-----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, Mkja6rraoAkuNnkmX45Ivcw2et0eggD+urE8Q9be730/Z16cv83NDR/Hmbg0P6u8 q8TQ2qhc2IYeS+z6Mqgl4g== 0000950117-04-000531.txt : 20040206 0000950117-04-000531.hdr.sgml : 20040206 20040206121731 ACCESSION NUMBER: 0000950117-04-000531 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031226 FILED AS OF DATE: 20040206 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12944 FILM NUMBER: 04572474 BUSINESS ADDRESS: STREET 1: LAUREL BROOK RD CITY: MIDDLEFIELD STATE: CT ZIP: 06455 BUSINESS PHONE: 8603478506 MAIL ADDRESS: STREET 1: LAUREL BROOK ROAD CITY: MIDDLEFIELD STATE: CT ZIP: 06455 10-Q 1 a37001.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 26, 2003 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 (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. [X] YES [ ] NO Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] 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. 17,858,267 shares of Common Stock, $.10 Par Value, at February 2, 2004 FORWARD LOOKING STATEMENTS All statements other than statements of historical fact included in this Form 10-Q Quarterly Report, regarding our financial position, business strategy, plans, anticipated growth rates, and objectives of management for future operations are forward-looking statements. Forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance based upon information currently available and assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plans," "strategy," "project," and other words of similar meaning in connection with a discussion of future operating or financial performance. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are fluctuations in capital spending in the semiconductor industry, fluctuations in net sales to our major customer, manufacturing and supplier risks, dependence on new product development, rapid technological and market change, international operations, dependence on proprietary technology and key personnel, length of the sales cycle, environmental regulations, and changes in expected costs of discontinued operations. Further information on potential factors that could affect our business is described in our reports on file with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended June 30, 2003. 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 --------------------------- --------------------------- December 26, December 27, December 26, December 27, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net sales Products $23,759 $21,852 $43,571 $ 39,553 Development services 3,895 4,458 8,330 7,166 ------- ------- ------- -------- 27,654 26,310 51,901 46,719 ------- ------- ------- -------- Cost of goods sold Products 14,360 13,664 27,172 24,656 Development services 2,907 3,651 6,565 5,702 ------- ------- ------- -------- 17,267 17,315 33,737 30,358 ------- ------- ------- -------- Gross profit 10,387 8,995 18,164 16,361 Selling, general, and administrative expenses 5,606 5,294 11,444 10,858 Research, development, and engineering expenses 3,310 3,188 6,619 6,186 ------- ------- ------- -------- Operating profit (loss) 1,471 513 101 (683) ------- ------- ------- -------- Other income (expense): Interest income 215 248 419 492 Miscellaneous income (expense), net 30 17 75 (167) ------- ------- ------- -------- Total other income 245 265 494 325 ------- ------- ------- -------- Earnings (loss) from continuing operations before income taxes and minority interest 1,716 778 595 (358) Income tax (expense) benefit (674) (301) (226) 131 Minority interest (114) (87) (104) (231) ------- ------- ------- -------- Earnings (loss) from continuing operations 928 390 265 (458) ------- ------- ------- -------- Discontinued TeraOptix operations, net of tax (719) (462) (881) (2,144) Charges on the disposal of TeraOptix, net of tax (1,193) 234 (1,193) (9,118) ------- ------- ------- -------- Loss from discontinued operations (1,912) (228) (2,074) (11,262) ------- ------- ------- -------- Net earnings (loss) $ (984) $ 162 $(1,809) $(11,720) ======= ======= ======= ======== Basic - Earnings (loss) per share: Continuing operations $ 0.05 $ 0.02 $ 0.01 $ (0.03) ======= ======= ======= ======== Discontinued operations $ (0.10) $ (0.01) $ (0.11) $ (0.64) ======= ======= ======= ======== Net earnings (loss) $ (0.05) $ 0.01 $ (0.10) $ (0.67) ======= ======= ======= ======== Diluted - Earnings (loss) per share: Continuing operations $ 0.05 $ 0.02 $ 0.01 $ (0.03) ======= ======= ======= ======== Discontinued operations (0.10) (0.01) (0.11) (0.64) ======= ======= ======= ======== Net earnings (loss) $ (0.05) $ 0.01 $ (0.10) $ (0.67) ======= ======= ======= ======== Weighted average shares outstanding: Basic shares 17,785 17,511 17,732 17,510 ======= ======= ======= ======== Diluted shares 18,355 17,706 18,163 17,510 ======= ======= ======= ========
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Thousands of dollars, except share amounts)
December 26, 2003 June 30, 2003 ----------------- ------------- Assets Current assets: Cash and cash equivalents $ 21,960 $ 31,209 Marketable securities 7,682 14,929 Receivables 18,502 12,868 Inventories 21,348 18,444 Prepaid expenses 1,223 1,791 Deferred income taxes 5,701 5,179 Assets of discontinued unit held for sale 9,595 11,899 -------- -------- Total current assets 86,011 96,319 Marketable securities 6,799 6,712 Property, plant, and equipment, net 26,870 26,648 Deferred income taxes 29,049 26,364 Intangible assets, net 4,725 4,464 Other assets 1,183 561 -------- -------- Total assets $154,637 $161,068 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ -- $ 11,374 Payables 11,296 5,254 Progress payments received from customers 1,121 2,319 Accrued salaries and wages 4,196 3,612 Other accrued liabilities 3,261 5,129 Income taxes payable 1,631 1,750 -------- -------- Total current liabilities 21,505 29,438 Other long-term liabilities 434 609 Minority interest 1,030 1,161 -------- -------- Total liabilities 22,969 31,208 -------- -------- Stockholders' equity: Common Stock, $.10 par value per share: 40,000,000 shares authorized; 18,248,680 shares issued (18,042,917, at June 30, 2003); 17,801,475 shares outstanding (17,595,712 at June 30, 2003) 1,825 1,804 Additional paid-in capital 140,277 138,333 Retained earnings (accumulated deficit) (4,398) (2,589) Accumulated other comprehensive income (loss): Currency translation effects (838) (1,623) Net unrealized loss on swap agreement -- (914) Net unrealized gain on marketable securities 89 136 -------- -------- 136,955 135,147 Less treasury stock, at cost (447,205 common shares) 5,287 5,287 -------- -------- Total stockholders' equity 131,668 129,860 -------- -------- Total liabilities and stockholders' equity $154,637 $161,068 ======== ========
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Thousands of dollars)
Six Months Ended --------------------------- December 26, December 27, 2003 2002 ------------ ------------ Cash provided by (used for) operating activities: Net loss $ (1,809) $(11,720) Adjustments to reconcile net loss to cash provided by (used for) operating activities: Loss from discontinued operations 2,074 11,262 Depreciation and amortization 3,018 2,923 Gain on disposal of assets 84 393 Deferred income taxes (466) (347) Other, net 9 38 Changes in operating accounts: Receivables (5,718) 3,466 Inventories (2,904) 1,086 Prepaid expenses 568 364 Accounts payable and accrued expenses 5,486 4,782 Minority interest 104 230 -------- -------- Net cash provided by continuing operations 446 12,477 Net cash used for discontinued operations (1,701) (2,908) -------- -------- Net cash provided by (used for) operating activities (1,255) 9,569 -------- -------- Cash provided by (used for) investing activities: Additions to property, plant, and equipment (3,906) (1,966) Investment in marketable securities (2,729) (3,477) Investments in other assets (504) (652) Interest and restricted cash from sale of Automation Systems Group -- 707 Proceeds from the sale or maturity of marketable securities 9,830 1,600 -------- -------- Net cash provided by (used for) continuing operations 2,691 (3,788) Net cash provided by discontinued operations -- 1,036 -------- -------- Net cash provided by (used for) investing activities 2,691 (2,752) -------- -------- Cash provided by (used for) financing activities: Dividend payments to minority interest (235) -- Employee stock purchase 249 441 Exercise of employee stock options 675 -- -------- -------- Net cash provided by continuing operations 689 441 Net cash used for discontinued operations (11,374) (419) -------- -------- Net cash provided by (used for) financing activities (10,685) 22 -------- -------- Net increase (decrease) in cash and cash equivalents (9,249) 6,839 Cash and cash equivalents, beginning of period 31,209 28,513 -------- -------- Cash and cash equivalents, end of period $ 21,960 $ 35,352 ======== ========
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except for per share amounts) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Presentation Zygo Corporation is a worldwide developer and supplier of high performance metrology instruments, high precision optics, optical assemblies, and automation for the semiconductor and industrial markets. The accompanying consolidated financial statements include the accounts of Zygo Corporation and our subsidiaries ("ZYGO," "we," "our," "us," or "Company"). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. The results of operations for the three and six month periods ended December 26, 2003 are not necessarily indicative of the results to be expected for the full fiscal year. The Consolidated Balance Sheet at December 26, 2003, the Consolidated Statements of Operations for the three and six months ended December 26, 2003 and December 27, 2002, and the Consolidated Statements of Cash Flows for the six months ended December 26, 2003 and December 27, 2002 are unaudited but, in management's opinion, 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 consolidated financial statements and notes included in our June 30, 2003 Annual Report on Form 10-K, including items incorporated by reference therein. Earnings (Loss) Per Share Basic and diluted earnings (loss) 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 26, December 27, December 26, December 27, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Basic weighted average shares outstanding 17,785,000 17,511,000 17,732,000 17,510,000 Dilutive effect of stock options 570,000 195,000 431,000 -- ---------- ---------- ---------- ---------- Diluted weighted average shares outstanding 18,355,000 17,706,000 18,163,000 17,510,000 ========== ========== ========== ==========
For the six months ended December 27, 2002 we recorded a loss from continuing operations. Due to this loss, stock options to acquire 183,000 shares of common stock for the six months ended December 27, 2002 were excluded from the computation of diluted earnings (loss) per share because of the anti-dilutive effect on loss per share. Stock Compensation Plans As of December 26, 2003, we have two stock-based compensation plans, which are described below. A third stock-based compensation plan expired in September 2002. We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans. Since all options were granted with an exercise price equal to the fair market value on the date of grant, no compensation cost has been recognized for our 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 we have accounted for our stock options granted in fiscal years beginning after December 15, 1994 under the fair value method of the Statement. The Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan permits the granting of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock at prices not less than the fair market value on the date of grant. Under the terms of the Plan, as amended on August 19, 2003, each new non-employee director (other than a person who was previously an employee of ZYGO or any of our 6 subsidiaries) is granted an option to purchase 12,000 shares of common stock, generally, on his or her first day of service as a non-employee director; and each other non-employee director is granted an option to purchase 6,000 shares of common stock on an annual basis. All options are fully exercisable on the date of grant and have a 10-year term. The Plan, as amended, will expire on November 17, 2009. The Zygo Corporation 2002 Equity Incentive Plan permits the granting of restricted stock and stock options to purchase shares of common stock up to a total of 1,500,000 shares of common stock. The exercise price per share of common stock covered by an option may not be less than the par value per share on the date of grant, and in the case of an incentive stock option, the exercise price may not be less than the fair market value per share on the date of grant. The Plan will expire on August 27, 2012. Pursuant to the terms of the Plan, the Board of Directors may also amend the Plan to authorize the grant of other types of equity-based awards, without further action by our stockholders. The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan permitted the granting of non-qualified options to purchase a total of 4,850,000 shares (adjusted for splits) of common stock at prices not less than the fair market value on the date of grant. Options generally became exercisable at the rate of 25% of the shares each year commencing one year after the date of grant. The Plan, as amended, expired on September 3, 2002. The fair value of options at date of grant was estimated using the Black-Scholes model. Our pro forma information is as follows:
Three Months Ended Six Months Ended --------------------------- --------------------------- December 26, December 27, December 26, December 27, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income (loss), as reported $ (984) $ 162 $(1,809) $(11,720) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,661) (1,587) (2,826) (2,768) ------- ------- ------- -------- Pro forma net loss $(2,645) $(1,425) $(4,635) $(14,488) ======= ======= ======= ======== Net income (loss) per share Basic -- as reported $ (0.05) $ 0.01 $ (0.10) $ (0.67) ======= ======= ======= ======== Basic -- pro forma $ (0.15) $ (0.08) $ (0.26) $ (0.83) ======= ======= ======= ======== Diluted -- as reported $ (0.05) $ 0.01 $ (0.10) $ (0.67) ======= ======= ======= ======== Diluted -- pro forma $ (0.14) $ (0.08) $ (0.26) $ (0.83) ======= ======= ======= ========
7 Comprehensive Income (Loss) Our total comprehensive income (loss) was as follows:
Three Months Ended Six Months Ended --------------------------- --------------------------- December 26, December 27, December 26, December 27, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net loss ($984) $ 162 ($1,809) ($11,720) Unrealized gain (loss) on marketable securities, net of tax (16) 7 (47) 36 Unrealized gain (loss) on swap agreement, net of tax 144 (25) 337 (346) Reclassification adjustment for loss on swap agreement included in net loss, net of tax 577 -- 577 -- Foreign currency translation effect 179 (105) 785 528 ----- ----- ------- -------- Comprehensive income (loss) ($100) $ 39 ($ 157) ($11,502) ===== ===== ======= ========
Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At December 26, 2003 and June 30, 2003, inventories were as follows:
December 26, June 30, 2003 2003 ------------ -------- Raw materials and manufactured parts $11,633 $10,103 Work in process 9,114 7,816 Finished goods 601 525 ------- ------- $21,348 $18,444 ======= =======
Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Management evaluates, on an ongoing basis, the carrying value of our property, plant, and equipment and makes adjustments when impairments are identified. Depreciation is based on the estimated useful lives of the various classes of assets and is computed using the straight-line method. At December 26, 2003 and June 30, 2003, property, plant, and equipment were as follows:
Estimated December 26, June 30, Useful Life 2003 2003 (Years) ------------ --------- ---------- Land $ 615 $ 615 -- Building and improvements 11,408 11,355 15-40 Machinery, equipment, and office furniture 38,658 39,545 3-8 Leasehold improvements 314 166 1-5 Construction in progress 4,537 2,222 -- -------- -------- 55,532 53,903 Accumulated depreciation (28,662) (27,255) -------- -------- $ 26,870 $ 26,648 ======== ========
Depreciation expense for the three months ended December 26, 2003 and December 27, 2002 was $1,420 and $1,408, respectively. Depreciation expense for the six months ended December 26, 2003 and December 27, 2002 was $2,786 and $2,755, respectively. 8 Intangible Assets Intangible assets include patents, trademarks, and license agreements. The cost of intangible assets is amortized on a straight-line basis, which ranges from 4-20 years. Intangible assets, at cost, at December 26, 2003 and June 30, 2003 were as follows:
December 26, June 30, 2003 2003 ------------ -------- Intangible assets $ 6,249 $ 5,775 Accumulated amortization (1,524) (1,311) ------- ------- $ 4,725 $ 4,464 ======= =======
Intangible amortization expense was $111 and $98 for the three months ended December 26, 2003 and December 27, 2002, respectively. Intangible amortization expense was $213 and $295 for the first half of fiscal 2004 and fiscal 2003, respectively. Amortization expense related to certain intangible assets is included in cost of goods sold in the Consolidated Statements of Operations. Warranty A limited warranty is provided on our products for periods ranging from 3 to 12 months and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires management to make estimates of product return rates and expected costs to repair or replace products under warranty. If actual return rates or repair and replacement costs, or both, differ significantly from management's estimates, adjustments to recognize additional expense may be required. The following is a reconciliation of the beginning and ending balances of our accrued warranty liability, which is included in the "Other accrued liabilities" line item in the Consolidated Balance Sheets:
Six Months Ended --------------------------- December 26, December 27, 2003 2002 ------------ ------------ Beginning balance $ 1,215 $ 830 Reductions for payments made (1,188) (488) Changes in accruals related to warranties issued in the current period 1,057 935 Changes in accruals related to pre-existing warranties 87 169 ------- ------ Ending balance $ 1,171 $1,446 ======= ======
Supplemental Cash Flow Information Interest payments on debt were $500 and $500 for the six months ended December 26, 2003 and December 27, 2002, respectively. We also paid $1,109 in the second quarter of fiscal 2004 in connection with the settlement of the interest rate swap agreement. Income tax payments amounted to $45 and $72 for the six months ended December 26, 2003 and December 27, 2002, respectively. 9 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("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 December 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 December 31, 2003, regardless of when the variable interest entity was established. Management believes the adoption of FIN 46 will not have a material affect on our results of operations or financial position. In April 2003, the FASB issued Statement of Financial Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments. SFAS No. 149 became effective for us in July 2003. The adoption of SFAS No. 149 did not have a material affect on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Generally, the statement is effective for financial instruments entered into or modified after November 5, 2003 and is otherwise effective for the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material affect on our results of operations or financial position. The FASB's Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on our results of operations or financial position. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," which expands financial statement disclosures for defined benefit plans. The change replaces existing FASB disclosure requirements for pensions. The adoption of SFAS No. 132 (revised) did not have a material affect on our results of operations or financial position. 10 NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS In September 2002, we recognized an after-tax loss of $9,352, net of a tax benefit of $5,870, for the planned disposition of our TeraOptix business unit ("TeraOptix"). The charges related to the disposal of TeraOptix consisted of impairment charges recorded on the equipment and Westborough 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 remainder of fiscal 2003, adjustments made to the estimated charges resulted in an overall fiscal 2003 after-tax loss of $9,652, net of a tax benefit of $5,101. In December 2003, we took an additional impairment charge on the vacant facility of $1,193, net of tax benefit of $1,111, reflecting the continued deterioration of the local real estate market for this type of facility. This charge is classified as charges on the disposal of TeraOptix, net of tax. The current estimated fair market value of the facility is $9,595, net of selling expenses, based on a third-party appraisal. We are presently marketing the facility and the asset is classified under current assets as "assets of discontinued unit held for sale". In December 2003, we paid off the remaining mortgage debt of $10,955 on the facility. The mortgage debt had carried interest at 7.5% per annum, and required monthly principal payments of $70, plus interest, until April 2007 and a balloon payment of $8,200 in May 2007. In connection with the debt repayment, the Company also paid the balance of a related interest rate swap agreement of $1,109. This payment resulted in an additional charge to discontinued TeraOptix operations, net of tax, of $577 in the quarter. Prior to the payment, in accordance with SFAS No. 133, as amended, the swap liability was recorded with a corresponding debit, net of tax, to stockholder's equity. The aggregate payment of $12,064 on the mortgage debt and swap agreement was funded from the Company's available cash and marketable securities. 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 TeraOptix operations, net of tax", for all periods presented. The components of cash flow from discontinued operations are as follows:
Six Months Ended --------------------------- December 26, December 27, 2003 2002 ------------ ------------ Cash flow from operating activities from discontinued operations: Loss from discontinued operations $ (881) $(2,144) Depreciation and amortization -- 379 Deferred income taxes (820) (1,120) Receivables -- 611 Inventories -- 164 Accounts payable and accrued expenses -- (798) -------- ------- Net cash used for operating activities from discontinued operations (1,701) (2,908) -------- ------- Cash flow from investing activities from discontinued operations: Proceeds from sale of assets -- 1,036 -------- ------- Net cash provided by investing activities from discontinued operations -- 1,036 -------- ------- Cash flow from financing activities from discontinued operations: Payment of long-term debt (11,374) (419) -------- ------- Net cash used for financing activities from discontinued operations (11,374) (419) -------- ------- Net cash used by discontinued operations $(13,075) $(2,291) ======== =======
11 NOTE 4: SEGMENT INFORMATION We operate 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 the six months in fiscal year 2003 was restated to reflect our exit from the telecommunications segment.
Three Months Ended Six Months Ended --------------------------- --------------------------- December 26, December 27, December 26, December 27, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Semiconductor Sales $16,123 $15,589 $28,374 $26,339 Gross profit 5,925 5,988 9,099 10,166 Gross profit as a % of sales 37% 38% 32% 39% Industrial Sales $11,531 $10,721 $23,527 $20,380 Gross profit 4,462 3,007 9,065 6,195 Gross profit as a % of sales 39% 28% 39% 30% Total Sales $27,654 $26,310 $51,901 $46,719 Gross profit 10,387 8,995 18,164 16,361 Gross profit as a % of sales 38% 34% 35% 35%
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. Substantially all of our operating expenses, assets, and depreciation and amortization are U.S. based. Sales by geographic area were as follows:
Three Months Ended Six Months Ended --------------------------- --------------------------- December 26, December 27, December 26, December 27, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Americas (primarily United States) $ 8,267 $ 7,416 $14,569 $14,255 Far East: Japan 13,584 14,407 27,394 23,473 Pacific Rim 3,639 2,572 6,867 4,113 ------- ------- ------- ------- Total Far East $17,223 $16,979 $34,261 $27,586 Europe and Other (primarily Europe) 2,164 1,915 3,071 4,878 ------- ------- ------- ------- Total $27,654 $26,310 $51,901 $46,719 ======= ======= ======= =======
12 NOTE 5: RELATED PARTY TRANSACTIONS Sales to Canon Inc., one of our significant stockholders, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc., amounted to $12,539 (45% of net sales) and $24,835 (48% of net sales) for the three months and six months ended December 26, 2003, as compared with $15,290 (58% of net sales) and $24,290 (52% of net sales) for the comparable prior year periods. These sales include revenues generated from the development contract referenced below. 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 the development contract are recorded on a cost-plus basis. At December 26, 2003 and June 30, 2003, there were, in the aggregate, $5,461 and $3,972, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc. In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. The contract had a total value of $29,690, which was fully billed to Canon by the end of the second quarter of fiscal 2004. We are continuing the development work with approval from Canon, which will result in the total contract value exceeding $30,000. During the three months and six months ended December 26, 2003, we recognized revenue in the semiconductor segment of $3,895 and $8,330, respectively, from this contract. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Introduction In September 2002, we entered into a development services agreement with Canon Inc. We have generated a total of approximately $30 million in revenues from this agreement, including $3.9 million and $8.3 million in the second quarter and first half of fiscal 2004, respectively. The agreement will be substantially complete by June 2004. At the request of Canon, we are currently negotiating the terms of a follow-on contract. Significant revenues can be expected from any such follow-on contract; while our period over period comparable sales will be significantly adversely affected if we do not continue to provide these development services. We are encouraged by orders achieved in both the semiconductor and industrial segments for the second quarter of fiscal 2004. Bookings in the semiconductor segment were $20.1 million, up 21% over the first quarter of fiscal 2004, while bookings for the industrial segment were $16.3 million, up 117% over the first quarter of fiscal 2004. In addition, the industry forecasts show increasing strength in calendar 2004 for capital spending in the semiconductor market, which has traditionally been a positive indicator for our business. While we expect continuing orders in the industrial segment from the defense and aerospace markets, we do not expect orders of the same magnitude in the next quarter in this segment. During the second quarter of fiscal 2004, we also expended approximately $12.1 million to pay off the remaining mortgage on the Westborough facility and the balance of a related interest rate swap agreement. These payments were funded from our available cash and marketable securities. At December 26, 2003, we had cash, cash equivalents and marketable securities totaling $36.4 million. We discontinued our telecommunications TeraOptix business unit during fiscal 2003. Accordingly, the results of TeraOptix have been presented as a separate line item on the Consolidated Statements of Operations as discontinued TeraOptix operations, net of tax, for all periods presented. In addition, the charges on the disposal of TeraOptix, net of tax, have been recorded as a separate line item for all periods presented. All continuing operations line items presented exclude TeraOptix results. Continuing Operations We recorded earnings from continuing operations for the second quarter of fiscal 2004 of $0.9 million, or $0.05 per share, as compared with $0.4 million, or $0.02 per share, for the second quarter of fiscal 2003; earnings from continuing operations for the six months of fiscal 2004 were $0.3 million, or $0.01 per share, as compared with a loss of $0.5 million, or $0.03 per share, for the six months of fiscal 2003. 13 Net sales of $27.7 million for the second quarter of fiscal 2004 increased by $1.4 million, or 5%, over the comparable prior year period sales of $26.3 million. Sales to Canon, a related party, represented 45% of our second quarter sales of fiscal 2004, as compared with 58% in the comparable prior year period. Prior year sales to Canon included more metrology systems than were shipped in the current year. This decrease was partially offset by a slight increase in semiconductor product sales to Canon. Net sales for the second quarter of fiscal 2004 included $3.9 million from a development services agreement with Canon, Inc., as compared with $4.5 million in the comparable prior year period. Net sales of $51.9 million for the first six months of fiscal 2004 increased by $5.2 million, or 11%, over the comparable prior year period sales of $46.7 million. Sales to Canon in each of the six month periods were approximately the same, representing 48% of our six month sales in fiscal 2004, as compared with 52% in the comparable prior year. For the second quarter of fiscal 2004, net sales in the semiconductor segment were $16.1 million, or 58% of total net sales, as compared with $15.6 million, or 59% of total net sales, in the prior year period; and net sales in the industrial segment were $11.6 million, or 42% of total net sales, as compared with $10.7 million, or 41% of total net sales, in the prior year period. For the first six months of fiscal 2004, net sales in the semiconductor segment were $28.4 million, or 55% of total net sales, as compared with $26.3 million, or 56% of total net sales; in the prior year period and net sales in the industrial segment were $23.5 million, or 45% of total net sales, as compared with $20.4 million, or 44% of total net sales, in the prior year period. The increase in the six month sales is primarily due to an increase in industrial sales across all regions and an increase in semiconductor sales in the Pacific Rim. Sales in the Americas, substantially all of which are in the United States, amounted to $8.3 million in the second quarter of fiscal 2004, an increase of $0.9 million, or 12%, from the second quarter of fiscal 2003 levels of $7.4 million. Sales outside the Americas amounted to $19.4 million in the second quarter of fiscal 2004, an increase of $0.5 million, or 3%, from the second quarter of fiscal 2003 levels of $18.9 million. Sales in Japan during the second quarter of fiscal 2004 amounted to $13.6 million, a decrease of $0.8 million, or 6%, from the second quarter of fiscal 2003 sales levels. This decrease in sales was offset by an increase in sales to Europe and the Pacific Rim. Europe/Other, primarily Europe, amounted to $2.2 million, an increase of $0.3 million, or 13%, from the second quarter of fiscal 2003. Sales in the Pacific Rim, excluding Japan, amounted to $3.6 million, an increase of $1.0 million, or 38%, from the second quarter of fiscal 2003 sales levels. This increase was primarily due to the delivery of more large metrology systems, including flat panel systems, in the six months of fiscal 2004 than in the comparable prior year period. Sales in the Americas amounted to $14.6 million in the first half of fiscal 2004, an increase of $0.3 million, or 2%, from the first half of fiscal 2003 of $14.3 million. Sales outside the Americas amounted to $37.3 million in the first half of fiscal 2004, an increase of $4.9 million, or 15%, from the first half of fiscal 2003 levels of $32.4 million. Sales in Japan during the first half of fiscal 2004 amounted to $27.4 million, an increase of $3.9 million, or 17%, from the first half of fiscal 2003 sales levels. Europe/Other, primarily Europe, amounted to $3.1 million, a decrease of $1.8 million, or 37%, from the first half of fiscal 2003. Sales in Europe continue to be impacted negatively by the weak economy. Sales in the Pacific Rim, excluding Japan, during the first half of fiscal 2004 amounted to $6.8 million, an increase of $2.8 million, or 68%, from the first half of fiscal 2003 sales levels. Sales in U.S. dollars for the three months ended December 26, 2003 were $24.4 million, or 88%, of all net sales for the period. For the first half of fiscal 2004, sales in U.S dollars were $46.3 million, or 89%. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of our products in export markets, as would changes in the general economic conditions in those markets. For our sales which are based in local currency, we are exposed to foreign exchange fluctuations from the time customers are invoiced in local currency until collection occurs. The majority of our foreign currency transactions are in euros and Japanese yen. The impact of changes in foreign currency values on our sales cannot be measured. Gross profit for the second quarter of fiscal 2004 totaled $10.4 million, an increase of $1.4 million, or 16%, from $9.0 million in the second quarter of fiscal 2003. Gross profit as a percentage of sales for the second quarters of fiscal 2004 and 2003 were 38% and 34%, respectively. The increase in gross profit as a percentage of sales was primarily due to an increase in industrial segment sales in regions that generally carry a higher gross profit percentage. Gross profit included $1.0 million for the second quarter of fiscal 2004 for the development services agreement with Canon, Inc., as compared with $0.8 million for the second quarter of fiscal 2003. Gross profit for the first half of fiscal 2004 totaled $18.2 million, an increase of $1.8 million, or 11%, from $16.4 million in the first half of fiscal 2003. Gross profit as a percentage of sales for the first halves of fiscal 2004 and 2003 was 35%. Several 14 manufacturing issues which contributed to low 2004 first quarter margins were resolved in the second quarter. We are continuing to address manufacturing issues in order to improve our gross margins. Selling, general and administrative expenses ("SG&A") in the second quarter of fiscal 2004 amounted to $5.6 million, an increase of $0.3 million, or 6%, from $5.3 million in the second quarter of fiscal 2003. As a percentage of net sales, SG&A for the second quarter of fiscal 2004 and fiscal 2003 was 20%. For the first half of fiscal 2004, SG&A was $11.4 million, an increase of $0.5 million, or 5%, from $10.9 million in the first half of fiscal 2003. As a percentage of net sales, SG&A for the first half of fiscal 2004 and fiscal 2003 was 22% and 23%, respectively. The increase in SG&A for the second quarter and first half of fiscal 2004 is primarily due to an increase in personnel and insurance costs. Research, development, and engineering expenses ("R&D") for the second quarter of fiscal 2004 totaled $3.3 million, an increase of $0.1 million, or 3%, from $3.2 million in the second quarter of fiscal 2003. For the first six months of fiscal 2004, R&D expenses totaled $6.6 million, an increase of $0.4 million, or 6%, from $6.2 million in the first half of fiscal 2003. The increase was primarily due to costs associated with our Zygo Applied Optics group in Southern California, which commenced operations in the second half of fiscal 2003. The income tax expense from continuing operations in the second quarter of fiscal 2004 totaled $0.7 million, or 39% of pretax earnings, which compares with an income tax expense of $0.3 million, or 39% of pretax earnings, in the second quarter of fiscal 2003. The income tax expense from continuing operations in the first half of fiscal 2004 totaled $0.2 million, or 38% of pretax earnings, which compares with an income tax benefit of $0.1 million, or 37% of pretax losses, in the first half of fiscal 2003. Our overall effective tax rate, including discontinued operations, was 50% for the first six months of fiscal 2004 as compared with 37% for the first six months of fiscal 2003. The increase in the overall effective tax rate is due to a shift in the mix of pretax income between domestic and foreign operations and a reduction in anticipated R&D credits. During the first quarter of fiscal 2004, we received notification that the federal income tax returns for the fiscal years ended June 30, 1999 through 2001 had been examined and accepted as filed. Backlog at December 26, 2003 totaled $45.8 million, an increase of $8.6 million, or 23%, from $37.2 million at June 30, 2003. Backlog at December 26, 2003 increased $8.7 million, or 23%, from $37.1 million at September 26, 2003. Orders by segment for the second quarter of fiscal 2004 consisted of $20.1 million, or 55%, in the semiconductor segment and $16.3 million, or 45%, in the industrial segment. Orders in the semiconductor segment increased by 23% over the prior year quarter and orders in the industrial segment increased 19% over the prior year quarter. The increase in the semiconductor segment is due to an increase in orders from Japan. The increase in the industrial segment is partially due to several large orders in the defense and aerospace markets for optics and optomechanical assemblies. We do not expect orders of the same magnitude in the next quarter. Discontinued Operations In September 2002, we made a decision to discontinue our TeraOptix telecommunications business unit. The discontinuation of this business unit has had a significant impact on our financial position and results of operations. For the quarter and six months ended December 26, 2003, we recorded charges for discontinued operations, net of tax, of $1.9 million and $2.1 million, respectively ($0.10 and $0.11, respectively, per share). These charges during the second quarter of fiscal 2004 primarily related to two items: (1) the write-down of the market value of our vacant Westborough, Massachusetts facility because of the continued deterioration in the local real estate market for clean room space and (2) the cost of exiting an interest rate swap agreement in conjunction with our paying off the remaining $11.0 million mortgage debt in December 2003 on the Westborough facility. We anticipate future expenses to maintain the facility to approximate $75,000 per quarter until the facility is sold. In addition, we may incur a further impairment charge on the value of the facility in the event we are unable to dispose of it at current carrying values. The facility is presently being marketed for sale. RELATED PARTY TRANSACTIONS In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers (refer to note 5 for additional information). The original contract was for $29.7 million, which was fully billed to Canon by the end of the second quarter of fiscal 2004. Our net sales for the second quarter and first half of fiscal 15 2004 included $3.9 million and $8.3 million, respectively, from this contract. We are continuing the development work with approval from Canon, which will result in the total contract value exceeding $30 million. The development work will be substantially complete by June 2004. LIQUIDITY AND CAPITAL RESOURCES At December 26, 2003, working capital was $64.5 million, a decrease of $2.4 million from $66.9 million at June 30, 2003. We maintained cash, cash equivalents, and marketable securities at December 26, 2003 totaling $36.4 million, a decrease of $16.4 million from June 30, 2003. The decrease was due to the pay off of the mortgage debt of $11.0 million and the swap agreement of $1.1 million, with the balance of $4.3 million comprised of purchases of capital equipment, an increase in accounts receivable, payments of year-end accrued employee benefits, and a decrease in progress payments. Inventories also increased in the period and this increase was partially offset by an increase in accounts payable. The aggregate payment of $12.1 million for the mortgage debt and swap agreement was funded from the Company's available cash and marketable securities. The mortgage debt had required monthly principal payments of $70,000, plus interest, until April 2007, and a principal balloon payment of $8.2 million in May 2007. We are currently marketing for sale the facility of the discontinued TeraOptix unit located in Westborough, Massachusetts. The net proceeds from the sale of the facility would be an addition to our cash balances. Our cash provided by operations increased $0.4 million for the first six months in fiscal 2004. This was a decrease of $12.1 million from the $12.5 million in cash provided by operations for the first six months in fiscal 2003. For the first six months of fiscal 2003, the increase was due primarily to progress payments received from customers, a reduction in accounts receivable resulting from increased collection efforts, and a reduction in inventory. In addition, for the first six months of fiscal 2004, our accounts receivable increased $5.7 million primarily due to large quarter end shipments for which payment was not yet due and customers holding back payments until after the end of the calendar year. We also increased our inventory to meet shipment dates in the next six months. There were no borrowings outstanding under our $3.0 million bank line of credit at December 26, 2003. The line of credit was extended to November 2004. Acquisitions of property, plant, and equipment were $2.0 million and $3.9 million for the three and six month periods ended December 26, 2003, respectively. In addition to normal recurring acquisitions, we expect to build an addition to our existing facility at an anticipated cost of $2.5-$3.0 million over the next nine months to be funded from existing cash reserves. The additional space is expected to be used primarily for manufacturing. 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 our liquidity requirements for the next 12 months. 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 of America. 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 consolidated 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 current market conditions and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider 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. 16 Revenue Recognition and Allowance for Doubtful Accounts We recognize revenue based on guidance provided in Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" and in accordance with EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." We recognize 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. We maintain 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 our 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. Our 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 future usage is written down to 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 our products, and technological obsolescence. Significant management judgments must be made when providing for obsolete and excess inventory and losses on contracts. If actual market conditions are different than those projected by management, additional inventory write-downs and loss accruals may be required. Warranty Costs We provide for the estimated cost of product warranties at the time revenue is recognized. We consider historical warranty costs actually incurred and specifically identified circumstances to establish the warranty liability. The warranty liability is reviewed on a quarterly basis. Should actual costs or revised estimated costs differ from management's prior estimates, revisions to the estimated warranty liability would be required. Accounting for Income Taxes Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to an estimated realizable 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, generally 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 17 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 with 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 management to be commensurate with the risk inherent in the current business model. Our cash flow estimates are based upon 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. 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, 2003. Item 3. Quantitative and Qualitative Disclosures about Market Risk The payment of the mortgage debt and related interest rate swap agreement eliminated interest rate risks associated with the debt. Other than this reduction in risk, there were no other material changes that have occurred in our quantitative and qualitative market risk disclosures during the first half of fiscal 2004. For discussion of our exposure to market risk, refer to Item 7a. Quantitative and Qualitative Disclosures about Market Risk, presented in our Annual Report filed with the Securities and Exchange Commission on Form 10-K for the year ended June 30, 2003. Item 4. Controls and Procedures ZYGO maintains "disclosure controls and procedures," as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that material information relating to ZYGO is made known to the Chief Executive Officer and Chief Financial Officer by others within our company during the period in which this report was being prepared. There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 18 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, 2003. The following matter was submitted to a vote of the Company's stockholders: Proposal No. 1 - 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 - ------------------------------------------- Eugene G. Banucci 16,292,776 167,419 - ------------------------------------------- Paul F. Forman 13,834,926 2,625,269 - ------------------------------------------- Samuel H. Fuller 16,291,776 168,419 - ------------------------------------------- Seymour E. Liebman 13,485,387 2,974,808 - ------------------------------------------- Robert G. McKelvey 14,200,278 2,259,917 - ------------------------------------------- J. Bruce Robinson 16,288,290 171,905 - ------------------------------------------- Robert B. Taylor 16,292,730 167,465 - ------------------------------------------- Bruce W. Worster 16,289,439 170,756 - ------------------------------------------- Carl A. Zanoni 16,277,322 182,873 - -------------------------------------------
There were no other matters submitted to a vote of our stockholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Master Reaffirmation and Amendment No. 4 to Loan Documents dated December 18, 2003, between Fleet National Bank and the Company 31.1 Certification of Chief Executive Officer under Rule 13a-14(a) 31.2 Certification of Chief Financial Officer under Rule 13a-14(a) 32.1 Certification of Chief Executive Officer and Chief Financial Officer (b) Current Reports on Form 8-K during the fiscal quarter ended December 26, 2003. Zygo Corporation Earnings Press Release, dated October 30, 2003. On December 23, 2003 we filed a Current Report of Form 8-K announcing the pay-off of the mortgage debt on our Westborough facility and related interest rate swap agreement, and an expected charge to earnings related to the discontinued telecommunications business. 19 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 6, 2004 20 EX-10 3 ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 MASTER REAFFIRMATION AND AMENDMENT NO. 4 TO LOAN DOCUMENTS THIS MASTER REAFFIRMATION AND AMENDMENT NO. 4 TO LOAN DOCUMENTS (this "Agreement") is made as of the 18th day of December, 2003, by and among ZYGO CORPORATION, a Delaware corporation with its principal place of business located at Laurel Brook Road, Middlefield, Connecticut 06455 ("Zygo"), ZTO PROPERTY HOLDINGS, LLC, a Delaware limited liability company with its principal place of business located at 20 Walkup Drive, Westborough, Massachusetts 01581 ("ZTO"), ZYGO TERAOPTIX, INC., a Delaware corporation with its principal place of business located at 100 Kuniholm Drive, Holliston, Massachusetts 01746 ("TeraOptix" and together with Zygo and ZTO, the "Obligors"), and FLEET NATIONAL BANK, a national bank with a place of business at 777 Main Street, Hartford, Connecticut 06115 ("Lender"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement described below. W I T N E S S E T H: WHEREAS, Obligors and Lender are parties to that certain Amended and Restated Credit Agreement dated as of May 14, 2001 (as amended, modified, restated or otherwise supplemented from time to time, including, but not limited to, that certain Master Reaffirmation and Amendment to Loan Documents dated as of November 22, 2001 and that certain Master Reaffirmation and Amendment No. 2 to Loan Documents dated as of June 26, 2002, the "Credit Agreement"), pursuant to which, among other things, Lender has extended to Zygo a commercial revolving loan/letter of credit facility in the original principal amount of up to $3,000,000 (the "Revolving Credit Facility"); and WHEREAS, ZTO and TeraOptix have each, among other things, unconditionally guaranteed payment and performance of the Obligations of Zygo under the Revolving Credit Facility, whether now existing or hereafter arising, pursuant and subject to the terms and conditions set forth in their respective Guaranty Agreements; and WHEREAS, Obligors have each requested Lender, and Lender has agreed, to extend the Maturity Dates of the Revolving Loan Commitment and L/C Commitment from November 20, 2003 to November 18, 2004; and WHEREAS, Lender is willing to extend the accommodations requested by Obligors subject to and in reliance upon the representations, warranties, acknowledgments, covenants and agreements of Obligors contained herein. NOW, THEREFORE, in consideration of the premises set forth herein (which are incorporated herein as though fully set forth below, by this reference thereto) and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned agrees as follows: 1. Amendments to Credit Agreement and other Loan Documents. a. Each reference in the Loan Documents to the Credit Agreement shall mean the Credit Agreement as modified by this Agreement. b. Section 1.1 of the Credit Agreement, entitled "Defined Terms", is hereby amended by deleting the definition of "Maturity Date" in its entirety and inserting the following in lieu thereof: "Maturity Date" means (a) with respect to the Revolving Loan Commitment, November 18, 2004, and any subsequent date to which such Maturity Date may be extended by Lender in writing in its sole and absolute discretion, (b) with respect to the L/C Commitment, November 18, 2004, and (c) with respect to the Converted Construction Loan, May 14, 2007. 2. Reaffirmation. Each of Obligors, as maker, debtor, grantor, pledgor, assignor, obligor, or in other similar capacity in which it incurs obligations to Lender or grants liens or security interests in its properties under any of the Loan Documents, hereby ratifies and reaffirms all of its Obligations, contingent or otherwise, under each of the Loan Documents to which it is a party and, to the extent it granted liens on or security interests in any of its properties pursuant to any Loan Document as security for the Obligations under or with respect to the Credit Agreement and the other Loan Documents, hereby ratifies and reaffirms such grant of liens and security interests and confirms and agrees that such liens and security interests hereafter secure all of the Obligations, including without limitation, the Obligations arising under the Revolving Credit Facility, as hereby amended, in each case as if each reference in such Loan Document to the obligations secured thereby are construed to hereafter mean and refer to such Obligations under the Credit Agreement and other Loan Documents, as hereby amended. Each of Obligors acknowledges that each of the Loan Documents to which it is a party remains in full force and effect, continues to apply to the Obligations, including, but not limited to, the Obligations arising under the Revolving Credit Facility as hereby amended, and is hereby ratified and confirmed. The execution of this Agreement shall not operate as a novation, waiver of any right, power or remedy of Lender nor constitute a waiver of any provision of any of the Loan Documents, except as expressly set forth herein and shall be limited to the particular instance expressly set forth. Each of Obligors confirms and agrees that the Loan Documents and each and every covenant, condition, obligation, representation (except those representations which relate only to a specific date, which are confirmed as of such date only), warranty and provisions set forth therein are, and shall continue to be, in full force and effect and are hereby confirmed, reaffirmed and ratified in all respects. 3. No Default or Event of Default, No Defenses. Each of Obligors hereby represents and warrants to, and covenants with Lender that, as of the date hereof, (a) no Default or Event of Default has occurred and is continuing, (b) it has no defense, offset or counterclaim of any kind or nature whatsoever against Lender with respect to the Revolving Credit Facility, the Obligations, or any of the Loan Documents to which it is a party, or any action previously taken or not taken by Lender with respect thereto or with respect to any security interest, encumbrance, lien or collateral in connection therewith to secure the Obligations, and (c) that Lender has fully performed all obligations to Obligors which it may have had or has on and as of the date hereof. 4. Fee. Simultaneously herewith, in consideration of the Lender's extension of the Maturity Dates of the Revolving Loan Commitment and L/C Commitment Termination Date, Zygo shall pay to Lender on the date hereof a non-refundable commitment fee in the amount of $7,500. 5. Successors and Assigns. This Agreement shall be binding upon each of Obligors and their respective successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. The successors and assigns of such entities shall include, without limitation, their respective receivers, trustees, or debtors-in-possession. 6. Further Assurances. Each of Obligors hereby agrees from time to time, as and when requested by Lender, to execute and deliver or cause to be executed and delivered all such documents, instruments and agreements and to take or cause to be taken such further or other action as Lender may reasonably deem necessary or desirable in order to carry out the intent and purposes of this Agreement and the Loan Documents. 7. Authorization. Each of Obligors is duly authorized to execute and deliver this Agreement and to perform its obligations under the Credit Agreement and the other Loan Documents to which it is a party, each as amended hereby. 8. No Conflicts. The execution and delivery of this Agreement, and the performance by each of Obligors of their respective obligations hereunder and under any Loan Documents to which any of them may be a party, each as amended hereby to the extent applicable, do not and will not conflict with any provision of law or of the charter or by-laws of any of them or of any agreement binding upon any of them. 9. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 2 10. Merger. This Agreement represents the final agreement of Obligors and Lender with respect to the matters contained herein and may not be contradicted by evidence of prior or contemporaneous agreements, or prior or subsequent oral agreements. 11. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 12. Section Headings. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 13. Governing Law. This Agreement shall be governed by the internal substantive laws of the State of Connecticut (without regard to its conflicts of law provisions). THE NEXT PAGE IS THE SIGNATURE PAGE 3 IN WITNESS WHEREOF, this Agreement has been duly executed by the undersigned as of the day and year first set forth above. WITNESSES (AS TO OBLIGORS): /s/ Joyce Goldberg - ----------------------------- ZYGO CORPORATION /s/ Michael M. Vehlies By: /s/ Richard Dressler - ----------------------------- ------------------------------------ Richard M. Dressler Its Treasurer ZTO PROPERTY HOLDINGS, LLC By: /s/ Richard M. Dressler ------------------------------------ Richard M. Dressler Its Treasurer ZYGO TERAOPTIX, INC. By: /s/ Richard M. Dressler ------------------------------------ Richard M. Dressler Its Treasurer WITNESSES (AS TO LENDER): /s/ Veronica Leonard - ----------------------------- FLEET NATIONAL BANK /s/ Matthew Latham By: /s/ Matthew E. Hummel - ----------------------------- ------------------------------------ Matthew E. Hummel Its Senior Vice President 4 EX-31 4 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF DISCLOSURE IN THE REGISTRANT'S QUARTERLY REPORT 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 6, 2004 /s/ J. Bruce Robinson ----------------------------------- J. Bruce Robinson Chairman, President, and Chief Executive Officer EX-31 5 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF DISCLOSURE IN THE REGISTRANT'S QUARTERLY REPORT 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-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 6, 2004 /s/ Richard M. Dressler ----------------------------------- Richard M. Dressler Vice President, Finance Chief Financial Officer EX-32 6 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, J. Bruce Robinson, certify, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Zygo Corporation on Form 10-Q for the fiscal quarter ended December 26, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Zygo Corporation. A signed original of this written statement required by Section 906 has been provided to Zygo Corporation and will be retained by Zygo Corporation and furnished to the Securities and Exchange Commission or its staff upon request. Dated: February 6, 2004 /s/ J. Bruce Robinson ----------------------------------- J. Bruce Robinson Chairman, President, and Chief Executive Officer of Zygo Corporation I, Richard M. Dressler, certify, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Zygo Corporation on Form 10-Q for the fiscal quarter ended December 26, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Zygo Corporation. A signed original of this written statement required by Section 906 has been provided to Zygo Corporation and will be retained by Zygo Corporation and furnished to the Securities and Exchange Commission or its staff upon request. Dated: February 6, 2004 /s/ Richard M. Dressler ----------------------------------- Richard M. Dressler Vice President, Finance, Chief Financial Officer of Zygo Corporation -----END PRIVACY-ENHANCED MESSAGE-----