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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 September 30, 1999
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 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.
11,466,722 Shares of Common Stock, $.10 Par Value, at November 8, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share amounts)
For the Three Months
Ended September 30,
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1999 1998
---- ----
Net sales ............................................. $17,901 $15,438
Cost of goods sold .................................... 10,576 10,064
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Gross profit .................................. 7,325 5,374
Selling, general and administrative expenses .......... 4,168 4,641
Research, development and engineering expenses ........ 2,018 2,271
Amortization of goodwill and other intangibles ........ 403 216
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Operating profit (loss) ....................... 736 (1,754)
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Other income (expense):
Interest income ............................... 264 310
Miscellaneous (expense), net .................. (60) (90)
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204 220
Earnings (loss) before income taxes ................... 940 (1,534)
Income tax expense (benefit) .......................... 354 (463)
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Net earnings (loss) (note 1) .......................... $ 586 $(1,071)
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Earnings (loss) per share:
Basic (1) .................................... $ .05 $ (.10)(2)
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Diluted (1) .................................. $ .05 $ (.10)(2)
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Weighted average number of shares:
Basic ......................................... 11,240 11,063
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Diluted ....................................... 12,156 11,063
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(1) The difference between basic shares outstanding and diluted shares
outstanding is the assumed conversion of common stock equivalents (stock
options) in the amount of 916,000 in the three months ended September 30,
1999.
(2) As per generally accepted accounting principles, the computation of the net
loss per share is based on the weighted average basic shares outstanding.
CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
ASSETS September 30, June 30,
1999 1999
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Current Assets:
Cash and cash equivalents ....................... $ 9,589 $13,020
Marketable securities ........................... 8,340 8,351
Receivables ..................................... 19,085 12,094
Inventories:
Raw materials and manufactured parts ........ 7,666 7,866
Work in process ............................. 4,094 4,622
Finished goods .............................. 518 2,985
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Total inventories ...................... 12,278 15,473
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Costs in excess of billings ..................... 1,226 660
Income taxes receivable ......................... 447 741
Prepaid expenses and taxes ...................... 1,055 799
Deferred income taxes ........................... 3,678 3,683
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Total current assets ................... 55,698 54,821
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Property, plant and equipment, at cost .............. 34,171 33,708
Less accumulated depreciation ....................... 17,870 17,460
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Net property, plant and equipment ............... 16,301 16,248
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Goodwill and other intangible assets, net ........... 9,608 9,939
Other assets ........................................ 939 819
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Total assets ........................... $82,546 $81,827
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................ $ 6,286 $ 4,989
Accrued expenses and customer
progress payments ............................. 4,906 6,251
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Total current liabilities .............. 11,192 11,240
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Deferred income taxes 2,213 2,213
Stockholders' Equity:
Common stock, $.10 par value per share:
15,000,000 shares authorized; 11,460,722
shares issued (11,402,422 at June 30, 1999) ..... 1,146 1,140
Additional paid-in capital ...................... 42,724 42,587
Retained earnings (note 1) ..................... 25,660 25,074
Currency translation effects .................... (15) (57)
Net unrealized gain on marketable securities .... (73) (69)
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69,442 68,675
Less treasury stock, at cost; 207,600 shares .... 301 301
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Total stockholders' equity ............. 69,141 68,374
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Total liabilities and
stockholders' equity ................. $82,546 $81,827
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1999 and 1998
(Thousands of dollars)
Cash provided by (used for) 1999 1998
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Operating activities:
Net earnings (loss) (note 1) ............................. $ 586 $(1,071)
Adjustments to reconcile net earnings (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization .......................... 1,267 1,047
Deferred income taxes .................................. (1) -
Loss on disposal of assets ............................. 52 99
Changes in operating accounts:
Receivables ........................................ (3,674) 2,346
Costs in excess of billings ........................ (566) 1,677
Inventories ........................................ (10) (128)
Prepaid expenses ................................... (256) (16)
Accounts payable and accrued expenses .............. 219 (6,195)
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Net cash (used for) operating activities ............... (2,383) (2,241)
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Cash provided by (used for)
investing activities:
Additions to property, plant and equipment ................ (989) (1,262)
Investment in marketable securities ....................... (248) (4,363)
Investment in other assets ................................ (204) -
Proceeds from maturity of marketable securities ........... 250 1,795
Cash acquired from acquisitions ........................... - -
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Net cash (used for) investing activities ............... (1,191) (3,830)
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Cash provided by (used for)
financing activities:
Repayment of long-term debt ............................... - -
Exercise of employee stock options ........................ 143 217
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Net cash provided by (used for) financing activities ... 143 217
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Net (decrease) in cash and cash equivalents ....................... (3,431) (5,854)
Cash and cash equivalents, beginning of year ...................... 13,020 22,023
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Cash and cash equivalents, end of quarter ......................... $ 9,589 $16,169
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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 September 30, 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, 1999 Annual
Report on Form 10-K405 including items incorporated by reference herein.
NOTE 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 stockholders' equity. Comprehensive income (loss) is defined as
net income plus nonshareholder direct adjustments to stockholders' equity which
consist of foreign currency translation adjustments and adjustments for the net
unrealized gains (losses) related to the Company's marketable equity securities.
For the three months ended September 30, 1999 and 1998, total comprehensive
income and loss amounted to $624,000 and $(974,000), respectively.
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 statement establishes standards using
a management approach, for reporting information regarding operating segments.
The Company has viewed its operations as one segment providing sales and service
in metrology, process control, and yield enhancement solutions for high
precision manufacturing industries. Substantially all of the Company's operating
results, assets, depreciation, and amortization are U.S. based. The Company's
export sales are as follows:
For the Three Months
Ended September 30,
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(Thousands of dollars) 1999 1998
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Far East:
Japan.............................................. $3,600 $5,104
Pac Rim ........................................... 2,629 603
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Total Far East......................................... 6,229 5,707
Europe and other....................................... 1,704 1,395
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Total.................................................. $7,933 $7,102
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NOTE 2: SUBSEQUENT EVENTS
On October 11, 1999, the Company announced it has reached an agreement in
principal with LOT-Oriel GmbH to establish a European joint venture. Zygo will
own a majority interest in this new company, called ZygoLOT GmbH. Completion of
the creation of the joint venture is contingent on finalizing definitive
documentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales in the three months ended September 30, 1999 totaled $17,901,000, an
increase of $2,463,000 or 16% from $15,438,000 in the three months ended
September 30, 1998. Net sales of the Company's instruments and systems increased
by 30% to approximately $12,270,000 and net sales of its modules and components
totaled approximately $5,631,000, a decrease of 7% from the comparable quarter
in the prior year. Net sales of instruments and systems were assisted by
the recovery of the semiconductor markets. Modules and components were impacted
by lower revenues associated with the optical components for the National
Ignition Facility (NIF).
Gross profit for the three months ended September 30, 1999, amounted to
$7,325,000, an increase of $1,951,000 from gross profit of $5,374,000 for the
comparable prior year period. For the three months ended September 30, 1999,
gross profit as a percentage of sales amounted to 41%, an increase of 6
percentage points from gross profit as a percentage of sales of 35% in the three
months ended September 30, 1998. The increase in gross profit and gross profit
as a percentage of sales were primarily due to sales volume increases,
particularly in automated reticle handling and automated reticle inspection
systems.
Selling, general and administrative expenses in the three months ended September
30, 1999, amounted to $4,168,000, a decrease of $473,000 from $4,641,000 in the
three months ended September 30, 1998. This decrease was primarily due to
reductions in bad debt expense associated with StorMedia filings made in 1998.
Partially offsetting these reductions were increased expenses associated with
new sales infrastructure in Europe, Japan and Chicago, Illinois. As a percentage
of sales, selling, general and administrative expenses decreased in the three
months ended September 30, 1999, to 23% as compared to 30% in the comparable
prior year period.
Research, development, and engineering ("R&D") expenses in the three months
ended September 30, 1999, totaled $2,018,000 or 11% of sales, as compared to
$2,271,000 or 15% of sales in the comparable prior year period. The decrease in
R&D expenses primarily resulted from cost reduction actions taken during the
quarter. Management has focused considerable attention on ensuring that
appropriate cost reductions be implemented while at the same time investing in
activities, which will enhance long-term benefits to the Company.
The Company's operating profit in the three months ended September 30, 1999 was
$736,000, as compared to an operating loss of $1,754,000 reported in the three
months ended September 30, 1998.
The Company reported net income of $586,000 in the three months ended September
30, 1999 versus a net loss of $1,071,000 in the three months ended September 30,
1998. The net earnings per share was $.05 for the quarter ending September 30,
1999 compared with a net loss on a per share basis in the comparable prior year
period of $(.10).
FINANCIAL CONDITION
At September 30, 1999, working capital was $44,506,000, an increase of $925,000
from the amount reported at June 30, 1999. The Company had cash and cash
equivalents of $9,589,000 and marketable securities amounting to $8,340,000 for
a total of $17,929,000 at September 30, 1999, a decrease of $3,442,000 from the
amount of cash and cash equivalents and marketable securities at June 30, 1999.
Receivables increased by $6,991,000 and inventory decreased by $3,195,000 from
the amounts reported at June 30, 1999. The increase in receivables and decrease
in inventory were impacted by an agreement with a former employee of the Company
for the outsourcing of the assembly, integration, testing and packaging of
certain confocal microscope systems. On July 8, 1999, the Company received a 2
year $3.3 million note in exchange for the book value of inventory sold.
Accounts payable increased by $1,297,000 in the first quarter of fiscal 2000 to
$6,286,000 primarily as a result of increased operating activity levels. Accrued
liability decreases resulted from the payment of June 30, 1999 accruals in the
first quarter. As of September 30, 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.
Backlog at September 30, 1999 totaled $31,171,000, an increase of $2,230,000 or
8% from June 30, 1999 and an increase of $5,651,000 or 22% from September 30,
1998. The Company had a positive
book-to-bill ratio at 1.12 in the quarter ended September 30, 1999. The backlog
of the Company's instrument and systems at September 30, 1999 increased by
$2,320,000 or 12% from that at June 30, 1999. The backlog of the Company's
modules and components decreased by $90,000 or 1% from the quarter earlier.
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
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 costs for assisting our
customers to 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 essential for the
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 essential for the 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 compliant. The system running the
Company's headquarters in Middlefield was upgraded to a version certified as
compliant by the supplier over the July 4th weekend, is operational, and is
handling dates in the next millennium correctly. 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 did not 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 as
of October 15 have been distributed and installed on all such systems. Older
systems have been 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 expense is
anticipated.
Suppliers:
Material and service suppliers have been surveyed at all sites. Included are the
more significant suppliers of 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.
The suppliers of utilities such as power, phone lines, water and sewage have
reported in the press and their web sites that they have assessed and corrected
systems that may be affected by the Year 2000 issues. Any outages caused by
unforeseen issues could prevent normal operation of the business. These
utility's 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 customer'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 customers' businesses.
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 or manufacturing equipment.
To minimize the material risks, items required for products scheduled for
shipment in early January 2000 will be delivered to the Company during late
1999. This does not represent a significant increase in inventory levels, and
therefore no significant additional costs are anticipated.
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.
Transactions could be recorded manually. This process has been used on occasions
when the systems have been unavailable for use due to equipment failure,
software bugs or upgrading.
Summary
Achieving Year 2000 readiness 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 Company's 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 readiness, 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
We are subject to interest rate risk on our investment portfolio.
A move in interest rates of 10% of our weighted-average worldwide interest rate
in 2000 affecting our financial investments as of September 30, 1999 would have
an insignificant effect on our pretax earnings. In 1999, the same move in the
interest rate affecting our interest sensitive investments would have had an
insignificant effect on our financial position, results of operations and cash
flows.
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule.
(b) 1. None.
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
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(Registrant)
/s/ GARY K. WILLIS
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Gary K. Willis
Chairman and Chief
Executive Officer
/s/ J. BRUCE ROBINSON
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J. Bruce Robinson
President
/s/ KEVIN M. MCGUANE
------------------------------------
Kevin M. McGuane
Vice President Finance, Treasurer,
and Chief Financial Officer
Date: November 8, 1999
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 Chief
Executive Officer
/s/ J. BRUCE ROBINSON
------------------------------------
J. Bruce Robinson
President
/s/ KEVIN M. MCGUANE
------------------------------------
Kevin M. McGuane
Vice President Finance, Treasurer,
and Chief Financial Officer
Date: November 8, 1999
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
27 Financial Data Schedule for the quarterly report, on Form 10-Q,
for the period ended September 30, 1999.