UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed from
last report)
Indicate by check mark whether the registrant 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
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.
17,561,588 shares of Common Stock, $.10 Par Value, at February 3, 2003
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.
2
PART I - Financial Information
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------------------ -----------------------------
Dec. 27, Dec. 30, Dec. 27, Dec. 30,
2002 2001 (1) 2002 2001 (1)
--------------- ------------- -------------- -------------
Net sales
Products $ 21,852 $ 17,868 $ 39,553 $ 37,572
Development services 4,458 - 7,166 -
--------------- ------------- -------------- -------------
26,310 17,868 46,719 37,572
--------------- ------------- -------------- -------------
Cost of goods sold
Products 13,664 12,654 24,656 25,375
Development services 3,651 - 5,702 -
--------------- ------------- -------------- -------------
17,315 12,654 30,358 25,375
--------------- ------------- -------------- -------------
Gross profit 8,995 5,214 16,361 12,197
Selling, general, and administrative expenses 5,294 6,091 10,754 11,358
Research, development, and engineering expenses 3,188 5,641 6,186 9,805
Amortization of intangibles - 185 104 370
Exit costs for Automation Systems Group - 1,920 - 1,920
--------------- ------------- -------------- -------------
Operating profit (loss) 513 (8,623) (683) (11,256)
--------------- ------------- -------------- -------------
Gain on sale of Automation Systems Group - 6,117 - 6,117
Other income (expense):
Interest income 248 288 492 843
Miscellaneous income (expense), net 17 (260) (167) (180)
--------------- ------------- -------------- -------------
Total other income 265 28 325 663
--------------- ------------- -------------- -------------
Earnings (loss) from continuing operations
before income taxes and minority interest 778 (2,478) (358) (4,476)
Income tax (expense) benefit (301) 1,084 131 2,003
Minority interest 87 82 231 152
--------------- ------------- -------------- -------------
Earnings (loss) from continuing operations 390 (1,476) (458) (2,625)
--------------- ------------- -------------- -------------
Discontinued TeraOptix operations, net of tax (462) (1,543) (2,144) (2,765)
Charges and related adjustments on the disposal of
TeraOptix, net of tax 234 - (9,118) -
--------------- ------------- -------------- -------------
Loss from discontinued operations (228) (1,543) (11,262) (2,765)
--------------- ------------- -------------- -------------
Net earnings (loss) $ 162 $ (3,019) $ (11,720) $ (5,390)
=============== ============= ============== =============
Earnings (loss) per share - Basic and Diluted:
Continuing operations $ 0.02 $ (0.08) $ (0.03) $ (0.15)
Discontinued operations, net of tax (0.01) (0.09) (0.64) (0.16)
--------------- ------------- -------------- -------------
Net earnings (loss) $ 0.01 $ (0.17) $ (0.67) $ (0.31)
=============== ============= ============== =============
Weighted average shares outstanding:
Basic 17,511 17,390 17,510 17,390
=============== ============= ============== =============
Diluted 17,706 17,390 17,510 17,390
=============== ============= ============== =============
See accompanying notes to consolidated financial statements.
(1) The consolidated statements of operations for the three and six
month-periods ended December 30, 2001 have been reclassified to conform
with the current period presentations of the discontinued operations
and loss on disposal of TeraOptix.
3
CONSOLIDATED BALANCE SHEETS
(Thousands)
Dec. 27, 2002 June 30, 2002
(Unaudited)
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 35,352 $ 28,513
Restricted cash 518 1,225
Marketable securities 10,681 8,734
Receivables 16,166 21,241
Income tax receivable 1,935 -
Inventories 21,712 23,612
Prepaid expenses 1,080 1,444
Deferred income taxes 4,742 4,899
Assets of discontinued unit held for sale 13,317 -
----------- -----------
Total current assets 105,503 89,668
Property, plant, and equipment, net 26,251 55,045
Deferred income taxes 26,086 19,981
Intangible assets, net 4,801 4,507
----------- -----------
Total assets $ 162,641 $ 169,201
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 11,792 $ 837
Accounts payable 5,578 5,020
Progress payments received from customers 5,230 368
Accrued salaries and wages 3,407 3,451
Other accrued liabilities 5,396 5,132
Income taxes payable - 929
----------- -----------
Total current liabilities 31,403 15,737
Long-term debt, excluding current portion - 11,374
Other long-term liabilities 1,056 1,115
Minority interest 1,200 970
----------- -----------
Total liabilities 33,659 29,196
----------- -----------
Stockholders' equity:
Common Stock, $.10 par value per share:
40,000 shares authorized;
17,960 shares issued (17,892 at June 30, 2002)
17,513 shares outstanding (17,445 at June 30, 2002) 1,796 1,789
Additional paid-in capital 137,862 137,390
Retained earnings (accumulated deficit) (3,739) 7,981
Accumulated other comprehensive income (loss):
Currency translation effects (841) (1,369)
Net unrealized loss on swap agreement (861) (515)
Net unrealized gain on marketable securities 52 16
----------- -----------
134,269 145,292
Less treasury stock of 447 common shares, at cost: 5,287 5,287
----------- -----------
Total stockholders' equity 128,982 140,005
----------- -----------
Total liabilities and stockholders' equity $ 162,641 $ 169,201
=========== ===========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands)
Six Months Ended
-----------------------------
Dec. 27, 2002 Dec. 30, 2001
------------- -------------
Cash provided by (used for) operating activities:
Net loss $ (11,720) $ (5,390)
Adjustments to reconcile net loss to cash
provided by (used for) operating activities:
Loss from discontinued operations 11,262 2,765
Depreciation and amortization 2,923 3,113
Gain on sale of Automation Systems Group - (6,117)
Loss on disposal of assets 393 160
Deferred income taxes (347) (3,339)
Non-cash compensation charges related to stock options 38 45
Changes in operating accounts:
Receivables 3,466 10,253
Costs in excess of billings - (1,772)
Inventories 1,086 (2,127)
Prepaid expenses 364 331
Accounts payable and accrued expenses 4,782 (4,266)
Minority interest 230 152
---------- ----------
Net cash provided by (used for) continuing operations 12,477 (6,192)
Net cash used for discontinued operations (2,908) (1,610)
---------- ----------
Net cash provided by (used for) operating activities 9,569 (7,802)
---------- ----------
Cash used for investing activities:
Additions to property, plant, and equipment (1,966) (5,301)
Investment in marketable securities (3,477) (5,426)
Investments in other assets (652) (139)
Proceeds from sale of Automation Systems Group, net of cash sold ($88) - 11,305
Receivables related to sale of Automation Systems Group - (772)
Interest and restricted cash from sale of Automation Systems Group 707 -
Proceeds from the sale or maturity of marketable securities 1,600 4,221
---------- ----------
Net cash provided by (used for) continuing operations (3,788) 3,888
Net cash provided by (used for) discontinued operations 1,036 (6,221)
---------- ----------
Net cash used for investing activities (2,752) (2,333)
---------- ----------
Cash provided by financing activities:
Employee stock purchase 441 -
Exercise of employee stock options - 514
Issuance and repurchase of common stock - (270)
---------- ----------
Net cash provided by continuing operations 441 244
Net cash used for discontinued operations (419) -
---------- ----------
Net cash provided by financing activities 22 244
---------- ----------
Net increase (decrease) in cash and cash equivalents 6,839 (9,891)
Cash and cash equivalents, beginning of period 28,513 52,630
---------- ----------
Cash and cash equivalents, end of period $ 35,352 $ 42,739
========== ==========
See accompanying notes to consolidated financial statements.
5
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 December
27, 2002 are not necessarily indicative of the results to be expected for the
full fiscal year.
The Consolidated Balance Sheet at December 27, 2002, the Consolidated Statements
of Operations for the three and six months ended December 27, 2002 and December
30, 2001, and the Consolidated Statements of Cash Flows for the six months ended
December 27, 2002 and December 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 Six Months Ended
------------------------------------ ------------------------------------
December 27, December 30, December 27, December 30,
2002 2001 2002 2001
----------------- --------------- --------------- -----------------
Basic weighted average shares 17,511 17,390 17,510 17,390
outstanding
Dilutive effect of stock options 195 - - -
----------------- --------------- --------------- -----------------
Diluted weighted average shares
outstanding 17,706 17,390 17,510 17,390
================= =============== =============== =================
For the six months ended December 27, 2002 and the three and six months ended
December 30, 2001, the Company recorded net losses. Due to these net losses,
stock options to acquire 324 shares of common stock for the three months ended
December 30, 2001, and 183 shares and 328 shares of common stock for the six
months ended December 27, 2002 and December 30, 2001, respectively, were
excluded from the computation of diluted earnings per share because of the
anti-dilutive effect on loss per share.
6
Comprehensive Income (Loss)
The Company's total comprehensive income (loss) were as follows:
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
December 27, December 30, December 27, December 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) $162 $(3,019) $(11,720) $(5,390)
Unrealized gain (loss) on
marketable securities 7 (22) 36 29
Unrealized gain (loss) on swap
agreement (25) 305 (346) (594)
Foreign currency translation effect (105) (520) 528 393
------------ ------------ ------------ -----------
Comprehensive income (loss) $39 $(3,256) $(11,502) $(5,562)
============ ============ ============ ===========
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. At December 27, 2002 and June 30, 2002, inventories were as
follows:
December 27, June 30,
2002 2002
----------- -------------
Raw materials and manufactured parts $13,614 $15,114
Work in process 7,398 8,477
Finished goods 700 21
----------- -------------
$21,712 $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 December 27, 2002 and June 30, 2002,
property, plant, and equipment were as follows:
December 27, June 30,
2002 2002
------------- ----------
Land and land improvements $1,460 $3,822
Buildings and building improvements 9,697 25,252
Machinery, equipment, and office furniture 39,211 47,640
Leasehold improvements 164 237
Construction in progress 1,048 2,878
------------- ----------
51,580 79,829
Accumulated depreciation (25,329) (24,784)
------------- ----------
$26,251 $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 $13,317 of machinery, equipment, and office furniture
and buildings and building improvements to current assets, as assets held for
sale (See note 3).
7
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 in our fiscal year 2003 did
not have a material effect on our results of operations or statements of
financial position.
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 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.
8
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a material effect on our financial
position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which addresses the alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. If a company adopts the recognition provisions of SFAS
No. 148 in a fiscal year beginning before December 16, 2003, that change in
accounting principle shall be reported using one of three methods: Prospective
Method, Modified Prospective Method or Retroactive Restatement Method. If a
company adopts the recognition provisions of SFAS No. 148 for fiscal years
beginning after December 15, 2003, only the Modified Prospective Method and
Retroactive Restatement Method may be used. In the absence of a single
accounting method for stock-based employee compensation, SFAS No. 148 requires
disclosure of comparable information for all companies regardless of whether,
when, or how a company adopts the fair value based method of accounting. SFAS
No. 148 is effective for fiscal years ending after December 15, 2002 and interim
periods beginning after December 15, 2002. Management is currently assessing the
impact that this SFAS will have on our results of operations and financial
position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company is
currently evaluating the provisions of the Interpretation, but believes its
adoption will not have a material impact on its financial statements.
9
NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS
On December 12, 2001, the Company sold its Automation Systems Group in Longmont,
Colorado, to Brooks Automation, Inc. ("Brooks") 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, inventory write-downs
of $808, and tax expense of $1,288. As of December 27, 2002, $518 remained in
escrow pending the disposition of certain inventory issues related to the 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. During the second quarter of fiscal 2003,
the Company reduced reserves associated with selling costs of the equipment and
facility by $469. The remaining value of the equipment and facility of $13,317
at December 27, 2002 represents the estimated fair market value for the
remaining assets to be disposed 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 the remaining
assets within the next twelve months. Proceeds from the sale of the facility
will be used to pay down the related mortgage loan. The mortgage has been
reclassified to current liabilities based on the expectation that the mortgage
loan would be repaid within twelve months. The results and loss on disposal of
the TeraOptix business unit have been presented as separate line items in the
accompanying consolidated statements of operations as discontinued operations,
net of tax, for all periods presented.
The components of cash flow from discontinued operations for the six months
ended December 27, 2002 and December 30, 2001 are as follows:
Dec. 27, Dec. 30,
2002 2001
------------ ------------
Cash flow from operating activities from discontinued operations:
Loss from discontinued operations $(2,144) $ (2,765)
Depreciation and amortization 379 483
Receivables 611 (2)
Income taxes (1,120) -
Inventories 164 (17)
Prepaid expenses - 31
Accounts payable and accrued expenses (798) 660
------------ ------------
Net cash used for operating activities from discontinued operations $(2,908) $ (1,610)
------------ ------------
Cash flow from investing activities from discontinued operations:
Additions to property, plant, and equipment $ - $ (6,221)
Proceeds from sale of assets 1,036 -
------------ ------------
Net cash provided by (used for) investing activities from discontinued operations $ 1,036 $ (6,221)
------------ ------------
Cash flow from financing activities from discontinued operations:
Payment of long-term debt $ (419) $ -
------------ ------------
Net cash used for financing activities from discontinued operations $ (419) $ -
------------ ------------
10
The mortgage loan has a balance of $11,792 as of December 27, 2002, with
interest at LIBOR plus 150 basis points (approximately 2.9% in total at December
27, 2002). Interest only payments were made through February 14, 2002. The
mortgage principal, amortizing on a 15-year level amortization schedule
requiring monthly principal and interest payments, is payable in full on May 14,
2007. The mortgage loan agreement contains financial covenants which, among
others, relate to debt service and consolidated debt ratios. As of December 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 December 27, 2002, the market value of the
agreement is ($1,389) and is recorded as a liability with a corresponding charge
to stockholders' equity, net of taxes.
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 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 Six Months Ended
------------------------------------- -----------------------------------------
December 27, December 30, December 27, December 30,
2002 2001 2002 2001
---------------- ---------------- ------------------ ------------------
Semiconductor
Sales $15,589 $8,118 $26,339 $18,503
Gross profit 5,988 1,729 10,166 5,660
Gross profit as a % of sales 38% 21% 39% 31%
Industrial
Sales $10,721 $9,750 $20,380 $19,069
Gross profit 3,007 3,485 6,195 6,537
Gross profit as a % of sales 28% 36% 30% 34%
Total
Sales $26,310 $17,868 $46,719 $37,572
Gross profit 8,995 5,214 16,361 12,197
Gross profit as a % of sales 34% 29% 35% 32%
11
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, and depreciation
and amortization are U.S. based. The Company's sales by geographic area were as
follows:
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
December 27, December 30, December 27, December 30,
2002 2001 2002 2001
---------- ----------- ----------- -----------
Americas (primarily United States) $ 7,416 $ 9,613 $14,255 $19,236
Far East:
Japan 14,407 3,605 23,473 9,485
Pacific Rim 2,572 1,379 4,113 2,766
---------- ----------- ------------ -----------
Total Far East $16,979 $ 4,984 $27,586 $12,251
Europe and Other (primarily Europe) 1,915 3,271 4,878 6,085
---------- ----------- ------------ -----------
Total $26,310 $17,868 $46,719 $37,572
========== =========== ============ ===========
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 $15,290 (58% of net sales) and $24,290 (52% of net sales), for the
three and six months ended December 27, 2002, respectively, as compared to
$1,837 (10% of net sales) and $6,632 (18% of net sales) for the comparable prior
year periods. 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 December 27, 2002 and June 30, 2002, there were approximately, in the
aggregate, $4,967 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 three and six months ended
December 27, 2002, the Company recognized revenue in the semiconductor segment
of $4,458 and $7,166, respectively, for this contract.
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 assets is greater
than the estimated future cash flows, the assets are written down to the
estimated fair value. We determine the estimated fair value of the assets based
on a current market value of the assets. If a current market value is not
readily available, a projected discounted cash flow method is applied using a
discount rate determined by
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.
We have not guaranteed any obligations of a third party.
Results of Operations
As previously announced the Company has discontinued its telecommunications-
focused TeraOptix business unit and is 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 all periods presented. In
addition, the loss on disposal of the business, net of tax, including
adjustments to original estimates, has been recorded as a separate line item for
the second quarter and first half of fiscal 2003. The consolidated statements of
operations for the second quarter and first half of fiscal 2002 have been
reclassified to conform with the current period presentations of the
discontinued operations and loss on disposal of TeraOptix.
Net sales of $26.3 million for the second quarter of fiscal 2003 increased by
$8.4 million, or 47%, from the comparable prior year period of $17.9 million.
Net sales of $46.7 million for the first half of fiscal 2003 increased by $9.1
million, or 24%, from the comparable prior year period of $37.6 million. Net
sales included $4.5 million and $7.2 million for the second quarter and first
half of fiscal 2003, respectively, from a development services agreement. There
were no comparable sales in the prior year.
For the second quarter of fiscal 2003, net sales in the semiconductor segment
were $15.6 million, or 59% of total net sales, as compared to $8.1 million, or
45%, in the prior year period and net sales in the industrial segment were $10.7
million, or 41% of total net sales, as compared to $9.8 million, or 55%, in the
prior year period.
For the first half of fiscal 2003, net sales in the semiconductor segment were
$26.3 million, or 56% of total net sales, as compared to $18.5 million, or 49%,
in the prior year period and net sales in the industrial segment were $20.4
million, or 44% of total net sales, as compared to $19.1 million, or 51%, in the
prior year period.
Company sales in the Americas, substantially all of which are in the United
States, amounted to $7.4 million in the second quarter of fiscal 2003, a
decrease of $2.2 million, or 23%, from the second quarter of fiscal 2002 levels
of $9.6 million. This decrease was primarily due to continued weakness in the
semiconductor sector. The Company's sales outside the Americas amounted to $18.9
million in the second quarter of fiscal 2003, an increase of $10.6 million, or
128%, from the second quarter of fiscal 2002 levels of $8.3 million. Sales in
Japan during the second quarter of fiscal 2003 amounted to $14.4 million, an
increase of $10.8 million, or 300%, from the second quarter of fiscal 2002 sales
levels. This increase was primarily due to increased sales to Canon Inc. (see
related party transactions), including revenues of $4.5 million generated from a
recently signed development agreement. Sales in Europe/Other, primarily Europe,
amounted to $1.9 million, a decrease of $1.4 million, or 42%, from the
15
second quarter of fiscal 2002. Sales in the Pacific Rim, excluding Japan,
amounted to $2.6 million, an increase of $1.2 million, or 86%, from the second
quarter of fiscal 2002 sales levels.
Company sales in the Americas, substantially all of which are in the United
States, amounted to $14.3 million in the first half of fiscal 2003, a decrease
of $4.9 million, or 26%, from the first half of fiscal 2002 levels of $19.2
million. This decrease was primarily due to continued weakness in the
semiconductor sector. The Company's sales outside the Americas amounted to $32.4
million in the first half of fiscal 2003, an increase of $14.0 million, or 77%,
from the first half of fiscal 2002 levels of $18.4 million. Sales in Japan
during the first half of fiscal 2003 amounted to $23.5 million, an increase of
$14.0 million, or 147%, from the first half of fiscal 2002 sales levels. This
increase was primarily due to increased sales to Canon Inc. (see related party
transactions), including revenues of $7.2 million generated from a recently
signed development agreement. Sales in Europe/Other, primarily Europe, amounted
to $4.9 million, a decrease of $1.2 million, or 20%, from the first half of
fiscal 2002. Sales in the Pacific Rim, excluding Japan, amounted to $4.1
million, an increase of $1.3 million, or 46%, from the first half of fiscal 2002
sales levels.
Sales in U.S. dollars, for the three and six months ended December 27, 2002,
were $24.0 million, or 91%, and $41.3 million, or 88%, respectively, 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.
Gross profit for the second quarter of fiscal 2003 totaled $9.0 million, an
increase of $3.8 million, or 73%, from $5.2 million in the second quarter of
fiscal 2002. Gross profit as a percentage of sales for the second quarters of
fiscal 2003 and fiscal 2002 were 34% and 29%, respectively. The increase in the
gross profit as a percentage of sales was primarily due to the write-down of
inventory in the second quarter of fiscal 2002 relating to the sale of the
Automation unit in Longmont, Colorado. Gross profit for the first half of fiscal
2003 totaled $16.4 million, an increase of $4.2 million, or 34%, from $12.2
million in the first half of fiscal 2002. Gross profit as a percentage of sales
for the first half of fiscal 2003 and fiscal 2002 were 35% and 32%,
respectively. Gross profit included $0.8 million and $1.5 million for the second
quarter and first half of fiscal 2003, respectively, from a development services
agreement with Canon Inc. (See related party transactions).
Selling, general and administrative expenses ("SG&A") in the second quarter of
fiscal 2003 amounted to $5.3 million, a decrease of $0.8 million, or 13%, from
$6.1 million in the second quarter of fiscal 2002. As a percentage of net sales,
SG&A for the second quarters of fiscal 2003 and fiscal 2002 were 20% and 34%,
respectively. SG&A in the first half of fiscal 2003 amounted to $10.8 million, a
decrease of $0.6 million, or 5%, from $11.4 million in the first half of fiscal
2002. As a percentage of net sales, SG&A for the first half of fiscal 2003 and
fiscal 2002 were 23% and 30%, respectively. The decrease is primarily due to
SG&A costs eliminated as a result of the sale of the Automation unit.
Research, development, and engineering expenses ("R&D") for the second quarter
of fiscal 2003 totaled $3.2 million, a decrease of $2.4 million, or 43%, from
$5.6 million in the comparable prior year period. R&D for the first half of
fiscal 2003 totaled $6.2 million, a decrease of $3.6 million, or 37%, from $9.8
million in the comparable prior year period. The
16
decrease was primarily related to the completion of several large research and
development projects in the semiconductor segment in the prior year and the
transfer of engineering resources to revenue producing projects in the current
year.
The Company recorded operating profit of $0.5 million in the second quarter of
fiscal 2003, as compared to an operating loss of $8.6 million in the second
quarter of fiscal 2002. The operating profit as a percentage of sales in the
second quarter of fiscal 2003 was 2%, as compared to an operating loss of 48% in
the second quarter of fiscal 2002. The Company recorded an operating loss of
$0.7 million in the first half of fiscal 2003, as compared to an operating loss
of $11.3 million in the first half of fiscal 2002. The operating loss as a
percentage of sales in the first half of fiscal 2003 was 1%, as compared to 30%
in the first half of fiscal 2002.
The income tax expense from continuing operations in the second quarter of
fiscal 2003 totaled $0.3 million, or 39% of pretax profits, which compares with
an income tax benefit of $1.1 million, or 44% of pretax losses, in the second
quarter of fiscal 2002. The change in tax rates is primarily attributable to a
decrease in expected R&D credits and anticipated taxable income in fiscal 2003.
The income tax benefit from discontinued operations in the second quarter of
fiscal 2003 totaled $0.3 million, or 43% of pretax losses, which compares with
$0.7 million, or 30% of pretax losses, in the second 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 second quarter
of fiscal 2003 totaled $0.1 million, or 33% of pretax losses. The income tax
benefit from continuing operations in the first half of fiscal 2003 totaled $0.1
million, or 37% of pretax losses, which compares with $2.0 million, or 45% of
pretax losses, in the first half of fiscal 2002. The change in tax rates is
primarily attributable 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 half of fiscal 2003 totaled $1.1 million, or 34% of
pretax losses, which compares with $1.2 million, or 30% of pretax losses, in the
first half 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 half of fiscal 2003 totaled $5.6 million, or 38% of
pretax losses.
The Company recorded net earnings of $0.2 million for the second quarter of
fiscal 2003 as compared to a net loss of $3.0 million for the second quarter of
fiscal 2002. On a diluted per share basis, the net earnings was $0.01 per share
for the second quarter of fiscal 2003 as compared to a net loss of $0.17 per
share for the second quarter of fiscal 2002. The net loss for the second quarter
of fiscal 2003 includes losses related to the operations of our discontinued
TeraOptix unit, net of tax ($0.4 million), and income related to the disposal of
our discontinued TeraOptix unit, net of tax ($0.2 million). The earnings from
continuing operations for the second quarter of fiscal 2003 was $0.4 million, or
$0.02 per share, compared to a loss of $1.5 million, or $0.08 per share, for the
second quarter of fiscal 2002. The Company recorded a net loss of $11.7 million
for the first half of fiscal 2003 as compared to a net loss of $5.4 million for
the first half of fiscal 2002. On a diluted per share basis, the net loss was
$0.67 per share for the first half of fiscal 2003 as compared to a net loss of
$0.31 per share for the first half of fiscal 2002. The net loss for the first
half of fiscal 2003 includes losses related to the operations of our
discontinued TeraOptix unit ($2.1 million) and charges related to the disposal
of our discontinued TeraOptix unit ($9.1 million). The loss from continuing
operations for the first half of fiscal 2003 was $0.5 million, or $0.03 per
share, as compared to a loss of $2.6 million, or $0.15 per share, for the first
half of fiscal 2002. The net loss for the second quarter and first half of
fiscal 2002 includes operating results of the Automation Systems Group in
Longmont, Colorado, which was sold in December 2001.
17
Backlog at December 27, 2002 totaled $46.8 million, an increase of $3.9 million,
or 9%, from $42.9 million at September 27, 2002. Backlog at December 27, 2002
increased $0.7 million, or 2%, from $46.1 million at December 30, 2001. Orders
for the second quarter of fiscal 2003 totaled $30.1 million, net of debookings
of $0.4 million. Net orders by segment for the second quarter of fiscal 2003
consisted of $16.4 million, or 54%, in the semiconductor segment and $13.7
million, or 46%, 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 $15.3 million (58% of net sales) and $24.3 million (52% of net
sales), for the three and six months ended December 27, 2002, respectively, as
compared to $1.8 million (10% of net sales) and $6.6 million (18% of net sales)
for the comparable prior year periods. Selling prices of products sold to Canon
Inc. and Canon Sales Co., Inc. are based, generally, on terms customarily given
to distributors. At December 27, 2002 and June 30, 2002, there was, in the
aggregate, $5.0 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 three and six months
ended December 27, 2002, the Company recognized revenue of $4.5 million and $7.2
million, respectively, for this contract in the semiconductor segment.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 2002, working capital was $74.1 million, an increase of $0.2
million from $73.9 million at June 30, 2002. The Company maintained cash, cash
equivalents, and marketable securities (excluding restricted cash of $0.5
million) at December 27, 2002 totaling $46.0 million. This represents an
increase of $8.8 million from June 30, 2002. The increase primarily was due to
progress payments received from customers, a reduction in accounts receivable
resulting from increased collection efforts, and a reduction in inventory.
The Company is in the process of disposing of the property and equipment of the
discontinued TeraOptix unit located in Westborough, Massachusetts. The assets,
reclassified to current assets as assets held for sale, are expected to be sold
within twelve months. The Company intends to use the proceeds from the sale of
the facility to pay down the mortgage loan described below.
As of December 27, 2002 the mortgage balance on the Company's Westborough,
Massachusetts facility was $11.8 million. The mortgage has an interest rate of
LIBOR plus 150 basis points (approximately 2.9% in total at December 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 $0.4
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
18
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 December 27, 2002.
Acquisitions of property, plant, and equipment were $2.0 million for the six
months ended December 27, 2002.
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.
19
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
(2.9% in total at December 27, 2002) which is payable in full on May 14, 2007.
As of December 27, 2002, the mortgage loan had a balance of $11.8 million. 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. Due to the existence of the swap agreement, we do not
believe that a material interest rate risk exposure exists.
Exchange Rate Sensitivity
Approximately 91% and 88% of the Company's sales for the three and six months
ended December 27, 2002, respectively, were in U.S. dollars. At December 27,
2002, the Company's backlog included orders in U.S. dollars of $42.2 million, or
90% 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 has exited the telecommunications segment of its business and is
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 December 27, 2002 of $11.8
million and a swap agreement to fix the interest rate on the mortgage at 7% has
a balance at December 27, 2002 of $1.4 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.
20
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 would have to record a loss on the
sale of the facility. 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.
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.
21
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on November 13, 2002. The following
matters were submitted to a vote of the Company's stockholders:
Proposal No. 1 - Adoption to amend our Certificate of Incorporation to
create and provide for a classified Board of Directors.
For Against Abstain/Not Voted
--- ------- -----------------
5,675,234 6,772,834 3,713,222
Proposal No. 2 - Election of Board of Directors
The following individuals, all whom were Zygo Corporation directors
immediately prior to the vote, were elected as a result of the
following vote:
----------------------------------------------------------------
For Against
----------------------------------------------------------------
Paul F. Forman 14,853,867 1,307,423
----------------------------------------------------------------
R. Clark Harris 14,784,584 1,376,706
----------------------------------------------------------------
Seymour E. Liebman 14,678,302 1,482,988
----------------------------------------------------------------
Robert G. McKelvey 14,648,355 1,512,935
----------------------------------------------------------------
J. Bruce Robinson 11,763,885 4,397,405
----------------------------------------------------------------
Robert B. Taylor 14,839,600 1,321,690
----------------------------------------------------------------
Bruce Worster 15,437,817 723,473
----------------------------------------------------------------
Carl A. Zanoni 15,585,356 575,934
----------------------------------------------------------------
Proposal No. 3 - Adoption to amend our Certificate of Incorporation to
authorize 2,000,000 shares of a new class of "blank check" preferred
stock and 40,000,000 additional shares of our Common Stock.
For Against Abstain/Not Voted
--- ------- -----------------
6,969,683 5,282,154 3,909,453
Proposal No. 4 - Adoption of the Zygo Corporation 2002 Equity Incentive
Plan.
For Against
--- -------
6,980,494 5,270,529
Due to the application of the Delaware General Corporation Laws (the
Company is incorporated under the laws of Delaware), insufficient votes
were cast to approve Proposals Nos. 1 and 3. There were no other matters
submitted to a vote of our stockholders.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Master Reaffirmation and Amendment No. 3 to Loan Documents dated
November 21, 2002, between Fleet National Bank and the Company.
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 October 22, 2002, the Company filed a Current Report on Form 8-K with
respect to a development and manufacturing support services agreement
between Philips Electronics North America Corporation and the Company.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zygo Corporation
----------------
(Registrant)
/s/ J. BRUCE ROBINSON
---------------------------------------
J. Bruce Robinson
President, Chairman, and Chief
Executive Officer
/s/ RICHARD M. DRESSLER
---------------------------------------
Richard M. Dressler
Vice President, Finance, Chief
Financial Officer, and Treasurer
Date: February 7, 2003
24
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: February 7, 2003
/s/ J. Bruce Robinson
------------------------------
J. Bruce Robinson
Chairman, President, and
Chief Executive Officer
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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: February 7, 2003
/s/ Richard M. Dressler
-----------------------------
Richard M. Dressler
Vice President, Finance
Chief Financial Officer
26