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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(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 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
(Amended by Exch Act Rel No. 312905. Eff 4/26/93)
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 X NO
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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
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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.
11,402,422 Shares of Common Stock, $.10 Par Value at May 10, 1999
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share amounts)
For the Three Months For the Nine Months
Ended March 31,(1) Ended March 31,(1)
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
Net sales .............................................. $13,056 $26,901 $44,473 $78,494
Cost of goods sold ..................................... 10,143 14,345 30,067 42,897
------- ------- ------- -------
Gross profit .................................. 2,913 12,556 14,406 35,597
Selling, general and administrative expenses ........... 5,991 4,776 14,614 12,324
Research, development and engineering expenses ......... 2,314 2,596 7,147 7,507
Nonrecurring acquisition-related charges ............... -- -- -- 1,585
Failed merger costs .................................... -- -- -- 335
Amortization of goodwill and other intangibles ......... 403 197 896 535
------- ------- ------- -------
Operating (loss) profit ....................... (5,795) 4,987 (8,251) 13,311
------- ------- ------- -------
Other income (expense):
Interest income ............................... 247 272 871 797
Miscellaneous (expense), net .................. (39) (144) (153) (300)
------- ------- ------- -------
208 128 718 497
(Loss) earnings before income taxes .................... (5,587) 5,115 (7,533) 13,808
Income tax (benefit) expense ........................... (1,789) 1,579 (2,328) 4,886
------- ------- ------- -------
Net (loss) earnings (note 1) ........................... $(3,798) $ 3,536 $(5,205) $ 8,922
======= ======= ======= =======
(Loss) earnings per common share (4):
Basic (2) ..................................... $ (.34)(3) $ .32 $ (.47)(3) $ .82
======= ======= ======= =======
Diluted (2) ................................... $ (.34)(3) $ .29 $ (.47)(3) $ .73
======= ======= ======= =======
Weighted average number of shares:
Basic ......................................... 11,179 10,939 11,133 10,857
======= ======= ======= =======
Diluted ....................................... 11,179 12,192 11,133 12,248
======= ======= ======= =======
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(1) The results of Sight Systems, Inc., which is being accounted for as an immaterial pooling-of-interests,
are included from July 1, 1997; the results of Syncotec Neue Technologien und Instrumente GmbH
("Syncotec")are included from September 1, 1997 when the acquisition of the remaining 50% of Syncotec
not then owned by Zygo was completed.
(2) The difference between basic shares outstanding and diluted shares outstanding is the assumed
conversion of common stock equivalents (stock options) in the amounts of 1,253,000 in the three months
ended March 31, 1998 and 1,391,000 in the nine months ended March 31, 1998.
(3) As per generally accepted accounting principles, the computation of the net loss per share is based on
the weighted average basic shares outstanding.
(4) The net earnings per common share have been restated as a result of the adoption of Statement of
Financial Accounting Standards No 128, Earnings per Share.
-2-
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
March 31, June 30,
1999 1998
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ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 14,219 $ 22,023
Marketable securities ................................. 8,427 8,264
Receivables ........................................... 10,930 16,555
Inventories:
Raw materials and manufactured parts .............. 7,439 9,763
Work in process ................................... 4,811 3,723
Finished goods .................................... 1,516 944
-------- --------
Total inventories .......................... 13,766 14,430
-------- --------
Costs in excess of billings ........................... 1,205 1,182
Income taxes receivable ............................... 2,442 0
Prepaid expenses and taxes ............................ 916 829
Deferred income taxes ................................. 2,709 2,680
-------- --------
Total current assets ....................... 54,614 65,963
-------- --------
Property, plant and equipment, at cost .................. 32,800 30,690
Less accumulated depreciation ........................... 16,913 15,001
-------- --------
Net property, plant and equipment ..................... 15,887 15,689
-------- --------
Goodwill and other intangible assets, net ............... 9,925 8,524
Other assets ............................................ 1,042 829
-------- --------
Total assets ............................... $ 81,468 $ 91,005
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................... $ 3,830 5,993
Accrued expenses and customer progress payments ....... 7,442 9,542
Federal and state income taxes ........................ 0 343
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Total current liabilities .................. 11,272 15,878
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Deferred income taxes ................................... 2,961 2,961
Stockholders' Equity:
Common stock, $.10 par value per share:
15,000,000 shares authorized; 11,399,422
shares issued (11,217,942 at June 30, 1998) ......... 1,140 1,122
Additional paid-in capital ............................ 42,580 42,267
Retained earnings ..................................... 23,858 29,063
Currency translation effects .......................... (14) 1
Net unrealized (loss) gain on marketable securities ... (28) 14
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67,536 72,467
Less treasury stock, at cost; 207,600 shares .......... 301 301
-------- --------
Total stockholders' equity ................. 67,235 72,166
-------- --------
Total liabilities and stockholders' equity . $ 81,468 $ 91,005
======== ========
-3-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1999 and 1998
(Thousands of dollars)
1999 1998
-------- --------
Cash (used for) provided by
operating activities:
Net (loss) earnings (note 1) ................................. $ (5,205) $ 8,922
Adjustments to reconcile net (loss) earnings to cash
provided by (used for) operating activities:
Depreciation and amortization ........................... 3,175 2,536
Loss on disposal of assets .............................. 308 206
Nonrecurring in-process R&D ............................. 0 879
Gain on sale of marketable securities ................... (38) (70)
Changes in operating accounts:
Receivables ......................................... 5,625 (133)
Costs in excess of billings ......................... (23) 345
Inventories ......................................... 664 (2,680)
Prepaid expenses .................................... (87) 393
Accounts payable and accrued expenses ............... (7,064) 1,522
-------- --------
Net cash (used for) provided by operating activities .... (2,645) 11,920
-------- --------
Cash (used for) provided by
investing activities:
Additions to property, plant and equipment ................... (3,026) (7,678)
Investment in marketable securities .......................... (11,363) (3,480)
Investment in other assets ................................... (2,262) (512)
Acquisition of business ...................................... 0 (1,268)
Proceeds from sale of marketable securities .................. 8,616 2,208
Proceeds from maturity of marketable securities .............. 2,545 5,765
Cash acquired from acquisitions .............................. 0 2,059
-------- --------
Net cash (used for) provided by investing activities .... (5,490) (2,906)
-------- --------
Cash provided by (used for)
financing activities:
Repayment of long-term debt .................................. 0 0
Exercise of employee stock options ........................... 331 550
-------- --------
Net cash provided by financing activities ............... 331 550
-------- --------
Net (decrease) increase in cash and cash equivalents ............... (7,804) 9,564
Cash and cash equivalents, beginning of year ....................... 22,023 10,981
-------- --------
Cash and cash equivalents, end of quarter .......................... $ 14,219 $ 20,545
======== ========
The interim financial statements furnished herein reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. All such adjustments are of a normal and
recurring nature. The results for the quarter ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year.
These interim financial statements should be read in conjunction with the
financial statements and notes included in the Company's June 30, 1998 Annual
Report on Form 10-K405 including items incorporated by reference herein.
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NEW ACCOUNTING PRONOUNCEMENTS
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's reported
net income or shareholders' equity. Comprehensive income (loss) is defined as
net income plus nonshareholder direct adjustments to shareholders' equity which
consist of foreign currency translation adjustments and adjustments for the net
unrealized gains (losses) related to the Company's marketable equity securities.
Comprehensive losses totaled $3,916,000 and $5,262,000 in the three-month and
nine-month periods ended March 31, 1999, respectively, as compared to
comprehensive income of $3,516,000 and $8,911,000 in the comparable prior-year
periods.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard changes the criteria used to
determine the segments for which SEC registrants must report information. The
statement is effective for both interim and annual financial statements for
periods beginning after December 15, 1997; however, this statement need not be
applied to interim financial statements in the initial year of its application.
The Company intends to adopt SFAS No. 131 for the fiscal year ending June 30,
1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales of $13,056,000 for the three months and $44,473,000 for the nine
months ended March 31, 1999, decreased by $13,845,000 or 51% and $34,021,000 or
43%, respectively, from the net sales in the comparable prior-year periods. Net
sales of the Company's instruments and systems decreased by 47% to $9,508,000
for the three months ended March 31, 1999 from the comparable quarter in the
prior fiscal year. The Company's sales continue to be adversely impacted by the
Asian economic environment and weak semiconductor and data storage markets. Net
sales of modules and components decreased by 60% to $3,548,000 in the third
quarter of fiscal 1999 from $8,800,000 in the comparable quarter in fiscal 1998
which included $1,700,000 of facilitization revenues recorded by the Company on
the NIF facility contract with Lawrence Livermore National Laboratory. Net sales
of the Company's instruments and systems and net sales of modules and components
decreased by $22,146,000 or 42% and $11,879,000 or 46%, respectively, for the
nine months ended March 31, 1999 as compared to the nine-month period ended
March 31, 1998.
Gross profit for the three months and nine months ended March 31, 1999, amounted
to $2,913,000 and $14,406,000, respectively, a decrease of $9,643,000 and
$21,191,000 from the comparable prior year periods. Gross profit as a percentage
of sales for the quarter and nine months ended March 31, 1999, amounted to 22%
and 32%, respectively, a decrease of 25 and 13 percentage points, respectively,
from gross profit as a percentage of sales of 47% and 45%, respectively, for the
three months and nine months ended March 31, 1998. The decrease in gross profit
and gross profit as a percentage of sales were primarily due to volume
shortfalls and the associated under utilization of the Company's manufacturing
facilities. Pricing pressures and the resulting discounting also continued to
impact margin levels. Additionally, third quarter results were impacted by $1.1
million of inventory write-offs.
-5-
Selling, general and administrative expenses of $5,991,000 and $14,614,000,
respectively, in the three months and nine months ended March 31, 1999,
increased by $1,215,000 or 25%, and $2,290,000 or 19%, respectively, from the
same periods the year earlier. The increases in the three-month period ended
March 31, 1999 included $2.2 million of costs associated with creating
additional infrastructure, consolidation of operations, and severance costs. The
nine- month period ended March 31, 1999 was also impacted by bad debt expenses
associated with the establishment of an allowance for doubtful accounts relating
to contracts associated with StorMedia Inc. during the first quarter. As a
percentage of sales, selling, and general and administrative expenses increased
in the three months and nine months ended March 31, 1999, to 46% and 33%,
respectively, as compared to 18% and 16%, respectively, in the comparable prior
year period.
Research, development and engineering expenses ("R&D") amounted to $2,314,000 or
18% of sales and $7,147,000 or 16% of sales, respectively, for the three months
and nine months ended March 31, 1999. In the comparable three- and nine-month
periods in the prior year, R&D expenses totaled $2,596,000 or 10% of sales and
$7,507,000 or 10% of sales, respectively. During the 1999 quarter,
consolidations and cost reduction efforts were targeted in this functional area.
These initiatives were made possible as a result of the completion of several
R&D programs and the introduction of the resulting new products. The Company's
management continues to focus its attention on projects which will enhance the
Company's product offering and provide long-term benefits to the Company.
The Company recorded an operating loss in the three months ended March 31, 1999
totaling $5,795,000, as compared to operating profit in the comparable prior
year period of $4,987,000. On a year-to-date basis, the Company reported an
operating loss of $8,251,000 for the nine months ended March 31, 1999 as
compared with an operating profit of $13,311,000 in the comparable prior year
period.
The Company recorded a net loss of $3,798,000 in the three months ended March
31, 1999, as compared to net income of $3,536,000 reported in the three months
ended March 31, 1998. The Company reported a net loss of $(.34) per share in the
quarter ended March 31, 1999, as compared to diluted per share earnings of $.29
in the comparable quarter in the prior year. The Company reported a net loss of
$5,205,000 or $(.47) per share for the first nine months of fiscal 1999, as
compared to a net profit in the comparable prior period of $8,922,000 or $.73
per share.
FINANCIAL CONDITION
At March 31, 1999, working capital was $43,342,000, a decrease of $6,743,000
from the amount at June 30, 1998 and $4,128,000 from December 31, 1998 levels.
The Company at March 31, 1999 had cash and cash equivalents of $14,219,000 and
marketable securities of $8,427,000 for a total of $22,646,000, a decrease of
$1,482,000 from December 31, 1998. The decrease in working capital in the
quarter was principally due to decreases in the levels of cash and cash
equivalents, and of accounts receivable, due to lower sales levels. During the
second quarter, the Company entered into a worldwide distribution agreement with
IBM which allows for exclusive marketing and servicing rights for its Atomic
Force Microscope line of business. To secure this relationship, the Company made
a cash payment to IBM in that quarter. During the year, the Company has utilized
a portion of its cash position to fund its capital plan. Capital expenditures of
$3,026,000 were incurred during the first nine months of fiscal 1999. This
compares with capital spending levels of $7,678,000 in 1998. As of March 31,
1999, there were no borrowings outstanding under the Company's $3,000,000 bank
line of credit. Unused amounts under the line of credit are available for
short-term working capital needs. At March 31, 1999, the Company and its
subsidiaries have significant purchase commitments to certain vendors totaling
approximately $14.0 million.
The Company's backlog at March 31, 1999 totaled $26,954,000, an increase of 17%
from the backlog at December 31, 1998. The increase in the Company's backlog
from the $23,088,000 at December 31, 1998 resulted from increased order activity
for automation systems, as well as the Company's first orders for its new Atomic
Force Microscope products.
-6-
YEAR 2000
STATE OF READINESS, COSTS AND RISK ASSESSMENTS:
The Company is continuing to work at each of it's sites to reduce the impact of
the Year 2000 software anomaly on the processing of date sensitive information
by the Company's computerized information systems, as well as supplier and
customer date-sensitive information transferred to or by the Company.
The work has addressed our products, product design tools, manufacturing tools,
information systems, business infrastructure, material and service suppliers and
our customers.
Products:
The Company's products only use the date function of the underlying
computer system to date-stamp data files collected during the measurement
process. Representative systems have been tested using a test scenario published
by an industry trade organization that many of our customers support. Our
current products pass these tests. Older products may have underlying computers
that are not listed as Y2K compliant by their manufacturers. After installing
patches or upgrading as recommended by Zygo or the computer's manufacturer (as
listed on the Company's Y2K web site), these products appear to be Y2K ready
when tested with the trade organization's test scenario. The cost to assist our
customers ensure that products will continue to operate in the 21st century have
been insignificant and are not anticipated to become significant.
Product design tools:
This equipment and associated software have been inventoried and were
investigated through contact with the manufacturer or by testing, and were found
to be Y2K ready, contain no date functions or are not required for continued
operation of the business. Costs to conduct this investigation were
insignificant, and no significant additional expense is anticipated.
Manufacturing Tools:
This equipment and associated software have been inventoried and were
investigated through contact with the manufacturer or by testing, and were found
to be Y2K ready, have been upgraded to be Y2K ready, contain no date functions
or are not required for continued operation of the business. Costs to conduct
this investigation were insignificant, and no significant additional expense is
anticipated.
Information Systems:
Information Systems at all sites have been inventoried and were investigated
through contact with the manufacturer or by testing, and were found to be Y2K
ready. The main Information system software at each site is also certified by
the software's manufacturer to be Year 2000 complaint, with the exception of the
version running at the company's headquarters in Middlefield. An upgraded
version of that software, which is certified by the manufacturer to be Year 2000
compliant, is currently being tested and is planned to be operational by the end
of June, 1999. Costs to procure the updated version of software were included in
the maintenance agreement signed when the software was first installed five
years ago. Testing and implementation costs are not broken out separately as
they are part of the normal costs incurred when installing upgraded software.
Upgrades to this software have been tested and installed in the past with no
significant costs incurred, and are not anticipated to cause significant
additional expenses this time.
Desktop computers have been inventoried. They have been upgraded to run the
current operating system version and office suite, which are reported to be
compliant with minor issues by their manufacturer. The manufacturer's patches to
these systems have either been applied, or will be before the end of September,
1999. Older systems are being retired or upgraded as a normal course of
business. Continued operation of the business is not dependent on the
applications running on these desktop systems. Costs to conduct the
investigation were insignificant. Upgrading and replacement costs were not
significantly different from prior year levels. No significant additional
expense is anticipated.
Business Infrastructure:
Business infrastructure items, including our phone systems, network equipment,
servers, fax machines, copiers, HVAC, security systems and elevators have been
inventoried and investigated through contact with the manufacturer or by
testing, and were found to be Y2K ready or contain no date functions. Costs to
conduct this investigation were insignificant, and no additional expenses is
anticipated.
-7-
Suppliers:
Material and service suppliers have been surveyed at all sites. Included are the
suppliers of all materials, financial services, benefits providers and
utilities. More than 83% have responded and none currently indicate that they
expect their products or businesses to be adversely impacted by the Year 2000
issue. Less than 1% indicate that they have no Year 2000 plan. Our purchasing
function has reviewed the suppliers for criticality to the business and does not
anticipate that there will be a significant impact on the Company's ability to
provide products and services to our customers.
Of most concern to the Company are the suppliers of utilities such as power,
water and sewage. Outages could prevent workers from operating the business.
Latest investigations of the utility's Year 2000 efforts indicate that while
they cannot guarantee there will be no outages of service, they do not expect
the outages to be prolonged and are making plans to provide rapid restoration of
service.
Customers:
Our most significant customers have active Year 2000 programs and have also
asked us for information regarding our Year 2000 program as part of their
supplier assessment process. Reviewing their public reports indicates that they
expect to be able to continue to satisfy their customers's needs in the 21st
century. However, it is not possible for the Company to predict all of the
impacts that the Year 2000 may have on our customer's business.
COMPANY'S CONTINGENCY PLANS
The Company believes that the largest risk to our customers may be the inability
to deliver products or services in a timely manner in early January, 2000 due to
delays in receipt of material or our inability to process the material because
of the outage of a critical utility supplier. Of less concern is the failure of
one of our internal business systems.
To minimize the material risks, items required for products scheduled for
shipment in early January 2000 will be scheduled in during late 1999.
The risk posed by our utility suppliers is reduced by the fact that January 1,
2000 falls on a Saturday and is a Holiday, when most operations of the business
will be suspended. Normal operations are scheduled to resume on Monday, January
3. It is anticipated that this will allow time for any utility outages to be
restored. Plans are being formulated to detect any unanticipated Year 2000
issues internal to the Company, and that they are corrected in time for the
return of the workforce on January 3, 2000.
Our internal business systems are required for efficient operation of the
business. Failure of the software would, however, not suspend operations.
Transaction will be recorded manually. This process has been used on occasions
when the systems have been unavailable for use due to equipment failure.
SUMMARY
Achieving Year 2000 compliance is dependent on many factors, some of which are
not completely within the Company's control. There can be no assurance that the
Company will be able to identify all aspects of its business that are subject to
Year 2000 problems of customers, suppliers or internal systems that affect the
Company's business. There also can be no assurance that the Company's software
suppliers are correct in their assertions that the software is Year 2000
compliant, or that the companies estimate of the costs relating to the Year 2000
issue will ultimately prove to be accurate. Should either the Company's internal
systems or those of critical suppliers fail to achieve Year 2000 compliance, or
the Company's estimate of the costs relating to the Year 2000 issue prove to be
materially inaccurate, the Company's business and its results could be adversely
affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently does not deal in derivative financial or commodity
instruments for the purpose of managing financial exposures related to interest
rates, foreign currency exchange rates, commodity prices or other market risks.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements which are subject to a number of
risks and uncertainties that may cause actual results to differ materially from
expectations. These uncertainties include, but are not limited to, general
economic conditions, competitive conditions in markets served by the Company,
most notably high technology markets such as data storage and semiconductor, and
economic and political developments in countries where the Company conducts
business.
-8-
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule.
(b) 1. None.
-9-
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/ GARY K. WILLIS
--------------------------------------
Gary K. Willis
Chairman and CEO
/s/ J. BRUCE ROBINSON
--------------------------------------
J. Bruce Robinson
President
/s/ KEVIN M. MCGUANE
--------------------------------------
Kevin M. McGuane
Vice President, Finance
and Chief Financial Officer
Date: May 14, 1999
EXHIBIT INDEX
Exhibit Description Page
- ------- ------------ ----
27 Financial Data Schedule for the quarterly report on Form 10-Q for
the period ended March 31, 1999.