ITEM 1. BUSINESS
THE COMPANY
Zygo Corporation ("Zygo" or the "Company") delivers high performance metrology and automation solutions for manufacturers of semiconductor equipment and precision parts, and manufactures optical components, systems and fiber optic modules for next generation optical networks.
The Company has a successful track record in commercializing its product innovations. Since 1992, the Company has introduced over 50 new products and an extensive number of customer-specific applications. The Company received R&D Magazine's R&D 100 awards and Photonics Circle of Excellence awards for its NewView 100, Pegasus 2000, ZMI 2000, and Mesa product introductions in 1994, 1996, 1997, and 1998, respectively, and has expanded its product applications to end industries which have not historically used noncontact metrology products such as the precision machined parts industry.
On May 5, 2000, the Company acquired Firefly Technologies, Inc. ("Firefly"), which became a wholly-owned subsidiary of the Company under the name Zygo TeraOptix. Under the terms of the acquisition, the Company issued 2,303,937 shares of its common stock.
The following chart illustrates the combined strengths of the current Zygo structure and demonstrates the strategic thrust of the Company:
INTEGRATED CORE COMPETENCIES
A) METROLOGY AND YIELD ENHANCEMENT SOLUTIONS
[GRAPHIC OMITTED] AUTOMATED METROLOGY SENSOR APPLICATION SPECIFIC ENGINEERING SOLUTIONS - ---------------- -------------------------------- ------------- Yield High Parts Productivity Precision Analysis Handling Enhancing Metrology Software Automation Solutions
Improving the yields of manufacturing processes by providing application specific solutions for customers' precision manufacturing needs.
B) OPTICS AND OPTICAL COMPONENTS
[GRAPHIC OMITTED]
- ------------ ------------- --------------- Next Macro Wavefront Generation & Engineering & Optical Network Micro Optics Opto- Components Mechanical Modules & Assembly Semiconductor Optics & Assemblies - ------------ ------------- ---------------- Providing high precision optics, components and modules to the semi-conductor and telecom industries.
INDUSTRY OVERVIEW
Manufacturers in high precision industries are radically redesigning processes in order to compete more effectively in an increasingly demanding marketplace. These changes are being necessitated by (i) decreasing product geometries, (ii) increasing complexity of manufacturing processes, (iii) shortened product life cycles, (iv) declining product prices and (v) intensified global competition. These pressures on manufacturers to improve productivity and quality have required integration of high precision metrology and process control technologies directly into the manufacturing process in order to increase yields and quality control. High performance, noncontact metrology is an enabling technology for the semiconductor, data storage, optical manufacturing, and other high precision manufacturing industries.
Advancing technologies have required manufacturers in a variety of industries to produce smaller products with more precise tolerances and increased complexity of design geometries, not capable of adequately being measured by the devices and systems historically utilized. For example, contact profilers and visual qualitative inspection systems are inadequate for quantitative analysis of critical dimensions such as semiconductor line widths, photomask surface quality, and sub micron precision machine parts.
The trend towards miniaturization and tighter tolerances creates new challenges for manufacturers as they are forced to handle, measure, and test ever-smaller components. As piece part dimensions and tolerances become smaller, "nano technology scale" precision is necessitated and, to a greater extent than ever, automated measurement and control is required.
With on-line process control and yield improvement metrology solutions being enabling factors for manufacturers of precision components, the growth for yield enhancement solutions is expected to outpace the growth of the overall capital equipment market. Shortened product lifecycles, increased competition, and declining product prices in these industries, have forced these manufacturers to no longer depend solely on sales growth to fuel financial performance improvement, but rather to focus greater attention on the need to reduce production defects and significantly increase production yields. While the semiconductor industry is rather mature in its use of these types of tools, the telecom and
industrial markets' requirement for on-line automated metrology solutions is at an early stage of penetration, since manufacturers are just beginning to measure critical dimensions and surface topography of smaller parts to tighter tolerances.
With the acquisition of Firefly, the Company entered into the optical communications marketplace. The Optical Communications Industry is characterized by rapid expansion and growth, with both established and emergent companies rushing to create next-generation all-optical components, systems and networks that will replace existing bandwidth-constrained electrical-based systems. All-optical networks will transport and process information at significantly higher throughputs, and more efficiently. Multiple streams of information will travel within optical fibers at the speed of light, and be introduced or retrieved using DWDM (dense wavelength division multiplexing) systems, and routed to different locations by high-speed Optical Cross-Connect Switches.
The availability of critical components and fiber-optic modules is presently pacing the growth of this industry. The strong demand and short supply of these components has created a significant opportunity for those who can efficiently produce and deliver optical components. The limited number of manufacturers of optical components creates a problem for customers who typically want multiple sources for critical components and modules. Items that are in high-demand include dielectric collimator lenses, filters, switches, beam combining modules, and fiber arrays.
The Company believes this situation creates an opportunity for new entrants who can rapidly fill the voids; and Zygo TeraOptix, with its assembled talent pool and vertical manufacturing capabilities, experienced in the technically analogous industries of optical data storage and recording head fabrication, is well poised to address this dynamic market.
STRATEGY
Zygo's objective has been to apply its core competencies in precision optics, metrology and automation to expand its position as a leading worldwide supplier of OEM products and instruments for the semiconductor, optical telecommunications, and industrial manufacturing markets. Zygo dedicates substantial resources to research, process and product development to enable it to compete effectively in its market areas. Key elements of Zygo's strategy include:
o MAINTAIN ENHANCED LEADERSHIP THROUGH INNOVATIVE TECHNICAL SOLUTIONS
Zygo's core competencies in high precision measurement, including interferometry, confocal scanning optical microscopy, systems integration, automated piece parts handling, and precision optic components are directly applied to meet the higher measurement precision, accuracy, resolution, data acquisition and data analysis requirements in the most demanding manufacturing processes of its customers. Throughout its history, Zygo has met its customers' requirements through innovation and invention, with 93 United States patents and 12 foreign patents, and 42 United States patent applications and 48 foreign patent applications pending.
o FOCUS ON NEW MARKETS
Over the course of its 30-year history, Zygo has developed an Intellectual Property portfolio around the use of light for metrology and motion control. Zygo possesses patents used in metrology instruments that can be re-deployed into modules for optical communications. As an example, the Company's management believes that metrology can increase the manufacturers ability to deliver high yields in the production of optical components.
Leveraging the assembled capabilities and talent pool, Zygo through its new TeraOptix subsidiary plans to deliver components and modules to optical communications customers, offering suitable alternative solutions at superior quality and competitive prices. As such, TeraOptix intends to operate at the highest level of integration to best optimize each given value proposition. Examples include a collimator lens and fiber-lens offering, electro-optic fiber-optic assembly and a polarizing beam combining module. A major internal development effort centers around the creation of a 1024 X 1024 optical cross-connect switch that will draw on our abilities to fabricate MEMs switches, microlenses and fiber-arrays, and integrate them.
In response to a recent customer need for a beam combiner, Zygo TeraOptix created a set of base process technologies that can be used to address a broad range of modules. Specific capabilities created include a wavefront-guided alignment and in-situ component attachment schemes that enable TeraOptix to create hermetically sealed, epoxy-free low-loss modules.
Zygo is also focused on expanding its presence in new high precision manufacturing markets where yield improvement process control solutions are enabling technologies. For example, the Company's MESA system has broadened the capabilities of Zygo's large aperture products and now allows manufacturers of precision machined parts to use interferometry to measure the surface topography of their parts. Zygo's history of innovation is across products and technologies, exhibited by the Company's ability to integrate nano-metrology products with automated discrete parts handling. Examples include Zygo's automated mask handling system, which incorporates motion control and precision parts handling with optical components and robotics, and the Company's reticle inspection system, which utilizes parts handling robotics and optical microscopy. The combination of several of the Company's core technologies results in automated precision metrology and process control solutions that can be placed directly in the production process.
o BROADEN CUSTOMER RELATIONSHIPS
One of Zygo's strategies is to form close technical and strategic relationships with leading companies in its targeted end markets. This is accomplished by working closely with its customers to provide high precision metrology and process control solutions integrated directly into the manufacturing process. Zygo has developed significant brand-name recognition among leading users of microfabrication technology, and several of its customers are repeat purchasers of multiple product families across technological platforms. Zygo intends, by forming closer customer alliances, to better understand the evolving needs of its customers and, through the application of innovative technology, to provide high performance, high quality, cost effective solutions to the production improvement requirements in the shortest possible cycle time. Through this solution-sales cycle, which further promotes a closer and longer term partnership relationship between Zygo and its customers, Zygo strives to attain a preferred position with major industry leaders.
o SUPPLY QUALITY SOLUTIONS RAPIDLY
Zygo seeks to deliver high quality and high reliability system solutions in a minimal cycle time. To this end, Zygo has installed an enterprise-wide total quality process where employee-led teams work to improve the effectiveness and efficiency of its processes while searching out and removing areas of poor quality and waste. Zygo's operations strategy focuses on internally providing those manufacturing services that add value for the customer.
o PROVIDE UNINTERRUPTED WORLDWIDE SERVICE AND SUPPORT
To support its customers' continuous manufacturing processes, Zygo intends to ensure optimal operation and reliable performance of its production control equipment through its worldwide customer support service group. Through a worldwide network of service representatives, Zygo provides 24-hour on-demand maintenance services. Its service engineers have a unique skill set, including optical and electrical component repair, software, application and system integration diagnostic and problem solution capabilities.
PRODUCTS AND APPLICATIONS
Zygo manufactures high performance, noncontact metrology instruments and systems and accessories, and optical components and systems to precise tolerances both for sale and for use as key elements in its own products. The Company's products are based on its core competencies: (i) interferometry, (ii) confocal scanning optical microscopy, (iii) systems integration, (iv) automated piece parts handling, (v) precision optics and modules, and (vi) MEMS manufacturing.
Zygo's product strategy with respect to metrology and yield enhancement is to apply its high precision automated metrology systems to its customers' production lines in order to improve yields and increase productivity. The Company's products employ such features as automated parts handling, auto-focus, and automated parts alignment, thereby removing the operator from the measurement process and improving throughput and product yields. The Company's instruments and systems utilize modular designs where entire product families share several, if not all, of the same components, modules, and software. Since 1992, Zygo has redesigned all of its instruments and continues to upgrade its systems and their features, particularly their software capabilities.
Since its inception, Zygo has been broadening its ability to provide productivity enhancing solutions through in-house development of leading-edge technological innovations and through synergistic add-on acquisitions. The Company has integrated these acquisitions, and has augmented its existing interferometry and optical expertise with a broad array of high precision metrology capabilities. The addition of systems integration and parts handling capabilities allows Zygo to integrate its core metrology products into an automated system, which can be placed directly into a customer's production line.
With the acquisition of Firefly Technologies, Zygo's combined experiences in metrology enable the Company to fully characterize its components, allowing for rapid process yield and quality improvements.
TeraOptix's wafer fab, with a full complement of vacuum deposition, photolithography, ion-milling, reactive ion etching, electroplating, wet chemistry and film characterization machines, enables the Company to fabricate a wide variety of components. These include patterned substrates for microwave
devices, MEMs devices for high-speed switching, and various metal and dielectric coatings, including those required for optical filters and anti-reflection. Silicon baseplates, with built-in alignment and attachment features, are also fabricated within the wafer fab.
TeraOptix's capabilities in precision mechanical processing, spanning from lapping and polishing to slicing and grinding, allows us to fabricate micro-optic and opto-mechanical components, i.e., ball lenses, collimator lenses, polished fibers, silicon baseplates, and platforms. A fully equipped model shop enables Zygo TeraOptix to rapidly fabricate its own machined parts and tools.
In Micro-Assembly and Opto-electronics Packaging, TeraOptix uses its proprietary wavefront guided alignment methods and in-situ attachment schemes, enabling it to produce hermetically sealed, epoxy-free, low-insertion loss modules. Recent projects have included MEMs switch packages, tight-pitch fiber-arrays and polarizing beam combiner modules. Leveraging the automation expertise of Zygo's Delray Beach operations, efforts are under way to create a rapid and precise fiber placement tool that will give Zygo TeraOptix a competitive advantage for fiber-array and fiber-optic module production.
"Dashboard", TeraOptix's home-grown database management system, enables managing and tracking of all manufacturing and business activities, including process trends, order status, inventory levels, and process equipment status. A web-accessible module, named "Approach", enables customers and partners to view real-time product and process data, in a secure yet easy-to-use manner. Enabled by TeraOptix proprietary data pumps, measurement information gathered off TeraOptix's networked measurement and manufacturing equipment, is typically available approximately 10 seconds after a measurement is completed.
We also manufacture the MicroLUPI 2000, a compact interferometer designed for ease of use, especially for applications that involve repetitive testing of similar components. Microlenses as small as 20 microns to 3 millimeters in diameter can be quickly and automatically characterized. The MicroLUPI 2000 is easily configured to test optics in reflection or transmission, using collimated, converging or diverging illumination. With its integrated motion control and down facing orientation, this system is ideal for testing lens arrays, and for picking and testing discrete lenses, molded aspherics, miniature mirrors and filters.
Zygo's instrument products utilize powerful processors that facilitate high-speed data acquisition and data analysis. Zygo's interferometric surface analysis microscopes and large aperture surface measurement interferometers utilize Zygo's proprietary MetroPro(R) software, which has a graphical user interface that makes the product very user friendly. The MetroPro(R) software, combined with super high-resolution graphics and pull-down menus, provides the user with engineering solutions with on-line processing. The software allows the user to record, print, and store measurement data locally as well as to distribute the data through networks for process management and further analysis. Zygo's proprietary software provides Zygo with a high speed, powerful analysis capability based on proprietary algorithms, easily configurable screens, powerful image analysis modules, and adaptability to new applications.
ZYGO'S PRODUCT OFFERINGS
PATENTS
Zygo relies on a combination of patent, copyright, trademark, and trade secret laws and license agreements to establish and protect its proprietary rights in its products. Zygo believes, however, that its success depends to a greater extent upon innovation, technological expertise, and distribution strength. The Company has been awarded 93 United States patents and 12 foreign patents, and has 42 United States patent applications and 48 foreign patent applications pending. Zygo, the Zygo logo, and Sight Systems are registered trademarks of Zygo Corporation. The Company also holds several nonregistered trade-marks including AAB System, AMS, GAPii, GapScope, GPI, Growth Potential Interferometer, KMS, MaximoGP, MESA, MicroLUPI, MicroLUPI 2000, NewView 100, New View 200, NewView 5000, Pegasus 2000, ROBOii, SXM-Cascade, SXM-Dolomite, SXM-Sierra, ZLF-1000, ZMI-510, ZMI-1000, and ZMI-2000.
RESEARCH AND DEVELOPMENT
Zygo operates in an industry that is subject to rapid technological change and engineering innovation. The Company distinguishes its instrument products on the basis of its electro-optical sensor technology, its software capability, and its skill in systems integration. Zygo dedicates substantial resources to research and development. At June 30, 2000, the Company employed 83 individuals within its R&D and engineering operations, including 26 individuals with advanced degrees, of which 9 individuals have earned doctoral degrees.
As an integral part of Zygo's product development strategy, it has formed technical relationships with several customers. The Company's strategy is to form close technical working relationships with the leading suppliers in its markets and thereby develop products and systems, which have the greatest
relevancy to the marketplace in general. In connection with its R&D operations, Zygo also maintains a close working relationship with various research groups and academic institutions in the United States as well as abroad. Zygo believes that continued enhancement, development, and commercialization of new and existing products and systems is essential to maintaining and improving its leadership position.
CUSTOMERS AND MARKETS
The growing need for dimensional control to the subnanometer level has created a growing need for Zygo's instruments and systems among both OEMs and end-users of microfabrication technology. As the market demands for greater tolerance control in the manufacturing process have increased, particularly in the data storage and semiconductor markets, Zygo has been able to meet these demands with on-the-production-line yield improvement instruments and systems as well as with its off-line quality control instruments. The Company's installed base of high precision metrology systems exceeds 6,540.
For most of fiscal year 2000, Zygo continued to operate in one segment, as a world leader in metrology, process control, and yield solutions servicing high precision industries. With the acquisition of Firefly in May 2000 and its continued focus on customers and their needs, Zygo has reorganized to address three key markets - semiconductor/data storage, industrial, and telecommunications - which is consistent with how management will monitor business performance and make key decisions beginning with the first quarter of fiscal 2001.
Sales to the semiconductor and data storage industry in fiscal year 2000 constituted approximately 62% of the Company's revenues. A large portion of sales to this sector is optics and motion control systems to OEMs for the photolithography process, wafer repair, sawing systems, and mask making. The demand for increasing disk drive areal density dictates that flying heights are decreasing and that head designs and tolerances are becoming more and more critical. As a result, the majority of sales to the data storage industry are interferometric and vision metrology microscopes and systems, which provide complete measurement and analysis of all critical head parameters.
Approximately 28% of the Company's fiscal year 2000 sales are to industrial companies and research institutions. The Company anticipates growth opportunities in its sales to the industrial market, as products such as the NewView, ZMI and GPI family, and new product introductions, such as the MESA, expand Zygo's capability to sell to the precision machining and industrial sectors. Specifically, the Company sees significant potential in the Tier 1 suppliers to the automotive industry as performance engines require parts machined to tighter and tighter tolerances. The Company also maintains close working relationships with various research groups and academic institutions. The Company continues to see its optic sales to the Industrial market increase.
The telecommunications industry, although a new market for the Company accounted for 10% of the Company's sales in 2000, which can be attributed to both the Company's Optics operations and the recently acquired TeraOptix operations.
Virtually all testing of optical components and systems and national laboratories is done with Zygo's GPI family of interferometers which have a variety of applications including aircraft windows, stages for high precision equipment, and optics for Zygo's own equipment. The Company maintains key relationships with major optics research organizations as evidenced by its relationship and significant contract with NIF, referred to earlier.
Several of Zygo's customers purchase multiple product family types and multiple technology platforms and employ Zygo's solutions at multiple facilities worldwide. The following is a representative list of end-users of Zygo's products:
SELECTED ZYGO CUSTOMERS BY END MARKET
Semiconductor & Industrial Surfaces, Data Storage Telecommunication Machine Control, & Optics - ---------------------- ------------------------ --------------------------
Canon Agilent Bausch & Lomb DuPont Photomasks Corning Berliner Glass ESI GSI Lumonics Bosch ETEC Infrared Fiber Canon IBM JDS Uniphase Catepillar Hitachi Leister Cummins Engine KLA-Tencor Lightchip Dover Instruments Intel Lucent General Motors Leica Mems Optical Hughes Motorola Opnetics Lawrence Livermore NEC Photonics Martin Marietta Phototronics Qtera Melles Griot SAE Magnetics Vytran Nikon Seimens NIST Sony Olympus SVGL Saint-Gobain/Norton Taiwan Mask Co. Schott Glass Texas Instruments Vistakon Zeiss Zeiss 3M
In fiscal years 2000, 1999, and 1998, sales to Zygo's top customer, Canon Inc., accounted for approximately 19%, 21%, and 18%, respectively, of Zygo's net sales. Sales to the Lawrence Livermore National Laboratories accounted for 3%, 6%, and 13% of the Company's sales in 2000, 1999, and 1998. No other single customer accounted for more than 10% of Zygo's sales in any of the 2000, 1999, or 1998.
BACKLOG
Backlog at June 30, 2000, was $45,943,000 compared to $28,941,000 at June 30, 1999, an increase of $17,002,000 (59%). The increase in the backlog was principally a result of a surge in the semiconductor industry and the change in the sales infrastructure.
MARKETING & SALES
The Company's core marketing strategy is to establish and solidify strategic relationships with leading OEMs and end-users in targeted end-markets. The selling process for Zygo's products is performed through Zygo's worldwide sales organization and frequently involves participation by sales, marketing, applications specialists, and engineering personnel. Zygo's marketing activities also include participation in international standards organizations, trade shows, publication of articles in trade journals, participation in industry forums, and distribution of sales literature. In addition, Zygo's strategic relationships with customers serve as highly visible references.
Sales to the Company's OEM customers are usually through direct sales personnel. Zygo's sales and marketing staff and engineers work closely with the OEM to design high value-added subsystems to be integrated into the OEM's product. These subsystems often contain multiple Zygo technologies, are highly customized, and provide a differentiated advantage for the OEM. While these sales generally take a long time to develop and deliver, the result can be a long-term relationship as a sole-source supplier.
Zygo's regional organization sells all Zygo products and services through a combination of direct sales staff and independent distributors and sales representatives. The Company's regional sales offices are headquartered in Middlefield, Connecticut (Eastern USA Region); Chicago, Illinois (Central USA Region); Sunnyvale, California (Western USA Region); Damstad, Germany (European Region); Singapore (Pac Rim Region); and Tokyo, Japan (Japan Region). Additionally, the Company maintains direct sales offices in Delray Beach, Florida; Longmont, Colorado; and Taiwan. At June 30, 2000 Zygo employed 93 sales, service, applications support, and marketing personnel. Additionally, the Company employs more than 10 representatives and distributors in international regions to support sales and service in over 20 countries including Japan, Singapore, Malaysia, Philippines, Taiwan, South Korea, Germany, United Kingdom, France, and Italy. The combination of direct sales and representatives allow the Company to be truly international in its sales and customer support approach.
The following table sets forth the percentage of Zygo's total sales by region (including sales delivered through distributors) during the past three years:
Year Ended June 30, ---------------------------------------------- 2000 1999 1998 ------------- ---------- -----------
United States.................... 56.0% 53.9% 56.0% Japan............................ 20.2% 23.3% 22.8% Pacific Rim...................... 13.4% 9.9% 11.6% Other (primarily Europe)......... 10.4% 12.9% 9.6%
Almost all of Zygo's export sales are negotiated, invoiced, and paid in United States dollars.
CUSTOMER SUPPORT
Zygo believes that its strong commitment to service is essential, based on the growing complexity of the equipment used in the manufacturing process by Zygo's customers. As Zygo's products are on customer production lines, uptime of Zygo's products is critical considering the effect on the customers' production efficiency. In March 1999, Zygo established a Technical Support Center within its Middlefield site. This center is staffed with individuals who are knowledgeable of the Company's products and offer technical support via e-mail or via an 800 number service (1-800-ZYGO-NOW). At June 30, 2000, Zygo's domestic customer support and service staff consisted of 20 persons. Outside of the U.S., Zygo's distributors and sales representatives assist the direct service staff allowing the Company to offer a worldwide network for customer support, providing 24-hour-on-demand maintenance services. The service engineers are skilled in optical and electrical component repair, software, application and system integration, diagnostics, and problem solving capabilities.
Zygo offers its customers three main types of service programs including priority support, extended warranty, and preventive maintenance, and also customizes programs to meet specific customer needs. These service programs include emergency service scheduling, software upgrades, preventative maintenance visits, and charges for parts, labor, and travel. To minimize downtime, the Company has available spare parts kits designed to ensure availability and emergency delivery. Finally, the Company can supply customers with upgrades for nearly all of its systems.
Zygo also offers testing services for a fee to customers, which require extra precision, an alternative metrology resource, a third party opinion/certification, or extended metrology capabilities. This service provides an economical way for customers to measure and/or certify their samples with Zygo's precision, noncontact, surface and optical measuring instruments. When customers need the accuracy and NIST-traceability of Zygo precision surface and optical measuring instruments, but do not have the volume to justify a purchase, Zygo's Testing & Certification Services provides a cost-effective solution. The Company's facility in Middlefield, Connecticut, has advanced equipment for testing a customer's parts and providing the customer with three-dimensional surface maps and supporting data necessary for determining the quality of the parts.
Zygo also offers absolute calibration of spheres and flats, as well as large aperture plano surfaces. To assist customers in establishing and maintaining a routine calibration program, the Company often automatically notifies customers when the next certification is due.
TRAINING AND SEMINARS
In addition to its customer support network, Zygo offers training programs and maintenance contracts for its customers for a fee. Zygo's Customer Education and Training seminars offer training in the areas of interferometry, optical testing, surface metrology, and 3D microscopy, and can be customized to suit the attendees particular needs. Customer opticians, QC inspectors, technicians and engineers, and managers generally attend the classes and receive the training necessary to reduce the variability of measurements, solve chronic testing problems due to issues such as alignment and environment, increase throughput of production teams, automate systems setup and data recording, and prevent bottlenecks in the QC department. Classes can be held at Zygo's Middlefield, Connecticut, or Sunnyvale, California, locations or at the customer's location.
All Zygo training courses integrate lab sessions with the classroom content. While the classes are not restricted to Zygo customers, attendees use Zygo interferometers to set up and measure surfaces as well as explore many of the features and functions of MetroPro(R). In this respect, classes also serve as a sales tool as attendees experience the user-friendly setup and performance of Zygo products.
MANUFACTURING, RAW MATERIALS, AND SOURCES OF SUPPLY
Late in 1999, Zygo reorganized its operations, eliminating the manufacturing activities of its Sunnyvale and Newbury Park, California, operations. Zygo's principal manufacturing activities are conducted at its facilities in Middlefield, Connecticut; Longmont, Colorado; Holliston, Massachusetts and Asslar, Germany. Zygo maintains an advanced optical components manufacturing facility in Middlefield, specializing in the fabrication, polishing, and coating of plano (flat) optics for sales to third parties, as well as the manufacturing of a wide variety of optics that are used in Zygo's instrument products. Zygo's manufacturing activities for its instruments and system products consist primarily of assembling and testing components and sub assemblies, some of which are supplied from within Zygo and others are supplied by third party vendors and then integrated into Zygo's finished products. Many of the components and subassemblies are standard products, although certain items are made to Company
specifications. Zygo also maintains Computer Numerical Control (CNC) metal fabrication equipment for in-house production of strategic metal formed components.
Certain components and subassemblies incorporated into Zygo's systems are obtained from a single source or a limited group of suppliers. Management routinely monitors single or limited source supply parts, and Zygo endeavors to ensure that adequate inventory is available to maintain manufacturing schedules should the supply of any part be interrupted. Although Zygo seeks to reduce its dependence on sole and limited source suppliers, it has not qualified a second source for various of these products and the partial or complete loss of certain of these sources could have an adverse effect on Zygo's results of operations and damage customer relationships.
At its Middlefield operations, Zygo also maintains a fully integrated management information system which includes the business modules (capacity planning, materials requirements planning, order entry, financials, etc.) necessary to manage Zygo's growing operations there. All of Zygo's worldwide operations are connected by a wide area network which provides full network services including shared databases, electronic mail, and the ability to interchange files containing writing material, software code and engineering drawings. Additionally, to facilitate effective communications, Zygo's Middlefield, Longmont, and Sunnyvale operations have installed advanced video conferencing equipment. At June 30, 2000 the Company employed 297 personnel in its manufacturing operations.
The Company has developed a significant Total Quality Management ("TQM") process, which is headed by the Vice President of Manufacturing. The TQM program is characterized by a 7-step problem solving process whereby employees identify areas of waste, establish teams, and apply the process to eliminate the root cause of the problem. The TQM program, which is completely voluntary for employees, was instrumental in the Company obtaining ISO 9001 certification at its Middlefield facility where it was originally launched and has a 30% employee participation
EMPLOYEES
At June 30, 2000, Zygo employed 486 persons.
None of the Company's employees are covered by collective bargaining agreements. Zygo has never experienced a work stoppage and believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company maintains manufacturing facilities in Middlefield, Connecticut, Holliston, Massachusetts, Asslar, Germany and Longmont, Colorado, and maintains its corporate headquarters on Laurel Brook Road in Middlefield, Connecticut. The Middlefield facility consists of one 135,500-square-foot building on approximately 13 acres. In 1998, this facility was expanded by 35,500 square feet to provide additional optical fabrication capacity and a new office area for sales, service, R&D, and administrative personnel. All other facilities are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
GARY K. WILLIS - AGE 55 - CHAIRMAN
Mr. Willis has served as Chairman of the Company since November 1999. Mr. Willis also served as Chairman and Chief Executive Officer from November 1998 to November 1999, and as President and Chief Executive Officer from August 1993 to November 1998. From February 1992 to August 1993, Mr. Willis served as President and Chief Operating Officer of the Company. Previously, Mr. Willis spent 15 years with The Foxboro Company, most recently as President, Chairman and CEO.
Mr. Willis has served as an executive officer of the Company since February 1992 and is a director of the Company.
J. BRUCE ROBINSON - AGE 58 - PRESIDENT AND CHIEF EXECUTIVE OFFICER
Mr. Robinson has served as President and Chief Executive Officer since November 1999 and as President from February 1992 to November 1999. Previously, Mr. Robinson spent 25 years with The Foxboro Company, his most recent positions were President Worldwide Operations from 1996 to 1998, and President of Europe from 1990 to 1996.
Mr. Robinson has served as an executive officer of the Company since February 1999 and is a director of the Company.
MICHAEL J. AUTH - AGE 46 - CHIEF FINANCIAL OFFICER, VICE PRESIDENT FINANCE AND TREASURER
Mr. Auth has served as the Chief Financial Officer, Vice President Finance and Treasurer since March 2000. Previously Mr. Auth served as Vice President, Finance and Information Systems for M/A-COM, the wireless division of Tyco International from 1996 to 2000 and in various senior financial positions with Comsat Corporation from 1987 to 1996.
Mr. Auth has served as an executive officer of the Company from March 2000.
JOHN S. BERG - AGE 37 - PRESIDENT AND CHIEF TECHNICAL OFFICER, ZYGO TERAOPTIX
Mr. Berg has served as the President and Chief Technical Officer of Zygo TeraOptix since May 2000. Previously Mr. Berg served as the President and Chief Technical Officer of Firefly Technologies from 1997 to 2000 and has held senior management and key engineering positions at Digital Papyrus Corporation from 1995 to 1997.
Mr. Berg has served as an executive officer of the Company since May 2000 and is a director of the Company.
WILLIAM H. BACON - AGE 50 - VICE PRESIDENT MANUFACTURING
Mr. Bacon has served as Vice President Manufacturing since April 2000. Previously, Mr. Bacon served as Vice President, Corporate Quality of the Company from January 1996 to April 2000. From November 1993 to January 1996, Mr. Bacon was Director of Total Quality of the Company and also served as Manager of Instrument Manufacturing Engineering of the Company from June 1987 to November 1993.
Mr. Bacon has served as an executive officer of the Company since January 1996.
BRIAN J. MONTI - AGE 44 - VICE PRESIDENT, WORLDWIDE SALES AND SERVICE
Mr. Monti has served as Vice President, Worldwide Sales and Service since July 1999. Previously, Mr. Monti served as Vice President, Sales, Service and Marketing for Radiometric Corporation from 1998 to 1999 and Vice President, Sales, Service and Marketing for Honeywell Measurex from 1984 to 1998.
Mr. Monti has served as an executive officer of the Company since July 1999.
DAVID J. PERSON - AGE 52 - VICE PRESIDENT HUMAN RESOURCES
Mr. Person has served as Vice President Human Resources since September 1998. Previously Mr. Person served in a number of senior human resource management positions with Digital Equipment Corporation from 1972 to September 1998.
Mr. Person has served as an executive officer of the Company since September 1998.
PATRICK K. TAN - AGE 40 - VICE PRESIDENT, BUSINESS OPERATIONS, ZYGO TERAOPTIX
Mr. Tan has served as the Vice President of Business Operations of Zygo TeraOptix since May 2000. Previously Mr. Tan served as the Vice President of Business Operations of Firefly Technologies from 1997 to 2000 and has held management and engineering positions at Quantum Corporation from 1994 to 1997.
Mr. Tan has served as an executive officer of the Company since May 2000 and is a director of the Company.
ROBERT A. SMYTHE - AGE 49 - VICE PRESIDENT PRODUCT DEVELOPMENT AND ENGINEERING
Mr. Smythe has served as Vice President Product Development and Engineering since June 1998. Previously, he served as Vice President, Sales and Marketing of the Company from January 1996 to June 1998. From June 1993 to January 1996, Mr. Smythe was Director of Sales and Marketing of the Company and from April 1992 to June 1993 served as Manager, Industry Marketing of the Company.
Mr. Smythe has served as an executive officer of the Company since January 1996.
CARL A. ZANONI - AGE 59 - VICE PRESIDENT TECHNOLOGY
Dr. Zanoni has served as Vice President Technology since June 1998. Previously, he served as Vice President, Research, Development and Engineering of the Company from April 1992 to June 1998.
Dr. Zanoni is a cofounder of the Company and has served as an executive officer since its inception in 1970. He is also a director of the Company.
Of the above executive officers, Mr. Willis, Mr. Robinson, Mr. Berg, Mr. Tan and Dr. Zanoni are directors of the Company. Under the By-laws, executive officers serve for a term of one year and until their successors are chosen and qualified unless earlier removed.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares are traded over-the-counter and are quoted on the NASDAQ/National Market under the symbol "ZIGO". Market price data for 2000 and 1999, is as follows:
Fiscal Year Fiscal Year Ended June 30, 2000 Ended June 30, 1999 ------------------------ ---------------------- High Low High Low -------- ------- ------- ------- First quarter $14 5/8 $9 1/4 $15 3/8 $6 3/8 Second quarter $25 1/16 $13 $12 3/4 $5 Third quarter $74 5/16 $19 3/8 $15 3/4 $8 1/2 Fourth quarter $94 $20 3/4 $13 1/8 $7 1/4
The number of stockholders of record at June 30, 2000 was 492.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(Thousands, except per share amounts)
(1) The results of Firefly Technologies, which is being accounted for as a pooling-of-interests, are included as of July 1, 1997. The results of Sight Systems, Inc ("SSI"), which is being accounted for as an immaterial pooling-of-interests, are included from July 1, 1997; the results of Syncotec Neue Technologien und Instrumente GmbH ("Syncotec") are included from September 1, 1997 when the acquisition of the remaining 50% of Syncotec was completed; and the results of Technical Instrument Company ("TIC") are included in the consolidated results of the Company from August 8, 1996 when that acquisition was effective. Both of Syncotec and TIC were accounted for as purchases.
(2) Nonrecurring charges include acquisition-related charges of $14,001, $1,585 and $11,083 in the fourth quarter ended June 30, 2000, and in the first quarter ended September 30, 1997 and 1996, respectively; west coast operations reorganization costs of $10,567 in the fourth quarter ended June 30, 2000; and failed merger costs of $335, in the first quarter ended September 30, 1997.
(3) The difference between basic shares outstanding and diluted shares outstanding is the assumed conversion of common stock equivalents (stock options) in the amounts of 0, 0, 1,397,000, 1,595,000, and 1,555,000 in the years ended June 30, 2000, 1999, 1998, 1997, and 1996, respectively.
(4) Includes nonrecurring charges of $4,214 related to the inventory write off in the fourth quarter of fiscal 2000 as part of the Company's reorganization of its west coast operation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales of $87,243,000 for fiscal 2000 increased by $23,861,000 or 38% from fiscal 1999 net sales of $63,382,000. The Company's sales were favorably impacted by the increase in demand from the semiconductor market and from the reorganization of the sales function, which moved the sales, marketing and customer service to a regional basis in order to put the critical support services closer to the customer. During each quarter of fiscal 2000 there was an increase in orders, sales and backlog. Product and system backlog is now at a record level and reflects the strong market demand for our manufacturing productivity and yield enhancement solutions. Orders for the year exceeded $100 million for the first time.
The Company's sales outside of the United States amounted to $38,408,000 in fiscal 2000, an increase of $10,379,000 or 37% from fiscal 1999 levels of $28,029,000. Sales in Japan during fiscal 2000 amounted to $17,588,000, an increase of $3,445,000 or 24.4% from fiscal 1999 levels. Sales in the Pacific Rim and Europe amounted to $11,714,000 and $9,106,000, respectively, representing 94% and 16% increases from 1999 sales levels. Substantially all of the Company's sales and 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 cannot be measured.
Gross profit in fiscal 2000 amounted to $32,555,000, an increase of $10,170,000 or 45.4% from gross profit of $22,385,000 in fiscal 1999. As a percentage of net sales, gross profit in fiscal 2000 was 37.3%, as compared to 35.3% in fiscal 1999. The increase in gross profit and gross profit as a percentage of sales were primarily due to the increase in volume and a more favorable product mix.
Selling, general and administrative expenses in fiscal 2000 amounted to $18,504,000 a decrease of $1,129,000 or 5.8% over fiscal 1999. During fiscal 2000, the Company recorded a $1 million credit to the selling, general and administrative expenses as a result of a legal settlement. Absent that credit, the expenses in this area remained relatively constant. As a percentage of net sales, selling, general, and administrative expenses decreased in fiscal 2000 to 21.2 % as compared to 31.0% in fiscal 1999, as a result of the increase in the volume of sales, increase in efficiencies of the group, and the decrease in the expense primarily as a result of the proceeds from the legal settlement.
Research, development and engineering expenses ("R&D") in fiscal 2000 totaled $11,270,000 and increased by $2,085,000 from fiscal 1999. The Company's management continues to pursue projects which will enhance the Company's product offering and provide long-term strategic and financial benefits. In addition to the normal investment in Research and Development, the Company is increasing its development in the optical module market in order to develop prototypes for major users in the telecommunications industry. R&D costs as a percentage of net sales amounted to 12.9%, which compares with 14.5% of net sales in 1999.
The Company recorded nonrecurring charges in the amount of $24,568,000 in fiscal 2000. This charge was a result of the Company's acquisition of Firefly Technologies, Inc. and the Company's decision to reorganize its West Coast operations. The Company recorded nonrecurring charges of $14,001,000 in 2000 as a result of the acquisition of Firefly Technologies, Inc. The nonrecurring charge from the acquisition was $12,024,000 for compensation expense resulting from the difference in the Firefly stock
option exercise price and the deemed fair market value on the date of grant for financial statement purposes and $1,977,000 for the payment of professional fees related to the transaction. The Company recorded a charge of $10,567,000 as a result of its reorganization of its West Coast operations, principally for the write off of goodwill and inventory. The Company did not record any nonrecurring charges in fiscal 1999.
Amortization expense of $7,102,000 for fiscal 2000 increased by $5,844,000 or 465% from fiscal 1999 levels of $1,258,000. Substantially all of the increase is associated with the West Coast operations write-off of goodwill and other intangible assets and the amortization expense recorded on the Atomic Force Microscope line of business.
The Company's operating losses in fiscal 2000 were $18,322,000 as compared to operating losses of $7,691,000 in fiscal 1999.
Income tax benefits in fiscal 2000 totaled $1,459,000 or 8% of pretax losses, which compares with income tax benefit of $2,975,000 or 43% of pretax losses in fiscal 1999. The change from year to year relates primarily to the tax benefits that could not be recorded for financial statement purposes associated with the compensation charge in connection with the Firefly acquisition in fiscal 2000.
The Company recorded a net loss for fiscal year 2000 of $16,047,000 or $(1.28) per share, as compared to a net loss of $3,876,000 or $(.33) per share during fiscal 1999.
Backlog at June 30, 2000 was $45,943,000 compared to $28,941,000 at June 30, 1999, an increase of $17,002,000 or 59%.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales of $63,382,000 for fiscal 1999 decreased by $35,702,000 or 36% from fiscal 1998 net sales of $99,084,000. The Company's sales were adversely impacted by market conditions, which began with poor conditions in the Asian economic environment, leading to weak conditions in the semiconductor and data storage markets. These forces impacted net sales of the Company's instruments and systems, which decreased by 35.3% to $41,020,000. Net sales of modules and components decreased by 35.1% to $22,362,000. The decrease in modules and components was principally the result of reductions in revenue associated with the Lawrence Livermore National Laboratory National Ignition Facility Project as 1998 results included $8,887,000 of revenue associated with the facilitation of the Company's Middlefield, Connecticut plant and to a lesser extent motion and optical component sales to OEM customers.
The Company's sales outside of the United States amounted to $28,029,000 in fiscal 1999, a decrease of $14,990,000 or 34.8% from fiscal 1998 levels of $43,019,000. Sales in Japan during fiscal 1999 amounted to $14,143,000, a decrease of $8,141,000 or 36.5% from fiscal 1998 levels. Shortfalls were caused by lower demand from Japanese customers due to market conditions, including lower sales of motion control components to Canon Inc. for incorporation into Canon's photolithography "steppers" used in the production of semiconductors. Additional reductions occurred in mask metrology systems where macroeconomic factors impacted sales levels. Sales in the Pacific Rim and Europe amounted to $6,038,000 and $7,848,000, respectively, representing 46.8% and 16.4% reductions from 1998 sales levels. Substantially all of the Company's sales and 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 cannot be measured.
Gross profit in fiscal 1999 amounted to $22,385,000, a decrease of $19,064,000 or 46% from gross profit of $41,449,000 in fiscal 1998. As a percentage of net sales, gross profit in fiscal 1999 was 35.3%, as compared to 41.8% in fiscal 1998. The decreases in gross profit and gross profit as a percentage of sales were primarily due to volume shortfalls and the associated underutilization of the Company's manufacturing facilities as well as costs, which were essentially one time in nature, incurred as the Company realigned its manufacturing operations in response to lower demand. These actions led to the elimination of manufacturing in the Company's Newbury Park and Sunnyvale, California facilities.
Selling, general and administrative expenses in fiscal 1999 amounted to $19,633,000 an increase of $909,000 or 4.9% over fiscal 1998. During fiscal 1999, the Company initiated substantial cost reduction efforts as well as efforts associated with creating additional sales and support infrastructure. 1999 results were also impacted by bad debt expenses, most notably with contracts associated with StorMedia, Inc. Additional costs have been incurred for the creation of sales infrastructure and the addition of Atomic Force Microscopy technology to the Company's product portfolio. As a percentage of net sales, selling, general, and administrative expenses increased in fiscal 1999 to 31.0% as compared to 18.9% in fiscal 1998, as a result of such increased expenses and lower sales volume levels.
Research, development and engineering expenses ("R&D") in fiscal 1999 totaled $9,185,000 and decreased by $659,000 from fiscal 1998. During the third and fourth quarters, consolidations and cost reduction efforts were targeted in this functional area. Particular emphasis was given to the vision and confocal product lines where the completion of certain R&D programs and the resulting introduction of new products enabled these cost savings actions to move forward. The Company's management continues to pursue projects which will enhance the Company's product offering and provide long-term strategic and financial benefits. R&D costs as a percentage of net sales amounted to 14.5%, which compares with 9.9% of net sales in 1998.
The Company recorded nonrecurring charges in the amount of $1,920,000 in fiscal 1998, all which were incurred in the three months ended September 30, 1997. The nonrecurring charges related to $707,000 of expenses incurred to complete the Company's merger with SSI, recorded as a pooling-of-interest, the write-off of $878,000 of in-process research and development costs in conjunction with the Company's acquisition of Syncotec, and failed merger costs of $335,000 relating to the Company's failed efforts to merge with Digital Instruments, Inc. The Company did not record any nonrecurring charges in fiscal 1999.
Amortization expense of $1,258,000 for fiscal 1999 increased by $465,000 or 58.6% from fiscal 1998 levels of $793,000. Substantially all of the increase is associated with the amortization expense recorded on the Atomic Force Microscope line of business.
The Company's operating losses in fiscal 1999 were $7,691,000 as compared to operating profits of $10,168,000 in fiscal 1998.
Income tax benefits in fiscal 1999 totaled $2,975,000 or 43% of pretax losses which compares with income tax expense of $3,991,000 or 36% of pretax income in fiscal 1998.
The Company recorded a net loss for fiscal 1999 of $3,876,000 or $(.33) per share, as compared to net earnings of $7,029,000 and $.55 per share during fiscal 1998.
Backlog at June 30, 1999 was $28,941,000 compared to $24,410,000 at June 30, 1998, an increase of $4,531,000. The Company's instruments and systems at June 30, 1999 increased $6,280,000 largely due to increases in the automation backlog. The components backlog fell by $1,749,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, working capital was $56,550,000, an increase of $12,784,000 from the amount at June 30, 1999, and the Company had cash and cash equivalents of $15,598,000 and marketable securities amounting to $8,268,000 for a total of $23,866,000. Accounts payable and accrued expenses increased by $4,629,000, while accounts receivable increased by $7,657,000. As of June 30, 2000, there were no borrowings outstanding under the Company's $3,000,000 bank line of credit. Stockholders equity at June 30, 2000 increased by $9,517,000 from the year earlier to $78,229,000, largely as a result of stock option exercises and the related tax benefit and the acquisition of Firefly.
At June 30, 1999, working capital was $43,766,000, a decrease of $6,480,000 from the amount at June 30, 1998, and the Company had cash and cash equivalents of $13,022,000 and marketable securities amounting to $8,351,000 for a total of $21,373,000. The $9,230,000 decrease in cash, cash equivalents, and marketable securities from the amount at June 30, 1998 came primarily from net losses of $3,989,000 and investing activities totaling $7,320,000. Additions to property, plant, and equipment account for $4,362,000 and AFM intangible purchases requiring cash payments of $2,250,000 were the major utilizers of cash. Lower business activity led to accounts payable and accrued expense decreases of $4,244,000, which were largely offset by accounts receivable reductions of $4,074,000. Management expects fiscal 2000 capital expenditures to approximate fiscal 1999 capital spending levels. At fiscal year end, the Company had $1,410,000 in inventory and purchase commitments of approximately $7,324,000 under its distribution agreement relating to the AFM technology and product line. As of June 30, 1999, there were no borrowings outstanding under the Company's $3,000,000 bank line of credit. Stockholders equity at June 30, 1999 decreased by $3,670,000 from the year earlier to $68,712,000, largely as a result of net losses of $3,989,000.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Industry Concentration and Cyclicality. Zygo's business is significantly dependent on capital expenditures by manufacturers of components for the computer disk drive industry and of semiconductors. These industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products manufactured and marketed by Zygo. For the foreseeable future, Zygo's operations will continue to be dependent on the capital expenditures in these industries which, in turn, is largely dependent on the market demand for hard disk drives and products containing integrated circuits. Zygo's net sales and results of operations may be materially adversely affected if downturns or slowdowns in the computer disk drive or semiconductor markets significantly extend into the future.
Risks Associated with Acquisitions. Zygo's growth strategy involves growth through acquisitions and internal development and, as a result, Zygo is subject to various risks associated with this growth strategy. The successful integration of acquired businesses is important to Zygo's future financial performance. In addition, while there are currently no commitments with respect to any future acquisitions, Zygo's business strategy includes the expansion of its products and services, which may be effected through further acquisitions. Zygo regularly reviews various acquisition prospects of businesses, technologies or products complementary to Zygo's business and periodically engages in discussions regarding such possible acquisitions. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired companies, the ability to manage effectively geographically remote units, the diversion of management's attention from the day-to-day business operations of the Company and its other business concerns, risks of entering markets in which Zygo has limited or no direct experience, integrating personnel with disparate business backgrounds, combining different corporate cultures, and the potential loss of key employees of the acquired companies. There can be no assurance that there will not be substantial costs associated with such activities or that there will not be other material adverse effects of those integrating efforts.
Further, there can be no assurance that management's efforts to integrate the operations of Zygo and newly acquired companies will be successful or that the anticipated benefits of the recent acquisitions will be fully realized.
In addition, acquisitions may result in dilutive issuances of equity securities, the incurrence of debt, reduction of existing cash balances, amortization expenses related to goodwill and other intangible assets, and other charges to operations that may materially adversely affect Zygo's business, financial condition or results of operations. Although management expects to carefully analyze any such opportunity before committing Zygo's resources, there can be no assurance that any acquisition will result in long-term benefits to Zygo or that Zygo's management will be able to manage effectively the resulting businesses.
Customer Concentration; Relationship with Canon. During fiscal 2000, 1999 and 1998, sales to Canon Inc. and Canon Sales Co., Inc. (collectively, "Canon"), Zygo's largest customer in those periods, accounted for approximately 19%, 21% and 18%, respectively, of Zygo's net sales. Zygo expects that sales to Canon, an original investor in Zygo which owns approximately 8.5% of Zygo's outstanding shares of Common Stock and is a distributor of certain Zygo products in the Japanese market, will continue to represent a significant percentage of Zygo's net sales for the foreseeable future. Zygo's customers generally do not enter into long-term agreements obligating them to purchase Zygo's products. A reduction or delay in orders from this customer, including reductions or delays due to market, economic, or competitive conditions in the semiconductor or computer disk drive industries, could have a material adverse effect upon Zygo's results of operations.
Technological Change and New Product Development. The market for Zygo's products is characterized by rapidly changing technology. Zygo's future success will continue to depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments and evolving industry standards, respond to changes in customer requirements, and achieve market acceptance. Zygo expends significant financial and personnel resources to continually redesign and enhance its instruments, systems and components and upgrade its proprietary software technology incorporated in its products. Any failure by Zygo to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on Zygo's business, and the results of close relationships with its customers and their willingness to share proprietary information about their requirements and participate in collaborative efforts with Zygo. There can be no assurance that Zygo's customers will continue to provide the Company with timely access to such information or that Zygo will be successful in developing and marketing new products and services or product and service enhancements on a timely basis and respond effectively to technological changes or new product announcements by others. In addition, there can be no assurance the new products and services or product enhancements, if any, developed by Zygo will achieve market acceptance.
Dependence on Key Personnel. Zygo's success depends in large part upon the continued services of many of its highly skilled personnel involved in management, research, development and engineering, and sales and marketing and upon its ability to attract and retain additional highly qualified employees. Zygo's employees may voluntarily terminate their employment with Zygo at any time. Competition for such personnel is intense, and there can be no assurance that Zygo will be successful in retaining its existing personnel or attracting and retaining additional personnel.
Quarterly Fluctuations. Zygo has experienced quarterly fluctuations in results of operations and anticipates that these fluctuations may continue. These fluctuations have been caused by various factors, including the capital procurement practices of its customers and the industries into which its products are sold generally, the timing and acceptance of new product introductions and enhancements, and the
timing of product shipments and marketing. Future results of operations may fluctuate as a result of these and other factors, including Zygo's ability to continue to develop innovative products, the announcement or introduction of new products by Zygo's competitors, Zygo's product and customer mix, the level of competition and overall trends in the United States and various economies.
Possible Volatility of Stock Price. Zygo believes that factors such as the announcement of new products or technologies by Zygo or its competitors, market conditions in the precision measurement, data storage, and semiconductor industries generally and quarterly fluctuations in financial results are expected to cause the market price of the Common Stock to vary substantially. Further, Zygo's net sales or results of operations in future quarters may be below the expectations of public market securities analysts and investors. In such event, the price of the Common Stock would likely decline, perhaps substantially. In addition, in recent years the stock market has experienced price and volume fluctuations that have particularly affected the market prices for many high technology companies and which often have been unrelated to the operating performance of such companies. The market volatility may adversely affect the market price of the shares of Zygo's Common Stock.
Competition. Zygo faces competition from a number of companies in all its markets, some of which have greater manufacturing and marketing capabilities, and greater financial, technological, and personnel resources. In addition, Zygo competes with the internal development efforts of its current and prospective customers, certain of which may attempt to become vertically integrated. Zygo's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics. Competitive pressures may necessitate price reductions, which can adversely affect results of operations. Although Zygo believes that it has certain technical and other advantages over certain of its competitors, maintaining such advantages will require a continued high level of investment by Zygo in research and development and sales, marketing and service. There can be no assurance that Zygo will have sufficient resources to continue to make such investment or that Zygo will be able to make the technological advances necessary to maintain such competitive advantages. In addition, there can be no assurance that the bases of competition in the industries in which Zygo competes will not shift.
Dependence on Proprietary Technology. Zygo's success is heavily dependent upon its proprietary technology. There can be no assurance that the steps taken by Zygo to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties or will be adequate under the laws of some foreign countries, which may not protect Zygo's proprietary rights to the same extent as do laws of the United States. In addition, there remains the possibility that others will "reverse engineer" Zygo's products in order to determine their method of operation and introduce competing products or that others will develop competing technology independently. Any such adverse circumstances could have a material adverse effect on Zygo's results of operations. Further, some of the markets in which Zygo competes are characterized by the existence of a large number of patents and frequent litigation for financial gain that is based on patents with broad, and often questionable, application. As the number of its products increase, the markets in which its products are sold expands, and the functionality of those products grows and overlaps with products offered by competitors, Zygo believes that it may become increasingly subject to infringement claims. Although Zygo does not believe any of its products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against Zygo in the future or that any such claim will not result in costly litigation or require Zygo to enter into royalty arrangements, which may not be available to the Company on commercially acceptable terms if at all.
Dependence on Third-Party Suppliers. Certain of the components and subassemblies included in Zygo's systems are obtained from a single source or a limited group of suppliers. Although Zygo seeks to reduce dependence on sole and limited source suppliers in some cases, the partial or complete loss of
certain of these sources could have an adverse effect on Zygo's results of operations and damage customer relationships.
Revenues Derived From International Sales and Foreign Operations. Zygo's products are sold internationally by Zygo primarily to customers in Japan and throughout the Pacific Rim. Net sales to customers outside the United States accounted for 44%, 46%, and 44% of Zygo's net sales in each of the fiscal years ended June 30, 2000, 1999, and 1998, and are expected to continue to account for a substantial percentage of Zygo's net sales. International sales and foreign operations are subject to inherent risks, including the economic conditions in these various foreign countries and their trading partners, political instability, longer payment cycles, greater difficulty in accounts receivable collection, compliance with foreign laws, changes in regulatory requirements, tariffs or other barriers, difficulties in obtaining export licenses and in staffing and managing foreign operations, exposure to currency exchange fluctuations, transportation delays, and potentially adverse tax consequences. Substantially all Zygo's sales and costs are negotiated and paid in U.S. dollars. However, changes in the values of foreign currencies relative to the value of the U.S. dollar can render Zygo's products comparatively more expensive to the extent locally produced alternative products are available. Such conditions could negatively impact international sales of Zygo's products and Zygo's foreign operations, as would changes in the general economic conditions in those markets. There can be no assurance that risks inherent in international sales and foreign operations will not have a material adverse effect on Zygo in the future.
Reliance on Middlefield Manufacturing Facility. The Company manufactures substantially all of its optical components at its facility in Middlefield, Connecticut. Any extended interruption of optical component production at the Middlefield manufacturing facility could have a material adverse effect on the business of the Company.
Control of Company. The Company's executive officers and directors, through their affiliation with certain stockholders and their stock option holdings, may be deemed to beneficially own approximately 18% of the outstanding shares of Common Stock. As a result, these individuals may have the ability to control the Company and direct its affairs and business, including the election of all the directors.
Dividend Policy. The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain all its earnings to finance the expansion and development of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future.
Year 2000. The Company has transitioned into the year 2000 with minimal interruptions. We are continuing to monitor our products, product design tools, manufacturing tools, information systems, business infrastructure, material and service suppliers and customers. Overall, there has been no significant impact on the Company. The cost spent on the year 2000 problem has been immaterial to date.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 June 30, 2000 would have an insignificant effect on our pretax earnings.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to this Item begin on Page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information concerning executive officers which is set forth in Part I of this Annual Report, information required by this item will be included under the captions "Election of Board of Directors" and "Other Agreements and Other Matters" in the Proxy Statement to be filed pursuant to Regulation 14A for use in connection with the Registrant's 2000 Annual Meeting of Stockholders ("the Proxy Statement") and is herein incorporated by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be included in the Proxy Statement under the caption "Executive Compensation" and is herein incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be included in the Proxy Statement under the captions "Election of Board of Directors" and "Principal Stockholders" and is herein incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be included in the Proxy Statement under the caption "Certain Relationships and Related Transactions" and is herein incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedules:
An index to the financial statements and financial statement schedules filed is located on page.
3. EXHIBITS
3.(i) Restated Certificate of Incorporation of the Company and amendments thereto (Exhibit 3.(i) to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)*
3.(ii) Certificate of Amendment of Certificate of Incorporation, filed June 3, 1996 (Exhibit 3.(ii) to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1996)*
3.(iii) By-laws of the Company (Exhibit (3)(b) to Registration No. 2-87253 on Form S-1 hereinafter "Registration No. 2-87253")*
4.1 Shareholders Agreement dated October 17, 1983, between Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, and Sol F. Laufer (Exhibit (4)(a) to Registration 2-87253)*
10.1 Confidentiality and Non-Competition Agreement dated October 25, 1983, between the Company and Carl A. Zanoni (Exhibit (10)(b) to Registration No. 2-87253)*
10.2 Agreement dated May 27, 1975, between the Company and Canon U.S.A., Inc., regarding information sharing and marketing (Exhibit (10)(x) to Registration No. 2-87253)*
10.3 Agreement dated November 20, 1980, between the Company and Canon Inc. regarding exchange of information (Exhibit (10)(y) to Registration No. 2-87253)*
10.4 Amended and Restated Zygo Corporation Profit Sharing Plan (Exhibit 10.15 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 1995)*
10.5 Canon/Zygo Confidentiality Agreement dated March 7, 1990, between the Company and Canon Inc. regarding confidential technical information received from each other (Exhibit 10.42 to the Company's Annual Report on Form 10-K for its year ended June 30, 1991)*
10.6 Employment Agreement dated February 13, 1992, relating to the employment of Gary K. Willis by the Company (Exhibit 10.38 to the Company's Annual Report on Form 10-K for its year ended June 30, 1992)*
10.7 Amendment, dated August 26, 1993, to the Employment Agreement dated February 13, 1992, between Gary K. Willis and the Company (Exhibit 10.22 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)*
10.8 Second Amendment, dated March 10, 1995, to the Employment Agreement dated February 13, 1992, between Gary K. Willis and the Company (Exhibit 10.19 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 1996)*
10.9 Stock Purchase Agreement dated March 4, 1992, relating to the purchase of Company Common Stock by Gary K. Willis from Wesleyan University (Exhibit 10.39 to the Company's Annual Report on Form 10-K for its year ended June 30, 1992)*
10.10 Services Agreement dated August 26, 1993, between the Company and Paul F. Forman (Exhibit 10.26 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)*
10.11 Amendment Agreement dated as of December 31, 1996, between the Company and Paul F. Forman.
10.12 Non-Competition Agreement dated August 26, 1993, between the Company and Paul F. Forman (Exhibit 10.27 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)*
10.13 Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan ratified and approved by the Company's Stockholders on November 19, 1992 (Exhibit 10.30 to the Company's Annual Report on Form 10-K for its year ended June 30, 1993)*
10.14 Termination Agreement dated November 30, 1993, covering the termination of the Shareholders' Agreement between Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, and Sol F. Laufer dated October 17, 1983 (Exhibit 10.33 to the Company's Annual Report on Form 10-K for its year ended June 30, 1994)*
10.15 Registration Rights Agreement dated November 30, 1993, between Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, Sol F. Laufer, and the Company (Exhibit 10.34 to the Company's Annual Report on Form 10-K for its year ended June 30, 1994)*
10.16 Renewal of Line of Credit dated June 3, 1997, between the Company and Fleet Bank Connecticut, N.A.*
10.17 Zygo Corporation Non-Employee Director Stock Option Plan ratified and approved by the Company's stockholders on November 17, 1994 (Exhibit 10.30 to the Company's Annual Report on Form 10-K405 for its year ended June 30, 1996)*
10.18 Subcontract B335188 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated May 9, 1997*
10.19 Agreement between Zygo Corporation and Dacon Corporation covering an addition to the Company's Middlefield, Connecticut, facilities (Project 1774) and the N.I.F. Manufacturing Renovation (Project 1842) dated April 7, 1997*
10.20 Employment agreement dated January 15, 1999, between Zygo Corporation and J. Bruce Robinson. (Exhibit 10.34 to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1999)*
10.21 Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan ratified and approved by the Company's stockholders on November 17, 1999 *
10.22 Employment agreement dated July 1, 1999, between Zygo Corporation and Brian J. Monti.
10.23 Acquisition Agreement dated May 5, 2000, by and among Zygo Corporation, Firefly Technologies Inc., and the Shareholders of Firefly Technologies Inc. (Company's Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)*
10.24 Employment agreement dated May 5, 2000, between Zygo Corporation and John Berg. (Exhibit 10.01(e)(1) to the Company's Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)*
10.25 Employment agreement dated May 5, 2000, between Zygo Corporation and Patrick Tan. (Exhibit 10.01(e)(2) to the Company's Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)*
21. Subsidiaries of Registrant
23. Accountants' Consent
24. Power of Attorney
27. Financial Data Schedule
(b) Reports on Form 8-K
1. On May 18, 2000, the Company filed a Current Report on Form 8-K, dated May 8, 2000, reporting the completion of an acquisition of Firefly Technologies, Inc. by Zygo Corporation.
2. On July 19, 2000, the Company filed an amended Current Report on Form 8-K/A, dated June 30, 2000, reporting the historical Financial Statements and Notes of Firefly Technologies, Inc. as of December 31, 1999, 1998, and 1997, and the Combined Proforma Financial Statements and Notes for the years ended June 30, 1999 and 1998 and the nine month period ended March 31, 2000.
- ----------
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Michael J. Auth Date September 25, 2000 - --------------------------------------- Michael J. Auth Vice President Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page Report of Management Independent Auditors' Report Consolidated balance sheets at June 30, 2000 and 1999 Consolidated statements of earnings for the years ended June 30, 2000, 1999, and 1998 Consolidated statements of stockholders' equity for the years ended June 30, 2000, 1999, and 1998 Consolidated statements of cash flows for the years ended June 30, 2000, 1999, and 1998 to Notes to consolidated financial statements Selected consolidated quarterly financial data for the years ended June 30, 2000 and 1999
Consolidated Schedules
S-1 Independent Auditors' Report on Schedule
S-2 II -Valuation and qualifying accounts
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules or the information required is included in the consolidated financial statements or notes thereto.
REPORT OF MANAGEMENT
Management is responsible for preparing the Company's consolidated financial statements and related information that appears in this report on Form 10-K405. Management believes that the financial statements fairly reflect the form and substance of transactions and reasonably present the Company's financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures, and controls intended to provide reasonable assurance, at appropriate cost, that transactions are executed in accordance with Company authorization and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded.
KPMG LLP audits the Company's financial statements in accordance with generally accepted auditing standards and provides an objective, independent review of the fairness of reported financial condition and results of operations.
The Board of Directors of the Company has an Audit Committee composed of nonmanagement directors. The Committee meets with financial management and the independent auditors to review internal accounting controls and accounting, auditing, and financial reporting matters.
Michael J. Auth Vice President of Finance, Treasurer, and Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ZYGO CORPORATION:
We have audited the accompanying consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zygo Corporation and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP Hartford, Connecticut August 12, 2000
CONSOLIDATED BALANCE SHEETS (Thousands, except share and per share amounts)
JUNE 30, June 30, 2000 1999 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 15,598 $ 13,022 Marketable securities (note 3) 8,268 8,351 Receivables (note 4) 20,138 12,481 Inventories (note 5) 11,879 15,473 Costs in excess of billings (note 6) 5,743 660 Income taxes receivable 866 741 Prepaid expenses and taxes 1,173 804 Deferred income taxes (note 16) 9,020 3,715 -------- -------- Total current assets 72,685 55,247 -------- -------- Property, plant and equipment, net (notes 7 and 11) 18,493 16,437 Goodwill and other intangibles, net (note 8) 3,078 9,939 Other assets 906 819 -------- -------- TOTAL ASSETS $ 95,162 $ 82,442 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,380 $ 5,140 Customer progress payments 279 784 Accrued salaries and wages 3,485 1,743 Other accrued expenses 3,934 3,782 Income taxes payable 57 32 -------- -------- Total current liabilities 16,135 11,481 -------- -------- Long-term debt 84 36 Deferred income taxes (note 16) 271 2,213 Minority Interest 443 --
STOCKHOLDERS' EQUITY (notes 13, 14,and 15): Common stock, $ .10 par value per share:15,000,000 shares authorized; 14,441,231 Shares issued (13,706,359 in 1999) 1,444 1,370 Additional paid-in capital 68,304 42,667 Retained earnings 9,055 25,102 Accumulated other comprehensive income: Currency translation effects (182) (57) Net unrealized (loss) on marketable securities (note 3) (91) (69) -------- -------- 78,530 69,013 Less treasury stock, at cost; 207,600 common shares 301 301 -------- -------- Total stockholders' equity 78,229 68,712 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 95,162 $ 82,442 ======== ========
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000, 1999, and 1998 Amounts in thousands except for per share
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries ("Zygo" or the "Company"). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. As discussed in Note 2, all the outstanding shares of Firefly Technologies, Inc. ("Firefly") were acquired by the Company on May 5, 2000, in a transaction accounted for as a pooling-of-interests. Accordingly the financial statements of the Company have been restated to reflect the merger as if it had occurred on July 1, 1997. The Company, via its wholly owned subsidiary, Technical Instrument Company, completed the acquisition of Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), a German-based company, effective September 1, 1997. Zygo, prior to this acquisition, completed all necessary legal requirements allowing for appropriate transfer and registration of its original 50 percent ownership of Syncotec on June 30, 1997.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash investments with maturities at the date of purchase of three months or less to be cash and cash equivalents.
MARKETABLE SECURITIES
The Company considers investments in securities with maturities at the date of purchase in excess of three months as marketable securities. Marketable securities primarily consist of corporate and tax exempt bonds. All securities held by the Company at June 30, 2000 and 1999, were classified as available-for-sale and recorded at fair value or held to maturity and recorded at cost. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
DEPRECIATION
Depreciation is based on the estimated useful lives of the various classes of assets and is computed using the straight-line method. See note 7.
IMPAIRMENT OF LONG-LIVED ASSETS
As required by Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed Of, the Company evaluates the carrying value of its long-lived and intangible assets at each balance sheet date to determine if impairment exists based upon estimated undiscounted future cash flows. The impairment, if any, is measured by the difference between carrying value and estimated fair value and charged to expense in the period identified. The remaining amortization periods are periodically evaluated and would be revised if considered necessary. See notes 8 and 20.
REVENUE RECOGNITION
Revenues, other than revenue under the National Ignition Facility ("NIF") contract (note 19) and revenue from certain automation contracts (note 6), are recognized when units are shipped. Revenues related to NIF and automation contracts are recognized under the percentage-of-completion method of accounting.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements.
The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:
- -------------------------------------------------------------------------------- JUNE 30, June 30, June 30, 2000 1999 1998 - -------------------------------------------------------------------------------- Weighted average shares outstanding 12,511 11,780 11,480 Dilutive effect of stock options -- -- 1,397 ------ ------ ------ Diluted weighted average shares outstanding 12,511 11,780 12,877 - --------------------------------------------------------------------------------
During 2000 and 1999, the Company recorded a loss and all options were excluded from the computation because of the anti-dilutive effect on earnings per share.
GAIN CONTINGENCY
The Company was awarded $2,669 plus recovery of certain costs in a judgment rendered by the United States District Court (District of Arizona) on June 2, 1994. The Court's decision was appealed to the Court of Appeals for the Federal Circuit located in Washington, D.C. by the defendant and oral arguments of the appeal were heard by the Court on March 9, 1995. On April 1, 1996, the United States Court of Appeals for the Federal Circuit rendered an Opinion Announcing Judgment of the Court. The appellate court affirmed-in-part and reversed-in-part the District Court's earlier findings and remanded the case to the District Court for a redetermination of the damage award. Zygo recorded a gain of $1 million in the third quarter of 2000 when the Company received the proceeds from this settlement.
STOCK BASED COMPENSATION
Stock-based compensation awards to employees under the Company's stock plans are accounted for using the intrinsic value method prescribed in Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional capital. Except as discussed in Note 2, no charges are reflected in the consolidated statements of operations as a result of the grant or exercise of stock options, which are granted with an exercise price at fair-market value on the date of grant. The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional capital.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires that reporting entities provide, to the extent practicable, the fair value of financial instruments, both assets and liabilities. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"), was issued in 1998 and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. In 1999, Statement of Financial Accounting Standard No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the effective date of FASB Statement 133, was issued which delays the required adoption of Statement 133 to the Company's fiscal year 2001. This statement is not expected to have an impact, as the Company does not significantly utilize derivatives or hedges.
NOTE 2: MERGERS, ACQUISITIONS AND STRATEGIC INITIATIVES
On May 5, 2000, the Company entered into an agreement and plan of merger with Firefly Technologies, Inc. ("Firefly"), a Delaware corporation, Zygo TeraOptix, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, and the security holders of Firefly, pursuant to which the Company agreed to acquire Firefly. Immediately thereafter, the acquisition was consummated by the merger of Zygo TeraOptix with and into Firefly and Firefly became a wholly-owned subsidiary of the Company under the new name Zygo TeraOptix.
Under the terms of the acquisition, the Company exchanged an aggregate of 2,303,937 shares of its common stock, $.10 par value per share, for all of the then outstanding capital stock and stock options of Firefly. The acquisition, which is intended to be tax free for federal income tax purposes to the Firefly securityholders, has been accounted for as a pooling-of-interest transaction. Firefly manufactures metrology equipment, micro-optics, switches and filters for the telecommunications industry, as well as heads and related products for the optical data storage industry. The telecommunications components are used in wave division multiplexers to increase the capacity of optical fibers. The Company intends to continue to use the assets acquired in the acquisition for these purposes.
Related to the transaction and the vesting of certain Firefly stock options, the Company has recorded approximately $12,024 of additional compensation expense and in addition recorded $1,977 in acquisition related costs for legal, investment banking and accounting fees in fiscal 2000.
In the fourth quarter of fiscal 2000, the Company decided to discontinue its investment in certain product lines, which were no longer compatible with their strategic plan. Related to the discontinuance of these product lines, the Company recorded approximately $10,567 of charges in the fourth quarter of fiscal year 2000 which consisted of the write-down of goodwill and other intangible assets ($5,478) and inventory ($5,089) which the Company will no longer continue to develop.
On September 1, 1997, the Company, through its Technical Instruments subsidiary completed the purchase of the remaining 50% of Syncotec Neue Technologien und Instrumente GmbH ("Syncotec") the Company did not already own. The Company paid $2,262 and issued 19,432 shares of common stock, $.10 par value, valued at $623. The transaction was accounted for as a purchase. The net
purchase price was allocated to the fair value of the net assets acquired. This allocation resulted in a charge of $878 of in-process research and development costs.
In October 1997, the Company terminated merger talks with Digital Instruments, Inc. resulting in a charge for failed merger costs of $335.
NOTE 3: MARKETABLE SECURITIES
Marketable securities at June 30, 2000 consist primarily of corporate bonds and tax exempt bonds issued by various state and municipal agencies while marketable securities at June 30, 1999 consist primarily of corporate bonds. Marketable securities at June 30, 2000 and June 30, 1999 are reported either at fair value or at cost depending on their classification. The unrealized loss on marketable securities of $154 (gross) is shown net of its related tax effect of $91 as a separate component of stockholders' equity.
Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
The cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities at June 30, 2000 and 1999 were as follows:
Gross Gross Unrealized Unrealized Holding Holding Fair Cost Gains Losses Value ------ ----------- ---------- ------ AT JUNE 30, 2000 STATE AND LOCAL MUNICIPAL BONDS $7,240 $ -- $ (154) $7,086 At June 30, 1999 Corporate Bonds $5,954 $ -- $ (117) $5,837 ------ ------- ------ ------
The Company recorded gross realized gains on the maturity of investment securities of $0 and $38 in 2000 and 1999, respectively. There were no gross realized losses recorded in 2000 or 1999.
Maturities of investment securities classified as available-for-sale were as follows at June 30, 2000:
Fair Cost Value ------- ------ Due within one year $ -- $ -- Due after one year through five years 7,240 7,086 ------- ------ $7,240 $7,086 ======= ======
Maturities of investment securities classified as held-to-maturity were as follows at June 30, 2000:
Fair Cost Value ------ ------ Due within one year $1,182 $1,182 Due after one year through five years -- -- ------ ------ $1,182 $1,182 ====== ======
NOTE 4: ACCOUNTS RECEIVABLE
At June 30, 2000 and 1999, accounts receivable, net of allowances, were as follows:
JUNE 30, June 30, 2000 1999 -------- -------- Trade (note 18) $ 19,293 $ 13,343 Other 1,079 462 -------- -------- 20,372 $ 13,805 Allowance (234) (1,324) -------- -------- $ 20,138 $ 12,481 ======== ========
NOTE 5: INVENTORIES
Inventories at June 30, 2000 and 1999 were as follows:
JUNE 30, June 30, 2000 1999 --------- -------- Raw materials and manufactured parts $ 7,034 $ 7,866 Work in process 3,471 4,622 Finished goods 1,374 2,985 ------- ------- $11,879 $15,473 ======= =======
NOTE 6: COSTS IN EXCESS OF BILLINGS
Revenues from automation projects are accounted for under the percentage-of- completion method, using total project costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. The cumulative effects of revisions of estimated total contract costs and revenues are recorded in the period in which the facts become known. When a loss is anticipated on a contract, the full amount of the loss is provided for currently. The differences between amounts billed and revenue recognized is shown as costs in excess of billings on the accompanying balance sheets.
Totals of revenue earned and billings issued on contracts were as follows:
JUNE 30, June 30, 2000 1999 ------- ------- Revenue recognized to date $37,069 $25,239 Billings to date 31,326 24,579 ------- ------- $ 5,743 $ 660 ======= =======
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Costs of replacements and improvements are capitalized and depreciated over a range of 3-40 years. Maintenance and repairs are charged to expense as incurred. At June 30, 2000 and 1999, property, plant and equipment, at cost, were as follows:
JUNE 30, June 30, 2000 1999 -------- ------- Land $ 897 $ 897 Building 9,115 9,115 Machinery, equipment and office furniture 23,839 21,887 Leasehold improvements 519 431 Construction in progress 3,621 1,603 ------- ------- 37,991 33,933 Less accumulated depreciation 19,498 17,496 ------- ------- $18,493 $16,437 ======= =======
NOTE 8: GOODWILL AND OTHER INTANGIBLES
The cost of intangible assets is amortized on a straight-line basis, which ranges from 4 to 20 years. Management evaluates, on an ongoing basis, the carrying value of its intangible assets and makes adjustments, when impairments are identified. Goodwill and other intangibles, net, at June 30, 2000 and 1999 were as follows:
JUNE 30, June 30, 2000 1999 ------ ------- Goodwill and other intangibles $5,140 $12,778 Accumulated amortization 2,062 2,839 ------ ------- $3,078 $ 9,939 ====== =======
NOTE 9: BANK LINE OF CREDIT
The Company has a $3,000 unsecured bank line of credit with interest at LIBOR plus 60 basis points (approximately 6.8% at June 30, 2000). The line of credit is available through November 22, 2000. At June 30, 2000 and 1999, no amounts were outstanding under the bank line of credit.
NOTE 10: LONG-TERM DEBT
As of June 30, 2000, the Company has $24 in long-term debt obligations as a result of the acquisition of Firefly.
Interest payments on debt and capital leases were $6, $11 and $6 in fiscal 2000, 1999, and 1998, respectively.
NOTE 11: LEASES
The Company leases certain manufacturing equipment and facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through 2005. Total rental expense charged to operations was $986 in 2000, $738 in 1999, and $600 in 1998. At June 30, 2000 the minimum future rental commitments under noncancellable leases payable over the remaining lives of the leases were:
Capital Operating Year ending June 30, ------- --------- 2001 $ 44 $1,253 2002 34 1,167 2003 -- 548 2004 -- 536 2005 -- 877 ------ ------ Total minimum lease payments 78 $4,381 ====== Less amount representing interest 6
Present value of minimum lease payments 72
Less current portion of capital lease obligations 40
Capital lease obligation, excluding current portion $ 32 ======
NOTE 12: PROFIT-SHARING PLAN
The Company maintains a deferred profit-sharing plan under which substantially all full-time employees of the Company are eligible to participate. Profit-sharing expense for the years ended June 30, 2000, 1999, and 1998 amounted to $709, $0, and $1,370, respectively.Profit-sharing contributions are determined annually at the discretion of the Board of Directors.
Effective June 30, 1985, the existing profit-sharing plan was revised and amended to incorporate a 401(k) tax deferred payroll deduction program and an Employee Stock Ownership Program. Under the 401(k) program, employees may contribute a tax-deferred amount of up to 15% of their compensation, as defined. The Company may contribute to the 401(k) program, an amount determined annually at the discretion of the Board of Directors. The 401(k) contribution expense for the years ended June 30, 2000, 1999, and 1998 amounted to $500, $607, and $603, respectively.
Under the Employee Stock Ownership Program, the Company may, at the discretion of the Board of Directors, contribute its own stock or contribute cash to purchase its own stock. The purchased stock's fair market value can not exceed the maximum amount of employee stock ownership credit as determined under Section 416 of the Internal Revenue Code. There were no purchases and no contributions made under this program for the years ended June 30, 2000, 1999, and 1998.
With the acquisition of Firefly, the Company maintains a separate defined contribution retirement plan for the employees of Zygo TeraOptix. Employees are eligible to participate after three months of employment with the Company and may elect to defer up to 15% of their salary on a pre-tax basis. The plan also allows the Company to make discretionary contributions to the plan, which are allocated to the participants' accounts. The Company has not made any contributions to the plan to date.
NOTE 13: STOCKHOLDERS' EQUITY
On July 31, 2000, the shareholders voted to increase the number of authorized shares from 15 million to 40 million.
NOTE 14: STOCK COMPENSATION PLANS
As of June 30, 2000, Zygo Corporation has two stock based compensation plans, which are described below (see note 15). The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Since all options were granted with an exercise price equal to the fair-market value on the date of the grant, no compensation cost has been recognized for its fixed option plans. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation", which requires that the information be determined as if the Company has accounted for its stock options granted in fiscal years beginning after December 15, 1994 under the fair value method of the statement. The fair value of options at date of grant was estimated using the Black-Scholes model. The Company's pro forma information is as follows:
JUNE 30, June 30, June 30, 2000 1999 1998 --------- --------- ------- Pro forma net (loss) income $(16,930) $(4,697) $5,583 Pro forma (loss) earnings per share $ (1.35) $ (.40) $ .43
The fair value of these options at the date of grant was estimated with the following weighted average assumptions of 2000 and 1999:
JUNE 30, June 30, June 30, 2000 1999 1998 ---------- ---------- ---------- Risk free rate of interest 5.9% 4.8% 5.8% Dividend yield 0.0% 0.0% 0.0% Volatility factor 67% 58% 68% Expected life of option 5.6 YEARS 5.7 years 6.2 years
The above pro forma information is based on historical activity and may not represent future trends.
NOTE 15: STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN AND DATA
The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan permits the granting of non-qualified options to purchase a total of 4,850,000 shares (adjusted for splits) of common stock at prices not less than the fair-market value on the date of grant. The Board of Directors approved a repricing of non-qualified options greater than $30.00 per share at the August 1998 board meeting. The average price of 112,000 shares went from $35.12 to $10.81. Options generally become exercisable at the rate of 25% of the shares each year commencing one year after the date of grant. The Plan as amended will expire on September 3, 2002. On July 31, 2000, the shareholders voted to increase the number of shares in the stock option plan by 1,500,000.
JUNE 30, 2000 ------------------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- Outstanding at beginning of year 1,245,299 $ 7.2277 Granted 182,650 $23.1386 Exercised (519,200) $ 7.2148 Expired or canceled (110,450) $13.2402 --------- Outstanding at end of year 798,299 $10.0199 =========
June 30, 1999 ------------------------------------- Weighted Average Shares Exercise Price --------- --------------- Outstanding at beginning of year 1,416,779 $ 7.2866 Granted 228,000 $10.5957 Exercised (184,480) $ 1.8362 Expired or canceled (215,000) $26.6993 --------- Outstanding at end of year 1,245,299 $ 7.2277 =========
June 30, 1998 ------------------------------------- Weighted Average Shares Exercise Price --------- ---------------- Outstanding at beginning of year 1,393,324 $ 5.6865 Granted 280,500 $32.9166 Exercised (145,170) $ 4.5445 Expired or canceled (111,875) $11.5510 --------- Outstanding at end of year 1,416,779 $ 7.2866 =========
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA
The Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan permits the granting of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock at prices not less than the fair-market value on the date of grant. Under the terms of the Plan, each
new non-employee director is granted an option to purchase 8,000 shares of Common Stock, generally, on his or her first day of service as a non-employee director; and each other non-employee director is granted an option to purchase 3,000 shares of Common Stock on an annual basis. All Options are fully exercisable on the date of grant and have a 10 year term. The Plan, as amended, will expire on November 17, 2009.
JUNE 30, 2000 -------------------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- --------------- Outstanding at beginning of year 450,000 $ 6.2292 Granted 15,000 $17.2500 Exercised (216,000) $ 7.4983 Expired or canceled -- $ -- ---------- Outstanding at end of year 249,000 $ 5.7922 ==========
June 30, 1999 -------------------------------------- Weighted Average Shares Exercise Price ------- -------------- Outstanding at beginning of year 450,000 $6.2292 Granted -- $ -- Exercised -- $ -- Expired or canceled -- $ -- ------- Outstanding at end of year 450,000 $6.2292 =======
June 30, 1998 ----------------------------- Weighted Average Shares Exercise Price ------- --------------- Outstanding at beginning of year 450,000 $6.2292 Granted -- $ -- Exercised -- $ -- Expired or canceled -- $ -- ------- Outstanding at end of year 450,000 $6.2292 =======
The following table summarizes information about all fixed stock options outstanding at June 30, 2000:
Options Outstanding - -------------------------------------------------------------------------------- Number Weighted Average Range of Outstanding Remaining Weighted Exercise as of Contractual Average Prices June 30, 2000 Life Exercise Price - -------------------------------------------------------------------------------- $ 1.42 - $ 1.92 44,500 1.88 $ 1.7774 $ 2.00 - $ 2.00 439,374 4.04 $ 2.0000 $ 2.42 - $ 9.50 183,150 5.31 $ 5.7870 $10.56 - $11.75 191,425 8.29 $10.9900 $13.38 - $58.75 182,050 7.85 $26.6417 $65.69 - $70.44 6,800 9.90 $69.0409 - --------------- --------- ---- -------- $ 1.42 - $70.44 1,047,299 5.65 $ 9.0147
Options Exercisable - ----------------------------------------------------------------------------- Range of Number Weighted Exercise Exercisable as of Average Prices June 30, 2000 Exercise Price - ----------------------------------------------------------------------------- $ 1.42 - $ 1.92 44,500 $ 1.7774 $ 2.00 - $ 2.00 439,374 $ 2.0000 $ 2.42 - $ 9.50 98,850 $ 2.8645 $10.56 - $11.75 33,300 $10.8752 $13.38 - $58.75 54,500 $20.4971 $65.69 - $70.44 -- $ -- --------------- ------- -------- $ 1.42 - $70.44 670,524 $ 4.0569
As discussed in Note 2, the Company recorded approximately $12,024 of additional compensation expense to reflect the derived fair market value of certain Firefly stock options, which were exercised by Firefly employees in connection with the exchange of Firefly capital stock and stock options for Zygo Corporation. No Firefly options have been included in the tables above because all Firefly options were exercised and converted to Zygo shares in connection with the merger.
NOTE 16: INCOME TAXES
The components of income tax expense (benefit) for each year are as follows:
Fiscal Year Ended June 30, ------------------------------------- 2000 1999 1998 ------- ------- -------- Currently payable: Federal $ 1,136 $(1,339) $ 3,670 State (71) 101 909 Foreign 604 101 285 ------- ------- ------- $ 1,669 $(1,137) $ 4,864 ======= ======= ======= Deferred: Federal $(3,051) $(1,034) $ (677) State (77) (755) (143) Foreign -- (49) (53) ------- ------- ------- $(3,128) $(1,838) $ (873) ------- ------- ------- Total income tax (benefit) expense $(1,459) $(2,975) $ 3,991 ======= ======= =======
Income taxes paid (refunded) amounted to $(2,539), $(848), and $4,660 in fiscal 2000, 1999, and 1998, respectively.
The total income tax expense (benefit) differs from the amount computed by applying the applicable U.S. federal income tax rate of 35% in each of the fiscal years 2000, 1999, and 1998 to earnings before income taxes for the following reasons:
Fiscal Year Ended June 30, 2000 1999 1998 -------------------------------- Computed "expected" tax expense (benefit) $(5,886) $(2,400) $3,858 Increases (reductions) in taxes resulting from: Nondeductible acquisition- related charges 4,329 -- 458 State taxes, net of federal income tax benefit (96) (432) 498 Tax exempt interest income (15) (131) (179) FSC benefit (300) -- (637) Other, net 509 (12) (7) -------------------------------- $(1,459) $(2,975) $3,991 ================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2000 and 1999, are presented below:
JUNE 30, June 30, 2000 1999 ---------------------- Deferred tax assets: Accounts receivable, principally due to the allowance for doubtful accounts $ 468 $ 501 Accrued liabilities 395 941 Inventory valuation 1,412 1,978 Unrealized gain on marketable securities 57 -- One-time charges 2,140 -- Intangibles 245 -- Federal and state NOLs and credits 4,572 380 Other 30 52 ---------------------- 9,319 3,852 Less valuation allowance -- -- ---------------------- Deferred tax asset 9,319 3,852 Deferred tax liabilities: Prepaid expenses (39) (52) Plant and equipment, principally due to differences in depreciation expense (516) (290) Intangibles -- (1,892) Unrealized gain on marketable securities -- (9) Other (15) (26) ---------------------- Deferred tax liability (570) (2,269) ---------------------- Net deferred tax asset (liability) $ 8,749 $ 1,583 ======================
The net current deferred tax assets and net non-current deferred tax liabilities as recorded on the balance sheet as of June 30, 2000 and 1999 are as follows:
JUNE 30, June 30, 2000 1999 -------- -------- Net current deferred tax asset $ 9,020 $ 3,715 Net noncurrent deferred tax liability (271) (2,132) -------- ------- Net deferred tax asset (liability) $ 8,749 $ 1,583
A valuation allowance has not been recorded because the Company believes that the deferred tax assets will, more likely than not, be realized. This determination is based largely upon the Company's historical earnings trend as well as its ability to carryback reversing items and recover taxes paid in the carryback
period. In addition, the Company has the ability to offset deferred tax assets against deferred tax liabilities associated with such items as depreciation and amortization.
The Company has federal and state net operating loss carryforwards of approximately $8,220 and $22,571 which are available to reduce federal and state taxable income, if any, through 2019.
The Company also has a federal general business credit carryforward of approximately $874, which is available to reduce federal taxable income, if any, through 2019.
NOTE 17: SEGMENT REPORTING
The Company has adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 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 is managed as a single operating segment with a centrally managed sales force selling Zygo's products in regional offices located in the U.S., Japan, Europe, and Asia.
For its fiscal year 2000, Zygo continued to operate in one segment, as a world leader in metrology, process control, and yield solutions servicing high precision industries. Beginning in Fiscal 2001, the Company will capture and report on its operations in three segments: Semiconductor/Data Storage, Industrial, and Telecommunication. Substantially all of the Company's operating results, assets, depreciation, and amortization are U.S. based. The Company's export sales are noted below.
The Company is headquartered in Middlefield, Connecticut, and also has facilities in Asslar, Germany; Longmont, Colorado; Holliston, Massachusetts; and in Newbury Park and Sunnyvale, California.
Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than 18% of total Company sales for each of the years ended June 30, 2000, 1999 and 1998 (see note 18). The Company recorded 3%, 6%, and 13% of total Company sales with the University of California's Lawrence Livermore National Laboratories for the years ended June 30, 2000, 1999, and 1998, respectively (see note 19). No other individual customer accounted for more than 10% of total Company sales for any year presented in the accompanying consolidated financial statements.
Export sales by geographic area were as follows:
Fiscal Year Ended June 30, 2000 1999 1998 ------------------------------------ Far east: Japan $17,588 $14,143 $22,284 Pacific Rim 11,714 6,038 11,348 ------------------------------------ Total Far East $29,302 $20,181 $33,632 Europe and other 9,106 7,848 9,387 ------------------------------------ Total $38,408 $28,029 $43,019 ====================================
NOTE 18: RELATED PARTY TRANSACTIONS
Sales to Canon Inc., a stockholder, and to Canon Sales Co., Inc., a distributor for certain of the Company's products in Japan and a subsidiary of Canon Inc., amounted to approximately $16,463 (19% of net sales), $13,375 (21% of net sales), and $17,626 (18% of net sales), for the years ended June 30, 2000, 1999, and 1998, respectively.
Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the normal terms given to distributors. At June 30, 2000 and 1999, there was approximately, in the aggregate, $2,171 and $1,548, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc.
NOTE 19: MATERIAL CONTRACTS
On May 9, 1997, the Company announced it had entered into a contract with the University of California's Lawrence Livermore National Laboratory ("LLNL"), whereby the Company will be a primary supplier of large plano optical components for the National Ignition Facility ("NIF"), a $1.2 billion Department of Energy project at LLNL to produce the world's largest laser for nuclear fusion research. The contract provided for the Company to design, manufacture, and equip a world-class optical fabrication facility at its Middlefield, Connecticut, operations for a fixed price of nearly $10 million over an 18-month time period. Revenues recognized on this contract in fiscal 2000 and 1999 amounted to $2,802 and $900, respectively. To accommodate the space required for the NIF facility and provide additional office facilities, the Company has built a 35,500-square-foot building addition at its Middlefield, Connecticut, site.
During fiscal year 1999, the Company entered into an agreement with IBM, which allows for marketing and servicing rights for its Atomic Force Microscope (AFM) line of business for a four-year period. The Company made payments totaling $2,250 to secure this relationship, which are being amortized over four years or less.
On March 28, 2000, the Company entered into an agreement to terminate the distribution agreement to market and sell AFM products. As part of the agreement, the Company was granted a nonexclusive license to the IBM AFM technology for the next three years and may continue to license the technology for additional terms thereafter. The Company and Veeco Corporation, who subsequently entered into the distribution agreement from IBM, have entered into an additional agreement for support and service of AFM products previously sold by Zygo. As a result of this agreement Zygo's AFM sales and service department has been discontinued.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (Thousands, except per share amounts)
(1) The difference between basic shares outstanding and diluted shares outstanding is the assumed conversion of common stock equivalents (stock options) in the amounts of 1,075,000, 0, 1,595,000, and 0 for fiscal 2000 quarters and 0, 0, 0 and 1,073,000 for the fiscal 1999 quarters ended September 30, December 31, March 31, and June 30, respectively.
(2) Generally accepted accounting principles requires the computation of the net loss per share to be based on the weighted average basic shares outstanding.
(3) Nonrecurring charges include acquisition-related charges of $14,001 and the west coast operations reorganization costs of $10,567 in the fourth quarter ended June 30, 2000.
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors Zygo Corporation
Under date of August 12, 2000, we reported on the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2000 as contained in the 2000 annual report to stockholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, this financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Hartford, Connecticut August 12, 2000
S-1
ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
* Includes opening balances of SSI Allowance for Doubtful Accounts $86,700
S-2
EXHIBIT INDEX
EXHIBIT TABLE FORM 10K-405 NUMBER PAGE NUMBER ------ ------------
10.22 Brian J. Monti's Employment Contract
21. Subsidiaries of Registrant
23. Accountants' Consent
24. Power of Attorney
27. Financial Data Schedule