10-Q 1 a34418.txt ZYGO CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 27, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from___________ to ________ Commission File Number 0-12944 Zygo Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0864500 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Laurel Brook Road, Middlefield, Connecticut 06455 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
(860) 347-8506 -------------------------------------------------------------------------------- Registrant's telephone number, including area code N/A -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed from last report) Indicate by check mark whether the registrant 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES NO --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 17,561,588 shares of Common Stock, $.10 Par Value, at February 3, 2003 FORWARD LOOKING STATEMENTS All statements other than statements of historical fact included in this Form 10-Q Quarterly Report, regarding the Company's financial position, business strategy, plans, and objectives of management of the Company for future operations, are forward-looking statements. These forward-looking statements include without limitation statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based upon information currently available and assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plans," "strategy," "project," and other words of similar meaning in connection with a discussion of future operating or financial performance. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors such as those disclosed under "Risk Factors" which references the Form 10-K filed by the Company for the fiscal year ended June 30, 2002. Such statements reflect the current views of the Company with respect to future events and are subject to these and other risks, uncertainties, and assumptions relating to the operations, results of operations, and growth strategy of the Company. 2 PART I - Financial Information Item 1. Financial Statements CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Thousands, except per share amounts)
Three Months Ended Six Months Ended ------------------------------ ----------------------------- Dec. 27, Dec. 30, Dec. 27, Dec. 30, 2002 2001 (1) 2002 2001 (1) --------------- ------------- -------------- ------------- Net sales Products $ 21,852 $ 17,868 $ 39,553 $ 37,572 Development services 4,458 - 7,166 - --------------- ------------- -------------- ------------- 26,310 17,868 46,719 37,572 --------------- ------------- -------------- ------------- Cost of goods sold Products 13,664 12,654 24,656 25,375 Development services 3,651 - 5,702 - --------------- ------------- -------------- ------------- 17,315 12,654 30,358 25,375 --------------- ------------- -------------- ------------- Gross profit 8,995 5,214 16,361 12,197 Selling, general, and administrative expenses 5,294 6,091 10,754 11,358 Research, development, and engineering expenses 3,188 5,641 6,186 9,805 Amortization of intangibles - 185 104 370 Exit costs for Automation Systems Group - 1,920 - 1,920 --------------- ------------- -------------- ------------- Operating profit (loss) 513 (8,623) (683) (11,256) --------------- ------------- -------------- ------------- Gain on sale of Automation Systems Group - 6,117 - 6,117 Other income (expense): Interest income 248 288 492 843 Miscellaneous income (expense), net 17 (260) (167) (180) --------------- ------------- -------------- ------------- Total other income 265 28 325 663 --------------- ------------- -------------- ------------- Earnings (loss) from continuing operations before income taxes and minority interest 778 (2,478) (358) (4,476) Income tax (expense) benefit (301) 1,084 131 2,003 Minority interest 87 82 231 152 --------------- ------------- -------------- ------------- Earnings (loss) from continuing operations 390 (1,476) (458) (2,625) --------------- ------------- -------------- ------------- Discontinued TeraOptix operations, net of tax (462) (1,543) (2,144) (2,765) Charges and related adjustments on the disposal of TeraOptix, net of tax 234 - (9,118) - --------------- ------------- -------------- ------------- Loss from discontinued operations (228) (1,543) (11,262) (2,765) --------------- ------------- -------------- ------------- Net earnings (loss) $ 162 $ (3,019) $ (11,720) $ (5,390) =============== ============= ============== ============= Earnings (loss) per share - Basic and Diluted: Continuing operations $ 0.02 $ (0.08) $ (0.03) $ (0.15) Discontinued operations, net of tax (0.01) (0.09) (0.64) (0.16) --------------- ------------- -------------- ------------- Net earnings (loss) $ 0.01 $ (0.17) $ (0.67) $ (0.31) =============== ============= ============== ============= Weighted average shares outstanding: Basic 17,511 17,390 17,510 17,390 =============== ============= ============== ============= Diluted 17,706 17,390 17,510 17,390 =============== ============= ============== =============
See accompanying notes to consolidated financial statements. (1) The consolidated statements of operations for the three and six month-periods ended December 30, 2001 have been reclassified to conform with the current period presentations of the discontinued operations and loss on disposal of TeraOptix. 3 CONSOLIDATED BALANCE SHEETS (Thousands)
Dec. 27, 2002 June 30, 2002 (Unaudited) ----------- ----------- Assets Current assets: Cash and cash equivalents $ 35,352 $ 28,513 Restricted cash 518 1,225 Marketable securities 10,681 8,734 Receivables 16,166 21,241 Income tax receivable 1,935 - Inventories 21,712 23,612 Prepaid expenses 1,080 1,444 Deferred income taxes 4,742 4,899 Assets of discontinued unit held for sale 13,317 - ----------- ----------- Total current assets 105,503 89,668 Property, plant, and equipment, net 26,251 55,045 Deferred income taxes 26,086 19,981 Intangible assets, net 4,801 4,507 ----------- ----------- Total assets $ 162,641 $ 169,201 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 11,792 $ 837 Accounts payable 5,578 5,020 Progress payments received from customers 5,230 368 Accrued salaries and wages 3,407 3,451 Other accrued liabilities 5,396 5,132 Income taxes payable - 929 ----------- ----------- Total current liabilities 31,403 15,737 Long-term debt, excluding current portion - 11,374 Other long-term liabilities 1,056 1,115 Minority interest 1,200 970 ----------- ----------- Total liabilities 33,659 29,196 ----------- ----------- Stockholders' equity: Common Stock, $.10 par value per share: 40,000 shares authorized; 17,960 shares issued (17,892 at June 30, 2002) 17,513 shares outstanding (17,445 at June 30, 2002) 1,796 1,789 Additional paid-in capital 137,862 137,390 Retained earnings (accumulated deficit) (3,739) 7,981 Accumulated other comprehensive income (loss): Currency translation effects (841) (1,369) Net unrealized loss on swap agreement (861) (515) Net unrealized gain on marketable securities 52 16 ----------- ----------- 134,269 145,292 Less treasury stock of 447 common shares, at cost: 5,287 5,287 ----------- ----------- Total stockholders' equity 128,982 140,005 ----------- ----------- Total liabilities and stockholders' equity $ 162,641 $ 169,201 =========== ===========
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Thousands)
Six Months Ended ----------------------------- Dec. 27, 2002 Dec. 30, 2001 ------------- ------------- Cash provided by (used for) operating activities: Net loss $ (11,720) $ (5,390) Adjustments to reconcile net loss to cash provided by (used for) operating activities: Loss from discontinued operations 11,262 2,765 Depreciation and amortization 2,923 3,113 Gain on sale of Automation Systems Group - (6,117) Loss on disposal of assets 393 160 Deferred income taxes (347) (3,339) Non-cash compensation charges related to stock options 38 45 Changes in operating accounts: Receivables 3,466 10,253 Costs in excess of billings - (1,772) Inventories 1,086 (2,127) Prepaid expenses 364 331 Accounts payable and accrued expenses 4,782 (4,266) Minority interest 230 152 ---------- ---------- Net cash provided by (used for) continuing operations 12,477 (6,192) Net cash used for discontinued operations (2,908) (1,610) ---------- ---------- Net cash provided by (used for) operating activities 9,569 (7,802) ---------- ---------- Cash used for investing activities: Additions to property, plant, and equipment (1,966) (5,301) Investment in marketable securities (3,477) (5,426) Investments in other assets (652) (139) Proceeds from sale of Automation Systems Group, net of cash sold ($88) - 11,305 Receivables related to sale of Automation Systems Group - (772) Interest and restricted cash from sale of Automation Systems Group 707 - Proceeds from the sale or maturity of marketable securities 1,600 4,221 ---------- ---------- Net cash provided by (used for) continuing operations (3,788) 3,888 Net cash provided by (used for) discontinued operations 1,036 (6,221) ---------- ---------- Net cash used for investing activities (2,752) (2,333) ---------- ---------- Cash provided by financing activities: Employee stock purchase 441 - Exercise of employee stock options - 514 Issuance and repurchase of common stock - (270) ---------- ---------- Net cash provided by continuing operations 441 244 Net cash used for discontinued operations (419) - ---------- ---------- Net cash provided by financing activities 22 244 ---------- ---------- Net increase (decrease) in cash and cash equivalents 6,839 (9,891) Cash and cash equivalents, beginning of period 28,513 52,630 ---------- ---------- Cash and cash equivalents, end of period $ 35,352 $ 42,739 ========== ==========
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands, except per share amounts) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Presentation The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries ("Company"). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. The results of operations for the period ended December 27, 2002 are not necessarily indicative of the results to be expected for the full fiscal year. The Consolidated Balance Sheet at December 27, 2002, the Consolidated Statements of Operations for the three and six months ended December 27, 2002 and December 30, 2001, and the Consolidated Statements of Cash Flows for the six months ended December 27, 2002 and December 30, 2001 are unaudited but, in the opinion of the Company, include all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results of the interim periods. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's June 30, 2002 Annual Report on Form 10-K including items incorporated by reference therein. Earnings Per Share Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:
Three Months Ended Six Months Ended ------------------------------------ ------------------------------------ December 27, December 30, December 27, December 30, 2002 2001 2002 2001 ----------------- --------------- --------------- ----------------- Basic weighted average shares 17,511 17,390 17,510 17,390 outstanding Dilutive effect of stock options 195 - - - ----------------- --------------- --------------- ----------------- Diluted weighted average shares outstanding 17,706 17,390 17,510 17,390 ================= =============== =============== =================
For the six months ended December 27, 2002 and the three and six months ended December 30, 2001, the Company recorded net losses. Due to these net losses, stock options to acquire 324 shares of common stock for the three months ended December 30, 2001, and 183 shares and 328 shares of common stock for the six months ended December 27, 2002 and December 30, 2001, respectively, were excluded from the computation of diluted earnings per share because of the anti-dilutive effect on loss per share. 6 Comprehensive Income (Loss) The Company's total comprehensive income (loss) were as follows:
Three Months Ended Six Months Ended --------------------------------- --------------------------------- December 27, December 30, December 27, December 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net income (loss) $162 $(3,019) $(11,720) $(5,390) Unrealized gain (loss) on marketable securities 7 (22) 36 29 Unrealized gain (loss) on swap agreement (25) 305 (346) (594) Foreign currency translation effect (105) (520) 528 393 ------------ ------------ ------------ ----------- Comprehensive income (loss) $39 $(3,256) $(11,502) $(5,562) ============ ============ ============ ===========
Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At December 27, 2002 and June 30, 2002, inventories were as follows:
December 27, June 30, 2002 2002 ----------- ------------- Raw materials and manufactured parts $13,614 $15,114 Work in process 7,398 8,477 Finished goods 700 21 ----------- ------------- $21,712 $23,612 =========== =============
Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Costs of additions, replacements, and improvements are capitalized. Maintenance and repairs are charged to expense as incurred. At December 27, 2002 and June 30, 2002, property, plant, and equipment were as follows:
December 27, June 30, 2002 2002 ------------- ---------- Land and land improvements $1,460 $3,822 Buildings and building improvements 9,697 25,252 Machinery, equipment, and office furniture 39,211 47,640 Leasehold improvements 164 237 Construction in progress 1,048 2,878 ------------- ---------- 51,580 79,829 Accumulated depreciation (25,329) (24,784) ------------- ---------- $26,251 $55,045 ============= ==========
Depreciation is based on the estimated useful lives ranging from 3-40 years for the various classes of assets and is computed using the straight-line method. The Company reclassified $13,317 of machinery, equipment, and office furniture and buildings and building improvements to current assets, as assets held for sale (See note 3). 7 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets" which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. SFAS No. 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. In addition, SFAS No. 142 expands the disclosure requirements for goodwill and other intangible assets in the years subsequent to their acquisition. SFAS No. 142 is effective for our fiscal year 2003. The adoption of SFAS No. 142 did not have a material effect on our results of operations or statements of financial position. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for retirement obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation in the period in which it is incurred. When the retirement obligation is initially recorded, the company also records a corresponding increase to the carrying amount of the related tangible long-lived asset and depreciates that cost over the useful life of the tangible long-lived asset. The retirement obligation is increased at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. Upon settlement of the retirement obligation, the company either settles the retirement obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 with earlier application encouraged. The adoption of SFAS No. 143 in our fiscal year 2003 did not have a material effect on our results of operations or statements of financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and also affects certain aspects of accounting for discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and certain aspects of APB No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. See note 3 for discontinued operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 nullifies Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to record liabilities for exit or disposal activities in the period in which they are incurred, except for certain types of transactions. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. 8 In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material effect on our financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which addresses the alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. If a company adopts the recognition provisions of SFAS No. 148 in a fiscal year beginning before December 16, 2003, that change in accounting principle shall be reported using one of three methods: Prospective Method, Modified Prospective Method or Retroactive Restatement Method. If a company adopts the recognition provisions of SFAS No. 148 for fiscal years beginning after December 15, 2003, only the Modified Prospective Method and Retroactive Restatement Method may be used. In the absence of a single accounting method for stock-based employee compensation, SFAS No. 148 requires disclosure of comparable information for all companies regardless of whether, when, or how a company adopts the fair value based method of accounting. SFAS No. 148 is effective for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. Management is currently assessing the impact that this SFAS will have on our results of operations and financial position. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities". In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is currently evaluating the provisions of the Interpretation, but believes its adoption will not have a material impact on its financial statements. 9 NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS On December 12, 2001, the Company sold its Automation Systems Group in Longmont, Colorado, to Brooks Automation, Inc. ("Brooks") of Chelmsford, Massachusetts in a cash transaction for $12,165. Substantially all of the assets were sold to Brooks and substantially all the liabilities were assumed by Brooks. The gain on the sale was $6,117 before related exit costs of $1,920, inventory write-downs of $808, and tax expense of $1,288. As of December 27, 2002, $518 remained in escrow pending the disposition of certain inventory issues related to the sale. In September 2002, the Company recognized an after-tax loss of $9,352 (net of a tax benefit of $5,870) for the planned disposition of its TeraOptix business unit ("TeraOptix"). The charges related to the disposal of TeraOptix consisted of impairment charges recorded on the equipment and facility of $13,349, estimated severance payments of $850, a write-down to fair market value of the inventory of $650, and $373 of other costs and write-downs related to the disposition of the remaining assets. During the second quarter of fiscal 2003, the Company reduced reserves associated with selling costs of the equipment and facility by $469. The remaining value of the equipment and facility of $13,317 at December 27, 2002 represents the estimated fair market value for the remaining assets to be disposed based on third-party appraisals, which are subject to future market conditions. The assets are classified under current assets as assets held for sale, and the Company expects to sell the remaining assets within the next twelve months. Proceeds from the sale of the facility will be used to pay down the related mortgage loan. The mortgage has been reclassified to current liabilities based on the expectation that the mortgage loan would be repaid within twelve months. The results and loss on disposal of the TeraOptix business unit have been presented as separate line items in the accompanying consolidated statements of operations as discontinued operations, net of tax, for all periods presented. The components of cash flow from discontinued operations for the six months ended December 27, 2002 and December 30, 2001 are as follows:
Dec. 27, Dec. 30, 2002 2001 ------------ ------------ Cash flow from operating activities from discontinued operations: Loss from discontinued operations $(2,144) $ (2,765) Depreciation and amortization 379 483 Receivables 611 (2) Income taxes (1,120) - Inventories 164 (17) Prepaid expenses - 31 Accounts payable and accrued expenses (798) 660 ------------ ------------ Net cash used for operating activities from discontinued operations $(2,908) $ (1,610) ------------ ------------ Cash flow from investing activities from discontinued operations: Additions to property, plant, and equipment $ - $ (6,221) Proceeds from sale of assets 1,036 - ------------ ------------ Net cash provided by (used for) investing activities from discontinued operations $ 1,036 $ (6,221) ------------ ------------ Cash flow from financing activities from discontinued operations: Payment of long-term debt $ (419) $ - ------------ ------------ Net cash used for financing activities from discontinued operations $ (419) $ - ------------ ------------
10 The mortgage loan has a balance of $11,792 as of December 27, 2002, with interest at LIBOR plus 150 basis points (approximately 2.9% in total at December 27, 2002). Interest only payments were made through February 14, 2002. The mortgage principal, amortizing on a 15-year level amortization schedule requiring monthly principal and interest payments, is payable in full on May 14, 2007. The mortgage loan agreement contains financial covenants which, among others, relate to debt service and consolidated debt ratios. As of December 27, 2002, the Company is in compliance with the financial covenants. In conjunction with the mortgage, the Company entered into an interest rate swap agreement that provides for a fixed interest rate of approximately 7% for the duration of the mortgage. As of December 27, 2002, the market value of the agreement is ($1,389) and is recorded as a liability with a corresponding charge to stockholders' equity, net of taxes. NOTE 4: SEGMENT INFORMATION FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards, using a management approach, for reporting information regarding operating segments in annual financial statements. The management approach designates the internal reporting that is used by the chief operating decision-maker when making operating decisions and assessing performance as the source of the Company's reportable segments. The Company's president has been determined to be its chief operating decision-maker, as defined under Statement 131. The Company operates in two principal business segments globally: Semiconductor and Industrial. The segment data is presented below in a manner consistent with management's internal measurement of the business. Segment data for 2001 was restated to reflect the Company's exit from the telecommunications segment.
Three Months Ended Six Months Ended ------------------------------------- ----------------------------------------- December 27, December 30, December 27, December 30, 2002 2001 2002 2001 ---------------- ---------------- ------------------ ------------------ Semiconductor Sales $15,589 $8,118 $26,339 $18,503 Gross profit 5,988 1,729 10,166 5,660 Gross profit as a % of sales 38% 21% 39% 31% Industrial Sales $10,721 $9,750 $20,380 $19,069 Gross profit 3,007 3,485 6,195 6,537 Gross profit as a % of sales 28% 36% 30% 34% Total Sales $26,310 $17,868 $46,719 $37,572 Gross profit 8,995 5,214 16,361 12,197 Gross profit as a % of sales 34% 29% 35% 32%
11 Separate financial information by segment for total assets, capital expenditures, and depreciation and amortization is not available and is not evaluated by the chief operating decision-maker of the Company. Substantially all of the Company's operating results, assets, and depreciation and amortization are U.S. based. The Company's sales by geographic area were as follows:
Three Months Ended Six Months Ended -------------------------------- ------------------------------- December 27, December 30, December 27, December 30, 2002 2001 2002 2001 ---------- ----------- ----------- ----------- Americas (primarily United States) $ 7,416 $ 9,613 $14,255 $19,236 Far East: Japan 14,407 3,605 23,473 9,485 Pacific Rim 2,572 1,379 4,113 2,766 ---------- ----------- ------------ ----------- Total Far East $16,979 $ 4,984 $27,586 $12,251 Europe and Other (primarily Europe) 1,915 3,271 4,878 6,085 ---------- ----------- ------------ ----------- Total $26,310 $17,868 $46,719 $37,572 ========== =========== ============ ===========
NOTE 5: RELATED PARTY TRANSACTIONS Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of the Company's products in Japan and a subsidiary of Canon Inc., amounted to $15,290 (58% of net sales) and $24,290 (52% of net sales), for the three and six months ended December 27, 2002, respectively, as compared to $1,837 (10% of net sales) and $6,632 (18% of net sales) for the comparable prior year periods. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the terms customarily given to distributors. Revenues generated from a development contract are recorded on a cost-plus basis. At December 27, 2002 and June 30, 2002, there were approximately, in the aggregate, $4,967 and $3,849, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc. In September 2002, the Company and Canon Inc. entered into a contract related to the development of certain interferometers. The contract currently has a value of $29,690 and generally covers the period to February 2004, subject to meeting certain milestones during that period. During the three and six months ended December 27, 2002, the Company recognized revenue in the semiconductor segment of $4,458 and $7,166, respectively, for this contract. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies, Significant Judgments, and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of our financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, warranty obligations, income taxes, and long-lived assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company considers certain accounting policies related to revenue recognition and allowance for doubtful accounts, inventory valuation, warranty costs, accounting for income taxes, and valuation of long-lived assets to be critical policies due to the estimates and judgments involved in each. Revenue Recognition and Allowance for Doubtful Accounts The Company recognizes revenue based on guidance provided in Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, there is no significant risk pertaining to customer acceptance, our price is fixed or determinable, and collectibility is reasonably assured. The Company maintains an allowance for doubtful accounts based on a continuous review of customer accounts, payment patterns, and specific collection issues. We perform on-going credit evaluations of our customers and do not require collateral from our customers. For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before a shipment is made. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required. Inventory Valuation Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. Management evaluates the need to record adjustments for impairment of inventory on a monthly basis. The Company's policy is to assess the valuation of all inventories, including raw materials, work-in-process, and finished goods. Obsolete inventory or inventory in excess of management's estimated usage is written down to its estimated market value, if less than its cost. Contracts with fixed prices are evaluated to determine if estimated total costs will exceed revenues. A loss provision is recorded when the judgment is made that actual costs incurred plus estimated costs remaining to be incurred will exceed total revenues from the contract. Inherent in the estimates of market value are management's estimates related to current economic trends, future demand for the Company's products, and technological 13 obsolescence. Significant management judgments must be made when establishing the reserve for obsolete and excess inventory and losses on contracts. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Warranty Costs The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company considers historical warranty costs actually incurred to establish the warranty liability. Should actual costs differ from management's estimates, revisions to the estimated warranty liability would be required. Accounting for Income Taxes Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. SFAS No. 109, "Accounting for Income Taxes," requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to an estimated amount based on historical and forecasted results. While management has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event management were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should management determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, and deductibility of certain costs and expenses by jurisdiction. Valuation of Long-Lived Assets In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment. Some factors we consider important, which could trigger the impairment review, include a significant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, a significant adverse change in the business climate that could affect the value of an asset, an accumulation of costs for an asset in excess of the amount originally expected, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection that demonstrates continuing losses, and a current expectation that, more likely than not, a long-lived asset will be disposed of significantly before the end of its estimated useful life. If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the assets and comparing that value to the carrying value of the assets. If the carrying value of the assets is greater than the estimated future cash flows, the assets are written down to the estimated fair value. We determine the estimated fair value of the assets based on a current market value of the assets. If a current market value is not readily available, a projected discounted cash flow method is applied using a discount rate determined by 14 management to be commensurate with the risk inherent in the current business model. Our cash flow estimates contain management's best estimates, using appropriate and customary assumptions and projections at the time. Off-Balance Sheet Arrangements We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We have not guaranteed any obligations of a third party. Results of Operations As previously announced the Company has discontinued its telecommunications- focused TeraOptix business unit and is disposing of its equipment and facility located in Westborough, Massachusetts. Accordingly, the results of TeraOptix have been presented as a separate line item on the consolidated statement of operations as discontinued operations, net of tax, for all periods presented. In addition, the loss on disposal of the business, net of tax, including adjustments to original estimates, has been recorded as a separate line item for the second quarter and first half of fiscal 2003. The consolidated statements of operations for the second quarter and first half of fiscal 2002 have been reclassified to conform with the current period presentations of the discontinued operations and loss on disposal of TeraOptix. Net sales of $26.3 million for the second quarter of fiscal 2003 increased by $8.4 million, or 47%, from the comparable prior year period of $17.9 million. Net sales of $46.7 million for the first half of fiscal 2003 increased by $9.1 million, or 24%, from the comparable prior year period of $37.6 million. Net sales included $4.5 million and $7.2 million for the second quarter and first half of fiscal 2003, respectively, from a development services agreement. There were no comparable sales in the prior year. For the second quarter of fiscal 2003, net sales in the semiconductor segment were $15.6 million, or 59% of total net sales, as compared to $8.1 million, or 45%, in the prior year period and net sales in the industrial segment were $10.7 million, or 41% of total net sales, as compared to $9.8 million, or 55%, in the prior year period. For the first half of fiscal 2003, net sales in the semiconductor segment were $26.3 million, or 56% of total net sales, as compared to $18.5 million, or 49%, in the prior year period and net sales in the industrial segment were $20.4 million, or 44% of total net sales, as compared to $19.1 million, or 51%, in the prior year period. Company sales in the Americas, substantially all of which are in the United States, amounted to $7.4 million in the second quarter of fiscal 2003, a decrease of $2.2 million, or 23%, from the second quarter of fiscal 2002 levels of $9.6 million. This decrease was primarily due to continued weakness in the semiconductor sector. The Company's sales outside the Americas amounted to $18.9 million in the second quarter of fiscal 2003, an increase of $10.6 million, or 128%, from the second quarter of fiscal 2002 levels of $8.3 million. Sales in Japan during the second quarter of fiscal 2003 amounted to $14.4 million, an increase of $10.8 million, or 300%, from the second quarter of fiscal 2002 sales levels. This increase was primarily due to increased sales to Canon Inc. (see related party transactions), including revenues of $4.5 million generated from a recently signed development agreement. Sales in Europe/Other, primarily Europe, amounted to $1.9 million, a decrease of $1.4 million, or 42%, from the 15 second quarter of fiscal 2002. Sales in the Pacific Rim, excluding Japan, amounted to $2.6 million, an increase of $1.2 million, or 86%, from the second quarter of fiscal 2002 sales levels. Company sales in the Americas, substantially all of which are in the United States, amounted to $14.3 million in the first half of fiscal 2003, a decrease of $4.9 million, or 26%, from the first half of fiscal 2002 levels of $19.2 million. This decrease was primarily due to continued weakness in the semiconductor sector. The Company's sales outside the Americas amounted to $32.4 million in the first half of fiscal 2003, an increase of $14.0 million, or 77%, from the first half of fiscal 2002 levels of $18.4 million. Sales in Japan during the first half of fiscal 2003 amounted to $23.5 million, an increase of $14.0 million, or 147%, from the first half of fiscal 2002 sales levels. This increase was primarily due to increased sales to Canon Inc. (see related party transactions), including revenues of $7.2 million generated from a recently signed development agreement. Sales in Europe/Other, primarily Europe, amounted to $4.9 million, a decrease of $1.2 million, or 20%, from the first half of fiscal 2002. Sales in the Pacific Rim, excluding Japan, amounted to $4.1 million, an increase of $1.3 million, or 46%, from the first half of fiscal 2002 sales levels. Sales in U.S. dollars, for the three and six months ended December 27, 2002, were $24.0 million, or 91%, and $41.3 million, or 88%, respectively, of all Company sales for both periods. 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 for the second quarter of fiscal 2003 totaled $9.0 million, an increase of $3.8 million, or 73%, from $5.2 million in the second quarter of fiscal 2002. Gross profit as a percentage of sales for the second quarters of fiscal 2003 and fiscal 2002 were 34% and 29%, respectively. The increase in the gross profit as a percentage of sales was primarily due to the write-down of inventory in the second quarter of fiscal 2002 relating to the sale of the Automation unit in Longmont, Colorado. Gross profit for the first half of fiscal 2003 totaled $16.4 million, an increase of $4.2 million, or 34%, from $12.2 million in the first half of fiscal 2002. Gross profit as a percentage of sales for the first half of fiscal 2003 and fiscal 2002 were 35% and 32%, respectively. Gross profit included $0.8 million and $1.5 million for the second quarter and first half of fiscal 2003, respectively, from a development services agreement with Canon Inc. (See related party transactions). Selling, general and administrative expenses ("SG&A") in the second quarter of fiscal 2003 amounted to $5.3 million, a decrease of $0.8 million, or 13%, from $6.1 million in the second quarter of fiscal 2002. As a percentage of net sales, SG&A for the second quarters of fiscal 2003 and fiscal 2002 were 20% and 34%, respectively. SG&A in the first half of fiscal 2003 amounted to $10.8 million, a decrease of $0.6 million, or 5%, from $11.4 million in the first half of fiscal 2002. As a percentage of net sales, SG&A for the first half of fiscal 2003 and fiscal 2002 were 23% and 30%, respectively. The decrease is primarily due to SG&A costs eliminated as a result of the sale of the Automation unit. Research, development, and engineering expenses ("R&D") for the second quarter of fiscal 2003 totaled $3.2 million, a decrease of $2.4 million, or 43%, from $5.6 million in the comparable prior year period. R&D for the first half of fiscal 2003 totaled $6.2 million, a decrease of $3.6 million, or 37%, from $9.8 million in the comparable prior year period. The 16 decrease was primarily related to the completion of several large research and development projects in the semiconductor segment in the prior year and the transfer of engineering resources to revenue producing projects in the current year. The Company recorded operating profit of $0.5 million in the second quarter of fiscal 2003, as compared to an operating loss of $8.6 million in the second quarter of fiscal 2002. The operating profit as a percentage of sales in the second quarter of fiscal 2003 was 2%, as compared to an operating loss of 48% in the second quarter of fiscal 2002. The Company recorded an operating loss of $0.7 million in the first half of fiscal 2003, as compared to an operating loss of $11.3 million in the first half of fiscal 2002. The operating loss as a percentage of sales in the first half of fiscal 2003 was 1%, as compared to 30% in the first half of fiscal 2002. The income tax expense from continuing operations in the second quarter of fiscal 2003 totaled $0.3 million, or 39% of pretax profits, which compares with an income tax benefit of $1.1 million, or 44% of pretax losses, in the second quarter of fiscal 2002. The change in tax rates is primarily attributable to a decrease in expected R&D credits and anticipated taxable income in fiscal 2003. The income tax benefit from discontinued operations in the second quarter of fiscal 2003 totaled $0.3 million, or 43% of pretax losses, which compares with $0.7 million, or 30% of pretax losses, in the second quarter of fiscal 2002. The income tax benefit associated with the change in the valuation of the assets and other charges related to the discontinued TeraOptix unit in the second quarter of fiscal 2003 totaled $0.1 million, or 33% of pretax losses. The income tax benefit from continuing operations in the first half of fiscal 2003 totaled $0.1 million, or 37% of pretax losses, which compares with $2.0 million, or 45% of pretax losses, in the first half of fiscal 2002. The change in tax rates is primarily attributable to a decrease in expected R&D credits and anticipated taxable income in fiscal 2003. The income tax benefit from discontinued operations in the first half of fiscal 2003 totaled $1.1 million, or 34% of pretax losses, which compares with $1.2 million, or 30% of pretax losses, in the first half of fiscal 2002. The income tax benefit associated with the change in the valuation of the assets and other charges related to the discontinued TeraOptix unit in the first half of fiscal 2003 totaled $5.6 million, or 38% of pretax losses. The Company recorded net earnings of $0.2 million for the second quarter of fiscal 2003 as compared to a net loss of $3.0 million for the second quarter of fiscal 2002. On a diluted per share basis, the net earnings was $0.01 per share for the second quarter of fiscal 2003 as compared to a net loss of $0.17 per share for the second quarter of fiscal 2002. The net loss for the second quarter of fiscal 2003 includes losses related to the operations of our discontinued TeraOptix unit, net of tax ($0.4 million), and income related to the disposal of our discontinued TeraOptix unit, net of tax ($0.2 million). The earnings from continuing operations for the second quarter of fiscal 2003 was $0.4 million, or $0.02 per share, compared to a loss of $1.5 million, or $0.08 per share, for the second quarter of fiscal 2002. The Company recorded a net loss of $11.7 million for the first half of fiscal 2003 as compared to a net loss of $5.4 million for the first half of fiscal 2002. On a diluted per share basis, the net loss was $0.67 per share for the first half of fiscal 2003 as compared to a net loss of $0.31 per share for the first half of fiscal 2002. The net loss for the first half of fiscal 2003 includes losses related to the operations of our discontinued TeraOptix unit ($2.1 million) and charges related to the disposal of our discontinued TeraOptix unit ($9.1 million). The loss from continuing operations for the first half of fiscal 2003 was $0.5 million, or $0.03 per share, as compared to a loss of $2.6 million, or $0.15 per share, for the first half of fiscal 2002. The net loss for the second quarter and first half of fiscal 2002 includes operating results of the Automation Systems Group in Longmont, Colorado, which was sold in December 2001. 17 Backlog at December 27, 2002 totaled $46.8 million, an increase of $3.9 million, or 9%, from $42.9 million at September 27, 2002. Backlog at December 27, 2002 increased $0.7 million, or 2%, from $46.1 million at December 30, 2001. Orders for the second quarter of fiscal 2003 totaled $30.1 million, net of debookings of $0.4 million. Net orders by segment for the second quarter of fiscal 2003 consisted of $16.4 million, or 54%, in the semiconductor segment and $13.7 million, or 46%, in the industrial segment. RELATED PARTY TRANSACTIONS Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of the Company's products in Japan and a subsidiary of Canon Inc., amounted to $15.3 million (58% of net sales) and $24.3 million (52% of net sales), for the three and six months ended December 27, 2002, respectively, as compared to $1.8 million (10% of net sales) and $6.6 million (18% of net sales) for the comparable prior year periods. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on terms customarily given to distributors. At December 27, 2002 and June 30, 2002, there was, in the aggregate, $5.0 million and $3.8 million, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc. In September 2002, the Company and Canon Inc. entered into a contract related to the development of certain interferometers. The contract currently has a value of $29.7 million and generally covers the period to February 2004, subject to meeting certain milestones during this period. During the three and six months ended December 27, 2002, the Company recognized revenue of $4.5 million and $7.2 million, respectively, for this contract in the semiconductor segment. LIQUIDITY AND CAPITAL RESOURCES At December 27, 2002, working capital was $74.1 million, an increase of $0.2 million from $73.9 million at June 30, 2002. The Company maintained cash, cash equivalents, and marketable securities (excluding restricted cash of $0.5 million) at December 27, 2002 totaling $46.0 million. This represents an increase of $8.8 million from June 30, 2002. The increase primarily was due to progress payments received from customers, a reduction in accounts receivable resulting from increased collection efforts, and a reduction in inventory. The Company is in the process of disposing of the property and equipment of the discontinued TeraOptix unit located in Westborough, Massachusetts. The assets, reclassified to current assets as assets held for sale, are expected to be sold within twelve months. The Company intends to use the proceeds from the sale of the facility to pay down the mortgage loan described below. As of December 27, 2002 the mortgage balance on the Company's Westborough, Massachusetts facility was $11.8 million. The mortgage has an interest rate of LIBOR plus 150 basis points (approximately 2.9% in total at December 27, 2002) which is payable in full on May 14, 2007. Interest only payments were made through February 14, 2002. The mortgage principal is amortizing on a 15-year level amortization schedule requiring monthly principal and interest payments. Future mortgage principal payments by fiscal years ended June 30 will total $0.4 million for 2003; $0.8 million for each year 2004-2006; and $0.7 million for the first 10 months of 2007 with a final payment of $8.2 million in May 2007. In conjunction with the 18 mortgage, the Company entered into an interest rate swap agreement (with a highly rated financial institution) that provides for a fixed interest rate of approximately 7% for the duration of the mortgage. There were no borrowings outstanding under the Company's $3.0 million bank line of credit at December 27, 2002. Acquisitions of property, plant, and equipment were $2.0 million for the six months ended December 27, 2002. Although cash requirements will fluctuate based on the timing and extent of various factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy the Company's liquidity requirements for the next 12 months. RISK FACTORS THAT MAY IMPACT FUTURE RESULTS Risk factors that may impact future results include those disclosed in our Form 10-K for the year ended June 30, 2002. 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk The following discussion about our market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and real estate and equipment valuations. We do not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity We maintain a portfolio of cash equivalents and marketable securities including institutional money market funds (which may include commercial paper, certificates of deposit, and U.S. treasury securities), government agency securities, and corporate bonds. Our interest income on our variable rate investments is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are short-term instruments. The impact of interest rate changes on the Company's results cannot be measured. During fiscal 2001, the Company entered into a mortgage on its Westborough facility of $12.6 million at an interest rate of LIBOR plus 150 basis points (2.9% in total at December 27, 2002) which is payable in full on May 14, 2007. As of December 27, 2002, the mortgage loan had a balance of $11.8 million. In conjunction with the mortgage, the Company entered into an interest rate swap agreement that provides for a fixed interest rate of approximately 7% for the duration of the mortgage. Due to the existence of the swap agreement, we do not believe that a material interest rate risk exposure exists. Exchange Rate Sensitivity Approximately 91% and 88% of the Company's sales for the three and six months ended December 27, 2002, respectively, were in U.S. dollars. At December 27, 2002, the Company's backlog included orders in U.S. dollars of $42.2 million, or 90% of the total backlog. Substantially all of the Company's 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 and backlog cannot be measured. Costs of Discontinued Operations The Company has exited the telecommunications segment of its business and is closing the TeraOptix facility in Westborough, Massachusetts. The facility, which is financed with a mortgage note, and equipment are being actively marketed, and it is the Company's intention to sell these assets within one year. The mortgage note payable has a balance at December 27, 2002 of $11.8 million and a swap agreement to fix the interest rate on the mortgage at 7% has a balance at December 27, 2002 of $1.4 million. The Company intends to use the proceeds from the sale of the facility to pay down the mortgage note and swap agreement. To the extent that the proceeds from the sale of the facility are less than the balance of the mortgage note and swap agreement, the Company would have to use existing cash balances to pay down the remaining portion of the mortgage note and/or swap agreement. There is no guarantee that the Company will be able to sell the facility at a price that yields proceeds in a sufficient amount to pay down the entire debt. 20 The equipment and facility at TeraOptix have been valued at an estimated fair market value based on third-party appraisals. The Company recorded an impairment charge to reduce the value of the equipment and facility to the fair market value. To the extent the final selling price of the equipment and facility is lower than the fair market value, the Company would have to record a loss on the sale of the facility. If, prior to the sale of the equipment and facility, the Company determines that the estimated fair market value has decreased, the Company may need to take an additional impairment charge at that time. Item 4. Controls and Procedures During the 90-day period prior to the filing date of this report, management, including the Corporation's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Corporation files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported as and when required. There have been no significant changes in the Corporation's internal controls or in other factors known to us that could significantly affect internal controls subsequent to the date of such evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 21 PART II - Other Information Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on November 13, 2002. The following matters were submitted to a vote of the Company's stockholders: Proposal No. 1 - Adoption to amend our Certificate of Incorporation to create and provide for a classified Board of Directors.
For Against Abstain/Not Voted --- ------- ----------------- 5,675,234 6,772,834 3,713,222
Proposal No. 2 - Election of Board of Directors The following individuals, all whom were Zygo Corporation directors immediately prior to the vote, were elected as a result of the following vote:
---------------------------------------------------------------- For Against ---------------------------------------------------------------- Paul F. Forman 14,853,867 1,307,423 ---------------------------------------------------------------- R. Clark Harris 14,784,584 1,376,706 ---------------------------------------------------------------- Seymour E. Liebman 14,678,302 1,482,988 ---------------------------------------------------------------- Robert G. McKelvey 14,648,355 1,512,935 ---------------------------------------------------------------- J. Bruce Robinson 11,763,885 4,397,405 ---------------------------------------------------------------- Robert B. Taylor 14,839,600 1,321,690 ---------------------------------------------------------------- Bruce Worster 15,437,817 723,473 ---------------------------------------------------------------- Carl A. Zanoni 15,585,356 575,934 ----------------------------------------------------------------
Proposal No. 3 - Adoption to amend our Certificate of Incorporation to authorize 2,000,000 shares of a new class of "blank check" preferred stock and 40,000,000 additional shares of our Common Stock.
For Against Abstain/Not Voted --- ------- ----------------- 6,969,683 5,282,154 3,909,453
Proposal No. 4 - Adoption of the Zygo Corporation 2002 Equity Incentive Plan.
For Against --- ------- 6,980,494 5,270,529
Due to the application of the Delaware General Corporation Laws (the Company is incorporated under the laws of Delaware), insufficient votes were cast to approve Proposals Nos. 1 and 3. There were no other matters submitted to a vote of our stockholders. 22 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Master Reaffirmation and Amendment No. 3 to Loan Documents dated November 21, 2002, between Fleet National Bank and the Company. 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K filed during the current quarter: On October 22, 2002, the Company filed a Current Report on Form 8-K with respect to a development and manufacturing support services agreement between Philips Electronics North America Corporation and the Company. 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Zygo Corporation ---------------- (Registrant) /s/ J. BRUCE ROBINSON --------------------------------------- J. Bruce Robinson President, Chairman, and Chief Executive Officer /s/ RICHARD M. DRESSLER --------------------------------------- Richard M. Dressler Vice President, Finance, Chief Financial Officer, and Treasurer Date: February 7, 2003 24 CERTIFICATIONS I, J. Bruce Robinson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Zygo Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 7, 2003 /s/ J. Bruce Robinson ------------------------------ J. Bruce Robinson Chairman, President, and Chief Executive Officer 25 CERTIFICATIONS I, Richard M. Dressler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Zygo Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 7, 2003 /s/ Richard M. Dressler ----------------------------- Richard M. Dressler Vice President, Finance Chief Financial Officer 26