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 September 27, 2002
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------------- -----------------------
Commission File Number 0-12944
Zygo Corporation
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(Exact name of registrant as specified in its charter)
Delaware 06-0864500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Laurel Brook Road, Middlefield, Connecticut 06455
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(Address of principal executive offices) (Zip Code)
(860) 347-8506
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Registrant's telephone number, including area code
N/A
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(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. YES NO X (1)
------ --------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
17,509,749 shares of Common Stock, $.10 Par Value, at November 4, 2002
1
(1) The Company erroneously omitted to file by EDGAR, with the Securities and
Exchange Commission, a copy of the Company's proxy statement dated October
6, 2001, in connection with the Annual Meeting of Stockholders held on
November 14, 2001. The proxy and the consequent amendment to the Company's
Annual Report on Form 10-K dated June 30, 2001 were filed by the Company on
February 13, 2002.
2
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this Form
10-Q Quarterly Report, regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations, are forward-looking statements. These forward-looking statements
include without limitation statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Forward-looking
statements are intended to provide management's current expectations or plans
for the future operating and financial performance of the Company, based upon
information currently available and assumptions currently believed to be valid.
Forward-looking statements can be identified by the use of words such as
"anticipate," "believe," "estimate," "expect," "intend," "plans," "strategy,"
"project" and other words of similar meaning in connection with a discussion of
future operating or financial performance. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors such as those disclosed under "Risk Factors" which references
the Form 10-K filed by the Company for the fiscal year ended June 30, 2002. Such
statements reflect the current views of the Company with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, and growth strategy of the
Company.
3
PART I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Thousands, except per share amounts)
Three Months Ended
-------------------------------------
SEPTEMBER 27, September 30,
2002 2001 (2)
------------- -------------
Net sales
Products ............................................... $ 17,701 $19,704
Development services ................................... 2,708 -
-------- -------
20,409 19,704
-------- -------
Cost of goods sold
Products ............................................... 10,992 12,721
Development services ................................... 2,051 -
-------- -------
13,043 12,721
-------- -------
Gross profit ........................................... 7,366 6,983
Selling, general, and administrative expenses ................... 5,460 5,267
Research, development, and engineering expenses ................. 2,998 4,164
Amortization of intangibles ..................................... 104 185
-------- -------
Operating loss ......................................... (1,196) (2,633)
-------- -------
Other income (expense):
Interest income ........................................ 407 555
Interest expense ....................................... (181) (2)
Miscellaneous (expense), net ........................... (167) 82
-------- -------
Total other income ..................................... 59 635
-------- -------
Loss from continuing operations before
income taxes and minority interest .................. (1,137) (1,998)
Income tax benefit .............................................. (432) (919)
Minority interest ............................................... 143 70
-------- -------
Loss from continuing operations ........................ (848) (1,149)
-------- -------
Discontinued TeraOptix operations, net of tax ................... (1,682) (1,222)
Charges related to the disposal of TeraOptix, net of tax ........ (9,352) -
-------- -------
Loss from discontinued operations ...................... (11,034) (1,222)
-------- -------
Net loss ........................................................ $(11,882) $(2,371)
======== =======
Basic and diluted - Loss per share:
Continuing operations .................................. $ (0.05) $ (0.07)
Discontinued operations ................................ (0.63) (0.07)
-------- -------
Net loss ............................................... $ (0.68) $ (0.14)
======== =======
Weighted average number of shares (1):
Basic and diluted ...................................... 17,510 17,389
======== =======
See accompanying notes to consolidated financial statements.
(1) Accounting principles generally accepted in the United States of America
require the computation of the net loss per share to be based on the
weighted average basic shares outstanding.
(2) The consolidated statement of operations for the three month-period ended
September 30, 2001 has been reclassified to conform with the current period
presentation of the discontinued operations and loss on disposal of
TeraOptix.
4
CONSOLIDATED BALANCE SHEETS
(Thousands)
SEPT. 27, 2002 June 30, 2002
(UNAUDITED)
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 28,243 $ 28,513
Restricted cash .................................................... 1,230 1,225
Marketable securities .............................................. 8,777 8,734
Receivables ........................................................ 17,629 21,241
Income tax receivable .............................................. 24 -
Inventories ........................................................ 23,842 23,612
Prepaid expenses ................................................... 1,213 1,444
Deferred income taxes .............................................. 4,888 4,899
Assets of discontinued unit held for sale .......................... 14,178 -
-------- --------
Total current assets .......................................... 100,024 89,668
Property, plant, and equipment, net ......................................... 26,284 55,045
Deferred income taxes ....................................................... 27,371 19,981
Intangible assets, net ...................................................... 4,590 4,507
-------- --------
TOTAL ASSETS ................................................................ $158,269 $169,201
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 837 $ 837
Accounts payable ................................................... 5,384 5,020
Accrued progress payments .......................................... 693 368
Accrued salaries and wages ......................................... 3,640 3,451
Other accrued liabilities .......................................... 5,428 5,132
Income taxes payable - 929
-------- --------
Total current liabilities ..................................... 15,982 15,737
Long-term debt, excluding current portion ................................... 11,164 11,374
Other long-term liabilities ................................................. 1,086 1,115
Minority interest ........................................................... 1,113 970
-------- --------
Total liabilities ...................................................... 29,345 29,196
-------- --------
Stockholders' equity:
Common Stock, $.10 par value per share:
40,000 shares authorized;
17,957 shares issued (17,892 at June 30, 2002);
17,510 shares outstanding (17,445 at June 30, 2002) ................ 1,796 1,789
Additional paid-in capital ............................................... 137,843 137,390
Retained earnings (accumulated deficit) .................................. (3,901) 7,981
Accumulated other comprehensive income (loss):
Currency translation effects ....................................... (736) (1,369)
Net unrealized loss on swap agreement .............................. (836) (515)
Net unrealized gain on marketable securities ....................... 45 16
-------- --------
134,211 145,292
Less treasury stock, at cost;
447 common shares .................................................. 5,287 5,287
-------- --------
Total stockholders' equity ......................................... 128,924 140,005
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................. $158,269 $169,201
======== ========
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands)
Three Months Ended
--------------------------------
SEPT. 27, 2002 Sept. 30, 2001
-------------- --------------
Cash provided by (used for) operating activities:
Loss from continuing operations .......................................... $ (848) $ (1,149)
Adjustments to reconcile net loss to cash
provided by (used for) operating activities:
Depreciation and amortization ......................................... 1,882 1,782
Loss on disposal of assets ............................................ 55 38
Deferred income taxes ................................................. (1,483) 21
Non-cash compensation charges related to stock options ................ 19 -
Changes in operating accounts:
Receivables ........................................................ 3,405 5,828
Costs in excess of billings ........................................ - 201
Inventories ........................................................ (880) (1,390)
Prepaid expenses ................................................... 231 148
Accounts payable and accrued expenses .............................. (382) (8,129)
Minority interest .................................................. 143 70
------- --------
Net cash provided by (used for) operating activities from continuing
operations ........................................................ 2,142 (2,580)
------- --------
Cash used for investing activities:
Additions to property, plant, and equipment .............................. (547) (8,049)
Investment in marketable securities ...................................... (480) (2,991)
Investments in other assets .............................................. (429) (27)
Interest from restricted cash from sale of Automation Systems Group ...... (5) -
Proceeds from the sale or maturity of marketable securities .............. 500 2,975
------- --------
Net cash used for investing activities from continuing operations ..... (961) (8,092)
------- --------
Cash provided by financing activities:
Payments of debt ......................................................... (210) -
Employee stock purchase .................................................. 441 -
Exercise of employee stock options ....................................... - 511
Issuance and repurchase of common stock .................................. - (270)
------- --------
Net cash provided by financing activities from continuing
operations ....................................................... 231 241
------- --------
Net increase (decrease) in cash and cash equivalents from continuing
operations .............................................................. 1,412 (10,431)
Net decrease in cash and cash equivalents from discontinued operations ..... (1,682) (1,222)
------- --------
Net decrease in cash and cash equivalents .................................. (270) (11,653)
Cash and cash equivalents, beginning of period ............................. 28,513 52,630
------- --------
Cash and cash equivalents, end of period ................................... $28,243 $ 40,977
======= ========
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands, except per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of Zygo
Corporation and its subsidiaries ("Company"). All material transactions and
accounts with the subsidiaries have been eliminated from the consolidated
financial statements. The results of operations for the period ended September
27, 2002 are not necessarily indicative of the results to be expected for the
full fiscal year.
The Consolidated Balance Sheet at September 27, 2002, the Consolidated
Statements of Operations for the three months ended September 27, 2002 and
September 30, 2001, and the Consolidated Statements of Cash Flows for the three
months ended September 27, 2002 and September 30, 2001 are unaudited but, in the
opinion of the Company, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair statement of the results of the interim
periods. The accompanying consolidated financial statements should be read in
conjunction with the financial statements and notes included in the Company's
June 30, 2002 Annual Report on Form 10-K including items incorporated by
reference therein.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
The following table sets forth the reconciliation of weighted average shares
outstanding and diluted weighted average shares outstanding:
Three Months Ended
------------------------------------
SEPTEMBER 27, September 30,
2002 2001
----------------- ---------------
Basic weighted average shares
outstanding ....................... 17,510 17,389
Dilutive effect of stock options ..... - -
----------------- ---------------
Diluted weighted average shares
outstanding ....................... 17,510 17,389
================= ===============
For the first quarter of fiscal 2003 and 2002, the Company recorded net losses.
Due to these net losses, stock options to acquire 171 shares of common stock and
331 shares of common stock for the three month periods, respectively, were
excluded from the computation of diluted earnings per share because of the
anti-dilutive effect on loss per share.
7
COMPREHENSIVE LOSS
The Company's total comprehensive loss was as follows:
SEPTEMBER 27, 2002 September 30, 2001
--------------------- ------------------
Net loss ............................................ $(11,882) $(2,371)
Unrealized gain on marketable securities ............ 29 51
Unrealized loss on swap agreement ................... (321) (899)
Foreign currency translation effect ................. 633 913
--------------------- ------------------
Comprehensive loss .................................. $(11,541) $(2,306)
===================== ==================
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. At September 27, 2002 and June 30, 2002, inventories were as
follows:
SEPTEMBER 27, June 30,
2002 2002
----------------------- -------------------
Raw materials and manufactured parts ........................ $17,896 $18,695
Work in process ............................................. 9,380 8,477
Finished goods .............................................. 241 179
----------------------- -------------------
27,517 27,351
Valuation reserves for excess and obsolete inventory ........ (3,675) (3,739)
----------------------- -------------------
$23,842 $23,612
======================= ===================
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Costs of additions,
replacements, and improvements are capitalized. Maintenance and repairs are
charged to expense as incurred. At September 27, 2002 and June 30, 2002,
property, plant, and equipment, at cost, were as follows:
SEPTEMBER 27, June 30,
2002 2002
--------------------- -----------------
Land and land improvements ................................... $ 1,461 $ 3,822
Buildings and building improvements .......................... 9,697 25,252
Machinery, equipment, and office furniture ................... 37,747 47,640
Leasehold improvements ....................................... 237 237
Construction in progress ..................................... 1,244 2,878
--------------------- -----------------
50,386 79,829
Accumulated depreciation ..................................... (24,102) (24,784)
--------------------- -----------------
$ 26,284 $ 55,045
===================== =================
Depreciation is based on the estimated useful lives ranging from 3-40 years for
the various classes of assets and is computed using the straight-line method.
The Company reclassified $14,178 of machinery, equipment, and office furniture
and buildings and building improvements under current assets, as assets held for
sale (See note 3).
8
LONG-TERM DEBT
On May 14, 2001, the Company entered into a mortgage on its Westborough,
Massachusetts facility. The original mortgage amount was $12,560 at an interest
rate of LIBOR plus 150 basis points (approximately 3.3% in total at September
27, 2002) and is payable in full on May 14, 2007. Interest only payments were
made through February 14, 2002. The mortgage principal is amortizing on a
15-year level amortization schedule requiring monthly principal and interest
payments. As of September 27, 2002, long-term debt was $11,164 and the current
portion of long-term debt was $837. The agreement contains financial covenants,
which among others relate to debt service and consolidated debt ratios. As of
September 27, 2002, the Company is in compliance with the financial covenants.
In conjunction with the mortgage, the Company entered into an interest rate swap
agreement that provides for a fixed interest rate of approximately 7% for the
duration of the mortgage. As of September 27, 2002, the market value of the
agreement is ($1,348) and is recorded as a liability with a corresponding charge
to stockholders' equity, net of taxes.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets" which addresses financial accounting
and reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets." SFAS
No. 142 addresses how intangible assets that are acquired individually or with a
group of other assets should be accounted for in financial statements upon their
acquisition and after they have been initially recognized in the financial
statements. SFAS No. 142 requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but rather tested at least annually for
impairment, and intangible assets that have finite useful lives be amortized
over their useful lives. SFAS No. 142 provides specific guidance for testing
goodwill and intangible assets that will not be amortized for impairment. In
addition, SFAS No. 142 expands the disclosure requirements for goodwill and
other intangible assets in the years subsequent to their acquisition. SFAS No.
142 is effective for our fiscal year 2003. The adoption of SFAS No. 142 did not
have a material effect on our results of operations or statements of financial
position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which addresses financial accounting and reporting for retirement
obligations associated with the retirement of tangible long-lived assets and for
the associated asset retirement costs. SFAS No. 143 requires a company to record
the fair value of an asset retirement obligation in the period in which it is
incurred. When the retirement obligation is initially recorded, the company also
records a corresponding increase to the carrying amount of the related tangible
long-lived asset and depreciates that cost over the useful life of the tangible
long-lived asset. The retirement obligation is increased at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the initial fair value measurement. Upon settlement of the
retirement obligation, the company either settles the retirement obligation for
its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002 with earlier
application encouraged. The adoption of SFAS No. 143 did not have a material
effect on our results of operations or statements of financial position.
9
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and also affects
certain aspects of accounting for discontinued operations. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-lived Assets to be Disposed of, " and certain aspects of APB No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. See note 3 for discontinued operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with the exit or disposal activities. SFAS No.
146 nullifies Emerging Issues Task Force Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
companies to record liabilities for exit or disposal activities in the period in
which they are incurred, except for certain types of transactions. SFAS No. 146
is effective for exit or disposal activities that are initiated after December
31, 2002.
NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS
On December 12, 2001, the Company sold its Automation Systems Group in Longmont,
Colorado, to Brooks Automation, Inc. of Chelmsford, Massachusetts, in a cash
transaction, for $12,165. Substantially all of the assets were sold to Brooks
and substantially all the liabilities were assumed by Brooks. The gain on the
sale was $6,117 before related exit costs of $1,920 to be paid from the
proceeds, inventory write-downs of $808, and tax expense of $1,288. As of
September 27, 2002, the restricted cash balance of $1,230 related to the
Automation sale is being held in escrow for a period of one year from the date
of sale.
In September 2002, the Company recognized an after-tax loss of $9,352 (net of a
tax benefit of $5,870) for the planned disposition of its TeraOptix business
unit ("TeraOptix"). The charges related to the disposal of TeraOptix consisted
of impairment charges recorded on the equipment and facility of $13,349,
estimated severance payments of $850, a write-down to fair market value of the
inventory of $650, and $373 of other costs and write-downs related to the
disposition of the remaining assets. The remaining value of the equipment and
facility of $14,178 at September 27, 2002 represents the estimated fair market
value for the assets based on third-party appraisals, which are subject to
future market conditions. The assets are classified under current assets as
assets held for sale, and the Company expects to sell these assets over the next
twelve months. Proceeds from the sale of the facility would be used to pay down
the mortgage loan. The results and loss on disposal of the TeraOptix business
unit have been presented as a separate line item in the accompanying
consolidated statements of operations as discontinued operations, net of tax,
for both periods presented.
NOTE 4: SEGMENT INFORMATION
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards, using a management approach, for reporting
information regarding operating segments in annual financial statements. The
management approach
10
designates the internal reporting that is used by the chief
operating decision-maker when making operating decisions and assessing
performance as the source of the Company's reportable segments. The Company's
president has been determined to be its chief operating decision-maker, as
defined under Statement 131.
The Company operates in two principal business segments globally: Semiconductor
and Industrial. The segment data is presented below in a manner consistent with
management's internal measurement of the business. Segment data for 2001 was
restated to reflect the Company's exit from the telecommunications segment.
Three Months Ended
-----------------------------------
SEPTEMBER 27, September 30,
2002 2001
------------- -------------
SEMICONDUCTOR
Sales .................................... $10,751 $10,385
Gross profit ............................. 4,178 3,931
Gross profit as a % of sales ............. 39% 38%
INDUSTRIAL
Sales .................................... $9,658 $9,319
Gross profit ............................. 3,188 3,052
Gross profit as a % of sales ............. 33% 33%
TOTAL
Sales .................................... $20,409 $19,704
Gross profit ............................. 7,366 6,983
Gross profit as a % of sales ............. 36% 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 of the Company.
Substantially all of the Company's operating results, assets, depreciation and
amortization are U.S. based. The Company's sales by geographic area were as
follows:
Three Months Ended
---------------------------------
SEPTEMBER 27, September 30,
2002 2001
------------- -------------
Americas (primarily United States) ......... $ 6,840 $ 9,623
Far East:
Japan ................................... 9,066 5,880
Pacific Rim ............................. 1,540 1,387
------------- -------------
Total Far East ............................. $10,606 $ 7,267
Europe and Other (primarily Europe) ........ 2,963 2,814
------------- -------------
Total ...................................... $20,409 $19,704
============= =============
11
NOTE 5: RELATED PARTY TRANSACTIONS
Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of
certain of the Company's products in Japan and a subsidiary of Canon Inc.,
amounted to $9,000 (44% of net sales) for the three months ended September 27,
2002, as compared to $4,795 (24% of net sales) for the comparable prior year
period. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc.
are based, generally, on the terms customarily given to distributors. Revenues
generated from a development contract are recorded on a cost-plus basis. At
September 27, 2002 and June 30, 2002, there was approximately, in the aggregate,
$5,205 and $3,849, respectively, of trade accounts receivable from Canon Inc.
and Canon Sales Co., Inc.
In September 2002, the Company and Canon Inc. entered into a contract related to
the development of certain interferometers. The contract currently has a value
of $29,690 and generally covers the period to February 2004, subject to meeting
certain milestones during that period. During the quarter ended September 27,
2002, the Company recognized revenue of $2,708 for this contract in the
semiconductor segment.
12
ITEM.2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosures at the date of our financial
statements. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, inventories, warranty
obligations, income taxes, and long-lived assets. Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The Company considers
certain accounting policies related to revenue recognition and allowance for
doubtful accounts, inventory valuation, warranty costs, accounting for income
taxes, and valuation of long-lived assets to be critical policies due to the
estimates and judgments involved in each.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company recognizes revenue based on guidance provided in Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." The Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, there is no significant risk pertaining to customer
acceptance, our price is fixed or determinable, and collectibility is reasonably
assured.
The Company maintains an allowance for doubtful accounts based on a continuous
review of customer accounts, payment patterns, and specific collection issues.
We perform on-going credit evaluations of our customers and do not require
collateral from our customers. For many of our international customers, we
require an irrevocable letter of credit to be issued by the customer before a
shipment is made. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required.
INVENTORY VALUATION
Inventories are valued at the lower of cost or market, cost being determined on
a first-in, first-out basis. Management evaluates the need to record adjustments
for impairment of inventory on a monthly basis. The Company's policy is to
assess the valuation of all inventories, including raw materials,
work-in-process, and finished goods. Obsolete inventory or inventory in excess
of management's estimated usage is written down to its estimated market value,
if less than its cost. Contracts with fixed prices are evaluated to determine if
estimated total costs will exceed revenues. A loss provision is recorded when
the judgment is made that actual costs incurred plus estimated costs remaining
to be incurred will exceed total revenues from the contract. Inherent in the
estimates of market value are management's estimates related to current economic
trends, future demand for the Company's products, and technological
13
obsolescence. Significant management judgments must be made when establishing
the reserve for obsolete and excess inventory and losses on contracts. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
WARRANTY COSTS
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. The Company considers historical warranty costs actually
incurred to establish the warranty liability. Should actual costs differ from
management's estimates, revisions to the estimated warranty liability would be
required.
ACCOUNTING FOR INCOME TAXES
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and operating loss and tax credit carryforwards. SFAS No. 109,
"Accounting for Income Taxes," requires the establishment of a valuation
allowance to reflect the likelihood of the realization of deferred tax assets.
The Company records a valuation allowance to reduce its deferred tax assets to
an estimated amount based on historical and forecasted results. While management
has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event management were to determine that it would be able to realize its deferred
tax assets in the future in excess of its net recorded amount, an adjustment to
the valuation allowance would increase income in the period such determination
was made. Likewise, should management determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the valuation allowance would be charged to income in the period such
determination was made. Our effective tax rate may vary from period to period
based on changes in estimated taxable income or loss, changes to the valuation
allowance, changes to federal, state or foreign tax laws, and deductibility of
certain costs and expenses by jurisdiction.
VALUATION OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," the carrying value of intangible assets and other long-lived
assets is reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest impairment. Some
factors we consider important, which could trigger the impairment review,
include a significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used, a significant adverse
change in the business climate that could affect the value of an asset, an
accumulation of costs for an asset in excess of the amount originally expected,
a current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection that demonstrates continuing
losses, and a current expectation that, more likely than not, a long-lived asset
will be disposed of significantly before the end of its estimated useful life.
If such circumstances exist, we evaluate the carrying value of long-lived assets
to determine if impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets and comparing that value to
the carrying value of the assets. If the carrying value of the asset is greater
than the estimated future cash flows, the asset is written down to the estimated
fair value. We determine the estimated fair value of the assets based on a
current market value of the asset. If a current market value is not readily
available, a projected discounted cash flow method is applied using a discount
rate determined by
14
management to be commensurate with the risk inherent in the current business
model. Our cash flow estimates contain management's best estimates, using
appropriate and customary assumptions and projections at the time.
OFF-BALANCE SHEET ARRANGEMENTS
We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
parts of our business that are not consolidated into our financial statements.
RESULTS OF OPERATIONS
As previously announced on September 27, 2002, the Company is discontinuing its
telecommunications-focused TeraOptix business unit and disposing of its
equipment and facility located in Westborough, Massachusetts. Accordingly, the
results of TeraOptix have been presented as a separate line item on the
consolidated statement of operations as discontinued operations, net of tax, for
both periods presented. In addition, the loss on disposal of the business, net
of tax, has been recorded as a separate line item for the first quarter of
fiscal 2003.
Net sales of $20.4 million for the first quarter of fiscal 2003 increased by
$0.7 million, or 4%, from the comparable prior year period of $19.7 million. The
net sales exclude sales for the first quarter of fiscal 2003 and 2002 related to
TeraOptix of $0.3 million and $1.3 million, respectively. Net sales include
product sales and related services and revenues derived from development
agreements.
For the first quarter of fiscal 2003, net sales in the semiconductor segment
were $10.8 million, or 53% of total net sales, as compared to $10.4 million, or
53%, in the prior year period and net sales in the industrial segment were $9.6
million, or 47% of total net sales, as compared to $9.3 million, or 47%, in the
prior year period.
Company sales to the Americas, the vast majority of which are in the United
States, amounted to $6.8 million in the first quarter of fiscal 2003, a decrease
of $2.8 million, or 29%, from the first quarter of fiscal 2002 levels of $9.6
million. This decrease was primarily due to weakness in the semiconductor
sector. The Company's sales outside the Americas amounted to $13.6 million in
the first quarter of fiscal 2003, an increase of $3.5 million, or 35%, from the
first quarter of fiscal 2002 levels of $10.1 million. Sales to Japan during the
first quarter of fiscal 2003 amounted to $9.1 million, an increase of $3.2
million, or 54%, from the first quarter of fiscal 2002 sales levels. This
increase was primarily due to increased sales to Canon Inc. (see related party
transactions), including revenues of $2.7 million generated from a recently
signed development agreement. Sales to Europe/Other, primarily Europe, amounted
to $3.0 million, an increase of $0.2 million, or 7%, from the first quarter of
fiscal 2002. Sales to the Pacific Rim, excluding Japan, amounted to $1.5
million, an increase of $0.1 million, or 7%, from the first quarter of fiscal
2002 sales levels.
Sales in U.S. dollars, for the quarter ended September 27, 2002, were $17.4
million, or 85% of all Company sales for both periods. Significant changes in
the values of foreign currencies relative to the value of the U.S. dollar can
impact the sales of the Company's products in its export markets, as would
changes in the general economic conditions in those markets. The impact of such
changes in foreign currency values on the Company's sales cannot be measured.
15
Gross profit for the first quarter of fiscal 2003 totaled $7.4 million
(excluding $0.9 million of a gross loss associated with the discontinued
operations of TeraOptix), an increase of $0.4 million, or 6%, from $7.0 million
(excluding $40,000 of gross profit associated with the discontinued operations
of TeraOptix) in the first quarter of fiscal 2002. Gross profit as a percentage
of sales for the first quarters of fiscal 2003 and fiscal 2002 was 36%. The
gross profit as a percentage of sales for each segment remained relatively
stable between the periods. Gross profit for the first quarter of fiscal 2003
included $0.6 million related to a recently signed development agreement with
Canon Inc. (See related party transactions).
Selling, general and administrative expenses ("SG&A") in the first quarter of
fiscal 2003 amounted to $5.5 million (excluding $0.5 million of SG&A expenses
associated with the discontinued operations of TeraOptix), an increase of $0.2
million, or 4%, from $5.3 million (excluding $0.5 million of SG&A expenses
associated with the discontinued operations of TeraOptix) in the first quarter
of fiscal 2002. As a percentage of net sales, SG&A for the first quarters of
fiscal 2003 and fiscal 2002 were 27%.
Research, development, and engineering expenses ("R&D") for the first quarter of
fiscal 2003 totaled $3.0 million (excluding $0.9 million of R&D expenses
associated with the discontinued operations of TeraOptix), a decrease of $1.2
million, or 29%, from $4.2 million (excluding $1.1 million of R&D expenses
associated with the discontinued operations of TeraOptix) in the comparable
prior year period. The decrease in the first quarter of fiscal 2003 was
primarily related to the completion of several large research and development
projects in the semiconductor segment in the prior year.
The Company recorded an operating loss of $1.2 million (excluding $2.3 million
of operating loss associated with the discontinued operations of TeraOptix) in
the first quarter of fiscal 2003, as compared to an operating loss of $2.6
million (excluding $1.5 of operating loss associated with the discontinued
operations of TeraOptix) in the first quarter of fiscal 2002. The operating loss
as a percentage of sales in the first quarter of fiscal 2003 was 6%, as compared
to 13% in the first quarter of fiscal 2002.
The income tax benefit from continuing operations in the first quarter of fiscal
2003 totaled $0.4 million, or 38% of pretax losses, which compares with $0.9
million, or 46% of pretax losses, in the first quarter of fiscal 2002. The
decrease in tax rates is primarily attributed to a decrease in expected R&D
credits and anticipated taxable income in fiscal 2003. The income tax benefit
from discontinued operations in the first quarter of fiscal 2003 totaled $0.8
million, or 34% of pretax losses, which compares with $0.5 million, or 29% of
pretax losses, in the first quarter of fiscal 2002. The income tax benefit
associated with the change in the valuation of the assets and other charges
related to the discontinued TeraOptix unit in the first quarter of fiscal 2003
totaled $5.8 million, or 38% of pretax losses.
The Company recorded a net loss of $11.9 million for the first quarter of fiscal
2003 as compared to a net loss of $2.4 million for the first quarter of fiscal
2002. On a diluted per share basis, the net loss was $0.68 per share for the
first quarter of fiscal 2003 as compared to a net loss of $0.14 per share for
the first quarter of fiscal 2002. The net loss for the first quarter of fiscal
2003 includes losses related to the operations of our discontinued TeraOptix
unit ($1.7 million) and charges related to the disposal of our discontinued
TeraOptix unit ($9.4 million). The loss from continuing operations for the
quarter was $0.8 million, or $0.05 per share, compared to a loss of $1.1
million, or $0.07 per share, in the comparable prior year quarter.
16
The net loss for the first quarter of fiscal 2002 includes operating results of
the Automation Systems Group in Longmont, Colorado, which was sold in December
2001.
Backlog at September 27, 2002 totaled $42.9 million, an increase of $2.4
million, or 6%, from $40.5 million (excluding $6.6 million of backlog associated
with the discontinued operations of TeraOptix) at June 30, 2002. Backlog at
September 27, 2002 decreased $4.1 million, or 9%, from $47.0 million (excluding
$7.7 million of backlog associated with the discontinued operations of
TeraOptix) at September 30, 2001. Orders for the first quarter of fiscal 2003
totaled $22.8 million, net of debookings of $0.8 million. Net orders by segment
for the first quarter of fiscal 2003 consisted of $12.7 million, or 56%, in the
semiconductor segment and $10.1 million, or 44%, in the industrial segment.
Telecommunication orders (a net debookings of $0.8 million) not associated with
TeraOptix were included in the industrial segment.
RELATED PARTY TRANSACTIONS
Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of
certain of the Company's products in Japan and a subsidiary of Canon Inc.,
amounted to $9.0 million (44% of net sales) for the three months ended September
27, 2002, as compared to $4.8 million (24% of net sales) for the comparable
prior year period. Selling prices of products sold to Canon Inc. and Canon Sales
Co., Inc. are based, generally, on terms customarily given to distributors. At
September 27, 2002 and June 30, 2002, there was approximately, in the aggregate,
$5.2 million and $3.8 million, respectively, of trade accounts receivable from
Canon Inc. and Canon Sales Co., Inc.
In September 2002, the Company and Canon Inc. entered into a contract related to
the development of certain interferometers. The contract currently has a value
of $29.7 million and generally covers the period to February 2004, subject to
meeting certain milestones during this period. During the quarter ended
September 27, 2002, the Company recognized revenue of $2.7 million for this
contract in the semiconductor segment.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 2002, working capital was $84.0 million, an increase of $10.1
million from $73.9 million at June 30, 2002. The Company maintained cash, cash
equivalents, and marketable securities (excluding restricted cash of $1.2
million) at September 27, 2002 totaling $37.0 million. This represents a
decrease of $0.2 million from June 30, 2002. The decrease primarily was due to
the operating loss (including the loss from discontinued operations) offset by a
decrease in receivables.
The decrease in property, plant, and equipment of $28.7 million to $26.3 million
as of September 27, 2002 from $55.0 million as of June 30, 2002 is primarily due
to an impairment charge on the TeraOptix assets of $13.3 million and the
reclassification of the balance of these assets of $14.2 million to current
assets as assets held for sale. The decrease also includes depreciation charges
of $1.7 million, partially offset by current period acquisitions of $0.5
million. Proceeds from the sale of the TeraOptix facility will be used to pay
down the mortgage loan described below.
As of September 27, 2002 the mortgage balance on the Company's Westborough,
Massachusetts facility was $12.0 million comprised of long-term debt of $11.2
million and a
17
current portion of long-term debt of $0.8 million. The mortgage has an interest
rate of LIBOR plus 150 basis points (approximately 3.3% in total at September
27, 2002) which is payable in full on May 14, 2007. Interest only payments were
made through February 14, 2002. The mortgage principal is amortizing on a
15-year level amortization schedule requiring monthly principal and interest
payments. Future mortgage principal payments by fiscal years ended June 30 will
total $0.6 million for 2003; $0.8 million for each year 2004-2006; and $0.7
million for the first 10 months of 2007 with a final payment of $8.2 million in
May 2007. In conjunction with the mortgage, the Company entered into an interest
rate swap agreement (with a highly rated financial institution) that provides
for a fixed interest rate of approximately 7% for the duration of the mortgage.
There were no borrowings outstanding under the Company's $3.0 million bank line
of credit at September 27, 2002.
Stockholders equity at September 27, 2002 decreased by $11.1 million from June
30, 2002 to $128.9 million, primarily due to the net loss in the first quarter
of fiscal 2003.
Although cash requirements will fluctuate based on the timing and extent of
various factors, management believes that cash generated from operations,
together with the liquidity provided by existing cash balances and borrowing
capability, will be sufficient to satisfy the Company's liquidity requirements
for the next 12 months.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Risk factors that may impact future results include those disclosed in our Form
10-K for the year ended June 30, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates, foreign currency exchange rates, and real estate and equipment
valuations. We do not use derivative financial instruments for speculative or
trading purposes.
INTEREST RATE SENSITIVITY
We maintain a portfolio of cash equivalents and marketable securities including
institutional money market funds (which may include commercial paper,
certificates of deposit, and U.S. treasury securities), government agency
securities, and corporate bonds. Our interest income on our variable rate
investments is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are short-term instruments.
The impact of interest rate changes on the Company's results cannot be measured.
During fiscal 2001, the Company entered into a mortgage on its Westborough
facility of $12.6 million at an interest rate of LIBOR plus 150 basis points
(3.3% in total at September 27, 2002) which is payable in full on May 14, 2007.
As of September 27, 2002, long-term debt was $11.2 million and the current
portion of long-term debt was $0.8 million. In conjunction with the mortgage,
the Company entered into an interest rate swap agreement that provides for a
fixed
18
interest rate of approximately 7% for the duration of the mortgage. Due to the
existence of the swap agreement, we do not believe that a material interest rate
risk exposure exists.
EXCHANGE RATE SENSITIVITY
Approximately 85% of the Company's sales for the quarter ended September 27,
2002 were in U.S. dollars. At September 27, 2002, the Company's backlog included
orders in U.S. dollars of $36.1 million, or 84% of the total backlog.
Substantially all of the Company's costs are negotiated and paid in U.S.
dollars. Significant changes in the values of foreign currencies relative to the
value of the U.S. dollar can impact the sales of the Company's products in its
export markets as would changes in the general economic conditions in those
markets. The impact of such changes in foreign currency values on the Company's
sales and backlog cannot be measured.
COSTS OF DISCONTINUED OPERATIONS
The Company is currently in the process of exiting the telecommunications
segment of its business and closing the TeraOptix facility in Westborough,
Massachusetts. The facility, which is financed with a mortgage note, and
equipment are being actively marketed, and it is the Company's intention to sell
these assets within one year. The mortgage note payable has a balance at
September 27, 2002 of $12.0 million and a swap agreement to fix the interest
rate on the mortgage at 7% has a balance at September 27, 2002 of $1.3 million.
The Company intends to use the proceeds from the sale of the facility to pay
down the mortgage note and swap agreement. To the extent that the proceeds from
the sale of the facility are less than the balance of the mortgage note and swap
agreement, the Company would have to use existing cash balances to pay down the
remaining portion of the mortgage note and/or swap agreement. There is no
guarantee that the Company will be able to sell the facility at a price that
yields proceeds in a sufficient amount to pay down the entire debt.
The equipment and facility at TeraOptix have been valued at an estimated fair
market value based on third-party appraisals. The Company recorded an impairment
charge to reduce the value of the equipment and facility to the fair market
value. To the extent the final selling price of the equipment and facility is
lower than the fair market value, the Company may need to take additional
impairment charges. If, prior to the sale of the equipment and facility, the
Company determines that the estimated fair market value has decreased, the
Company may need to take an additional impairment charge at that time.
19
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report, management,
including the Corporation's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Corporation's
disclosure controls and procedures. Based upon, and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports the
Corporation files and submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported as and when required.
There have been no significant changes in the Corporation's internal controls or
in other factors known to us that could significantly affect internal controls
subsequent to the date of such evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
20
PART II - Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K filed during the current quarter:
On September 17, 2002, the Company filed a Current Report on Form 8-K with
respect to a development contract between Canon Inc. and the Company.
On September 27, 2002, the Company filed a Current Report on Form 8-K with
respect to the disposal of its Zygo TeraOptix business unit and facility
located in Westborough, Massachusetts.
21
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: November 8, 2002
22
CERTIFICATIONS
I, J. Bruce Robinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zygo Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ J. Bruce Robinson
---------------------
J. Bruce Robinson
Chairman, President, and
Chief Executive Officer
23
CERTIFICATIONS
I, Richard M. Dressler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zygo Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Richard M. Dressler
-----------------------
Richard M. Dressler
Vice President, Finance
Chief Financial Officer
24