Zygo Corporation Business Information, Profile, and History

Company Perspectives:

Zygo continues to develop new hardware and software to address specialized measurement problems and improve the capability of their instruments.

In less than 20 years, the interferometer became a commodity item used in an increasing number of applications to measure and assure that precision parts are made and are performing correctly. Although Zygo pioneered much of the technology which forms the basis of instruments in use today and originally held almost the entire market share, Zygo is no longer the sole supplier of such instruments. The increasing variety of measurements that customers desire has encouraged the development of a number of different instruments, a growing market, and, as a result, a number of competitors making interferometric instrumentation. Such competition is good, inasmuch as it accelerates the implementation of new ideas and techniques into new instruments, keeps prices competitive, and provides customers with a steady flow of measurement tools of ever greater utility. We at Zygo are proud of our past and present role in developing such measurement instruments and look forward to the challenge of maintaining our leadership position.

History of Zygo Corporation

With its headquarters located in the small town of Middlefield, Connecticut, Zygo Corporation has been a world leader in its manufacturing niche since the company was created in 1970. As a result of its work in the physics of light, Zygo has evolved from a company intended to make prisms to one with three lines of business that take advantage of its optical technology. Zygo's Industrial/Optical division provides instrumentation that allows manufacturers to measure the roughness of surfaces without touching them or requiring a sample. In conjunction with this process, Zygo offers automated parts handling systems so that precise measurements can be taken. The optical side of this division offers an array of components, ranging from eight millimeters to more than a meter in size. Zygo's Semiconductor division provides semiconductor and data storage manufacturers with light-based measuring devices. Because computer chips have become minuscule and the range for their uses has grown exponentially, Zygo's measuring devices have become increasingly more important. Rather than simply spot checking components in the lab, chip makers now use Zygo instrumentation to maintain quality control on the production floor. The result has been the sale of more Zygo instruments and the division producing the lion's share of corporate revenues. The third Zygo division, Telecom, looks to leverage the company's expertise with light to become a major player in fiber optics, which is expected to take the Internet to an entirely new level in terms of speed and capability. Fiber Optics holds the most promise for Zygo's continuing growth.

Creation of Zygo: 1970

The three men who founded Zygo in 1970 were Paul Forman, Carl Zanoni, and Sol Laufer. Forman had originally recruited the other men while working at Parkin-Elmer in Norwalk, Connecticut. Among the optical devices the men worked on at Parkin-Elmer were prisms that were taken to the moon to perform measurement studies. The three men brought together a complementary set of abilities. Forman was the businessman, adept at marketing and administration, Zanoni an engineer, and Laufer a manufacturing specialist. For Laufer, Zygo represented a testament to one man's remarkable persistence. As a German Jew forced to serve five years as a slave laborer during World War II, Laufer was simply fortunate to survive. When the war ended he was 17 and alone, his entire family having been exterminated in the concentration camps of Auschwitz and Bergen-Belsen. Laufer immigrated to the newly formed state of Israel, where he started a family and began his career in optics. He moved to the United States in 1960.

With funding from Canon Inc., which would become a major customer and 20 percent owner, and Wesleyan University (located in Middletown, Connecticut), Laufer, Forman, and Zanoni created Zygo to produce optics with the highest precision surfaces and angles in the world. That goal would require a highly accurate interferometer to provide precise measurements of glass surfaces. The team found that the commercially available interferometers were simply inadequate for Zygo's purposes. The first order of business, therefore, became the creation of an interferometer for the company's own use. It soon became apparent, however, that Zygo was not alone in needing such advanced instrumentation. As a result, the in-house interferometer became Zygo's first product offering, the Model GH, first introduced in 1972 at the Optical Society of America's annual meeting. It was so much more superior than competing products that Zygo quickly became the world's leading supplier of interferometers, a position it would hold for the next decade. The sale of optics, the company's original emphasis, became a secondary source of income.

In 1973 Zygo moved its 16 employees into a new 10,000-square-foot facility in Middlefield, where it would eventually become the town's largest employer and taxpayer. The company earned a reputation as a good corporate citizen. Executive offices were described by the local press as being little more than cubicles. Zygo became very much a tight-knit company, enjoying an extremely low turnover of staff. All the while, it continued to make advances on the interferometer. In 1978 Zygo introduced the Mark II, the first interferometer suitable for industrial use. Not only did it incorporate a closed circuit television system, it was durable and could be mounted in any orientation required. The company also introduced the Zygo Automatic Pattern Processor (ZAPP), which scanned the video output of the interferometer to calculate the best fitting plane. In 1980 Zygo then introduced the Mark III, which increased accuracy by employing phase measuring instead of the old system that relied on the variance between two wavefronts. The Mark III was thus able to measure more complex shapes.

Going Public: 1983

To keep up with growth, Zygo expanded to a 100,000-square-foot facility in 1981. It also incurred a lot of debt and had difficulty obtaining financing. In order to raise money to continue growth and pay down debt, in 1983 Zygo went public at $14 a share and began trading on the NASDAQ. Revenues stood at $17.5 million by 1984, then reached $21.6 million in 1985, as the company continued to make advances in its line of interferometers. In 1984 Zygo introduced the Production Test Interferometer, a smaller and less expensive device that could be used for online production testing. A year later it introduced the Mark IV, the first programmable interferometer that was suitable for a large number of applications. In 1987 Zygo challenged Hewlett-Packard in the distance-measuring segment of the interferometer business by offering the Axiom 2/20, which would form the basis of the company's ZMI product line. Also in 1987 Zygo introduced the Mark IVxp interferometer and the Maxim 3D interference microscope. Both of these products helped to continue the transformation of the interferometer from being simply a laboratory measuring device to serving an integral function in a manufacturing process, thereby providing quality assurance and process control.

Despite the company's considerable technical achievements, Zygo was not enjoying comparable financial progress. After suffering through a sluggish stock price and some poor quarters, Zygo hired Richard T. Fedor to serve as president and chief operating officer. For a while the company appeared to make progress under Fedor's guidance; its revenues reached $30.4 million in 1991, with a net income of $1.26 million, but the numbers could not paper over some serious deficiencies at Zygo. After years of reigning supreme in the interferometer business, it was losing market share, manufacturing was inefficient, and the new products were not being developed fast enough. Moreover, a worldwide recession was stunting orders for equipment and its stock fell well below its initial offering price. Fedor resigned in June 1991, replaced by Forman who had been serving as chairman of the company. He instituted cost-cutting measures, including the layoff of about 10 percent of the workforce. In 1992 revenues would slide to $26.7 million and net income to $600,000. The company's numbers would bottom out in 1993 when revenues sank to $22.7 million and net income to $500,000. As part of the effort to restructure the company, Forman hired Gary K. Willis to replace Fodor in February 1992. Willis had been the CEO of the Foxboro Company and was quite familiar with Zygo after serving as an independent consultant at Zygo for the previous 16 months. A year later, as part of a planned transition, he was named chief executive officer. Both Forman and Laufer, who had become vice-president of the optics group, announced they would retire from Zygo on June 30, 1994. Moreover, Zygo terminated an arrangement that had placed appointments to the board in the hands of the three founders, plus Canon and Wesleyan. The change was intended to make Zygo more of a public company and stimulate its market value. The price of Zygo stock had fallen so low that it almost reached the penny stock category.

Zygo began to turn around in fiscal 1994, with revenues rebounding to $24.1 million and net earnings approaching $1 million. By 1995 the company was entering a growth phase; investors recognized this and began to bid up the price of Zygo stock to the point that management authorized a three-for-two split. For fiscal 1995, the company would generate $32.3 million in revenues and post $2.7 million in net income. Zygo was benefiting from the increasing need of the data storage and semiconductor industries to test throughout the production process. Furthermore, as components continued to shrink, there was less tolerance for error. In essence, the market was catching up with the kind of precise measuring instruments that had always been Zygo's strong suit. The company also developed new products to service the computer industry. Its small Simi Valley division introduced an instrument capable of testing the microscopic space between a spinning hard drive disk and a magnetic stylus. In addition to opening a small office in Singapore to gain a presence in Asia, Zygo began to earnestly look for companies with complementary businesses to acquire. In order to have sufficient capital available, the company made an additional offering of 1.3 million shares, of which 845,000 were provided by the company itself, at a price of $29 per share.

Developing External Channels of Growth: 1996

Zygo's first effort to grow externally came in 1996 when it made two acquisitions. In April it announced the purchase of NexStar Automation, a Canadian company with an operating business located in Boulder, Colorado. NexStar made automation and parts handling equipment for use in the data storage and semiconductor markets, providing expertise to help Zygo automate testing and measurement in the production process. The deal was a stock swap worth approximately $7.5 million. Zygo's second acquisition of 1996 was the $14.7 million cash and stock deal for the manufacturing operation of Technical Instrument Co. (TIC), located in Sunnyvale, California. TIC designed and manufactured precision microscopes and systems used in testing in the semiconductor, data storage, and other high technology industries. Again, the acquisition complemented a core business. In 1997 Zygo completed a pair of smaller deals, purchasing Sight Systems Inc., involved in improving the yield of data storage devices, and the remaining 50 percent of Synotec Neue Technologien und Instrumente GmbH Co., in which TIC had gained a stake before merging with Zygo. In July 1997 Zygo announced its most ambitious deal by far, the $220.5 million stock purchase of Digital Instruments, a Santa Barbara, California, maker of measurement products and systems used in the data storage and semiconductor industries. The parties, however, failed to finalize the details of the deal and ultimately in October 1997 the merger talks ceased.

Zygo grew rapidly through fiscal 1998. Revenues reached $53.5 million in 1996, then $87.2 million in 1997, and topped out at $97.9 million in 1998. Although profits were affected in 1997 because of acquisitions, Zygo was posting solid earnings and its stock was doing well enough to permit the company to institute a two-for-one split in February 1997. A severe downturn in the Asian economy, especially in the high-tech industries, would cripple Zygo in 1999. Moreover, the economics of data storage made the company's instrumentation superfluous. The price of computer hard drives fell so rapidly that manufacturers simply could not afford to purchase instrumentation to test individual units. Hard drives became all but disposable items.

Once again Zygo was forced to restructure its management and business focus. As early as July 1998, just after reporting record results, the company initiated cost containment measures. Staff was cut, salaries frozen, and discretionary spending slashed. The hope was that the company could save as much as $3 million in fiscal 1999. Nevertheless, Zygo posted a loss of $4 million for the year, unable to compensate for revenues that fell some 40 percent in 1999 to $60.8 million. In January 1999 the company hired Canadian J. Bruce Robinson as president with the intention of grooming him to replace Willis, who had suffered a heart attack in the fall of 1997. Like Willis, Robinson had served as president of The Foxboro Company before joining Zygo. By November 1999 he also become chief executive officer while Willis remained as chairman of the board.

In March 2000 Zygo turned in a new direction that offered solid prospects for the future when it purchased Firefly Technologies for approximately $60 million in cash and stock. Through Firefly, Zygo would be able to apply its expertise to fiber optics used in the telecommunications and optical storage markets. The company renamed the operation Zygo TeraOptix. As far as Wall Street was concerned, the timing could not have been better, since fiber optics IPOs typically found eager buyers. Investors clearly saw fiber optics as the way to bridge the electronic world with the optical world and make possible the next step in the communications revolution, in particular broadband Internet access. Zygo was caught up in investor enthusiasm, as the price of its stock soared to unprecedented heights, peaking just below $100, at one point transforming Zygo into a company with a market value in excess of $1 billion.

Zygo stock returned to more realistic levels later in 2000. The company reported fiscal 2000 revenues of $87.2 million, a significant improvement over the previous year, but it lost $16 million as it changed the emphasis of its business. In November 2000, Willis retired and Robinson became chairman as well as CEO. In 2001 Zygo issued more shares of stock, an offering that netted $51.8 million that was intended to upgrade manufacturing facilities for its micro-optics business. Management was optimistic about Zygo's future, convinced that the company was uniquely situated to provide what it called the three pieces to solve the Internet Infrastructure manufacturing puzzle: optics, metrology (measurement), and automation. With the U.S. economy suffering through a sluggish patch, the upgrading of the Internet infrastructure was not occurring at the pace that many had hoped for during the bid-up of fiber optics stocks in 2000. The long-term outlook, however, still favored the prospects of established and respected support companies such as Zygo.

Principal Subsidiaries: Technical Instrument Corporation; NexStar Corporation; Sight Systems, Inc.; Zygo TeraOptix.

Principal Divisions: Industrial/Optical; Semiconductor; Telecom.

Principal Competitors: ADE; CyberOptics; Jenoptik AG; Robotic Vision Systems, Inc.; Veeco Instruments Inc.; Yokogawa Electric Works, Limited.

Chronology

• Key Dates:
• 1970: Zygo is founded.
• 1972: Company's first interferometer is introduced.
• 1978: The Mark II becomes the first interferometer suitable for industrial use.
• 1983: Zygo goes public.
• 1994: Founders and original investors relinquish control of the company's board of directors.
• 1996: Company acquires Technical Instrument Co. and NexStar Automation.
• 2000: Company acquires Firefly Technologies.