee shall not, directly or indirectly, alone or as a member of any partnership or other organization, or as an officer, director or employee of any other corporation, partnership or other organization, be actively engaged in or concerned with any other duties or pursuits which interfere with the performance of his duties hereunder, or which, even if non-interfering, may be inimical, or contrary, to the best interests of the Company, except those duties or pursuits specifically authorized by the Board of Directors of the Company or Zygo. -3- 7. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION. (a) Employee's employment hereunder may be terminated at any time upon written notice from the Company to Employee, (i) upon the determination by the President, Chief Executive Officer or Chief Operating Officer of Zygo or the Board of Directors of the Company or Zygo that Employee's performance of his duties has not been fully satisfactory for any reason which would not constitute justifiable cause (as hereinafter defined) upon five (5) days' prior written notice to Employee; or (ii) immediately upon determination by the Board of Directors of the Company or Zygo that justifiable cause exists for such termination. (b) Employee's employment shall terminate upon: (i) the death of the Employee; or (ii) the "disability" of Employee (as hereinafter defined pursuant to subsection (d) herein). (c) For the purposes of this Agreement, the term "disability" shall mean the inability of Employee, due to illness, accident or any other physical or mental incapacity, to perform his duties in a normal manner for a period of three (3) consecutive months or for a total of four (4) months (whether or not consecutive) in any twelve (12) month period during the term of this Agreement. (d) For the purposes hereof, the term "justifiable cause" shall mean and be limited to: any repeated failure or refusal by Employee to perform, or willful neglect by Employee of, any of his duties pursuant to this Agreement; Employee's conviction (which, through lapse of time or otherwise, is not subject to appeal) of any crime or offense involving money or other property of the Company, Zygo or any of their respective subsidiaries or affiliates or which constitutes a felony in the jurisdiction involved; Employee's performance of any act or his failure to act, for which if he were prosecuted and convicted, a crime or offense involving money or property of the Company, Zygo or any of their respective subsidiaries or affiliates, or which constitutes a felony in the jurisdiction involved, would have occurred; any disclosure by Employee to any person, firm or corporation other than the Company, Zygo, any of their respective subsidiaries or affiliates and its and their directors, officers and employees, of any confidential information or trade secret of the Company, Zygo or any of their respective subsidiaries or affiliates or any other breach by Employee of any of the provisions of Section 9, 10 or 11 hereof; any attempt by Employee to secure any personal profit in connection with the business of the Company, Zygo or any of their respective subsidiaries or affiliates; or the engaging by Employee in any business or activities other than the business of the Company, Zygo and their respective -4- subsidiaries or affiliates which interferes with the performance of his duties hereunder. Upon termination of Employee's employment by the Company for justifiable cause, this Agreement shall terminate immediately and Employee shall not be entitled to any amounts or benefits hereunder other than such portion of Employee's annual salary and reimbursement of expenses pursuant to Section 4 hereof as has been accrued through the date of his termination of employment. (e) If Employee shall die during the term of his employment hereunder, this Agreement shall terminate immediately. In such event, the estate of Employee shall thereupon be entitled to receive such portion of Employee's annual salary and reimbursement of expenses pursuant to Section 4 hereof as has been accrued through the date of his death. (f) Upon Employee's "disability," the Company shall have the right to terminate Employee's employment. Notwithstanding any inability to perform his duties, Employee shall be entitled to receive his compensation as provided herein until the termination of his employment for disability. Any termination pursuant to this subsection (f) shall be effective on the date thirty (30) days after which Employee shall have received written notice of the Company's election to terminate. Notwithstanding anything to the contrary contained herein, during any period that Employee fails to perform his duties hereunder as a result of his disability (but prior to receiving the notice of termination specified in this Section 7(f), (i) Employee shall continue to receive his full salary at the rate then in effect and all benefits provided in Section 5 hereof, provided that payments made to Employee pursuant to this Section 7(f) shall be reduced by the sum of the amounts, if any, payable to Employee at or prior to the time of any such payment under any disability benefit plan or program of, or provided by, the Company or Zygo, and (ii) the Company shall have the right to hire any other individual or individuals to perform such duties and functions as the Company shall desire, including those duties heretofore performed by Employee. (g) Notwithstanding any provision to the contrary contained herein, in the event that Employee's employment is terminated by the Company at any time for any reason other than justifiable cause, disability or death, the parties hereto agree that damages to Employee shall be difficult to ascertain in any such event, but in order to limit the liability of the Company and Zygo in any such event, Employee shall be entitled to receive as liquidated damages and not as a penalty, and the Company shall pay to Employee, Employee's salary (payable in such amount and in such manner as set forth in Section 3 herein) from and after the date of such termination for a period ending six (6) months after the date of termination which amount shall be in lieu of any and all other payments due and owing to Employee under the terms of this Agreement or otherwise. 8. REPRESENTATIONS AND AGREEMENTS OF EMPLOYEE. (a) Employee represents and warrants that he is free to enter into this Agreement and to perform the duties required hereunder, and that there are no -5- employment contracts or understandings, restrictive covenants or other restrictions, whether written or oral, preventing the performance of his duties hereunder, except for the existing employment agreement between Employee and the Company, which existing agreement is superseded in its entirety by this Agreement. Employee further represents and warrants that he is in full compliance with all existing agreements between himself and the Company or Zygo. (b) Employee agrees to submit to a medical examination and to cooperate and supply such other information and documents as may be required by any insurance company in connection with the Employees' inclusion in any insurance or fringe benefit plan or program as the Company shall determine from time to time to obtain, or in connection with, in the Company's sole discretion, the Company's or Zygo's obtaining life insurance for its benefit on the life of Employee. 9. NON-COMPETITION. (a) Employee agrees that during his employment by the Company (which shall be deemed to include the period in which Employee is receiving any severance payments set forth in Section 7(g) hereto) and for a period of three (3) years after the later to occur of the termination or expiration of Employee's employment with the Company (or Zygo as the case may be) (the "Non-Competitive Period"), Employee shall not, directly or indirectly, as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any capacity whatsoever engage in, become financially interested in, be employed by, render any consultation or business advice with respect to, or have any connection with, any business engaged in the research, development, testing, design, manufacture, sale, lease, marketing, utilization or exploitation of any products or services which are designed for the same purpose as, are similar to, or are otherwise competitive with, products or services of the Company, Zygo or any of their respective subsidiaries or affiliates which are being sold or provided or proposed to be provided at the time of termination or expiration of Employee's employment, in any geographic area where, at the time of the termination or expiration of his employment hereunder, the business of the Company, Zygo or any of their respective subsidiaries or affiliates was being conducted or was proposed to be conducted in any manner whatsoever; provided, however, that Employee may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time one percent (1%) of any class of stock or securities of such corporation. In addition, Employee shall not, directly or indirectly, during the Non-Competitive Period, request or cause contracting parties, suppliers or customers with whom the Company, Zygo or any of their respective subsidiaries or affiliates has a business relationship to cancel or terminate any such business relationship with the Company, Zygo or any of their respective subsidiaries or affiliates or solicit, interfere with or entice from the Company, Zygo or any of their respective subsidiaries or affiliates any employee (or former employee) of the Company, Zygo or any of their respective subsidiaries or affiliates. In addition, the Company and Employee hereby agree, acknowledging such agreement to be in their respective best interests, that, at the option of the Company, Employee shall -6- enter into a consulting agreement following the termination or expiration of his employment with the Company (or Zygo, as the case may be), pursuant to which Employee will devote an equivalent of 33% of his full-time employment hours, at a time and place to be mutually agreed upon by Employee and the Company, to performing consulting services for the Company for a period of up to three (3) years, in consideration for which the Company will pay to Employee 33% of Employee's salary (at the rate then in effect); provided, however, that the foregoing requirement to provide consulting services shall in no way interfere with Employee's ability to accept and perform any employment or services, on a full- or part-time basis, which are not competitive with the business of the Company, Zygo or any of their respective subsidiaries or affiliates as set forth in the first sentence of this Section 9(a). Notwithstanding the foregoing, in the event Employee's employment hereunder is terminated by the Company for justifiable cause pursuant to Section 7(a), the Non-Competitive Period shall continue through the expiration of the scheduled term of this Agreement as provided in Section 2 hereof and for a period of two (2) years thereafter. (b) If any portion of the restrictions set forth in this Section 9 should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected. (c) Employee acknowledges that the Company and/or Zygo conducts business on a world-wide basis, that its sales and marketing prospects are for continued expansion into world markets and that, therefore, the territorial and time limitations set forth in this Section 9 are reasonable and properly required for the adequate protection of the business of the Company, Zygo and their respective subsidiaries. In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of the territorial or time limitation to the area or period which such court deems reasonable. (d) The existence of any claim or cause of action by Employee against the Company, Zygo or any of their respective subsidiaries or affiliates shall not constitute a defense to the enforcement by the Company, Zygo or any such subsidiary or affiliate of the foregoing restrictive covenants, but such claim or cause of action shall be litigated separately. 10. INVENTIONS AND DISCOVERIES. (a) Employee shall promptly and fully disclose to Zygo, and with all necessary detail for a complete understanding of the same, all developments, know-how, discoveries, inventions, improvements, concepts, ideas, writings, formulae, processes and methods (whether copyrightable, patentable or otherwise) made, received, conceived, acquired or written during working hours, or otherwise, by Employee (whether or not at the request or upon the suggestion of Zygo) during the period of his employment with the Company, Zygo or any of their respective subsidiaries or affiliates, solely or jointly with others, in all instances in or relating to any activities of the Company, Zygo -7- or their respective subsidiaries or affiliates known to him as a consequence of his employment hereunder (collectively the "Subject Matter"). (b) Employee hereby assigns and transfers, and agrees to assign and transfer, to Zygo, all his rights, title and interest in and to the Subject Matter, and Employee further agrees to deliver to Zygo any and all drawings, notes, specifications and data relating to the Subject Matter, and to execute, acknowledge and deliver all such further papers, including applications for copyrights or patents, as may be necessary to obtain copyrights and patents for any thereof in any and all countries and to vest title thereto to Zygo. Employee shall assist Zygo in obtaining such copyrights or patents during the term of this Agreement, and any time thereafter on reasonable notice, and Employee agrees to testify in any prosecution or litigation involving any of the Subject Matter (provided that if such testimony occurs after termination of this Agreement, Employee shall be reasonably compensated for his time and reimbursed for any out-of-pocket expense). 11. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee shall not, during the term of this Agreement or at any time following termination or expiration of this Agreement, directly or indirectly, disclose or permit to be known (other than as is required in the regular course of his duties or required by law (in which case Employee shall give Zygo prior written notice of such required disclosure) or with the prior written consent of the President of Zygo), to any person, firm or corporation, any confidential information acquired by Employee during the course of, or as an incident to, his employment hereunder, relating to the Company, Zygo or any of their respective subsidiaries or affiliates, the directors of the Company, Zygo or any of their respective subsidiaries or affiliates, any client of the Company, Zygo or any of their respective subsidiaries or affiliates, or any corporation, partnership or other entity owned or controlled, directly or indirectly, by any of the foregoing, or in which any of the foregoing has a beneficial interest, including, but not limited to, the business affairs of each of the foregoing. Such confidential information shall include, but shall not be limited to, proprietary technology, trade secrets, patented processes, research and development data, know-how, market studies and forecasts, competitive analyses, pricing policies, employee lists, personnel policies, the substance of agreements with customers, suppliers and others, marketing or dealership arrangements, servicing and training programs and arrangements, customer lists and any other documents embodying such confidential information. This confidentiality obligation shall not apply to any confidential information which thereafter becomes publicly available other than pursuant to a breach of this Section 11(a), directly or indirectly, by Employee. (b) All information and documents relating to the Company, Zygo and their respective subsidiaries or affiliates as hereinabove described (or other business affairs) shall be the exclusive property of the Company or Zygo, as the case may be, and Employee shall use commercially reasonable best efforts to prevent any publication or disclosure thereof. Upon termination of Employee's employment with the Company, -8- all documents, records, reports, writings and other similar documents containing confidential information, including copies thereof, then in Employee's possession or control shall be returned and left with the Company. (c) Employee will execute the form of "Sight Systems, Inc. Non-Disclosure and Non-Solicitation Agreement" in the form of Exhibit A hereto, all the terms and provisions of which are incorporated herein as if fully set forth herein. 12. RIGHT TO INJUNCTION. Employee recognizes that the services to be rendered by him hereunder are of a special, unique, unusual, extraordinary and intellectual character involving skill of the highest order and giving them peculiar value the loss of which cannot be adequately compensated for in damages. In the event of a breach of this Agreement by Employee, the Company shall be entitled to injunctive relief or any other legal or equitable remedies. Employee agrees that the Company may recover by appropriate action the amount of the actual damage caused the Company by any failure, refusal or neglect of Employee to perform his agreements, representations and warranties herein contained. The remedies provided in this Agreement shall be deemed cumulative and the exercise of one shall not preclude the exercise of any other remedy at law or in equity for the same event or any other event. 13. AMENDMENT OR ALTERATION. No amendment or alteration of the terms of this Agreement shall be valid unless made in writing and signed by both of the parties hereto. 14. GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, applicable to agreements made and to be performed therein. 15. CONSENT TO JURISDICTION. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the courts of the State of Connecticut, including the jurisdiction of the United States District Courts therein, and agrees not to assert by way of motion, as a defense or otherwise, in any such suit, action or proceeding, any claim that he or it is not subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement may not be enforced in or by such courts. Employee agrees that all actions and proceedings to be instituted hereunder by Employee or his successors or assigns arising out of or related to this Agreement or the transactions contemplated hereby shall be commenced only in the courts having a situs in Connecticut. -9- 16. SEVERABILITY. The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 17. NOTICES. Any notices required or permitted to be given hereunder shall be sufficient if in writing, and if delivered by hand, or sent by certified mail, return receipt requested, to the addresses set forth above or such other address as either party may from time to time designate in writing to the other, and shall be deemed given as of the date of the delivery or mailing. 18. WAIVER OR BREACH. It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 19. ENTIRE AGREEMENT AND BINDING EFFECT. This Agreement, together with the Acquisition Agreement and all agreements and exhibits referred to herein and therein, contains the entire agreement of the parties with respect to the subject matter hereof and shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, heirs, distributors, successors and assigns. Notwithstanding the foregoing, all prior agreements between Employee and the Company relating to the confidentiality of information, trade secrets and patents shall not be affected by this Agreement. 20. SURVIVAL. The termination of Employee's employment hereunder shall not affect the enforceability of Sections 7, 8(a), 9, 10, 11, 12, 14 and 15 hereof. 21. NON-ASSIGNABILITY. This Agreement is entered into in consideration of the personal qualities of Employee and may not be, nor may any right or interest hereunder be, assigned by him without the prior written consent of the Company. It is expressly understood and agreed that this Agreement, and the rights accruing and obligations owed to the Company hereunder, and the obligations to be performed by the Company hereunder, may be assigned by the Company at any time without the consent of Employee to Zygo or any of the Company's successors or assigns. In the event that this Agreement is assigned by the Company to Zygo pursuant to this Section 21, all references in this -10- Agreement to "Company" shall refer to Zygo except that the references thereto contained in Section 5(a) hereof shall refer to SSI, a business unit of Zygo. 22. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 23. FURTHER ASSURANCES. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 24. HEADINGS. The Section headings appearing in this Agreement are for the purposes of easy reference and shall not be considered a part of this Agreement or in any way modify, demand or affect its provisions. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SIGHT SYSTEMS, INC. By: /s/ GARY K. WILLIS ------------------------------------ Name: Gary K. Willis Title: Chairman of Board /s/ DAVID GRANT ------------------------------------ David Grant AGREED TO: ZYGO CORPORATION By: /s/ GARY K. WILLIS ------------------------------------ Name: Gary K. Willis Title: President -12- EXHIBIT A SIGHT SYSTEMS, INC. NON-DISCLOSURE AND NON-SOLICITATION AGREEMENT AGREEMENT, dated as of August 19, 1997, by and between SIGHT SYSTEMS, INC., a California corporation (the "Company"), and David Grant (the "Employee") W I T N E S S E T H: In consideration of the Company's employment of the Employee and in consideration of the covenants contained herein, the parties hereby agree as follows: 1. The Employee agrees that he will not directly or indirectly disclose or use at any time any knowledge, information or material relating to any, business, customer, machine, design, apparatus or system of the Company, Zygo Corporation, a Delaware corporation and the owner of all the outstanding capital stock of the Company ("Zygo"), or any of their respective subsidiaries or affiliates, or any of the methods of conducting any part of their respective business or the like which may become known to the Employee by reason of his employment or otherwise except as may be reasonably necessary to the performance of his assigned duties as an employee of the Company. 2. The Employee agrees to promptly and completely disclose in writing to such person as the Company may designate all ideas, developments, inventions and improvements heretofore or hereafter made, developed, perfected, devised, conceived or acquired by the Employee either solely or jointly with others during the Employee's employment by the Company and within ninety (90) days after any termination thereof, whether or not during regular working hours, relating in any way to the actual or anticipated business, research, developments or products of the Company; and if so requested by the Company, to assign, transfer and convey to the Company all right, title and interest in and to all such ideas, developments, inventions and improvements. 3. The Employee agrees, at the request and expense of the Company, to make, execute and deliver any and all papers, documents and instruments, including applications for patents in any and all countries and reissues and extensions thereof, and to assist and cooperate (without expense to the Employee) with the Company or its representative in any controversy or legal proceedings relating to said ideas, developments, inventions and improvements, and the patents which may be procured thereon. 4. The Company does not assume any responsibility for the prosecution or defense of any application for patents in any countries arising from ideas, developments, inventions and improvements disclosed to the Company pursuant to this Agreement. 5. The Employee represents and warrants that he/she is free to enter into the employment arrangements and, if applicable, the employment agreement, to be entered into with the Company and to perform the duties required of the Employee in connection with his/her employment by the Company; and that, except as indicated on Exhibit 1 hereto, there are no employment agreements, confidentiality agreements, restrictive covenants or other agreements or restrictions binding on the Employee or to which the Employee is a party which limit, prohibit or prevent the full performance by the Employee of his/her employment duties and arrangements with the Company or which would preclude the Employee from disclosing or otherwise limit the Employee's right to disclose to the Company any ideas, inventions, discoveries or other information. 6. The Employee represents and warrants that he/she has not brought and agrees that he/she will not bring to the Company or use in the performance of his/her employment responsibilities at the Company any materials, documents, trade secrets or confidential information of a former employer or any other person which are of a confidential nature or which are not generally available to the public. The Employee agrees that he/she has not and will not disclose to the Company or seek to induce the Company to use any such confidential information, materials, documents or trade secrets. 7. The Employee agrees that during his/her employment by the Company and following the termination of such employment, the Employee will not, directly or indirectly, request or cause any suppliers or customers with whom the Company, Zygo or any of their respective subsidiaries or affiliates has a business relationship to cancel or terminate any such business relationship with the Company, Zygo or any of their respective subsidiaries or affiliates or solicit, interfere with or entice from the Company or Zygo any employee or former employee of the Company or Zygo. 8. Neither this Agreement nor any benefits hereunder are assignable by the Employee, but the terms and provisions hereof shall inure to the benefit of the Company's successors and assigns. 9. This Agreement is not a contract of employment; it does not give the Employee any rights to any employment with the Company, and it in no way abridges, alters, amends or modifies any rights the Company may otherwise have to terminate its employment of the Employee. -2- 10. This Agreement, together with the Employment Agreement, dated August 19, 1997, by and between the Employee and the Company and the Stock Purchase Agreement, dated as of August 19, 1997, by and among the Company, Zygo and the shareholders of the Company and all agreements and exhibits referred to therein, contains the entire understanding and agreement of the parties with respect to the matters herein contained, and no waiver or modification hereof shall be binding unless in writing and subscribed by the parties hereto. 11. If any paragraph, clause, or phrase of this Agreement shall, by any federal, state or other law or by any decision of any court, be declared or held illegal, void or unenforceable, the remaining portions of this Agreement shall continue to be valid and in full force and effect. -3- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SIGHT SYSTEMS, INC. By: /s/ GARY K. WILLIS ------------------------------------ Name: Gary K. Willis Title: Chairman of Board EMPLOYEE /s/ DAVID GRANT ------------------------------------ David Grant AGREED TO: ZYGO CORPORATION By: /s/ GARY K. WILLIS ------------------------------------ Name: Gary K. Willis Title: President EX-13 9 ANNUAL REPORT ZYGO [Logo] ------------------ Zygo Corporation 1997 Annual Report M A K I N G P R E C I S I O N E V E N M O R E P R E C I S E . [Photo] CONSOLIDATED FINANCIAL HIGHLIGHTS (Thousands, except per share amounts)
Fiscal Year Ended June 30, Percentage Change --------------------------------- --------------------------- 1997 1996(1) 1995 1996 to 1997 1995 to 1996 ------- ------- ------- ------------ ------------ Net sales .............................................. $87,220 $57,374 $32,233 52% 78% Earnings before acquisition-related charges (2) ........ $13,960 $ 7,799 $ 2,749 79 184 Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ...... $ 1.16 $ 0.72 $ 0.32 61 125 Net earnings ........................................... $ 2,877 $ 7,799 $ 2,749 (63) 184 Net earnings per common and common equivalent share (3) ................................. $ 0.24 $ 0.72 $ 0.32 (67) 125 Weighted average common shares and common dilutive equivalents outstanding (3) .......... 11,998 10,878 8,484 10 28 June 30, Percentage Change --------------------------------- --------------------------- 1997 1996(1) 1995 1996 to 1997 1995 to 1996 ------- ------- ------- ------------ ------------ Working capital ........................................ $47,633 $47,148 $17,072 1% 176% Stockholders' equity ................................... $62,408 $54,087 $22,333 15 142 - ---------- (1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods prior to fiscal 1996 have not been restated due to immateriality. (2) Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fiscal 1997. (3) Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on January 23, 1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997.
[GRAPHICAL REPRESENTATION OF DATA OF BAR CHARTS BELOW] NET SALES (in thousands) 1993 ................................. $22,702 1994 ................................. $24,141 1995 ................................. $32,233 1996 ................................. $57,374 1997 ................................. $87,220 EARNINGS BEFORE INCOME TAXES Excluding Acquisition-Related Charges (in thousands) 1993 ................................. $ 698 1994 ................................. $ 1,328 1995 ................................. $ 3,956 1996 ................................. $11,558 1997 ................................. $21,121 NUMBER OF EMPLOYEES (Year End) 1993 ................................. 193 1994 ................................. 179 1995 ................................. 210 1996 ................................. 287 1997 ................................. 399 SALES PER EMPLOYEE 1993 ................................. $113,000 1994 ................................. $132,000 1995 ................................. $173,000 1996 ................................. $224,000 1997 ................................. $231,000 CORPORATE PROFILE Zygo Corporation is a customer-focused technology leader well known for developing yield-enhancement solutions for precision manufacturing industries. Zygo solutions employ process measuring instruments, automation technology, and precision components to benefit a wide variety of industries, including: semiconductor capital equipment and components, data storage, automotive, optical, and R&D. Some key applications for Zygo solutions include: semiconductor mask defect analysis, characterization of disks and heads used in hard disk drives, ultra-precise measurement of semiconductor stepper stage position, fabrication of optical components for laser fusion research, and automation for disk drive manufacturing processes. Founded in 1970, Zygo is a publicly-owned company with shares traded on the NASDAQ exchange. The Company is headquartered in a 100,000-square-foot (growing to 135,000) facility in Middlefield, Connecticut, with manufacturing, regional sales, service, and technology centers in Connecticut, California, and Colorado, and distributors/agents worldwide providing local customer support. - ------------------------------------------------------------------------------- On the cover is a portion of a 3D measurement plot of the surface curvature of an in-process hard disk platter, as measured and analyzed by Zygo instruments and software. The shape of the disk's surface is one of the critical elements manufacturers must control in order to make higher-density drives. - ------------------------------------------------------------------------------- 1 TO OUR SHAREOWNERS Your company concluded fiscal 1997 by posting record performance for the third consecutive year. These results also mark the fifth year in a row of improved year over year performance. Net sales of $87 million for fiscal 1997 were up some 52% as compared to fiscal 1996 net sales of $57 million. As was the case in fiscal 1996 and 1995, operating profits, pretax profits, and net earnings per share in fiscal 1997, excluding nonrecurring acquisition-related charges, not only increased over the previous year's level, but attained historical highs for your company. Net earnings in fiscal 1997 of $1.16 per share, excluding one-time acquisition-related charges, increased 61% over the $.72 per share recorded in fiscal 1996. Continued high productivity within our operations and increased revenues in all sectors of our business - systems, components, accessories, and services - drove this strong earnings performance. The demand for our products, systems, and services continued strong throughout fiscal 1997 and not only fueled the significant revenue increases, but also resulted in the establishment of a year-end record backlog of nearly $39 million, up some 77% versus the $22 million backlog at the end of fiscal 1996. As well as posting outstanding operations performance in fiscal 1997, your company also made progress in a number of other significant areas resulting in a strengthened ability to serve our customers and provide increased value to our loyal shareowners. Included in these activities are a 2-for-1 stock split in the third quarter of our fiscal year, the successful integration of our subsidiary companies, Technical Instrument Company and NexStar Automation, Inc., receipt of two prestigious awards for our newly commercialized ZMI 2000 product line, selection by Lawrence Livermore National Laboratory as a primary optics supplier for the National Ignition Facility, receipt of ISO 9001 certification at our Middlefield operations, and as we began fiscal 1998, the announcement of the addition of two new members to our corporate family, Sight Systems, Inc. and Digital Instruments Inc. Let's address each of these areas individually. --------- [PHOTO] OF GARY K. WILLIS --------- STOCK SPLIT: In February of 1997, during the third quarter of our fiscal year, your board of directors had the pleasure of authorizing a 2-for-1 stock split effected in the form of a stock dividend paid on February 27, 1997 to shareowners of record on February 3, 1997. This stock split was our second in as many years, following a 3-for-2 split effected on August 21, 1995, during the first quarter of fiscal 1996. The board's action to effect the split responded to the increasing demand for our company's securities and resulted in further increases to the practical float of the Company's shares and should further attract value-oriented institutional investors to your company. INTEGRATION OF ACQUISITIONS: During August and September of 1996, we completed the acquisitions of Technical Instrument Company and NexStar Automation, Inc., respectively. These acquisitions broadened our measurement capability with the addition of confocal microscopy technology and added parts handling and discreet component automation capabilities to our systems offering. Both of these complementary strengths furthered our ability to provide yield improvement solutions to our high technology industry customers. The enhanced value of these solutions became readily apparent to our customers and resulted in accelerated growth rates of our Middlefield, Connecticut, NexStar, and Technical Instrument operations. AWARD WINNING TECHNOLOGY: Once again, during fiscal 1997, your company was recognized for its innovative technology and the creative development of new products. We were honored to receive two most prestigious awards for the introduction of our ZMI 2000 motion measurement and precision positioning systems: the Photonics Circle of Excellence Award given by Photonics Spectra magazine to recognize "the 25 most innovative new products" and the R&D 100 Award selected by R&D magazine as "one of the 100 most significant new technical products of the year." This was the fourth 2 Circle of Excellence Award and the eighth R&D 100 Award received by your company. We, of course, are honored to receive such recognition. NATIONAL IGNITION FACILITY CONTRACT: At the close of our fiscal year, we received the initial contracts for the creation of a world class optical components manufacturing facility from the Lawrence Livermore National Laboratory. This award selected Zygo as a primary optical components supplier for the National Ignition Facility to be built at Lawrence Livermore National Laboratory in California. The National Ignition Facility is being constructed for, and funded by, the United States Department of Energy for the peaceful pursuit of nuclear fusion technology. This contract will result in the creation of a world class optical manufacturing facility at Zygo Middlefield, Connecticut, headquarters and as the future funding of the program is approved by Congress, a continuing stream of revenue as the optics component production continues beyond the turn of the century. In winning this contract, Zygo has been once again recognized as the premier worldwide supplier of precision flat optical components. ISO 9001 CERTIFICATION: Our Middlefield operation was honored to receive ISO 9001 certification in March of 1997. This culminated a multiyear effort of all of the employees in Middlefield in our total quality management program. A major factor for our improved financial performance and enhanced ability to satisfy customers resulted from our quality teams' efforts identifying areas of our business requiring improvement and installing countermeasures to make such improvements. ISO certification is a valued recognition of the creation of high quality processes, procedures, and practices. - -------- ISO 9001 [LOGO] - -------- ADDITIONS TO THE CORPORATE FAMILY: As we began fiscal 1998, we had the pleasure of announcing two new additions to the corporate family: Sight Systems, Inc. and Digital Instruments, Inc. The acquisition of Sight Systems, Inc. was completed on August 19, 1997 and further strengthens our ability to provide yield improvement solutions to our customers by broadening our measurement capability through the addition of enhanced application-specific vision metrology systems. The letter of intent announcing our intent to acquire Digital Instruments, Inc. was signed on July 22, 1997 and this acquisition is expected to be completed through the approval of our shareowners before the end of calendar year 1997. Digital Instruments is the worldwide leader in the supplying of scanning probe microscopy and the addition of this technology strengthens our precision measurement capability. With these acquisitions, we have created the world's leading supplier of precision metrology and measurement equipment. Both of these acquisitions will enhance our ability to provide yield improvement solutions to the high technology market, and we look forward with enthusiasm to integrating them into our company during fiscal 1998. OUTLOOK: As we enter fiscal 1998, we are confident in our ability to continue to better serve our customers and further our performance track record. Our strong financial position, our operating productivity improvements, our strengthened competitive product position through new product introductions, and our enhanced ability to provide yield improvement solutions through the addition of our acquired companies, all will allow us to take advantage of the opportunities that present themselves during fiscal 1998. Although no one can predict with certainty the strength of the demand for our goods and services generated by the markets we serve, we are optimistic about the future potential of your company based on our strengthened market position. You, of course, can count on the best efforts of all of us to continue to drive your company forward. Once again, we thank you for your continued interest in, and support of, your company. Sincerely, /s/ GARY K. WILLIS - ----------------------------------------- Gary K. Willis President and Chief Executive Officer September 11, 1997 3 PRECISION IS AT THE HEART OF THE SOLUTION Growing out of the need to remain viable in today's fiercely-competitive business climate, manufacturers all over the world have been fighting a continuous battle to retain their existing customers and win over new ones. The successful ones have realized that the way to do this is simple in concept - give their customers what they want with a cost/performance value better than their competition's. Putting this concept into practice means that manufacturers must continually improve the quality and reliability of their products while simultaneously reducing production costs. In some situations, this means reducing the physical size of the product while increasing it's performance; in other situations, it means making existing products to much tighter specifications to improve performance and reliability. In both cases, it is precision that is at the heart of the solution - precision to produce miniaturized components that do many times the work of their bulky predecessors, and precision to produce components for everyday-use products that outperform, outlast, and represent a greater value than previous models. - -------------------------------------------------------------------------------- [PHOTO] Everyday-use products, like contact lenses, are manufactured in mass quantity with greater precision than ever before. Zygo precision helps manufacturers improve their processes to make better products at lower cost. - -------------------------------------------------------------------------------- Realizing that precision manufacturing holds the answer to maintaining a competitive edge, manufacturers are facing production challenges unlike any they had faced in the past. As new manufacturing techniques were developed to produce smaller components and improve the precision of existing ones, it quickly became clear that traditional batch sample testing and manual handling of components would no longer be sufficient. To meet the challenges of maintaining product quality, high throughput, and high production yields, new measurement technologies for evaluating the precision of in-process products, and new automation technologies for handling components without causing damage or contamination, would be essential. - -------------------------------------------------------------------------------- [PHOTO] Precision manufacturing, once reserved for hi-tech devices like computer hard disk drives and semiconductor chips, is growing rapidly in many other industries. Zygo precision helps a wide variety of manufacturers achieve their quality and production goals. [PHOTO] - -------------------------------------------------------------------------------- Zygo Corporation has been monitoring this growing trend in the manufacturing industry and has committed its considerable resources in precision measurement and automation technologies to develop solutions that help precision manufacturers attain their quality and production goals. The next few pages highlight some key industries that have made astounding progress in pushing the envelope of product quality and production yields, and have done so with the help of Zygo's solutions. - -------------------------------------------------------------------------------- [PHOTO] Highly-sophisticated electronic circuits, printed on miniature semiconductor chips, make possible extremely compact electronic devices like cellular telephones. Zygo precision helps the semiconductor industry pack more and more circuitry onto microchips. - -------------------------------------------------------------------------------- 4 DATA STORAGE INDUSTRY The data storage industry, makers of hard disk drive components and assemblies used in all computer systems sold in the world today, is an excellent example of how far the precision, performance, value, and manufacturing volume of electromechanical devices has advanced in a relatively short period of time. - -------------------------------------------------------------------------------- [GRAPHICAL REPRESENTATION OF BAR CHART] MAGNETIC HEAD SIZE (%) AREA DENSITY Head Size Areal Density Year (percent) (Gigabits per square inch) ---- --------- -------------------------- 1982 ........... 100% .03 1987 ........... 70% .06 1992 ........... 50% .10 1997 ........... 30% .85 The physical size of magnetic heads is steadily decreasing, enabling corresponding increases in the areal density of disk drives. - -------------------------------------------------------------------------------- The first disk storage system for computers had a capacity of just five megabytes, using a total of 50 rigid disks, each 24-inches in diameter. Because this device could access data at random, it was tremendously faster than the linear tape storage devices in use at the time, and opened up the possibility of using computers for a wide variety of tasks that were previously impractical. Hard disk technology steadily advanced; disk drives got physically smaller, while their storage capacity and reliability continued to rise, and their per-megabyte cost continued to decline. In the early 1980's, Zygo recognized the business potential of the data storage industry and began developing specialized software applications for our precision measuring instruments to satisfy the growing needs of the data storage industry. - -------------------------------------------------------------------------------- [PHOTO] Zygo's automated inspection station (above) automatically certifies and sorts in-process disks, and our Pegasus 2000 system (below) accurately measures the flying height of in-process heads. Both systems are used on the production line to remove substandard components from the process. - -------------------------------------------------------------------------------- The data storage industry's interest and confidence in Zygo's instruments and automation solutions has grown at an increasing rate over the years. Once used only in new-product development laboratories, Zygo solutions are now an integral part of the manufacturing process. Zygo instruments and systems are installed on production lines measuring hard disk platter flatness, and air-bearing surface geometry, pole tip recession, pole tip dimensions, and flying height of magnetic heads. Our automation systems provide precise, reliable, contamination-free handling of drive components for processing and assembly. - -------------------------------------------------------------------------------- [PHOTO] Zygo's AAB System automatically measures critical air bearing surface geometries on over 20,000 heads per day, generating SPC data to help manufacturers improve their processes. - -------------------------------------------------------------------------------- Looking ahead to the future, Zygo is committed to working closely with the data storage industry to develop innovative solutions to the new manufacturing challenges that will undoubtedly arise as the demand to pack more information into smaller spaces continues to accelerate. - -------------------------------------------------------------------------------- [PHOTO] Controlling the characteristics of a magnetic head's pole tips (top) is essential for manufacturing high-capacity disk drives. Zygo machine vision metrology systems measure critical x-y dimensions, and our interferometric systems measure the amount of recession. The 3D measurement plot (above) shows the slight curvature of a head's air-bearing surfaces, required to maintain proper flying height. - -------------------------------------------------------------------------------- 5 SEMICONDUCTOR COMPONENT MANUFACTURING INDUSTRY - -------------------------------------------------------------------------------- [PHOTO] A photomask (below) is the "master" used to print one layer of a semiconductor chip. Some chips require as many as 20 photomasks; a small defect in any one of them could result in thousands of unusable chips. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [GRAPHICAL REPRESENTATION OF BAR CHART] [ ] LINE WIDTH (um) AND [ ] CHIP DENSITY Millions of Bit/Chip (DRAM) Line Widths Chip Density Year (micrometers) [Millions of bits/chip (DRAM)] ---- -------------- ------------------------------ 1982 ........... 4.0 0.256 1987 ........... 2.0 2 1992 ........... 1.0 16 1997 ........... 0.35 256 The "line widths" of semiconductor chips is steadily decreasing, enabling corresponding increases in density of semiconductor device printed on each chip. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [PHOTO] Multiple semiconductor chips are made at the same time on silicon wafers like this one. The wafers are then "diced" and the individual chips are put into "packages", which are then used in a wide variety of products. - -------------------------------------------------------------------------------- In today's world, it's difficult not to encounter something that doesn't have a semiconductor chip of some type inside. Everyone knows that computers and calculators rely on these devices, but so do many everyday items like automobiles, televisions, VCRs, telephones, dishwashers, vacuum cleaners, and lawnmowers. The intelligence programmed into these chips doesn't think for us, rather it handles a multitude of tasks to make these appliances more efficient or easier to use. One of the reasons chips have become so commonplace is that manufacturing techniques have been developed to produce them in much greater quantities and at much lower cost. Zygo technology has been, and will continue to be, integral in enabling manufacturers to achieve their ambitious production goals. The density of the circuitry on chips has been steadily increasing over the years, and the growth is accelerating. In the early days of semiconductor manufacturing, Gordon Moore, founder of Intel Corporation, stated that semiconductor chip device density would double every two years. He later revised it to say that the density would double every 18 months. This statement became known as "Moore's Law" and still holds true today. To pack more circuitry on a chip, the lines that comprise the circuitry have to become thinner. This is known in the semiconductor industry as "line width" and serves as an indicator of the state of semiconductor manufacturing technology. Line widths have been steadily decreasing since the semiconductor chip was invented and, in many of today's chips, the lines are only about 0.35 um (millionths of a meter) wide. With circuitry that small, it doesn't take much of a defect or contaminant to completely ruin the chip, or a whole batch of chips. Zygo manufactures specialized microscopes for measuring line widths and defects on wafers, and on the photomasks containing the circuit patterns printed onto the wafers, to enable manufacturers to better understand, and improve, their manufacturing processes. Other Zygo measurement and automation systems are used to measure and analyze several critical surfaces on wafers, and provide contamination-free handling and transport during production. - -------------------------------------------------------------------------------- [PHOTO] Zygo's confocal microscope systems are used to analyze photomask defects, and manufacturers use the measurement data to improve the process that creates the photomasks. Special measurement analysis software can simulate the characteristics of the finished chip's circuitry (above right) before the photomask is put into actual production. - -------------------------------------------------------------------------------- 6 SEMICONDUCTOR CAPITAL EQUIPMENT MANUFACTURING - -------------------------------------------------------------------------------- [GRAPHICAL REPRESENTATION OF BAR CHART] STAGE POSITIONING TOLERANCE (In Nanometers) 1982 ................................... 100 1987 ................................... 67 1992 ................................... 37 1997 ................................... 10 With the demand for increasing chip density and decreasing line widths, the positioning accuracy tolerances for photolithography steppers are steadily becoming more stringent as well. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [PHOTO] Zygo's GPI interferometer system (below) is the accepted standard in the optics industry for extremely high precision measurements of optical surfaces and lens systems. These systems are used to verify the precision of the lenses (measurement above) that print the photomask patterns onto the semiconductor wafer. [PHOTO] - -------------------------------------------------------------------------------- Few things in the history of mankind have had as significant an impact on people's lives as the development and continuing miniaturization of the semiconductor chip. Central to the manufacture of chips are machines called photolithography steppers which photographically print the minute circuitry for many chips onto a semiconductor wafer. Since the circuitry is applied in layers, the same area on the wafer must be positioned under the stepper's lenses in exactly the same position each time a new layer is printed. In the past, when the chips were not as densely packed with circuitry, the positioning accuracy required was about 50 nanometers (billionths of a meter). The circuitry on today's densely-packed chips is much smaller and requires a positioning accuracy of approximately five nanometers. This is a formidable task for stepper manufacturers. To meet the challenges of this task, Zygo developed a measurement system that reliably measures with the accuracy required for today's, and tomorrow's, steppers. The award-winning ZMI 2000 distance measuring interferometer system accurately measures the relative position of the stage assembly that moves and positions the in-process wafer. The ZMI system continuously sends position information to the motor controllers that move the stage so the wafer can be positioned precisely where it needs to be. The ZMI system does this with unsurpassed reliability and accuracy, on production lines that run 24 hours a day. Another of Zygo's technologies is also an integral part of the accuracy of today's steppers. The lenses that focus the circuitry patterns onto the wafer must have near-perfect optical characteristics. The manufacturers of these lenses rely on the accuracy of Zygo's GPI family of interferometer products to measure and analyze the surface shape and light transmissive qualities of these lenses, and provide documentation of the measurements. - -------------------------------------------------------------------------------- [PHOTO] Zygo's award-winning ZMI 2000 (below) distance measuring interferometer system is used in many photolithography steppers. Its unrivaled accuracy ensures that each chip on the wafer is in exactly the right position when a new layer is printed. Individual chips (left) are a labyrinth of minute circuitry, imperceptible to the unaided eye. [PHOTO] Photonics Circle of Excellence Award R&D 100 Award [logo] [logo] - -------------------------------------------------------------------------------- 7 AUTOMOTIVE PRECISION MANUFACTURING INDUSTRIES - -------------------------------------------------------------------------------- [GRAPHICAL REPRESENTATION OF BAR CHART] MANUFACTURING TOLERANCE 1982 ................................... 20 1987 ................................... 10 1992 ................................... 6 1997 ................................... 3.5 Mass-produced parts, such as those in automobile engines, are becoming more and more precise as demonstrated by steady tightening of manufacturing tolerances. - -------------------------------------------------------------------------------- [PHOTO] Zygo's new MESA system greatly expands the range of surfaces that can be measured with Zygo products. Precision components with a large amount of surface figure, previously unmeasurable with Zygo instruments, can now be measured with the MESA, opening up a great many opportunities for in-process measurements. - -------------------------------------------------------------------------------- [PHOTO] - -------------------------------------------------------------------------------- One of the most imitated automobile commercials in recent memory shows a luxury sedan with a pyramid of champagne glasses sitting on the hood, unwavering, while the car is run at simulated high speed - or the one where a steel ball rolls around the seams of the car's perfectly uniform door, hood, and trunk seams. These commercials are often imitated by other automobile manufacturers who want to communicate the idea that precision design and manufacturing, once reserved for luxury-class cars, is now being applied to models aimed at the general population. Several years ago, quality and precision in automobile manufacturing was not at the level it is today. Strong competition forced manufacturers to look for ways to improve their products' quality, which meant improving not only the design, but the precision and consistency of the manufacturing process. The aforementioned commercials and their imitators are indicators of where the automotive industry, and manufacturing as a whole, is headed - using higher levels of precision to improve performance and reliability of all kinds of commonplace products. Historically, Zygo instruments have been valuable tools in QC labs, used for measuring and analyzing critical surfaces on production samples. The measurement data was used by manufacturing engineers to reduce variability and ensure higher precision. In recent years, a growing number of manufacturers have been making Zygo instruments an integral part of their production line, measuring and analyzing surfaces on 100% of components produced by a variety of processes, including: machining, grinding, molding, extruding, and polishing. Zygo instruments assess the quality level of the parts to determine which are acceptable for further processing and which must be rejected for scrap or rework. They also perform statistical process control analysis on the measurement data, which manufacturers use to refine the manufacturing process so that fewer parts are rejected. As this trend toward increasing precision in commonplace products continues, manufacturers will rely even more heavily on Zygo instruments and technologies to monitor and improve their production processes. - -------------------------------------------------------------------------------- [PHOTO] When comparing surface quality of mass-produced machined parts, there is a dramatic difference between today's parts (above) and parts produced a few years ago (below). [PHOTO] - -------------------------------------------------------------------------------- [PHOTO] Zygo's NewView 200 microscope system measures and analyzes surface structure on a wide variety of manufactured parts, including honed, ground, cast, turned, milled, and etched parts. [PHOTO] - -------------------------------------------------------------------------------- 8 OUTLOOK FOR THE FUTURE So what lies ahead? To understand the challenges that will face precision component manufacturers in the future, we need only to look back a few years to see how much the industry has progressed in such a short time. Extrapolating this development trend shows that future demand for precision in manufactured goods will increase as more and more commonplace products are made with higher levels of precision. Zygo will continue to be an integral part of the progress of precision manufacturing. We will be developing and acquiring new and innovative measurement and automation solutions to help manufacturers produce smaller, faster, more reliable components at a level of precision that wasn't conceivable a few years ago. Traditionally used for applications in the upper reaches of precision manufacturing, Zygo's product line is being expanded to provide yield improvement solutions for components with less stringent production tolerances as well. This approach will greatly expand the number of manufacturing processes for which we can provide solutions, and open up many new opportunities for the future. We are also dedicated to progressing along the growth and development course that we have charted for ourselves. By committing resources, both human and financial, to the task of providing yield-enhancement solutions for precision manufacturing industries, we will be ensuring our own success by ensuring the success of our customers. FIVE-YEAR SUMMARY (Thousands, except per share amounts) Zygo Corporation and Subsidiaries 9
Fiscal Year Ended June 30, --------------------------------------------------------- 1997 1996(1) 1995 1994 1993 -------- -------- -------- -------- -------- Net sales ................................................ $ 87,220 $ 57,374 $ 32,233 $ 24,141 $ 22,702 Instruments and Systems sales .......................... 75% 65% 62% 54% 56% Modules and Components sales ........................... 25% 35% 38% 46% 44% Gross profit ............................................. $ 41,825 $ 25,866 $ 14,231 $ 10,616 $ 9,049 % of sales ............................................. 48% 45% 44% 44% 40% Earnings before taxes and acquisition-related charges (2)............................................. $ 21,121 $ 11,558 $ 3,956 $ 1,328 $ 698 % of sales ........................................... 24% 20% 12% 6% 3% Earnings before acquisition-related charges (2) .......... $ 13,960 $ 7,799 $ 2,749 $ 918 $ 481 % of sales ........................................... 16% 14% 9% 4% 2% Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ........ $ 1.16 $ 0.72 $ 0.32 $ 0.12 $ 0.06 Earnings per share growth rate ....................... 62% 121% 181% 87% (23)% Net earnings ............................................. $ 2,877 $ 7,799 $ 2,749 $ 918 $ 481 Net earnings per common and common equivalent share (3) ................................... $ 0.24 $ 0.72 $ 0.32 $ 0.12 $ 0.06 Weighted average common share and common dilutive equivalents outstanding (3) ................... 11,998 10,878 8,484 7,974 7,804 Research and development ................................. $ 7,151 $ 5,538 $ 3,967 $ 2,786 $ 3,077 Capital expenditures ..................................... $ 4,723 $ 2,864 $ 1,631 $ 1,912 $ 910 Depreciation and amortization ............................ $ 2,612 $ 1,477 $ 1,248 $ 1,348 $ 1,270 June 30, --------------------------------------------------------- 1997 1996(1) 1995 1994 1993 -------- -------- -------- -------- ------- Working capital .......................................... $ 47,633 $ 47,148 $ 17,072 $ 14,889 $ 14,648 Current ratio ............................................ 4.6 5.2 3.6 4.8 4.1 Total assets ............................................. $ 78,799 $ 65,895 $ 29,666 $ 24,499 $ 24,555 Long-term debt (excluding current portion) ............... -- -- -- 481 613 Stockholders' equity ..................................... $ 62,408 $ 54,087 $ 22,333 $ 19,274 $ 18,416 Price-earnings ratio (2) ................................. 26.5 30.4 35.2 18.1 38.2 Number of employees at year end .......................... 399 287 210 176 193 Sales per employee - average ............................. $ 231 $ 224 $ 173 $ 132 $ 113 Book value per common share .............................. $ 5.91 $ 5.34 $ 2.84 $ 2.48 $ 2.37 Market price at year-end ................................. $ 30.750 $ 21.875 $ 11.250 $ 2.167 $ 2.292
- ---------- (1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods prior to fiscal 1996 have not been restated due to immateriality. (2) Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fiscal 1997. (3) Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on January 23, 1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- NET SALES BY GEOGRAPHIC AREA (Fiscal 1997) [GRAPHICAL REPRESENTATION OF PIE CHART BELOW] [ ] Domestic (54%) .................... $47,695 [ ] Japan (25%) ....................... $21,730 [ ] Pacific Rim (15%) ................. $12,650 [ ] Europe and Other (6%) ............. $ 5,145 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GROSS PROFIT AND GROSS PROFIT AS A PERCENT OF NET SALES (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW] Percent Gross of Profit Sales ------ ------- 1993 ......................... $ 9,049 40% 1994 ......................... $10,616 44% 1995 ......................... $14,231 44% 1996 ......................... $25,866 45% 1997 ......................... $41,825 48% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EARNINGS PER SHARE Excluding Acquisition-Related Charges [GRAPHICAL REPRESENTATION OF BAR CHART BELOW] 1993 ......................... $0.06 1994 ......................... $0.12 1995 ......................... $0.32 1996 ......................... $0.72 1997 ......................... $1.16 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996 Net sales of $87,220,000 for fiscal 1997 increased by $29,846,000 or 52.0% from fiscal 1996 net sales of $57,374,000. This increase was the result of strong demand for all of the Company's instruments, systems, and components, as well as, the addition of Technical Instrument Company ("TIC") from August 8, 1996. Including TIC on a pro forma basis in fiscal 1996, the increase in net sales in fiscal 1997, which already included TIC, amounted to $18,761,000 or 27.4%. Net sales of the Company's instruments and systems, including the impact of TIC, increased by 75.4% to $65,121,000 and net sales of modules and components, also including the impact of TIC, increased by 9.1% to $22,099,000, in fiscal 1997, each from fiscal 1996. These increases in net sales in fiscal 1997 were principally due to increased market demand from data storage and semiconductor industry customers. The Company's sales outside the United States amounted to $39,525,000 in fiscal 1997, an increase of $12,330,000 or 45.3% from fiscal 1996. Sales in Japan during fiscal 1997 amounted to $21,730,000, an increase of $1,967,000 over fiscal 1996 despite a reduction of sales for the Company's motion control components to Canon Inc. for incorporation into Canon's photolithography "steppers" used in production of semiconductors. Sales to other geographic markets outside the U.S. amounted to $17,795,000 in fiscal 1997, an increase of $10,363,000 or 139.4% from fiscal 1996. This increase was principally the result of increased demand for the Company's instruments and systems by the data storage and semiconductor manufacturing industries in the Pacific Rim, the addition of TIC which has a strong market presence in the Pacific Rim, primarily among the various producers of semiconductor masks, and increased sales of the Company's products in Europe due to improved market conditions. 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 1997 amounted to $41,825,000, an increase of $15,959,000 or 61.7% over gross profit of $25,866,000 in fiscal 1996. As a percentage of net sales, gross profit in fiscal 1997 was 48.0%, as compared to 45.1% in fiscal 1996. Gross profit dollars and gross profit as a percent of net sales increased principally due to the effect of product mix as the Company's systems generally sell at higher margins than its OEM metrology components and its optical components as well as the effect of the volume of net sales and certain volume-related manufacturing efficiencies. Selling, general and administrative expenses in fiscal 1997 amounted to $13,830,000 and increased by $4,330,000 or 45.6% from fiscal 1996. The increase was primarily due to the impact of including TIC from August 8, 1996, infrastructure additions, and volume-related expenses, such as commissions paid to the Company's direct sales personnel and external sales agents. As a percentage of net sales, selling, general and administrative expenses declined in fiscal 1997 to 15.9%, as compared to 16.6% in fiscal 1996. Research, development and engineering expenses ("R&D") in fiscal 1997 totaled $7,151,000 and increased by $1,613,000 or 29.1% from fiscal 1996. The increase in R&D expenses was principally due to the impact of including TIC from August 8, 1996 and increased engineering headcount at the Company's Middlefield, Connecticut, facilities, partially offset Zygo Corporation and Subsidiaries 11 by lower material expenditures. R&D expenses as a percentage of net sales decreased to 8.2% in fiscal 1997 as compared to 9.7% in fiscal 1996. The Company recorded nonrecurring acquisition-related charges in the amount of $11,083,000 in the three months ended September 30, 1996. The nonrecurring charges related to $999,000 of expenses incurred to complete the Company's acquisition of NexStar Automation Inc. ("NexStar") and the write-off of $10,084,000 of in-process research and development costs in conjunction with the Company's acquisition of TIC. Excluding the nonrecurring acquisition-related charges, the Company's operating profit in fiscal 1997 was $20,286,000, an increase of $9,458,000 or 87.3% from operating profit in fiscal 1996. Operating profit in fiscal 1997, including the nonrecurring acquisition-related charges, amounted to $9,203,000 as compared to $10,828,000 in fiscal 1996. Income tax expense in fiscal 1997 totaled $7,161,000 on earnings before income taxes of $10,038,000 as compared to $3,759,000 of income taxes in fiscal 1996 on earnings before income taxes of $11,558,000. The higher tax expense as a percentage of earnings before taxes in fiscal 1997 compared to fiscal 1996 was principally a result of the non-tax deductible nature of the $10,084,000 of in-process research and development charge to earnings in the quarter ended September 30, 1996. Backlog at June 30, 1997, was $38,688,000 compared to $22,397,000 at June 30, 1996, an increase of $16,291,000 or 72.7%. The backlog of the Company's instruments and systems at June 30, 1997, increased by $8,363,000 or 61.3% from that at June 30, 1996, principally as a result of stronger demand from customers in the data storage, semiconductor and other high technology industries for yield enhancement systems. The backlog of the Company's modules and components increased by $7,928,000 or 90.5% from the year earlier primarily as a result of the Company's entering 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"), a $1.2 billion Department of Energy project at LLNL to produce the world's largest laser for nuclear fusion research. The contract provides for the Company to design, manufacture, and equip a world-class optical fabrication facility at its Middlefield, Connecticut, operations for a fixed price of nearly $10.0 million over an 18-month period, of which slightly in excess of $5.5 million is presently funded, the majority of which was in backlog at June 30, 1997. Net earnings and earnings per share for fiscal 1997 amounted to $2,877,000 and $.24 as compared to $7,799,000 and $.72, respectively, for fiscal 1996, both years restated for the 2-for-1 stock split. Excluding nonrecurring acquisition-related charges, net income for fiscal 1997 totaled $13,960,000, an increase of $6,161,000 or 79.0% from fiscal 1996. Earnings per share adjusted for the 2-for-1 stock split, excluding the nonrecurring charges, were $1.16, up 61.1% from $.72 in fiscal 1996, despite a 10.3% increase in shares outstanding. FISCAL 1996 COMPARED TO FISCAL 1995 Net sales of $57,374,000 for fiscal 1996 increased by $25,141,000 or 78.0% from fiscal 1995 net sales of $32,233,000. The increase in net sales in fiscal 1996 was principally due to increased demand for the Company's instruments and systems from manufacturers of data storage, semiconductor, and other high technology products. The increase in net sales was also partially attributable to the inclusion of NexStar Automation, Inc. ("NexStar"). (See note 2). Net sales of the Company's electro-optical instruments and systems in fiscal 1996, which accounted for 64.7% of total fiscal 1996 net sales, increased by 86.9% from fiscal 1995. Net sales of the Company's various components increased by 63.7% in fiscal 1996 from the prior year. The Company's sales outside the United States amounted to $27,195,000 in fiscal 1996, an increase of $12,214,000 or 81.5% from fiscal 1995. Sales in Japan during fiscal 1996 amounted to $19,763,000, an increase of $10,133,000 over fiscal 1995. The significant increase was due to the improving Japanese economy and the improved demand for the Company's instruments and systems, including its motion control systems which are sold to Canon for incorporation into their step-and-repeat photolithography systems used in semiconductor manufacturing, as well as the Company's other systems which are sold to Canon for resale in the domestic Japanese market or used by Canon in their facilities. Sales to other geographic markets outside the U.S. amounted to $7,432,000 in fiscal 1996, an increase of $2,081,000 from fiscal 1995. The 38.9% increase was principally the result of a continuation of strong sales of the Company's electro-optical instruments, systems and accessories to the data storage and semiconductor manufacturing industry in the Pacific Rim and increased sales in Europe. Gross profit in fiscal 1996 amounted to $25,866,000, an increase of $11,635,000 or 81.8% over gross profit of $14,231,000 in fiscal 1995. As a percentage of net sales, gross profit in fiscal 1996 was 45.1%, as compared to 44.2% in fiscal 1995. Gross profit dollars and gross profit as a percent of net sales increased principally due to the increased volume of sales from electro-optical instruments and systems, optical components, and services, combined with volume-related manufacturing efficiencies. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Selling, general and administrative expenses in fiscal 1996 of $9,500,000 increased by $2,963,000 from fiscal 1995. The increase was principally a result of volume-related expenses, such as commissions, allowance for doubtful accounts, and product marketing expenses and necessary infrastructure changes made to support the growth of the business such as additions to sales and marketing personnel. Approximately 40.3% of the $2,963,000 increase was attributable to selling, general and administrative expenses relating to the addition of NexStar. As a percentage of net sales, selling, general and administrative expenses declined in fiscal 1996 to 16.6%, as compared to 20.3% in fiscal 1995, principally due to the 78.0% growth in net sales. Research and development costs in fiscal 1996 totaled $5,538,000 and increased by $1,571,000 or 39.6% from fiscal 1995. The increase in R&D expenses primarily resulted from spending on personnel and materials at both the Company's principal R&D center in Middlefield, Connecticut, and its R&D facility in Simi Valley, California, which was formed during the second half of fiscal 1995. As a percentage of net sales, research and development costs were 9.7% and 12.3% in fiscal 1996 and fiscal 1995, respectively. In fiscal 1996, the Company had operating profit of $10,828,000 as compared to $3,727,000 in fiscal 1995. Operating profit as a percentage of net sales in fiscal 1996 improved to 18.9% from 11.6% in fiscal 1995. Interest income in fiscal 1996 amounted to $946,000 and was $574,000 higher than in fiscal 1995. This increase was primarily due to higher cash balances, principally as a result of the sale by the Company of 845,000 shares of its common stock in a follow-on offering which generated approximately $22.7 million in net proceeds to the Company. Backlog at June 30, 1996, was $22,397,000 compared to $12,993,000 at June 30, 1995. The $9,404,000 or 72.4% increase in backlog was primarily a result of stronger demand for all of the Company's electro-optical instruments and systems and the inclusion of NexStar. The backlog of the Company's instruments and systems at June 30, 1996, increased by $6,688,000 or 96.3% from that at June 30, 1995. The backlog of the Company's modules and components increased by $2,716,000 or 44.9% from the year earlier as a result of improved demand for the Company's motion controllers, used in the semiconductor industry, and its precision optical components. The Company reported net earnings and earnings per common and common equivalent share of $7,799,000 and $.72, respectively, in fiscal 1996 as compared to $2,749,000 and $.32 per share in fiscal 1995. This reflected an increase in net earnings and earnings per share of $5,050,000 (183.7%) and $.40 (125.0%), respectively, over fiscal 1995. Per share figures have been adjusted to reflect the impact of the 2-for-1 stock split effective February 27, 1997 and have been restated to reflect the operations of NexStar for the full fiscal year 1996. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 working capital was $47,633,000, an increase of $485,000 from the amount at June 30, 1996, and the Company had cash and cash equivalents of $10,981,000 and marketable securities amounting to $12,766,000 for a total of $23,747,000. The $14,737,000 decrease in cash and cash equivalents and marketable securities from the amount at June 30, 1996 was partially due to the cash paid for the acquisition of TIC (See note 2) and the repayment of certain outstanding indebtedness of TIC (See note 10). Trade accounts receivable increased by $10,765,000, principally as a result of the growth in the Company's net sales and the timing of shipments in the fourth quarter of fiscal 1997. As a result of the addition of TIC and necessary inventory to support the growth in sales of the Company's electro-optical instruments and systems, inventory increased by $4,494,000 at June 30, 1997 compared to the year earlier. Accounts payable and accrued expenses increased by $3,033,000 in fiscal 1997 to $12,905,000 due to normal business activities. The Company's expenditures for property, plant and equipment totaled $4,723,000 in fiscal 1997 which was $1,859,000 more than the prior fiscal year. Capital expenditures were primarily for capacity additions and productivity improvements in the Company's optical manufacturing facility, construction of a laser manufacturing work cell at the Middlefield, Connecticut location, and necessary productivity-related leasehold improvements made at TIC. The Company expects to complete certain building additions amounting to $4.2 million in fiscal 1998. These expenditures will be funded by operating cash flows. These building additions include the expansion of the Middlefield, Connecticut, site facilities by 35,500 square feet to accommodate the space required for the NIF facility and to provide additional office facilities. As of June 30, 1997, there were no borrowings outstanding under the Company's $3,000,000 bank line of credit. Unused amounts under the line of credit are available for short-term working capital needs. Stockholders' equity at June 30, 1997, increased by $8,321,000 from the year earlier to $62,408,000 as a result of net income of $2,877,000, and increases in the Company's common stock and paid-in capital accounts resulting from the Company's acquisition of TIC and the exercise of employee stock options. Effective June 30, 1997, TIC, a wholly owned subsidiary of the Company, and Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), Zygo Corporation and Subsidiaries 13 a German-based company, completed all necessary legal requirements allowing for the appropriate transfer and registration of 50 percent of Syncotec shares to TIC. Effective September 1, 1997, the Company, through TIC, purchased the remaining 50 percent of Syncotec for approximately $2.0 million in a combination of cash and the Company's common stock. Syncotec designs, develops, manufactures, and markets certain products which incorporate TIC's confocal technology for European customers. Syncotec's sales in the year ended December 31, 1996 amounted to $2.9 million (DM4.9 million). The Company announced on July 28, 1997 the signing of a letter of intent providing for the Company's acquisition of Digital Instruments, Inc. ("Digital"), a privately held California based entity that designs, develops, and manufactures high precision measurement products and systems which use scanning probe microscopy imaging and metrology technology. These systems are used in product research and development applications as well as to improve the production efficiency and manufacturing yields within the data storage, semiconductor, and other high technology industries. It is expected that the Company will acquire all the outstanding stock of Digital and an affiliated corporation in exchange for 7,000,000 shares of the Company's common stock. Closing the transaction is subject to various conditions and is expected to be accounted for as a pooling-of-interests. The transaction is subject, among other things, to approval by the stockholders of the Company, and is expected to be completed prior to the end of the calendar year 1997. Digital's revenues for the year ended December 31, 1996 were approximately $50 million. Effective August 19, 1997, the Company acquired Sight Systems, Inc. ("SSI"), a privately held California based business which designs, develops, and manufactures application-specific machine vision metrology systems, for 287,400 shares of the Company's common stock. The transaction will be accounted for as a pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were approximately $3.5 million. FORWARD LOOKING STATEMENTS This report contains forward looking statements which are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These uncertainties include, but are not limited to, general economic conditions, competitive conditions in markets served by the Company, most notably high technology markets such as data storage and semiconductor, and political developments in countries where the Company conducts business. - -------------------------------------------------------------------------------- WORKING CAPITAL (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW] 1993 ......................... $14,648 1994 ......................... $14,889 1995 ......................... $17,072 1996 ......................... $47,148 1997 ......................... $47,633 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW] Depreciation Capital and Amortization Expenditure ---------------- ----------- 1993 ......................... $1,270 $ 910 1994 ......................... $1,348 $1,912 1995 ......................... $1,248 $1,631 1996 ......................... $1,477 $2,864 1997 ......................... $2,612 $4,723 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW] 1993 ......................... $18,416 1994 ......................... $19,274 1995 ......................... $22,333 1996 ......................... $54,087 1997 ......................... $62,408 - -------------------------------------------------------------------------------- 14 CONSOLIDATED BALANCE SHEETS Zygo Corporation and Subsidiaries (Thousands, except share and per share amounts)
June 30, June 30, 1997 1996 ------- ------- Assets Current assets: Cash and cash equivalents .................................. $10,981 $18,449 Marketable securities (note 3) ............................. 12,766 20,035 Receivables (note 4) ....................................... 20,730 10,627 Inventories (note 5) ....................................... 11,656 7,162 Costs in excess of billings (note 6) ....................... 2,082 252 Prepaid expenses and taxes ................................. 590 233 Deferred income taxes (note 17) ............................ 2,205 1,506 ------- ------- Total current assets ............................... 61,010 58,264 ------- ------- Property, plant and equipment, net (notes 7, 11, and 19) ........... 9,174 6,512 Goodwill and other intangibles, net (note 8) ....................... 7,818 600 Other assets ....................................................... 797 519 ------- ------- Total assets ....................................................... $78,799 $65,895 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Accounts payable ........................................... $ 4,659 $ 4,302 Customer progress payments ................................. 251 176 Accrued salaries and wages ................................. 3,581 3,083 Other accrued expenses ..................................... 4,414 2,311 Income taxes payable ....................................... 472 1,244 ------- ------- Total current liabilities .......................... 13,377 11,116 ------- ------- Deferred income taxes (note 17) .................................... 3,014 692 Stockholders' equity (notes 13, 14, 15 and 16): Common stock, $.10 par value per share: 15,000,000 shares authorized; 10,765,940 shares issued (10,337,972 in 1996) ....................... 1,077 517 Additional paid-in capital ................................. 40,210 34,846 Retained earnings .......................................... 21,405 19,060 Net unrealized gain (loss) on marketable securities (note 3) 17 (35) ------- ------- 62,709 54,388 Less treasury stock, at cost; 207,600 common shares ........ 301 301 ------- ------- Total stockholders' equity ......................... 62,408 54,087 ------- ------- Total liabilities and stockholders' equity ......................... $78,799 $65,895 ======= =======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF EARNINGS Zygo Corporation and Subsidiaries 15 (Thousands, except per share amounts)
Fiscal Year Ended June 30, ------------------------------- 1997 1996 1995 ------- ------- ------- Net sales (notes 18 and 19) ...................... $87,220 $57,374 $32,233 Cost of goods sold ............................... 45,395 31,508 18,002 ------- ------- ------- Gross profit ..................... 41,825 25,866 14,231 Selling, general and administrative expenses ..... 13,830 9,500 6,537 Research and development ......................... 7,151 5,538 3,967 Nonrecurring acquisition-related charges ......... 11,083 -- -- Amortization of goodwill and other intangibles ... 558 -- -- ------- ------- ------- Operating profit ................. 9,203 10,828 3,727 ------- ------- ------- Other income (expense): Interest income .......................... 883 946 372 Interest expense (note 10) ............... -- -- (40) Miscellaneous expense, net ............... (48) (216) (103) ------- ------- ------- Total other income ............... 835 730 229 ------- ------- ------- Earnings before income taxes ..... 10,038 11,558 3,956 Income tax expense (note 17) ..................... 7,161 3,759 1,207 ------- ------- ------- Net earnings ..................................... $ 2,877 $ 7,799 $ 2,749 ======= ======= ======= Earnings per common and common equivalent share (note 14) ............... $ 0.24 $ 0.72 $ 0.32 ======= ======= ======= Weighted average common share and common dilutive equivalents outstanding (note 14) 11,998 10,878 8,484 ======= ======= =======
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Zygo Corporation and Subsidiaries (Thousands of dollars)
Unrealized Additional Gain (Loss) on Total Common Paid-In Retained Marketable Treasury Stockholders' Stock Capital Earnings Securities Stock Equity ------------------------------------------------------------------------- Balance at June 30, 1994 ............................ $ 266 $10,484 $ 8,893 $ (68) $(301) $19,274 Net earnings ................................ -- -- 2,749 -- -- 2,749 Net unrealized gain on marketable securities, net of related tax effect..... -- -- -- 65 -- 65 Exercise of employee stock options. and related tax effect ................... 3 242 -- -- -- 245 Stock split (note 14) ....................... 134 -- (134) -- -- -- ------ ------- ------- ----- ----- ------- Balance at June 30, 1995 ............................ 403 10,726 11,508 (3) (301) 22,333 Net earnings ................................ -- -- 7,799 -- -- 7,799 Shares issued for NexStar (note 2) .......... 25 1,017 (247) -- -- 795 Net unrealized loss on marketable securities, net of related tax effect..... -- -- -- (32) -- (32) Issuance of common stock (note 14) .......... 85 22,607 -- -- -- 22,692 Exercise of employee stock options and related tax effect ................... 4 496 -- -- -- 500 ------ ------- ------- ----- ----- ------- Balance at June 30, 1996 ............................ 517 34,846 19,060 (35) (301) 54,087 Net earnings ................................ -- -- 2,877 -- -- 2,877 Shares issued for TIC (note 2) .............. 10 2,990 -- -- -- 3,000 Net unrealized gain on marketable securities, net of related tax effect..... -- -- -- 52 -- 52 Exercise of employee stock options and related tax effect ................... 18 2,374 -- -- -- 2,392 Stock split (note 14) ....................... 532 -- (532) -- -- -- ------ ------- ------- ----- ----- ------- Balance at June 30, 1997 ............................ $1,077 $40,210 $21,405 $ 17 $(301) $62,408 ====== ======= ======= ===== ===== =======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Zygo Corporation and Subsidiaries 17 (Thousands of dollars)
Fiscal Year Ended June 30, ----------------------------- 1997 1996 1995 -------- -------- ------- Cash provided by (used for) operating activities: Net earnings .................................................. $ 2,877 $ 7,799 $ 2,749 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization ......................... 2,612 1,477 1,248 Deferred income taxes ................................. (255) (67) (248) Loss on disposal of assets ............................ 298 266 251 Nonrecurring acquisition-related IPR&D charges (note 2) 10,084 -- -- Gain on sale of marketable securities ................. (49) (16) -- Changes in operating accounts: Receivables ................................... (7,682) (3,579) (2,220) Costs in excess of billings ................... (1,830) (252) -- Inventories ................................... (764) (1,519) (2,387) Prepaid expenses and taxes .................... 20 350 (313) Accounts payable and accrued expenses ......... (1,244) 4,136 2,751 -------- -------- ------- Net cash provided by operating activities ............. 4,067 8,595 1,831 -------- -------- ------- Cash provided by (used for) investing activities: Additions to property, plant and equipment .................... (4,723) (2,864) (1,631) Investment in marketable securities ........................... (3,772) (16,986) (1,229) Investments in other assets ................................... (154) (229) (39) Acquisition of business ....................................... (11,699) -- (100) Proceeds from the sale of marketable securities ............... 6,098 999 -- Proceeds from maturity of marketable securities ............... 4,860 3,660 1,465 Proceeds from sale of assets .................................. 18 4 12 -------- -------- ------- Net cash used for investing activities ................ (9,372) (15,416) (1,522) -------- -------- ------- Cash provided by (used for) financing activities: Repayments of long-term debt .................................. (2,662) -- (656) Net proceeds from issuance of common stock .................... -- 22,692 -- Exercise of employee stock options ............................ 499 150 245 -------- -------- ------- Net cash provided by (used for) financing activities .. (2,163) 22,842 (411) -------- -------- ------- Net increase (decrease) in cash and cash equivalents .................. (7,468) 16,021 (102) Cash and cash equivalents, beginning of year .......................... 18,449 2,428 2,530 -------- -------- ------- Cash and cash equivalents, end of year ................................ $ 10,981 $ 18,449 $ 2,428 ======== ======== =======
See accompanying notes to consolidated financial statements. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997, 1996, and 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (the "Company" or "Zygo"). 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 NexStar Automation, Inc. ("NexStar") were acquired by the Company on September 12, 1996, in a transaction accounted for as a pooling-of-interests, and, accordingly, the Company's consolidated financial statements for fiscal 1996 have been restated to include the accounts and operations of NexStar. The operating results for NexStar were not material to the combined results of the two companies for all periods prior to fiscal 1996, and therefore, results for those periods have not been restated. CASH AND CASH EQUIVALENTS The Company considers cash and cash investments with maturities at the date of purchase of less than three months 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 tax-exempt municipal debt securities. All securities held by the Company at June 30, 1997 and 1996, 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. REVENUE RECOGNITION Revenues, other than revenue under the National Ignition Facility ("NIF") contract (note 20) and revenue from certain automation contracts (note 6), are recognized when units are shipped. Revenues related to NIF and automation contracts are recognized under the percentage-of-completion method of accounting. DEPRECIATION Depreciation rates are based on the estimated useful lives of the various classes of assets and are computed using the straight-line method. EARNINGS PER SHARE Earnings per common and common equivalent share amounts represent primary earnings per share and are based upon the weighted average number of common shares outstanding, plus, when their effect is dilutive, the weighted average number of shares issuable upon exercise of outstanding stock options, less the weighted average number of common shares which could have been repurchased with the proceeds available from the assumed exercise of the outstanding options. Fully diluted earnings per share are not significantly different from primary earnings per share. GAIN CONTINGENCY The Company was awarded $2,668,710 plus recovery of certain costs in a judgment rendered by the United States District Court (District of Arizona) on June 2, 1994. The Court's decision was appealed to the Court of Appeals for the Federal Circuit located in Washington, D.C. by the defendant and oral arguments of the appeal were heard by the Court on March 9, 1995. On April 1, 1996, the United States Court of Appeals for the Federal Circuit rendered an Opinion Announcing Judgment of the Court. The appellate court affirmed-in-part and reversed-in-part the District Court's earlier findings and remanded the case to the District Court for a redetermination of the damage award. The Company has not recorded any gain from the District Court's earlier ruling and will not until a final determination of the award is made. STOCK SPLIT The Board of Directors of the Company declared a 2-for-1 split of the Company's common shares, effected in the form of a 100% stock dividend which was paid on February 27, 1997, to shareholders of record as of the close of business on February 3, 1997. The Board of Directors of the Company also declared a 3-for-2 split of the Company's common shares, effected in the form of a 50% stock dividend paid on August 21, 1995, to shareholders of record as of the close of business on August 1, 1995. All presentations involving numbers of shares and amounts per share in 1996 and prior years have been restated to reflect the stock splits. CAPITAL STOCK The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional capital. 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 capital. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets Zygo Corporation and Subsidiaries 19 and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of ("Statement 121") was issued in 1995. Statement 121 requires that long-lived assets to be disposed of, certain identifiable intangibles, and goodwill to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Statement 121 was adopted for the Company's fiscal year 1996 and has not had a material impact on its operating results or financial condition. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), was issued in 1995. Implementation is required in the fiscal year commencing July 1, 1996. Statement 123 established financial accounting and reporting standards for stock-based compensation plans. The Company has adopted the disclosure requirements of Statement 123, effective for the fiscal year ended June 30, 1997. (See note 15). Accordingly, no compensation cost has been recognized for its stock option plans under Statement 123. Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 128 was issued to simplify the computation of EPS and to make the U.S. standard more compatible with the EPS standards of other countries and that of the International Accounting Standards Committee. The Company intends to adopt Statement 128 for its interim period ended December 31, 1997, as early adoption is not permitted. Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("Statement 129"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 129 was issued to establish standards for disclosing information about an entity's capital structure. The Company is currently compliant with this standard. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 130 was issued to establish standards for reporting and display of comprehensive income and components in a full set of general purpose financial statements. The Company will adopt this statement no later than the interim period ended December 31, 1997. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 131 was issued to establish standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt this statement no later than the interim period ended December 31, 1997. NOTE 2: MERGERS AND ACQUISITIONS On August 8, 1996, the Company acquired and accounted for as a purchase, the proprietary products division of Technical Instrument Company ("TIC"), a privately held California-based entity that designs, manufactures, markets and sells microscope systems and other precision optical instrument systems and components. The Company paid $11,699,000 and issued unregistered shares of its common stock, $.10 par value, valued at $3.0 million in exchange for all the outstanding capital stock of TIC. The net purchase price was allocated to its net assets acquired, less a write-off of $10,084,000 of in-process research and development costs ("IPR&D"), as follows: (Thousands of dollars) Working capital ....................................... $ 867 Property, plant and equipment ......................... 135 Other assets .......................................... 573 Goodwill and other intangibles ........................ 7,580 Debt assumed .......................................... (2,662) Deferred tax liability, net ........................... (1,878) ------- $ 4,615 ======= Results of operations after the acquisition date are included in the 1997 Consolidated Statements of Earnings. Fiscal 1997 sales would have been increased $1,727,000 for the July 1, 1996 to August 8, 1996 time frame with no material impact on earnings. The following unaudited pro forma information for 1996 has been prepared assuming that this acquisition had taken place at the beginning of the period. The pro forma information includes adjustments to record the amortization of intangibles arising from the transaction, to reduce interest income for cash used for the transaction, and to adjust income taxes for the reduction in interest income. The unaudited pro forma financial information is 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. Fiscal Year Ended June 30, 1996 (Thousands, except per share amounts) ----------------- Pro forma net sales ...................................... $68,459 Pro forma net earnings ................................... $ 7,968 Pro forma net earnings per common share .................. $ 0.72 ----------------- On September 12, 1996, the Company issued 500,000 shares of its common stock, effected for the 2-for-1 stock split, in exchange for all of the outstanding shares of NexStar Automation, Inc. ("NexStar"). The acquisition has been accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements for fiscal 1996 have been restated to include the accounts and operations of NexStar. The operating results for NexStar were not material to the combined results of the two companies for all periods prior to fiscal 1996, and therefore, results for those periods have not been restated. In connection with the acquisition, $999,000 of acquisition-related costs were incurred and have been charged to nonrecurring acquisition expense in the first quarter of fiscal 1997. The acquisition costs consisted of legal, investment banking, and accounting fees. NOTE 3: MARKETABLE SECURITIES Marketable securities at June 30, 1997, consist primarily of tax-exempt bonds issued by various state and municipal agencies which are reported either at fair value or at cost depending on their classification. The unrealized gain on marketable securities of $28,920 (gross) is shown net of its related tax effect of $11,742 as a separate component of stockholders' equity. Dividend and interest income are 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, gross unrealized holding losses, and fair value for available-for-sale securities at June 30, 1997 and 1996, were as follows: Gross Gross Unrealized Unrealized Holding Holding Fair Cost Gains Losses Value (Thousands of dollars) ---- ---------- ---------- ----- At June 30, 1997 State and local municipal bonds ......... $ 5,536 $29 $-- $ 5,565 ------- --- --- ------- At June 30, 1996 State and local municipal bonds ......... $11,098 $-- $59 $11,039 ------- --- --- ------- The Company recorded gross realized gains on the maturity of investment securities of $49,228 and $15,611 in 1997 and 1996, respectively. There were no gross realized losses recorded in 1997 or 1996. Maturities of investment securities classified as available-for-sale were as follows at June 30, 1997: Fair Cost Value (Thousands of dollars) ---- ----- Due within one year ..................................... $ -- $ -- Due after one year through five years ................... 5,536 5,565 ------ ------ $5,536 $5,565 ====== ====== Maturities of investment securities classified as held-to-maturity were as follows at June 30, 1997: Fair Cost Value (Thousands of dollars) ---- ----- Due within one year ..................................... $7,201 $7,201 Due after one year through five years ................... -- -- ------ ------ $7,201 $7,201 ====== ====== NOTE 4: ACCOUNTS RECEIVABLE At June 30, 1997 and 1996, accounts receivable, net of allowances, were as follows: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Trade (note 19) ...................................... $21,047 $10,282 Other ................................................ 411 612 ------- ------- 21,458 10,894 Allowance ............................................ (728) (267) ------- ------- $20,730 $10,627 ======= ======= NOTE 5: INVENTORIES Inventories at June 30, 1997 and 1996 were as follows: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Raw materials and manufactured parts ................. $ 7,435 $ 3,126 Work in process ...................................... 3,248 3,558 Finished goods ....................................... 973 478 ------- ------- $11,656 $ 7,162 ======= ======= NOTE 6: COSTS IN EXCESS OF BILLINGS Revenues from automation projects are 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 are recorded in the period in which the facts become known. When a loss is anticipated on a contract, the full amount of the loss is provided for currently. 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 contracts were as follows: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Revenue recognized to date ........................... $14,674 $ 6,303 Billings to date ..................................... 12,592 6,051 ------- ------- $ 2,082 $ 252 ======= ======= Zygo Corporation and Subsidiaries 21 NOTE 7: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Costs of replacements and improvements are capitalized and depreciated. Maintenance and repairs are charged to expense as incurred. At June 30, 1997 and 1996, property, plant and equipment, at cost, was as follows: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Land (note 19) ....................................... $ 650 $ 650 Building ............................................. 4,170 4,352 Machinery, equipment and office furniture ............ 15,372 12,072 Leasehold improvements ............................... 277 18 Construction in progress ............................. 1,396 896 ------- ------- 21,865 17,988 Less accumulated depreciation ........................ 12,691 11,476 ------- ------- $ 9,174 $ 6,512 ======= ======= NOTE 8: GOODWILL AND OTHER INTANGIBLES The cost of intangible assets is amortized on a straight-line basis which ranges from 4 to 20 years. During fiscal 1997, goodwill and other intangibles increased by $7,799,000 largely due to the Company's acquisition of Technical Instrument Company. (See note 2). This increase was partially offset by current year amortization of $581,000. Management evaluates, on an ongoing basis, the carrying value of its intangible assets and makes adjustments, when impairments are identified. Goodwill and other intangibles, net, at June 30, 1997 and 1996 were as follows: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Goodwill and other intangibles ....................... $ 8,594 $ 795 Accumulated amortization ............................. 776 195 ------- ------- $ 7,818 $ 600 ======= ======= NOTE 9: BANK LINE OF CREDIT The Company has a $3,000,000 unsecured bank line of credit with interest at LIBOR plus 60 basis points (approximately 6.7% at June 30, 1997). The line of credit is available through November 30, 1997. At June 30, 1997 and 1996, no amounts were outstanding under the bank line of credit. NOTE 10: LONG-TERM DEBT In the quarter ended March 31, 1995, the Company retired its 1977 and 1981 Series Industrial Development Bonds totaling $375,000 and $150,000, respectively, prior to scheduled maturity. This transaction resulted in no extraordinary gain or loss. The funds for these retirements were obtained from internally generated cash flows. As part of the acquisition of TIC, the Company assumed outstanding debt totaling $2,662,000. The Company repaid this debt immediately after the acquisition. Interest payments were $0, $0, and $39,900 in fiscal 1997, 1996, and 1995, 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 2001. Total rental expense charged to operations was $509,000 in 1997, $336,000 in 1996, and $183,000 in 1995. At June 30, 1997, the minimum future rental commitments under noncancellable leases payable over the remaining lives of the leases were: Minimum Future Rental Commitments (Thousands of dollars) ------------- 1998 ..................................................... $ 517 1999 ..................................................... 473 2000 ..................................................... 391 2001 ..................................................... 101 ------ $1,482 ====== 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, 1997, 1996, and 1995 amounted to $2,007,600, $1,295,600 and $440,000, respectively. Profit-sharing contributions are determined annually at the discretion of the Board of Directors. Effective June 30, 1985, the existing profit-sharing plan was revised and amended to incorporate 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, 1997, 1996, and 1995 amounted to $468,700, $333,900, and $255,000, respectively. Under the Employee Stock Ownership Program, the Company may, at the discretion of the Board of Directors, contribute its own stock or cash to purchase its own stock. The purchased stock's fair market value shall 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, 1997, 1996, and 1995. NOTE 13: STOCKHOLDERS' AGREEMENTS A registration rights agreement was entered into by Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, Sol F. Laufer, and the Company in November 1993, granting to each of these stockholders the right, until November 30, 1998, to have his or its shares of Common Stock included in any registered public offering of the Company's securities. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14: STOCKHOLDERS' EQUITY On January 23, 1997 the Board of Directors declared a 2-for-1 split effected in the form of a 100% stock dividend payable on February 27, 1997, to shareholders of record on February 3, 1997. This transaction resulted in the issuance of approximately 5,320,000 additional shares of Common Stock. Stockholders' Equity had been adjusted to recognize the effect of the stock split by reclassifying from retained earnings to paid-in capital the par value of the additional shares arising from the split. In addition, all references in the financial statements to numbers of shares, per share amounts, stock option data, and market prices of the Company's Common Stock have been restated to give retroactive recognition to the stock split. On July 20, 1995, the Board of Directors approved an increase in the authorized shares of the Company's Common Stock from 10,000,000 to 15,000,000 which was approved by the Company's stockholders at its annual meeting held on November 16, 1995. On December 13, 1995, the Company commenced a public offering of 1,300,000 shares of Common Stock, of which 845,000 shares were sold by the Company, and 455,000 shares were sold by certain of the Company's stockholders. The Company generated approximately $22.7 million in net proceeds, which is being used for working capital and other general corporate purposes, and for acquisitions. NOTE 15: STOCK COMPENSATION PLANS As of June 30, 1997, Zygo Corporation has two stock based compensation plans, which are described below. (See note 16). The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Since all options are 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 follows: June 30, June 30, 1997 1996 (In thousands, except per share amounts) ------- ------- Pro forma net income ................................ $ 423 $6,613 Pro forma earnings per share ........................ $ .04 $ .61 The fair values of these options at the date of grant was estimated with the following weighted average assumptions for 1997 and 1996: risk free interest rate 6.8%, no dividend yield, volatility factor of the expected market price of the Company's common stock of 69% and an expected life of the option of 6.6 years. The above pro forma information is based on historical activity and may not represent future trends. NOTE 16: STOCK OPTION PLANS 1987 STOCK OPTION PLAN AND DATA The Zygo Corporation 1987 Amended and Restated Stock Option Plan permits the granting of non-qualified options to purchase a total of 2,850,000 shares (adjusted for splits) of common stock at prices not less than the fair-market value on the date of grant. 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 will expire on September 3, 2002. June 30, 1997 --------------------------- Weighted Average Shares Exercise Price --------- -------------- Outstanding at beginning of year ................. 1,304,674 $ 2.1836 Granted .......................................... 322,500 $17.9720 Exercised ........................................ (232,950) $ 2.1436 Expired or canceled .............................. (900) $ 1.6650 --------- Outstanding at end of year ....................... 1,393,324 $ 5.6865 ========= June 30, 1996 --------------------------- Weighted Average Shares Exercise Price --------- -------------- Outstanding at beginning of year ................. 1,375,574 $ 2.0347 Granted .......................................... 15,500 $14.2426 Exercised ........................................ (86,400) $ 1.7554 Expired or canceled .............................. 0 $ 0.0000 --------- Outstanding at end of year ....................... 1,304,674 $ 2.1982 ========= June 30, 1995 --------------------------- Weighted Average Shares Exercise Price --------- -------------- Outstanding at beginning of year ................. 911,850 $ 1.8393 Granted .......................................... 540,226 $ 2.2436 Exercised ........................................ (76,502) $ 1.6339 Expired or canceled .............................. 0 $ 0.0000 --------- Outstanding at end of year ....................... 1,375,574 $ 2.0347 ========= Zygo Corporation and Subsidiaries 23 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA The Zygo Corporation 1994 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. Options become exercisable at the rate of 20% of the shares each year commencing one year after the date of grant. The Plan, as amended, will expire on August 25, 2004. June 30, 1997 --------------------------- Weighted Average Shares Exercise Price --------- -------------- Outstanding at beginning of year ................. 450,000 $ 6.2292 Granted .......................................... 0 $ 0.0000 Exercised ........................................ 0 $ 0.0000 Expired or canceled .............................. 0 $ 0.0000 ------- Outstanding at end of year ....................... 450,000 $ 6.2292 ======= June 30, 1996 --------------------------- Weighted Average Shares Exercise Price --------- -------------- Outstanding at beginning of year ................. 375,000 $ 2.0000 Granted .......................................... 75,000 $24.2594 Exercised ........................................ 0 $ 0.0000 Expired or canceled .............................. 0 $ 0.0000 ------- Outstanding at end of year ....................... 450,000 $ 6.2292 ======= June 30, 1995 --------------------------- Weighted Average Shares Exercise Price --------- -------------- Outstanding at beginning of year ................. 0 $ 0.0000 Granted .......................................... 375,000 $ 2.0000 Exercised ........................................ 0 $ 0.0000 Expired or canceled .............................. 0 $ 0.0000 ------- Outstanding at end of year ....................... 375,000 $ 2.0000 ======= The following table summarizes information about all fixed stock options outstanding at June 30, 1997: Options Outstanding ------------------------------------------------------------------- Number Weighted Average Range of Outstanding Remaining Weighted Exercise as of Contractual Average Prices June 30, 1997 Life Exercise Price ----------------- ------------- -------------- -------------- $ 1.25 - $ 1.92 293,950 2.68 $ 1.6287 $ 2.00 - $ 2.00 896,624 6.77 $ 2.0000 $ 2.29 - $14.88 360,750 6.93 $ 6.6211 $15.57 - $22.75 208,500 9.11 $19.1843 $25.75 - $25.75 8,500 9.67 $25.7500 $27.38 - $27.38 75,000 8.92 $27.3750 ----------------- ------------- -------------- -------------- $ 1.25 - $27.38 1,843,324 6.52 $ 5.9308 ================= ============= ============== ============== Options Exercisable ------------------------------------------------------------------- Range of Number Weighted Exercise Exercisable as of Average Prices June 30, 1997 Exercise Price ----------------- ----------------- -------------- $ 1.25 - $ 1.92 284,950 $ 1.6276 $ 2.00 - $ 2.00 443,999 $ 2.0000 $ 2.29 - $14.88 119,875 $ 2.6261 $15.57 - $22.75 1,500 $15.6900 $25.75 - $25.75 0 $ 0.0000 $27.38 - $27.38 15,000 $27.3700 ----------------- ----------------- -------------- $ 1.25 - $27.38 865,324 $ 2.4270 ================= ================= ============== NOTE 17: INCOME TAXES The components of income tax expense (benefit) for each year are as follows: Fiscal Year Ended June 30, -------------------------- 1997 1996 1995 (Thousands of dollars) ------ ------ ------ Currently payable: Federal ....................................... $5,614 $3,264 $1,036 State ......................................... 1,494 910 421 ------ ------ ------ $7,108 $4,174 $1,457 ====== ====== ====== Deferred: Federal ....................................... $ 38 $ (319) $ (188) State ......................................... 15 (96) (62) ------ ------ ------ $ 53 $ (415) $ (250) ====== ====== ====== Total income tax expense ........................ $7,161 $3,759 $1,207 ====== ====== ====== Income taxes paid amounted to $6,068,000 (including cash payments of $5,432,500 and $635,500 of prior year overpayments applied to fiscal 1997), $3,403,300 and $793,100 (including additional taxes owed for fiscal 1991), in fiscal 1997, 1996, and 1995, respectively. The total income tax expense differs from the amount computed by applying the applicable U.S. federal income tax rate of 35% in 1997 and 34% in 1996 and 1995 to earnings before income taxes for the following reasons: Fiscal Year Ended June 30, -------------------------- 1997 1996 1995 (Thousands of dollars) ------ ------ ------ Computed "expected" tax expense ................. $3,516 $3,994 $1,345 Increases (reductions) in taxes resulting from: Nondeductible acquisition- related charges ........................... 3,634 -- -- State taxes, net of federal income tax benefit ........................ 989 537 237 Tax exempt interest income .................. (170) (245) (108) FSC benefit ................................. (724) (543) (194) Other, net .................................. (84) 16 (73) ------ ------ ------ $7,161 $3,759 $1,207 ====== ====== ====== 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997 and 1996, are presented below: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Deferred tax assets: Accounts receivable, principally due to the allowance for doubtful accounts ............. $ 295 $ 110 Warranty costs .................................... 347 246 Vacation costs .................................... 104 30 Medical insurance costs ........................... 123 123 Inventory valuation ............................... 1,386 969 Unrealized loss on marketable securities .......... -- 24 Other ............................................. 28 64 ------ ------ 2,283 1,566 Less valuation allowance .......................... -- -- ------ ------ Deferred tax asset ................................ 2,283 1,566 Deferred tax liabilities: Prepaid expenses .................................. (67) (60) Plant and equipment, principally due to differences in depreciation expense .......... (555) (662) Intangibles ....................................... (2,429) -- Unrealized gain on marketable securities .......... (11) -- Other ............................................. (30) (30) ------ ------ Deferred tax liability ............................ (3,092) (752) ------ ------ Net deferred tax asset (liability) .................. $ (809) $ 814 ====== ====== The net current deferred tax assets and net non-current deferred tax liabilities as recorded on the balance sheet as of June 30, 1997 and 1996, are as follows: June 30, June 30, 1997 1996 (Thousands of dollars) ------- ------- Net current deferred tax asset ...................... $2,205 $1,506 Net noncurrent deferred tax liability ............... (3,014) (692) ------ ------ Net deferred tax asset (liability) .................. $ (809) $ 814 ====== ====== A valuation allowance has not been recorded because the Company believes that the deferred tax assets will, more likely than not, be realized. This determination is based largely upon the Company's historical earnings trend as well as its ability to carryback reversing items and recover taxes paid in the carryback period. In addition, the Company has the ability to offset deferred tax assets against deferred tax liabilities associated with such items as depreciation and amortization. NOTE 18: PRODUCTS, PRINCIPAL CUSTOMERS, AND OPERATIONS BY GEOGRAPHIC AREA The Company designs, develops, manufactures, and markets precision measurement and automation systems and components used to enhance production in high technology industries. The Company is headquartered in Middlefield, Connecticut, and also has operations in Longmont, Colorado, and in Newbury Park, Simi Valley, and Sunnyvale, California. Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than 20% of total Company sales for each of the years ended June 30, 1997, 1996 and 1995. (See note 19.) For the years ended June 30, 1996 and 1995, sales to a major manufacturer of computer disk drives and related hardware and software, accounted for 16% and 17%, respectively, of total Company sales. No other individual customer accounted for more than 10% of total Company sales for any year presented in the accompanying consolidated financial statements. Export sales by geographic area were as follows: Fiscal Year Ended June 30, -------------------------- 1997 1996 1995 (Thousands of dollars) ------ ------ ------ Far east: Japan ...................................... $21,730 $19,763 $ 9,630 Pacific Rim ................................ 12,650 4,765 3,279 ------- ------- ------- Total Far East ............................... $34,380 $24,528 $12,909 Europe and other ............................. 5,145 2,667 2,072 ------- ------- ------- Total ........................................ $39,525 $27,195 $14,981 ======= ======= ======= NOTE 19: RELATED PARTY TRANSACTIONS Sales to Canon Inc., a stockholder, and to Canon Sales Co., Inc., a distributor for certain of the Company's products in Japan and a subsidiary of Canon Inc., amounted to approximately $17,564,000 (20% of net sales), $19,761,000 (34% of net sales), and $9,553,000 (30% of net sales), for the years ended June 30, 1997, 1996, and 1995, 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, 1997, 1996, and 1995, there was approximately, in the aggregate, $2,345,500, $3,198,100, and $1,104,700, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc. On January 4, 1996, the Company purchased approximately 22 acres of land adjacent to the Company's facility in Middlefield, Connecticut, for a purchase price of $440,000. The land, which was jointly owned by Paul F. Forman, Sol F. Laufer, and Carl A. Zanoni, founders of the Company, is intended to be used to facilitate the expansion of the Company's buildings and/or parking facilities in the future. NOTE 20: MATERIAL CONTRACTS On May 9, 1997, the Company announced it had 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"), a $1.2 billion Department of Energy project at LLNL to produce the world's largest laser for nuclear fusion research. The contract provides for the Company to design, manufacture, and equip a world-class optical fabrication facility at its Middlefield, Connecticut, operations for a fixed price of nearly $10 million over an 18-month time period. The contract is presently funded to slightly in excess of $5.5 million and, Zygo Corporation and Subsidiaries 25 consistent with similar government contracts, requires additional appropriations from the U.S. Congress prior to the Company's receiving additional funding. Revenues recognized on this contract in fiscal 1997 were immaterial. To accommodate the space required for the NIF facility and provide additional office facilities, the Company has commenced work at its Middlefield, Connecticut, site to expand its facilities by 35,500 square feet. It is expected that the addition will be completed in December 1997. NOTE 21: SUBSEQUENT EVENTS On June 30, 1997, Technical Instrument Company ("TIC"), a wholly owned subsidiary of the Company, and Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), a German-based company, completed all necessary legal requirements allowing for the appropriate transfer and registration of a 50 percent ownership interest in Syncotec. The conclusion of this transaction completed commitments made by the former owners of TIC and enabled the Company to release $440,000 of contingent proceeds recorded as a liability at the time of the TIC acquisition by the Company. The Company, through TIC, is negotiating the purchase of the remaining 50 percent of Syncotec for approximately $2.0 million in a combination of cash and the Company's common stock. Syncotec designs, develops, manufactures, and markets certain products which incorporate TIC's confocal technology for European customers. Syncotec's sales in the year ended December 31, 1996 amounted to $2.9 million (DM4.9 million). The Company announced on July 28, 1997 the signing of a letter of intent providing for the Company's acquisition of Digital Instruments, Inc. ("Digital"), a privately held California-based entity that designs, develops, and manufactures high precision measurement products and systems which use scanning probe microscopy imaging and metrology technology. These systems are used in product research and development applications as well as to improve the production efficiency and manufacturing yields within the data storage, semiconductor, and other high technology industries. It is expected that the Company will acquire all the outstanding stock of Digital and an affiliated corporation in exchange for 7,000,000 shares of the Company's common stock. Closing the transaction is subject to various conditions and is expected to be accounted for as a pooling-of-interests. The transaction is subject, among other things, to approval by the stockholders of the Company, and is expected to be completed prior to the end of the calendar year 1997. Digital's revenues for the year ended December 31, 1996 were approximately $50 million. Additionally, the Company is in the process of acquiring Sight Systems, Inc. ("SSI"), a privately held California-based business that designs, develops, and manufactures application-specific vision metrology systems for 287,400 shares of the Company's common stock. The transaction will be accounted for as a pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were approximately $3.5 million. 26 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS Zygo Corporation and Subsidiaries REPORT OF MANAGEMENT Management is responsible for preparing the Company's financial statements and related information that appears in this annual report. Management believes that the financial statements fairly reflect the form and substance of transactions and reasonably present the Company's financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. The Company maintains a system of internal accounting policies, procedures, and controls intended to provide reasonable assurance, at appropriate cost, that transactions are executed in accordance with Company authorization and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. KPMG Peat Marwick LLP audits the Company's financial statements in accordance with generally accepted auditing standards and provides an objective, independent review of the fairness of reported financial condition and results of operations. The Board of Directors of the Company has an Audit Committee composed of nonmanagement directors. The Committee meets with financial management and the independent auditors to review internal accounting controls and accounting, auditing, and financial reporting matters. /s/ MARK J. BONNEY - ----------------------------------------- Mark J. Bonney Vice President, Finance & Administration, Treasurer, and Chief Financial Officer 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, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles. [LOGO] KPMG PEAT MARWICK LLP - ----------------------------- KPMG PEAT MARWICK LLP Hartford, Connecticut August 8, 1997 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Thousands, except per share amounts) Zygo Corporation and Subsidiaries 27
For the Fiscal Year Ended June 30, 1997 --------------------------------------------------- September 30 December 31 March 31 June 30 ------------ ----------- -------- ------- Net sales .......................................................... $18,443 $20,810 $22,476 $25,491 Earnings before taxes and acquisition- related charges (2) ............................................. $ 4,345 $ 4,873 $ 5,771 $ 6,132 Income taxes ....................................................... 1,206 1,774 2,078 2,103 ------- ------- ------- ------- Earnings before acquisition-related charges (2) .................... $ 3,139 $ 3,099 $ 3,693 $ 4,029 ======= ======= ======= ======= Net earnings per common and common equivalent share before acquisition-related charges (2)(3)(4) .............. $ 0.26 $ 0.26 $ 0.31 $ 0.33 ======= ======= ======= ======= Net earnings (3) ................................................... $(7,944) $ 3,099 $ 3,693 $ 4,029 ======= ======= ======= ======= Net earnings per common and common equivalent share (3)(4) ......................................... $ (0.77) $ 0.26 $ 0.31 $ 0.33 ======= ======= ======= ======= For the Fiscal Year Ended June 30, 1996 (1) --------------------------------------------------- September 30 December 31 March 31 June 30 ------------ ----------- -------- ------- Net sales .......................................................... $11,831 $13,479 $15,231 $16,833 Earnings before income taxes ....................................... $ 1,549 $ 2,415 $ 3,585 $ 4,009 Income taxes ....................................................... 588 876 1,038 1,257 ------- ------- ------- ------- Net earnings ....................................................... $ 961 $ 1,539 $ 2,547 $ 2,752 ======= ======= ======= ======= Earnings per common and common equivalent share (3)(4) ......................................... $ 0.10 $ 0.15 $ 0.22 $ 0.23 ======= ======= ======= ======= - ---------- (1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods prior to fiscal 1996 have not been restated due to immateriality. (2) Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fiscal 1997. (3) Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on January 23, 1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997. (4) Quarterly per share earnings do not necessarily equal the total per share earnings reported for the year as a result of the dilutive effect of common stock equivalents on the calculation of per share earnings.
STOCK DATA NASDAQ Symbol: ZIGO The number of stockholders of record at June 30, 1997, was 514. The Company's common shares are traded over-the-counter and are quoted on the NASDAQ/National Market. Market price data for 1997 and 1996, adjusted for the effect of the 2-for-1 stock split which was effective on February 27, 1997, was as follows: Fiscal Year Ended June 30, 1997 Fiscal Year Ended June 30, 1996 ------------------------------- ------------------------------- High Low High Low ------- ------- ------- --------- First quarter .... $21 1/2 $14 $14 5/8 $10 1/3 Second quarter ... $26 $12 1/4 $17 3/4 $12 Third quarter .... $29 7/8 $21 $20 1/8 $10 1/4 Fourth quarter ... $31 1/2 $21 1/2 $31 1/16 $17 11/16 - ---------- Source: National Association of Securities Dealers, Inc. 28 STOCKHOLDER INFORMATION Zygo Corporation and Subsidiaries FORM 10-K405 AVAILABLE Stockholders may obtain from the Company, without charge, a copy of the Annual Report on Form 10-K405 filed with the Securities and Exchange Commission for fiscal 1997. Written requests should be directed to: Sheree F. Denny Director, Corporate Financial Planning and Reporting Zygo Corporation Laurel Brook Road Middlefield, Connecticut 06455 E-mail requests should be directed to: investor@zygo.com ANNUAL MEETING November 13, 1997, at 10 a.m. Hotel Inter / Continental 111 East 48th Street (Lexington and Park) New York, New York 10017 CORPORATE HEADQUARTERS Laurel Brook Road Middlefield, Connecticut 06455 Web Site: www.zygo.com E-mail: inquire@zygo.com NEXSTAR AUTOMATION, INC. 2505-A Trade Centre Avenue Longmont, Colorado 80501 Web Site: www.zygo.com E-mail: inquire@nexstarauto.com SIGHT SYSTEMS, INC. 3541 Old Conejo Road #119 Newbury Park, California 91320 Web Site: www.zygo.com, E-mail: inquire@zygo.com TECHNICAL INSTRUMENT COMPANY 650 North Mary Avenue Sunnyvale, California 94086 Web Sites: www.technical.com www.zygo.com E-mail: sales@technical.com AUDITORS KPMG Peat Marwick LLP City Place II Hartford, Connecticut 06103 LEGAL COUNSEL Fulbright & Jaworski L.L.P. 666 Fifth Avenue New York, New York 10103 TRANSFER AGENT AND REGISTRAR Continental Stock Transfer and Trust Company 2 Broadway New York, New York 10004 DIVIDENDS The Company has not declared or paid cash dividends since becoming a public company. Zygo, the Zygo logo, NexStar, and Sight Systems are registered trademarks of Zygo Corporation. DIRECTORS AND OFFICERS - ------------------------- [Photo] - ------------------------- Clockwise from upper left: John R. Rockwell, Paul W. Murrill, Michael R. Corboy, Robert G. McKelvey, Seymour E. Liebman, Paul F. Forman, Robert B. Taylor. DIRECTORS MICHAEL R. CORBOY Chairman and President, Corboy Investment Company PAUL F. FORMAN Chairman of the Board Zygo Corporation SEYMOUR E. LIEBMAN Executive Vice President and General Counsel Canon U.S.A., Inc. ROBERT G. MCKELVEY Chairman and President George McKelvey Co., Inc. PAUL W. MURRILL Professional Engineer JOHN R. ROCKWELL Retired Senior Executive ROBERT B. TAYLOR Vice President and Treasurer Wesleyan University GARY K. WILLIS Zygo Corporation CARL A. ZANONI Zygo Corporation OFFICERS GARY K. WILLIS President and Chief Executive Officer AHMAD AKRAMI Vice President, President NexStar Automation WILLIAM H. BACON Vice President, Director of Corporate Quality MARK J. BONNEY Vice President, Finance and Administration, Treasurer, and Chief Financial Officer FRANCIS E. LUNDY Vice President, President Technical Instrument Company ROBERT A. SMYTHE Vice President, Director of Sales and Marketing CARL A. ZANONI Vice President, Research, Development and Engineering PAUL JACOBS Secretary - ------------------------- [Photo] - ------------------------- From left to right: Carl A. Zanoni, Paul Jacobs (Partner, Fulbright and Jaworski L.L.P.), Gary K. Willis, Michael Fedoras (Partner, KPMG Peat Marwick LLP), Mark J. Bonney. OPERATING LOCATIONS NexStar Automation AHMAD AKRAMI President Sight Systems DAVID GRANT President Technical Instrument Company FRANCIS E. LUNDY President ZYGO [LOGO] - ------------ Zygo Corporation Laurel Brook Road Middlefield, Connecticut 06455 Telephone: 860.347.8506 Facsimile: 860.347.8372 E-mail: inquire@zygo.com Web Site: www.zygo.com EX-21 10 SUBSIDIARIES OF ZYGO CORP EXHIBIT 21 SUBSIDIARIES OF ZYGO CORPORATION (DELAWARE) Zygo Credit Corporation (Delaware) 100% owned by Registrant 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) EX-23 11 ACCOUNTANTS' CONSENT EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Zygo Corporation: We consent to incorporation by reference in Registration Statements 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 8, 1997, with respect to the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 1997, and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended June 30, 1997, which reports appear in or are incorporated by reference into the June 30, 1997 Annual Report on Form 10-K405 of Zygo Corporation. KPMG PEAT MARWICK LLP Hartford, Connecticut September 16, 1997 EX-24 12 POWER OF ATTORNEY 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, Michael R. Corboy, 8111 Preston Road, Suite 712, Dallas, Texas 75225, do hereby appoint Mark J. Bonney, 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, 1997, 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 30th day of June 1997. /s/ MICHAEL R. CORBOY ------------------------------------ Michael R. Corboy STATE OF TEXAS ) ) ss.: COUNTY OF DALLAS ) On the 30th day of June 1997, before me personally came Michael R. Corboy to me known, and 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/ EDITH JONES ------------------------------------ Edith Jones Notary Public EDITH JONES [SEAL] MY COMMISSION EXPIRES November 30, 2000 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 Mark J. Bonney, 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, 1997, 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 annual 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 1997. /s/ PAUL F. FORMAN ------------------------------------ Paul F. Forman STATE OF CONNECTICUT ) ) ss.: COUNTY OF NEW HAVEN ) On the 23rd day of July 1997, 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/ ALICE H. GIRARDI ------------------------------------ Notary Public My commission expires 11/30/2001 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 Mark J. Bonney, 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, 1997, 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 annual 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 4th day of August 1997. /s/ SEYMOUR E. LIEBMAN ------------------------------------ Seymour E. Liebman STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On the 4th day of August 1997, 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/ RUTH WEINSTEIN ------------------------------------ Ruth Weinstein Notary Public RUTH WEINSTEIN Notary Public, State of New York No. 01WE 4734936 Qualified in Nassau County Commission Expires Jan. 31, 1998 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 Mark J. Bonney, 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, 1997, 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 3rd day of July 1997. /s/ ROBERT G. McKELVEY ------------------------- Robert G. McKelvey STATE OF NEW JERSEY, COUNTY OF MONMOUTH ss.: On the 3rd day of July 1997, 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/ MARGARET CAMPBELL -------------------------- Notary Public Margaret Campbell Notary Public of New Jersey My Commission Expires: March 19, 2001 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 W. Murrill, 206 Sunset Boulevard, Baton Rouge, Louisiana 70808, do hereby appoint Mark J. Bonney, 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, 1997, 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 JULY 1997. /s/ PAUL W. MURRILL -------------------------- Paul W. Murrill STATE OF LOUISIANA, PARISH OF E. BATON ROUGE On the 1st day of July 1997, before me personally came Paul W. Murrill 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/ SHARON M. TAYLOR -------------------------- Notary Public, Sharon M. Taylor 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, John R. Rockwell, Harbour Ridge, 12790 Mariner Court, Palm City, Florida 34990, do hereby appoint Mark J. Bonney, 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, 1997, 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 3rd day of July 1997. /s/ JOHN R. ROCKWELL --------------------------- John R. Rockwell STATE OF MAINE, COUNTY OF YORK ss.: On the 3rd day of July 1997, before me personally came John R. RockwelI 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/ MICHELLE A. DOW -------------------------- Notary Public Michelle A. Dow Notary Public of Maine My Commission Expires Feb. 11, 2004 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, North College, Wesleyan University, Middletown, Connecticut 06459, do hereby appoint Mark J. Bonney, 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, 1997, 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 2nd day of July 1997. /s/ ROBERT B. TAYLOR --------------------------- Robert B. Taylor STATE OF CONNECTICUT, COUNTY OF MIDDLESEX ss.: On the 2nd day of July 1997, 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/ ROBIN D. OSTRUM -------------------------- Notary Public Robin D. Ostrum Notary Public My Commission Expires Aug. 31, 2001 EX-27 13 FDS -- FOR FORM 10-K405
5 This schedule contains summary financial information extracted from the consolidated balance sheet and the consolidated statement of earnings and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1997 JUN-30-1997 10,981 12,766 21,047 728 11,656 61,010 21,865 12,691 78,799 13,377 0 0 0 1,077 61,331 78,799 87,220 87,220 45,395 78,017 302 0 0 10,038 7,161 2,877 0 0 0 2,877 .24 .24
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