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FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
_X_ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to _____________________
Commission File Number 0-12944
ZYGO CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 06-0864500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LAUREL BROOK ROAD, MIDDLEFIELD, CONNECTICUT 06455
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(Address of principal executive offices) (Zip Code)
(860) 347-8506
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Registrant's telephone number, including area code
N/A
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(Former name, former address, and former fiscal year,
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES ___ NO __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
11,375,272 Common Stock, $.10 Par Value at February 4, 1999
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share amounts)
For the Three Months For the Six Months
Ended December 31, (1) Ended December 31, (1)
------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $15,979 $27,277 $31,417 $51,593
Cost of good sold 9,860 15,701 19,924 28,552
------- ------- ------- -------
Gross profit 6,119 11,576 11,493 23,041
Selling, general and administrative expenses 3,982 3,620 8,623 7,548
Research, development and engineering expenses 2,562 2,465 4,833 4,910
Nonrecurring acquisition-related charges 0 0 0 1,585
Failed merger costs 0 0 0 335
Amortization of goodwill and other intangibles 277 196 493 338
------- ------- ------- -------
Operating (loss) profit (702) 5,295 (2,456) 8,325
------- ------- ------- -------
Other income (expense):
Interest income 313 240 624 525
Miscellaneous (expense), net (23) (135) (114) (156)
------- ------- ------- -------
290 105 510 369
------- ------- ------- -------
(Loss) earnings before income taxes (412) 5,400 (1,946) 8,694
Income tax (benefit) expense (76) 1,711 (539) 3,307
------- ------- ------- -------
Net (loss) earnings (note 1) $ (336) $ 3,689 $(1,407) $ 5,387
======= ======= ======= =======
(Loss) earnings per share (4):
Basic (2) $ (.03) (3) $ .34 $ (.13) (3) $ .50
======= ======= ======= =======
Diluted (2) $ (.03) (3) $ .30 $ (.13) (3) $ .44
======= ======= ======= =======
Weighted average number of shares:
Basic 11,158 10,921 11,110 10,816
======= ======= ======= =======
Diluted 11,158 12,338 11,110 12,275
======= ======= ======= =======
</TABLE>
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(1) The results of Sight Systems, Inc. which is being accounted for as an
immaterial pooling-of-interests, are included from July 1, 1997; the
results of Syncotec Neue Technologien und Instrumente GmbH ("Syncotec") are
included from September 1, 1997 when the acquisition of the remaining 50%
of Syncotec not then owned by Zygo was completed.
(2) The difference between basic shares outstanding and diluted shares
outstanding is the assumed conversion of common stock equivalents (stock
options) in the amounts of 1,417,000 in the three months ended December 31,
1997 and 1,459,000 in the six months ended December 31, 1997.
(3) As per generally accepted accounting principles, the computation of the net
loss per share is based on the weighted average basic shares outstanding.
(4) The net earnings or loss per common share have been restated as a result of
the adoption of Statement of Financial Accounting Standards No 128,
Earnings per Share.
<PAGE>
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CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and June 30, 1998
(Thousands, except share amounts)
ASSETS December 31, June 30,
- ------ 1998 1998
------------ --------
Current Assets:
Cash and cash equivalents $14,660 $22,023
Marketable securities 9,468 8,264
Receivables 11,426 16,555
Inventories:
Raw materials and manufactured parts 9,878 9,763
Work in process 3,497 3,723
Finished goods 1,540 944
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Total inventories 14,915 14,430
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Costs in excess of billings 2,049 1,182
Income taxes receivable 633 --
Prepaid expenses and taxes 587 829
Deferred income taxes 2,696 2,680
------- -------
Total current assets 56,434 65,963
------- -------
Property, plant and equipment, at cost 31,804 30,690
Less accumulated depreciation 16,265 15,001
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Net property, plant and equipment 15,539 15,689
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Goodwill and other intangible assets, net 10,156 8,524
Other assets 896 829
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Total assets $83,025 $91,005
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,509 $ 5,993
Accrued expenses and customer progress payments 5,455 9,542
Federal and state income taxes -- 343
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Total current liabilities 8,964 15,878
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Deferred income taxes 2,961 2,961
Stockholders' Equity:
Common stock, $.10 par value per share:
15,000,000 shares authorized; 11,374,522
shares issued (11,217,942 at June 30, 1998) 1,137 1,122
Additional paid-in capital 42,532 42,267
Retained earnings (note 1) 27,656 29,063
Currency translation effects 84 1
Net unrealized (loss) gain on marketable securities (8) 14
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71,401 72,467
Less treasury stock, at cost; 207,600 shares 301 301
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Total stockholders' equity 71,100 72,166
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Total liabilities and stockholders' equity $83,025 $91,005
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-3-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997
(Thousands of dollars)
1998 1997
---- ----
Cash provided by (used for) operating activities:
Net (loss) earnings (note 1) $(1,407) $ 5,387
Adjustments to reconcile net (loss) earnings to cash
provided by (used for) operating activities:
Depreciation and amortization 2,049 1,652
Loss on disposal of assets 108 232
Nonrecurring in-process R&D 0 879
Gain on sale of marketable securities (35) (70)
Changes in operating accounts:
Receivables 5,128 984
Costs in excess of billings (866) (390)
Inventories (486) (1,859)
Prepaid expenses 242 315
Accounts payable and accrued expenses (7,465) (1,847)
------- -------
Net cash (used for) provided by operating activities (2,732) 5,283
------- -------
Cash (used for) provided by investing activities:
Additions to property, plant and equipment (1,492) (4,684)
Investment in marketable securities (9,113) (2,704)
Investment in other assets (2,212) (345)
Acquisition of business 0 (1,268)
Proceeds from sale of marketable securities 5,361 2,208
Proceeds from maturity of marketable securities 2,545 4,805
Cash acquired from acquisitions 0 2,059
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Net cash (used for) provided by investing activities (4,911) 71
------- -------
Cash provided by financing activities:
Repayment of long-term debt 0 0
Exercise of employee stock options 280 480
------- -------
Net cash provided by financing activities 280 480
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Net (decrease) increase in cash and cash equivalents (7,363) 5,834
Cash and cash equivalents, beginning of year 22,023 10,981
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Cash and cash equivalents, end of quarter $14,660 $16,815
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The interim financial statements furnished herein reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. All such adjustments are of a normal and
recurring nature. The results for the quarter ended December 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
These interim financial statements should be read in conjunction with the
financial statements and notes included in the Company's June 30, 1998 Annual
Report on Form 10-K405 including items incorporated by reference herein.
<PAGE>
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: New Accounting Pronouncements
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's reported
net income or shareholders' equity. Comprehensive income (loss) is defined as
net income plus nonshareholder direct adjustments to shareholders' equity which
consist of foreign currency translation adjustments and adjustments for the net
unrealized gains (losses) related to the Company's marketable equity securities.
Comprehensive losses totaled $372,000 and $1,346,000 in the three-month and
six-month periods ended December 31, 1998, respectively, as compared to
comprehensive income of $3,679,000 and $5,395,000 in the comparable prior-year
periods.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard changes the criteria used to
determine the segments for which SEC registrants must report information. The
statement is effective for both interim and annual financial statements for
periods beginning after December 15, 1997; however, this statement need not be
applied to interim financial statements in the initial year of its application.
The Company intends to adopt SFAS No. 131 for the fiscal year ending
June 30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales of $15,979,000 for the three months and $31,417,000 for the six months
ended December 31, 1998, decreased by $11,298,000 or 41% and $20,176,000 or 39%,
respectively, from the net sales in the comparable prior year periods. Net sales
of the Company's instruments and systems decreased by 33% to $11,382,000 from
the comparable quarter in the prior fiscal year. The Company's sales continue to
be impacted by the Asian economic environment and weak semiconductor and data
storage markets. Net sales of modules and components decreased by 55% to
$4,597,000 in the second quarter of fiscal 1999 from $10,184,000 in the
comparable quarter in fiscal 1998 which included $3.2 million of facilitization
revenues recorded by the Company on the NIF facility contract with Lawrence
Livermore National Laboratory. Net sales of the Company's instruments and
systems and net sales of modules and components decreased by $13,539,000 or 39%
and $6,637,000 or 38%, respectively, for the six months ended December 31, 1998
as compared to the six-month period ended December31, 1997.
Gross profit for the three months and six months ended December 31, 1998,
amounted to $6,119,000 and $11,493,000, respectively, a decrease of $5,457,000
and $11,548,000 from the comparable prior year periods. Gross profit as a
percentage of sales for the quarter and six months ended December 31, 1998,
amounted to 38% and 37%, respectively, a decrease of 4 and 8 percentage points,
respectively, from gross profit as a percentage of sales of 42% and 45%,
respectively, for the three months and six months ended December 31, 1997. The
decrease in gross profit and gross profit as a percentage of sales were
primarily due to volume shortfalls and the associated under utilization of the
Company's manufacturing facilities. Pricing pressures and the resulting
discounting also continued to impact margin levels, most notably in the mask
metrology sector.
<PAGE>
-5-
Selling, general and administrative expenses of $3,982,000 and $8,623,000,
respectively, in the three months and six months ended December 31, 1998,
increased by $362,000 or 10%, and $1,075,000 or 14%, respectively, from the same
periods the year earlier. The increases in the three-month period ended December
31, 1998 primarily included costs associated with creating additional
infrastructure, most notably for the Company's new Atomic Force Microscope
products. The six month period ended December 31, 1998 was also impacted by bad
debt expenses associated with the establishment of an allowance for doubtful
accounts relating to contracts associated with StorMedia Inc. during the first
quarter. As a percentage of sales, selling, and general and administrative
expenses increased in the three months and six months ended December 31, 1998,
to 25% and 27%, respectively, as compared to 13% and 15%, respectively, in the
comparable prior year period.
Research, development and engineering expenses ("R&D") amounted to $2,562,000 or
16% of sales and $4,833,000 or 15% of sales, respectively, for the three months
and six months ended December 31, 1998. In the comparable three- and six-month
periods in the prior year, R&D expenses totaled $2,465,000 or 9% of sales and
$4,910,000 or 10% of sales, respectively. The Company's management continues to
focus considerable attention on projects which will enhance the Company's
product offering and should provide long-term benefits to the Company.
The Company recorded an operating loss in the three months ended December 31,
1998 totaling $702,000, as compared to operating profit in the comparable prior
year period of $5,295,000. Excluding the nonrecurring charges for both periods,
the Company's operating loss in the six months ended December 31, 1998 was
$2,456,000, as compared to operating profit of $10,245,000 in the six months
ended December 31, 1997. Including the nonrecurring charges for both periods,
the Company reported an operating loss of $2,456,000 for the six months ended
December 31, 1998 as compared with an operating profit of $8,325,000 in the
comparable prior year period.
The Company recorded a net loss of $336,000 in the three-month period ended
December 31, 1998, as compared to net income of $3,689,000 reported in the
three-month period ended December 31, 1997. The Company reported diluted per
share earnings of $(.03) in the quarter ended December 31, 1998, as compared to
diluted per share earnings of $.30 in the comparable quarter in the prior year.
Excluding nonrecurring charges, a net loss for the first half of fiscal 1999
totaled $1,407,000, as compared to a net profit of $7,307,000 in the first half
of fiscal 1998. Diluted earnings per share for the first half of fiscal 1999,
excluding the nonrecurring charges, were $(.13), as compared to $.60 in the
first half of fiscal 1998. Including the nonrecurring charges, the Company
reported a net loss of $1,407,000 or $(.13) per share for the first half of
fiscal 1999, as compared to a net profit in the comparable prior period of
$5,387,000 or $.44 per share.
Financial Condition
At December 31, 1998, working capital was $47,470,000, a decrease of $2,615,000
from the amount at June 30, 1998 and $1,741,000 from September 30, 1998 levels.
The Company at December 31, 1998 had cash and cash equivalents of $14,660,000
and marketable securities of $9,468,000 for a total of $24,128,000, a decrease
of $2,896,000 from September 30, 1998. The decrease in working capital in the
quarter was principally due to decreases in the levels of cash and cash
equivalents, and of accounts receivable, due to lower sales levels. During the
quarter, the Company entered into a worldwide distribution agreement with IBM
which allows for exclusive marketing and servicing rights for its Atomic Force
Microscope line of business. To secure this relationship, the Company made a
cash payment to IBM in the quarter. During the year, the Company has utilized a
portion of its cash position
<PAGE>
-6-
to fund its capital plan. Capital expenditures of $1,492,000 were incurred
during the first six months of fiscal 1999 representing a 68% decrease when
compared to the same period in 1998. As of December 31, 1998, there were no
borrowings outstanding under the Company's $3,000,000 bank line of credit.
Unused amounts under the line of credit are available for short-term working
capital needs.
The Company's backlog at December 31, 1998 totaled $23,088,000, a decrease of
36% from the backlog at December 31, 1997. Management remains concerned with the
Asian currency crisis and the resultant uncertainty in demand for data storage
and semiconductor components which has led customers in those sectors to hold
back their capital spending plans affecting orders for the Company's equipment.
Year 2000
As discussed in the Company's Annual Report for June 30, 1998 filed on Form
10-K405, the Company is currently working to minimize the potential impact of
the Year 2000 software anomaly on the processing of date-sensitive information
by the Company's computerized information systems, as well as any supplier and
customer date-sensitive information transferred to or by the Company. The
Company's products only use the date function of the underlying computer system
to date-stamp data files collected during the measurement process.
Based on an assessment of the systems, the cost of addressing potential problems
is not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, if the Company, its customers, and suppliers are unable to resolve such
processing issues on a timely basis, the Company's financial condition and
results of operations could be adversely affected. Accordingly, the Company has
been executing a plan in order to attempt to resolve the significant Year 2000
issues in a timely manner.
Achieving Year 2000 compliance is dependent on many factors, some of which are
not completely within the Company's control. There can be no assurance that the
Company will be able to identify all aspects of its business that are subject to
Year 2000 problems of customers or suppliers that affect the Company's business.
There also can be no assurance that the Company's software vendors are correct
in their assertions that the software is Year 2000 compliant, or that the
Company's estimate of the costs of systems preparation for Year 2000 compliance
will prove ultimately to be accurate. Should either the Company's internal
systems or those of one or more significant suppliers or customers fail to
achieve Year 2000 compliance, or the Company's estimate of the costs of becoming
Year 2000 compliant prove to be materially inaccurate, the Company's business
and its results of operations could be adversely affected.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company currently does not deal in derivative financial or commodity
instruments for the purpose of managing financial exposures related to interest
rates, foreign currency exchange rates, commodity prices or other market risks.
<PAGE>
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Forward Looking Statements
This report contains forward looking statements which are subject to a number of
risks and uncertainties that may cause actual results to differ materially from
expectations. These uncertainties include, but are not limited to, general
economic conditions, competitive conditions in markets served by the Company,
most notably high technology markets such as data storage and semiconductor, and
economic and political developments in countries where the Company conducts
business.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on November 17, 1998. The following
matters were submitted to a vote of the Company's stockholders:
Proposal No. 1 - Election of Board of Directors
To elect nine directors for the ensuing year. The following individuals,
all of whom were Company directors immediately prior to the vote, were
elected as a result of the following vote:
For Against
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Michael R. Corboy 9,122,979 166,123
Paul F. Forman 9,123,729 165,373
Seymour E. Liebman 9,123,512 165,590
Robert G. McKelvey 9,124,429 164,673
Paul W. Murrill 9,124,779 164,323
John R. Rockwell 9,122,979 166,123
Robert B. Taylor 9,126,119 162,983
Gary K. Willis 9,119,714 169,388
Carl A. Zanoni 9,119,929 169,173
There were no other matters submitted to a vote of the Company's
stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27. Financial Data Schedule.
(b) None.
<PAGE>
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYGO CORPORATION
-------------------------------------
(Registrant)
/s/ GARY K. WILLIS
-------------------------------------
Gary K. Willis
Chairman and Chief Executive Officer
/s/ KEVIN M. McGUANE
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Kevin M. McGuane
Vice President Finance, Treasurer,
and Chief Financial Officer
Date: February 4, 1999
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
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27 Financial Data Schedule for the quarterly report on
Form 10-Q for the period ended December 31, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
Article 5 - Financial Data Schedule for Form 10-Q
Six Months Ended December 31, 1998
(Thousands, except per share amounts)
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of earnings and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 14,660
<SECURITIES> 9,468
<RECEIVABLES> 13,151
<ALLOWANCES> 1,725
<INVENTORY> 14,915
<CURRENT-ASSETS> 56,434
<PP&E> 31,804
<DEPRECIATION> 16,265
<TOTAL-ASSETS> 83,025
<CURRENT-LIABILITIES> 8,964
<BONDS> 0
0
0
<COMMON> 1,137
<OTHER-SE> 69,963
<TOTAL-LIABILITY-AND-EQUITY> 83,025
<SALES> 31,417
<TOTAL-REVENUES> 31,417
<CGS> 19,924
<TOTAL-COSTS> 33,873
<OTHER-EXPENSES> 113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,946)
<INCOME-TAX> (539)
<INCOME-CONTINUING> (1,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,407)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
