10-Q 1 a37581.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 March 26, 2004 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 Identification No.) incorporation or organization) Laurel Brook Road, Middlefield, Connecticut 06455 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (860) 347-8506 -------------------------------------------------- Registrant's telephone number, including area code 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. 17,865,591 shares of Common Stock, $.10 Par Value, at April 28, 2004 1 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 Nine Months Ended --------------------- --------------------- March 26, March 28, March 26, March 28, 2004 2003 2004 2003 --------- --------- --------- --------- Net sales Products $23,425 $22,450 $66,996 $ 62,003 Development services 5,008 6,560 13,338 13,726 ------- ------- ------- -------- 28,433 29,010 80,334 75,729 ------- ------- ------- -------- Cost of goods sold Products 14,878 14,250 42,050 38,906 Development services 4,153 5,258 10,718 10,960 ------- ------- ------- -------- 19,031 19,508 52,768 49,866 ------- ------- ------- -------- Gross profit 9,402 9,502 27,566 25,863 Selling, general, and administrative expenses 5,358 5,716 16,802 16,574 Research, development, and engineering expenses 2,725 2,510 9,344 8,696 ------- ------- ------- -------- Operating profit 1,319 1,276 1,420 593 ------- ------- ------- -------- Other income (expense): Interest income 219 220 638 712 Miscellaneous income (expense), net 138 (108) 213 (275) ------- ------- ------- -------- Total other income 357 112 851 437 ------- ------- ------- -------- Earnings from continuing operations before income taxes and minority interest 1,676 1,388 2,271 1,030 Income tax expense (637) (515) (863) (384) Minority interest (71) (93) (175) (324) ------- ------- ------- -------- Earnings from continuing operations 968 780 1,233 322 ------- ------- ------- -------- Discontinued TeraOptix operations, net of tax (340) (338) (1,221) (2,482) Charges and adjustments on the disposal of TeraOptix, net of tax (327) 39 (1,520) (9,079) ------- ------- ------- -------- Loss from discontinued operations (667) (299) (2,741) (11,561) ------- ------- ------- -------- Net earnings (loss) $ 301 $ 481 $(1,508) $(11,239) ======= ======= ======= ======== Basic - Earnings (loss) per share: Continuing operations $ 0.05 $ 0.04 $ 0.07 $ 0.02 Discontinued operations $ (0.03) $ (0.01) $ (0.15) $ (0.66) ------- ------- ------- -------- Net earnings (loss) $ 0.02 $ 0.03 $ (0.08) $ (0.64) ======= ======= ======= ======== Diluted - Earnings (loss) per share: Continuing operations $ 0.05 $ 0.04 $ 0.07 $ 0.02 Discontinued operations $ (0.03) $ (0.01) $ (0.15) $ (0.65) ------- ------- ------- -------- Net earnings (loss) $ 0.02 $ 0.03 $ (0.08) $ (0.63) ======= ======= ======= ======== Weighted average shares outstanding: Basic shares 17,858 17,560 17,775 17,527 ======= ======= ======= ======== Diluted shares 18,422 17,738 18,248 17,708 ======= ======= ======= ========
See accompanying notes to consolidated financial statements. 3
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Thousands of dollars, except share amounts) March 26, 2004 June 30, 2003 -------------- ------------- Assets Current assets: Cash and cash equivalents $ 18,830 $ 31,209 Marketable securities 7,931 14,929 Receivables 19,808 12,868 Inventories 21,128 18,444 Prepaid expenses 1,234 1,791 Deferred income taxes 5,529 5,179 Assets of discontinued unit held for sale 9,595 11,899 -------- -------- Total current assets 84,055 96,319 Marketable securities 7,344 6,712 Property, plant, and equipment, net 27,265 26,648 Deferred income taxes 27,568 26,364 Intangible assets, net 4,821 4,464 Other assets 1,138 561 -------- -------- Total assets $152,191 $161,068 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ - $ 11,374 Payables 8,943 5,254 Progress payments received from customers 603 2,319 Accrued salaries and wages 3,522 3,612 Other accrued liabilities 3,679 5,129 Income taxes payable 1,593 1,750 -------- -------- Total current liabilities 18,340 29,438 Other long-term liabilities 328 609 Minority interest 1,101 1,161 -------- -------- Total liabilities 19,769 31,208 -------- -------- Stockholders' equity: Common Stock, $.10 par value per share: 40,000,000 shares authorized; 18,312,371 shares issued (18,042,917 at June 30, 2003); 17,865,166 shares outstanding (17,595,712 at June 30, 2003) 1,831 1,804 Additional paid-in capital 140,952 138,333 Retained earnings (accumulated deficit) (4,097) (2,589) Accumulated other comprehensive income (loss): Currency translation effects (1,050) (1,623) Net unrealized loss on swap agreement - (914) Net unrealized gain on marketable securities 73 136 -------- -------- 137,709 135,147 Less treasury stock, at cost (447,205 shares) 5,287 5,287 -------- -------- Total stockholders' equity 132,422 129,860 -------- -------- Total liabilities and stockholders' equity $152,191 $161,068 ======== ========
See accompanying notes to consolidated financial statements. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Thousands of dollars) Nine Months Ended --------------------- March 26, March 28, 2004 2003 --------- --------- Cash provided by (used for) operating activities: Net loss $ (1,508) $(11,239) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Loss from discontinued operations 2,741 11,561 Depreciation and amortization 4,271 4,277 Gain on disposal of assets 173 740 Deferred income taxes 629 234 Other, net 347 57 Changes in operating accounts: Receivables (7,086) 230 Inventories (2,684) 3,559 Prepaid expenses 559 567 Accounts payable and accrued expenses 2,003 3,794 Minority interest 175 324 -------- -------- Net cash provided by (used for) continuing operations (380) 14,104 Net cash used for discontinued operations (1,852) (4,522) -------- -------- Net cash provided by (used for) operating activities (2,232) 9,582 -------- -------- Cash provided by (used for) investing activities: Additions to property, plant, and equipment (5,521) (3,446) Investment in marketable securities (4,941) (5,019) Investments in other assets (743) (893) Interest and restricted cash from sale of Automation Systems Group - 1,225 Proceeds from the sale or maturity of marketable securities 11,226 2,696 -------- -------- Net cash provided by (used for) continuing operations 21 (5,437) Net cash provided by discontinued operations - 2,822 -------- -------- Net cash provided by (used for) investing activities 21 (2,615) -------- -------- Cash provided by (used for) financing activities: Dividend payments to minority interest (235) (268) Employee stock purchase 578 731 Exercise of employee stock options 863 6 -------- -------- Net cash provided by continuing operations 1,206 469 Net cash used for discontinued operations (11,374) (628) -------- -------- Net cash used for financing activities (10,168) (159) -------- -------- Net increase (decrease) in cash and cash equivalents (12,379) 6,808 Cash and cash equivalents, beginning of period 31,209 28,513 -------- -------- Cash and cash equivalents, end of period $ 18,830 $ 35,321 ======== ========
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 supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services for the semiconductor capital equipment 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 intercompany transactions and accounts have been eliminated from the consolidated financial statements. The results of operations for the three and nine month periods ended March 26, 2004 are not necessarily indicative of the results to be expected for the full fiscal year. The Consolidated Balance Sheet at March 26, 2004, the Consolidated Statements of Operations for the three and nine months ended March 26, 2004 and March 28, 2003, and the Consolidated Statements of Cash Flows for the nine months ended March 26, 2004 and March 28, 2003 are unaudited but, in management's opinion, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation 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 basic weighted average shares outstanding and diluted weighted average shares outstanding:
Three Months Ended Nine Months Ended ----------------------- ----------------------- March 26, March 28, March 26, March 28, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Basic weighted average shares outstanding 17,858,346 17,559,978 17,774,599 17,526,965 Dilutive effect of stock options 563,322 178,053 473,561 181,365 ---------- ---------- ---------- ---------- Diluted weighted average shares outstanding 18,421,668 17,738,031 18,248,160 17,708,330 ========== ========== ========== ==========
Stock Compensation Plans As of March 26, 2004, 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 market value of the stock 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 market value of the stock 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 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. 6 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. 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 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 market value of the stock 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 Nine Months Ended --------------------- --------------------- March 26, March 28, March 26, March 28, 2004 2003 2004 2003 --------- --------- --------- --------- Net income (loss), as reported $ 301 $ 481 $(1,508) $(11,239) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,446) (1,093) (4,272) (3,861) ------- ------- ------- -------- Pro forma net loss $(1,145) $ (612) $(5,780) $(15,100) ======= ======= ======= ======== Net income (loss) per share Basic - as reported $ 0.02 $ 0.03 $ (0.08) $ (0.64) ======= ======= ======= ======== Basic - pro forma $ (0.06) $ (0.03) $ (0.33) $ (0.86) ======= ======= ======= ======== Diluted - as reported $ 0.02 $ 0.03 $ (0.08) $ (0.63) ======= ======= ======= ======== Diluted - pro forma $ (0.06) $ (0.03) $ (0.32) $ (0.86) ======= ======= ======= ========
Comprehensive Income (Loss) Our total comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended --------------------- --------------------- March 26, March 28, March 26, March 28, 2004 2003 2004 2003 --------- --------- --------- --------- Net income (loss) $ 301 $ 481 $(1,508) $(11,239) Unrealized gain (loss) on marketable securities, net of tax (16) (21) (63) 15 Unrealized gain (loss) on swap agreement, net of tax - 29 337 (317) Reclassification adjustment for loss on swap agreement included in net loss, net of tax - - 577 - Foreign currency translation effect (212) (221) 573 307 ----- ----- ------- -------- Comprehensive income (loss) $ 73 $ 268 $ (84) $(11,234) ===== ===== ======= ========
7 Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At March 26, 2004 and June 30, 2003, inventories were as follows:
March 26, June 30, 2004 2003 --------- -------- Raw materials and manufactured parts $11,341 $10,103 Work in process 9,276 7,816 Finished goods 511 525 ------- ------- $21,128 $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 March 26, 2004 and June 30, 2003, property, plant, and equipment were as follows:
Estimated March 26, June 30, Useful Life 2004 2003 (Years) --------- -------- ----------- Land $ 615 $ 615 - Building and improvements 11,437 11,355 15-40 Machinery, equipment, and office furniture 39,083 39,545 3-8 Leasehold improvements 314 166 1-5 Construction in progress 5,109 2,222 - ------- ------- 56,558 53,903 Accumulated depreciation (29,293) (27,255) ------- ------- $27,265 $26,648 ======= =======
Depreciation expense for the three months ended March 26, 2004 and March 28, 2003 was $1,131 and $1,322, respectively. Depreciation expense for the nine months ended March 26, 2004 and March 28, 2003 was $3,917 and $4,077, respectively. 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 March 26, 2004 and June 30, 2003 were as follows:
March 26, June 30, 2004 2003 --------- -------- Intangible assets $ 6,454 $ 5,775 Accumulated amortization (1,633) (1,311) ------- ------- $ 4,821 $ 4,464 ======= =======
Intangible amortization expense was $110 and $99 for the three months ended March 26, 2004 and March 28, 2003, respectively. Intangible amortization expense was $322 and $394 for the nine months 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. 8 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 the 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:
Nine Months Ended --------------------- March 26, March 28, 2004 2003 --------- --------- Beginning balance $ 1,215 $ 830 Reductions for payments made (1,894) (724) Changes in accruals related to warranties issued in the current period 1,216 183 Changes in accruals related to pre-existing warranties 757 1,098 ------- ------ Ending balance $ 1,294 $1,387 ======= ======
Supplemental Cash Flow Information Interest payments on debt were $480 and $765 for the nine months ended March 26, 2004 and March 28, 2003, 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 $92 and $109 for the nine months ended March 26, 2004 and March 28, 2003, respectively. NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued Statement of Financial Accounting 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. 9 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, Massachusetts 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 recorded an additional impairment charge on the vacant facility of $2,304 reflecting the continued weakness of the local real estate market for this type of facility. This charge is recorded, net of tax, as "charges and adjustments on the disposal of TeraOptix, net of tax" in the consolidated statements of operations. 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 the consolidated balance sheets. 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 at the time of repayment, 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, recorded net of tax. 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 stockholders' 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:
Nine Months Ended --------------------- March 26, March 28, 2004 2003 --------- --------- Cash flow from operating activities from discontinued operations: Loss from discontinued operations $ (2,741) $(11,561) Depreciation and amortization - - Loss on sale and impairment of assets 2,304 12,880 Deferred income taxes (1,413) (5,674) Receivables - 845 Income taxes - (1,311) Inventories - 815 Accounts payable and accrued expenses - (726) Other, net (2) 210 -------- -------- Net cash used for operating activities from discontinued operations (1,852) (4,522) -------- -------- Cash flow from investing activities from discontinued operations: Proceeds from sale of assets - 2,822 -------- -------- Net cash provided by investing activities from discontinued operations - 2,822 -------- -------- Cash flow from financing activities from discontinued operations: Payment of long-term debt (11,374) (628) -------- -------- Net cash used for financing activities from discontinued operations (11,374) (628) -------- -------- Net cash used by discontinued operations $(13,226) $ (2,328) ======== ========
10 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 nine months in fiscal year 2003 was restated to reflect our exit from the telecommunications segment.
Three Months Ended Nine Months Ended --------------------- --------------------- March 26, March 28, March 26, March 28, 2004 2003 2004 2003 --------- --------- --------- --------- Semiconductor Sales $18,027 $17,793 $46,401 $44,132 Gross profit 6,289 4,773 15,388 14,939 Gross profit as a % of sales 35% 27% 33% 34% Industrial Sales $10,406 $11,217 $33,933 $31,597 Gross profit 3,113 4,729 12,178 10,924 Gross profit as a % of sales 30% 42% 36% 35% Total Sales $28,433 $29,010 $80,334 $75,729 Gross profit 9,402 9,502 27,566 25,863 Gross profit as a % of sales 33% 33% 34% 34%
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 Nine Months Ended --------------------- --------------------- March 26, March 28, March 26, March 28, 2004 2003 2004 2003 --------- --------- --------- --------- Americas (primarily United States) $ 6,567 $ 9,124 $21,136 $23,379 Far East: Japan 16,342 16,127 43,736 39,601 Pacific Rim 3,624 1,118 10,491 5,230 ------- ------- ------- ------- Total Far East $19,966 $17,245 $54,227 $44,831 Europe and Other (primarily Europe) 1,900 2,641 4,971 7,519 ------- ------- ------- ------- Total $28,433 $29,010 $80,334 $75,729 ======= ======= ======= =======
11 NOTE 5: RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMER 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 $19,493 (69% of net sales) and $44,328 (55% of net sales) for the three months and nine months ended March 26, 2004, as compared with $15,606 (54% of net sales) and $38,640 (51% of net sales) for the comparable prior year periods. These sales include revenues generated from the development agreements 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 agreements are recorded on a cost-plus basis. At March 26, 2004 and June 30, 2003, there were, in the aggregate, $9,412 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 $33,000. During the three months and nine months ended March 26, 2004, we recognized revenue in the semiconductor segment of $3,420 and $11,750, respectively, from this contract. During the quarter we signed a new agreement letter with Canon Inc. authorizing the start of a new project with the expectation that a follow-on agreement will be signed by the fall of this year. Revenue of $1,588 related to this agreement was recognized during the three months ended March 26, 2004. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Introduction Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial markets. Optical instruments products encompass non-contact optical measurement instruments. Optics products consist of high performance macro-optics components, optical coatings, and optical system assemblies. In September 2002, we entered into a development services agreement with Canon Inc. We have generated a total of approximately $33 million in revenues from this agreement, including $3.4 million and $11.7 million in the third quarter and first nine months of fiscal 2004, respectively. Delivery under this agreement will be in July 2004. During the third quarter of fiscal 2004 we signed an agreement letter that allows us to begin a new developmental project with the expectation that a follow-on contract will be signed by the fall of this year. For the third quarter of fiscal 2004, revenue of $1.6 million has been recognized under this new agreement. Significant revenues can be expected from any such follow-on contract. Our period over period comparable sales would be significantly adversely affected if we do not continue to provide these development services. We achieved an order level for the third quarter of fiscal 2004 of $31.6 million as compared to $23.7 million for the third quarter of fiscal 2003. This order flow boosted backlog at March 26, 2004 to $49.0 million, which is our highest level since fiscal 2001. Orders for the third quarter of fiscal 2004 were down $4.8 million from the second quarter of fiscal 2004. As expected, bookings for the industrial segment decreased to $12.7 million, down 22% over the second quarter of fiscal 2004, due to several large orders that occurred in the second quarter within the industrial markets. 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 third quarter of fiscal 2004 of $1.0 million, or $0.05 per share, as compared with $0.8 million, or $0.04 per share, for the third quarter of fiscal 2003; earnings from continuing operations for the first nine months of fiscal 2004 were $1.2 million, or $0.07 per share, as compared with earnings of $0.3 million, or $0.02 per share, for the first nine months of fiscal 2003. Net sales of $28.4 million for the third quarter of fiscal 2004 decreased by $0.6 million, or 2%, over the comparable prior year period sales of $29.0 million. Net sales for the third quarter of fiscal 2004 included $5.0 million from development services agreements with Canon, Inc., as compared with $6.6 million in the comparable prior year period. Net sales of $80.3 million for the first nine months of fiscal 2004 increased by $4.6 million, or 6%, over the comparable prior year period sales of $75.7 million. Net sales for the first nine months of fiscal 2004 included $13.3 million from the development services agreements, as compared with $13.7 million in the comparable prior year period. For the third quarter of fiscal 2004, net sales in the semiconductor segment were $18.0 million, or 63% of total net sales, as compared with $17.8 million, or 61% of total net sales, in the prior year period; and net sales in the industrial segment were $10.4 million, or 37% of total net sales, as compared with $11.2 million, or 39% of total net sales, in the prior year period. Semiconductor product sales increased $1.8 million, primarily due to shipments to the Pacific Rim region for flat panel systems, partially offset by a decrease in revenues from the development services agreements. Industrial sales decreased primarily due to the weak economy in Europe. For the first nine months of fiscal 2004, net sales in the semiconductor segment were $46.4 million as compared with $44.1 million in the comparable prior year period (58% of total net sales in both periods), and net sales in the industrial segment were $33.9 million, as compared with $31.6 million in the comparable prior year period (42% of total net sales in both periods). The increase in the nine month sales in both semiconductor and industrial segments is primarily due to an increase in sales to Canon, including under the development services agreements, and the delivery of flat panel systems to the Pacific Rim region. 13 Sales in the Americas, substantially all of which are in the United States, amounted to $6.6 million in the third quarter of fiscal 2004, a decrease of $2.5 million, or 27%, from the third quarter of fiscal 2003 levels of $9.1 million. Sales in the third quarter of fiscal 2003 included the delivery of several large systems, which we did not have in the current quarter. Sales outside the Americas amounted to $21.8 million in the third quarter of fiscal 2004, an increase of $1.9 million, or 10%, from the third quarter of fiscal 2003 levels of $19.9 million. Sales in Japan during the third quarter of fiscal 2004 amounted to $16.3 million, an increase of $0.1 million, or 1%, from the third quarter of fiscal 2003 sales levels. Europe/Other, primarily Europe, amounted to $1.9 million, a decrease of $0.7 million, or 27%, from the third quarter of fiscal 2003. Sales in the Pacific Rim during the third quarter of fiscal 2004, excluding Japan, amounted to $3.6 million, an increase of $2.5 million, or 227%, from the third quarter of fiscal 2003 sales levels. This increase was primarily due to the delivery of a greater number of large metrology systems, including flat panel systems, in the first nine months of fiscal 2004 than in the comparable prior year period. Sales in the Americas amounted to $21.1 million in the first nine months of fiscal 2004, a decrease of $2.3 million, or 10%, from the first nine months of fiscal 2003 of $23.4 million. Sales outside the Americas amounted to $59.2 million in the first nine months of fiscal 2004, an increase of $6.9 million, or 13%, from the first nine months of fiscal 2003 levels of $52.3 million. Sales in Japan during the first nine months of fiscal 2004 amounted to $43.7 million, an increase of $4.1 million, or 10%, from the first nine months of fiscal 2003 sales levels. Sales in Europe/Other during the first nine months of fiscal 2004, primarily Europe, amounted to $5.0 million, a decrease of $2.5 million, or 33%, from the first nine months 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 nine months of fiscal 2004 amounted to $10.5 million, an increase of $5.3 million, or 102%, from the first nine months of fiscal 2003 sales levels. This increase was primarily due to increased sales of flat panel systems. Sales in U.S. dollars for the third quarter of fiscal 2004 were $25.9 million, or 91%, of all net sales for the period. For the first nine months of fiscal 2004, sales in U.S dollars were $72.2 million, or 90% of all net sales for the period. 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. Sales outside the Americas represent approximately 70-80% of our total sales. 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 third quarter of fiscal 2004 totaled $9.4 million, a decrease of $0.1 million, or 1%, from $9.5 million in the third quarter of fiscal 2003. Gross profit as a percentage of sales for the third quarters of fiscal 2004 and 2003 were both 33%. Gross profit as a percentage of sales in the third quarter of fiscal 2004 was negatively impacted by low margins on the delivery of our initial flat panel systems. Gross profit for the first nine months of fiscal 2004 totaled $27.6 million, an increase of $1.7 million, or 7%, from $25.9 million in the first nine months of fiscal 2003. Gross profit as a percentage of sales for the first nine months of fiscal 2004 and 2003 was 34%. We are continually working on improvements in the manufacturing process in order to increase our gross profit as a percentage of sales. Selling, general, and administrative expenses ("SG&A") in the third quarter of fiscal 2004 amounted to $5.4 million, a decrease of $0.3 million, or 5%, from $5.7 million in the third quarter of fiscal 2003. As a percentage of net sales, SG&A for the third quarter of fiscal 2004 and fiscal 2003 was 19% and 20%, respectively. For the first nine months of fiscal 2004, SG&A was $16.8 million, an increase of $0.2 million, or 1%, from $16.6 million in the first nine months of fiscal 2003. As a percentage of net sales, SG&A for the first nine months of fiscal 2004 and fiscal 2003 was 21% and 22%, respectively. The decrease in SG&A for the third quarter of fiscal 2004 was primarily a result of a cost savings initiative partially offset by costs related to one-time personnel costs and increased insurance costs. The increase during the first nine months of fiscal 2004 is primarily due to one-time personnel costs and increased insurance costs. Research, development, and engineering expenses ("R&D") for the third quarter of fiscal 2004 totaled $2.7 million, an increase of $0.2 million, or 8%, from $2.5 million in the third quarter of fiscal 2003. For the first nine months of fiscal 2004, R&D expenses totaled $9.3 million, an increase of $0.6 million, or 7%, from $8.7 million in the first nine months of fiscal 2003. These increases were primarily due to costs associated with our Zygo Applied Optics group in Southern California, which commenced operations in the second half of fiscal 2003, and costs with certain projects associated with new products and improvements to existing products. 14 The income tax expense from continuing operations in the third quarter of fiscal 2004 totaled $0.6 million, or 38% of pre-tax earnings, which compares with income tax expense of $0.5 million, or 37% of pre-tax earnings, in the third quarter of fiscal 2003. The income tax expense from continuing operations in the first nine months of fiscal 2004 totaled $0.9 million, or 38% of pre-tax earnings, which compares with income tax expense of $0.4 million, or 37% of pre-tax losses, in the first nine months of fiscal 2003. Our overall effective tax rate, including discontinued operations, was 29% for the first nine months of fiscal 2004 as compared with 37% for the first nine months of fiscal 2003. The change in the overall effective tax rate is due to a shift in the mix of pre-tax income between domestic and foreign operations and a reduction in anticipated R&D credits. 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 first nine months ended March 26, 2004, we recorded charges for discontinued operations, net of tax, of $0.7 million and $2.7 million, respectively ($0.03 and $0.15, respectively, per share). The charges for the quarter ended March 26, 2004 were primarily related to a change in the tax rate applied to existing charges after calculating the overall effective tax rate for the nine months ended March 26, 2004. We anticipate future expenses to maintain the facility to approximate $0.1 million 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 its current carrying value. 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 of our unaudited financial statements 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 and an additional billing of $3.4 million related to this contract occurred in the third quarter of fiscal 2004. Our net sales for the first nine months of fiscal 2004 included $11.8 million from this contract. Delivery under this contract will be made in July 2004. During the quarter we signed an agreement letter with Canon Inc. authorizing the initial start of a new project with the expectation that a follow-on agreement will be signed by the fall of this year. Revenue of $1.6 million related to this follow-on agreement was recognized during the third quarter of fiscal 2004. LIQUIDITY AND CAPITAL RESOURCES At March 26, 2004, working capital was $65.7 million, a decrease of $1.2 million from $66.9 million at June 30, 2003. We maintained cash, cash equivalents, and marketable securities at March 26, 2004 totaling $34.1 million, a decrease of $18.7 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 associated with our TeraOptix facility in Westborough, Massachusetts, with the balance of $6.6 million comprised of increases in accounts receivable, inventory and purchases of capital equipment, partially offset by an increase in accounts payable. The payment of 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 $0.1 million, plus interest (7.5% at the time of repayment), until April 2007, and a principal balloon payment of $8.2 million in May 2007. We are currently marketing for sale the facility of our 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 used by continuing operations was $0.4 million for the first nine months in fiscal 2004, a decrease of $14.5 million from the $14.1 million in cash provided by operations for the first nine months in fiscal 2003. This difference was primarily related to changes in accounts receivable and inventories. Accounts receivable accounted for $7.3 million of the change in periods and inventories accounted for $6.2 million of the change between periods. The change in accounts receivable is primarily due to an increase in receivables from Canon for product sales and sales related to the development services agreements, all of which are within terms at March 26, 2004, and an increase in receivables in the Pacific Rim region on large shipments. The changes in inventories are due to the increase in orders while the prior year decrease was primarily due to shipments of optics with long lead times. There were no borrowings outstanding under our $3.0 million bank line of credit at March 26, 2004. The line of credit was extended to November 2004. 15 Acquisitions of property, plant, and equipment were $1.6 million and $5.5 million for the three and nine month periods ended March 26, 2004, 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 six 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, 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. 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 16 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 Zygo 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 Zygo 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 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 nine months 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 17 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 6. Exhibits and Reports on Form 8-K (a) Exhibits: 14.1 Zygo Corporation Code of Ethics 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 March 26, 2004. Zygo Corporation Earnings Press release, dated January 27, 2004. 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/ WALTER A. SHEPHARD -------------------------------------- Walter A. Shephard Vice President, Finance, Chief Financial Officer, and Treasurer Date: April 30, 2004 20 STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as..................... 'r'