UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
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 0-1649
NEWPORT CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 94-0849175
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1791 Deere Avenue, Irvine, California 92606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 863-3144
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Stated Value $0.1167 per share
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 ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 2002, 37,796,720 shares of the Registrant's sole class of
common stock were outstanding. The aggregate market value of the common stock
held by non-affiliates of the Registrant as of February 28, 2002 (based upon the
closing price as reported by the Nasdaq National Market) was approximately $706
million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 22, 2002 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
Page 1
TABLE OF CONTENTS
PART I
ITEM 1 Business.......................................................................................3
ITEM 2 Properties....................................................................................12
ITEM 3 Legal Proceedings.............................................................................12
ITEM 4 Submission of Matters to a Vote of Security Holders...........................................13
PART II
ITEM 5 Market for the Registrant's Common Equity and Related Security Holder Matters.................13
ITEM 6 Selected Financial Data.......................................................................14
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.........15
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk....................................29
ITEM 8 Financial Statements and Supplementary Data...................................................30
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........30
PART III
ITEM 10 Directors and Executive Officers of the Registrant............................................30
ITEM 11 Executive Compensation........................................................................30
ITEM 12 Security Ownership of Certain Beneficial Owners and Management................................30
ITEM 13 Certain Relationships and Related Transactions................................................30
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................31
SIGNATURES...............................................................................................34
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This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and we intend that such forward-looking
statements be subject to the safe harbors created thereby. For this purpose, any
statements contained in this Annual Report on Form 10-K except for historical
information may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond our control, and actual
results may differ depending on a variety of important factors, including those
described below in the sections entitled "Business" and "Risks Relating To Our
Business."
PART I
ITEM 1 Business
General Description of Business
Newport Corporation is a global supplier of high-precision test, measurement and
automation systems and subsystems that enable manufacturers of fiber optic
components, semiconductor capital equipment, industrial metrology, aerospace and
other high-precision products to automate manufacturing processes, enhance
product performance, and improve manufacturing efficiencies and yields.
Manufacturers of high-precision products increasingly require third party
expertise to develop, engineer and build automated systems and subsystems to
produce, assemble and test their products. Our products enhance the productivity
and capabilities of assembly, test and measurement functions by leveraging our
expertise in high-precision automated positioning systems, robotics, vibration
isolation technology, precision optics and optomechanics. By combining our
proven technology with advanced computer software and imaging technology and our
in-depth industry and process expertise, we are able to offer comprehensive,
automated and semi-automated manufacturing and test solutions to manufacturers
of fiber optic components. In the semiconductor capital equipment market we
supply high-performance value-added subsystems that enhance the performance of
our customers' products. Our value-added subsystems are also incorporated into
the high-precision products of customers in industries such as aerospace and
life and health sciences. We also provide sophisticated high-precision equipment
to commercial, academic and governmental research institutions worldwide that
engage in advanced research and development activities.
For over three decades we have serviced the needs of research laboratories for
precision equipment. Between 1991 and 1996, we acquired a series of companies
which expanded our product offerings, technology base and geographic presence.
Through these acquisitions and our internal development efforts, we evolved from
a provider of discrete components and instruments for research applications to a
company that manufactures both components and integrated systems for research
and commercial applications. In October 1998, we acquired Environmental Optical
Sensors, Inc., further strengthening our position as a leading provider of
high-precision assembly and test equipment for the fast growing fiber optic
communications marketplace. In October 1999, we acquired the west coast
commercial optics operation of Corning OCA Corporation, a subsidiary of Corning
Incorporated (renamed Newport Precision Optics Corporation). This acquisition
increased our product offerings and expertise in the areas of specialized
precision optical and optomechanical products and systems. In August 2000, we
acquired Unique Equipment Company ("Unique"), a systems integrator specializing
in the use of robotics for the fiber optics and semiconductor industries, which
increased our expertise in these areas. In December 2000, we acquired the
business of CEJohansson AB ("CEJ"), a Swedish global supplier of advanced
metrology systems, which expanded our industrial metrology product offerings and
expertise by adding touch-probe metrology systems to our existing non-contact
visual metrology systems. In February 2001, we acquired Kensington Laboratories,
Inc. ("KLI"), a manufacturer of high-precision robotic and motion control
equipment for the semiconductor and fiber optic communications industries, which
significantly increased our product offerings and expertise in these areas. Also
in February 2001, we acquired Design Technology Corporation ("DTC"), a systems
integrator specializing in the use of robotics and flexible automation solutions
for manufacturing processes, which further broadened our expertise in these
areas. In February 2002, we acquired Micro Robotics Systems, Inc. ("MRSI"), a
privately held manufacturer of high precision, fully automated assembly and
dispensing systems for the fiber optic communications, microwave
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and semiconductor equipment markets. We pursue acquisitions of companies,
technologies and complementary product lines that we believe will provide us
with key technologies, give us access to new markets or otherwise further our
strategic objectives.
As a result of our internal growth and strategic acquisitions, we are a leading
supplier of automated manufacturing and test equipment, high-precision optics,
instruments, micro-positioning and measurement products and systems to
manufacturers of fiber optic communications equipment and semiconductor
manufacturing equipment worldwide, as well as to manufacturers of other high
precision products. In addition, we continue to focus on our core strengths in
research test and measurement equipment to provide ultra-precise motion and
measurement technologies for research applications. We seek to leverage our
expertise in research laboratory equipment to continue to expand our product
offerings for commercial applications.
Products and Services
We develop and sell a broad range of components, instruments, subsystems and
systems to markets where high-precision, efficient manufacturing, test and
assembly are critical. Our products are used in mission-critical applications in
industries including fiber optic device manufacturing, semiconductor equipment
manufacturing and life and health sciences. We develop, manufacture and market
products within three distinct business segments, organized around customer and
manufacturing requirements. This structure enables us to quickly incorporate
customer feedback into new products and to respond rapidly to changing market
requirements.
Fiber Optics and Photonics
Our Fiber Optics and Photonics division offers a broad line of automated
manufacturing and test systems. These products address a wide spectrum of
applications in the fiber optic component manufacturing process, from pre-test
to assembly and packaging to final device testing and burn-in. Our integrated
systems enable component manufacturers to significantly increase the
productivity, capacity and manufacturing yields of their manufacturing
operations. In addition, we provide customers with value-added product and
process engineering services and device packaging services to assist them in
automating the manufacturing of their fiber optic devices.
Pre-Test. Our pre-test products automate the testing of devices used in fiber
optic components, such as laser diodes, to ensure their integrity prior to the
start of the assembly process. We offer a range of products, both fully
automated and semi-automated, that increase the efficiency of the pre-test
process, including:
---------------------------------------------------------------------------------------------------------------------
Product Application
---------------------------------------------------------------------------------------------------------------------
ALDCS Automated Laser Diode Characterization Systems Automated laser diode pre-test, characterization and
sorting
---------------------------------------------------------------------------------------------------------------------
LDSS Laser Diode Characterization Subsystems Semi-automated laser diode pre-test and
characterization
---------------------------------------------------------------------------------------------------------------------
Broad Area Test Stations Automated testing and validation of devices on
semiconductor wafers
---------------------------------------------------------------------------------------------------------------------
AutoBar Test and Characterization System Automated test and characterization of unmounted
laser diode chips, laser bars, chip on carrier
(COC) and other devices
---------------------------------------------------------------------------------------------------------------------
AutoAlign(TM)Characterization Workstations Automated alignment, test and characterization of
laser diodes and planar waveguides
---------------------------------------------------------------------------------------------------------------------
Chameleon Nano Vision and Cognito Micromeasurement Non-contact dimensional and defect analysis of
Systems V-grooves, fibers and fiber arrays, MEMS devices,
laser diodes and waveguides
---------------------------------------------------------------------------------------------------------------------
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Assembly and Packaging. The assembly and packaging of fiber optic devices
require a high degree of precision. Manufacturers have traditionally used manual
assembly techniques for fiber optic components. These techniques are costly,
result in low production yields and produce inconsistent quality. We offer a
full range of integrated assembly and packaging systems, including automated,
semi-automated and manual systems, which automate these processes and help
reduce manufacturing times, increase yields and enhance quality. Our automated
and semi-automated systems utilize common architectures and process control
software, enabling the user to upgrade their system to increase their level of
automation as their needs change. Our assembly and packaging products include:
---------------------------------------------------------------------------------------------------------------------
Product Application
---------------------------------------------------------------------------------------------------------------------
AutoAlign and AMS(TM)Assembly Workstations Automated assembly of waveguides, laser diodes, MEMS
devices and fiber arrays using soldering and
adhesive techniques
---------------------------------------------------------------------------------------------------------------------
LaserWeld and AMS(TM)LaserWeld Automated Packaging High-precision automated assembly of optoelectronic
Workstations components using laser welding processes
---------------------------------------------------------------------------------------------------------------------
VCSEL Assembly Workstations Configurable fully automated assembly cells for
high-volume assembly of various vertical cavity
surface emitting laser (VCSEL) devices
---------------------------------------------------------------------------------------------------------------------
AutoAlign-MDX Systems Modular, expandable semi-automated alignment and
characterization for passive and active devices
---------------------------------------------------------------------------------------------------------------------
ORION Semi-automated Fiber Alignment System High-precision fiber-to-fiber and fiber-to-device
alignment systems for low-volume applications
---------------------------------------------------------------------------------------------------------------------
ULTRAlign Optical Component Positioning System Positioning systems for manual alignment of optical
fibers and devices
---------------------------------------------------------------------------------------------------------------------
Final Device Testing and Burn-In. Fiber optic devices must meet rigorous
reliability and performance specifications, including requirements such as 20 to
30 year life cycles and the ability to perform in harsh weather conditions or
even under water. These performance standards require manufacturers to perform
extensive testing of the completed devices. We offer standardized systems which
automate the burn-in and test process, including:
--------------------------------------------------------------------------------------------------------------------
Product Application
--------------------------------------------------------------------------------------------------------------------
Butterfly Module Test Station High-precision characterization of performance data
of butterfly modules during the manufacturing
process and final Quality Assurance checks
--------------------------------------------------------------------------------------------------------------------
Chip-on-Carrier and Coaxial Burn-in and Test Systems High-volume precision burn-in and testing of COC
and coaxial devices
--------------------------------------------------------------------------------------------------------------------
Butterfly Module Burn-in and Testing Racks High-volume precision control and monitoring of
long-term burn-in and life testing of butterfly
modules
--------------------------------------------------------------------------------------------------------------------
Model 8800 Photonics Test System Modular instrumentation platforms for testing and
qualification of optical fibers and passive fiber
optic components
--------------------------------------------------------------------------------------------------------------------
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Instruments. We offer several lines of instrumentation that are integral or
complementary to the development of fiber optic components, including:
---------------------------------------------------------------------------------------------------------------------
Product Application
---------------------------------------------------------------------------------------------------------------------
Power Meters Measure optical power for free space and fiber
directed laser light
---------------------------------------------------------------------------------------------------------------------
Laser Diode Instruments Temperature and current controllers for maintaining
stability of laser diodes
---------------------------------------------------------------------------------------------------------------------
Optical Spectrum Analyzers Characterization of light emitted by laser diodes,
ion lasers and solid state lasers
---------------------------------------------------------------------------------------------------------------------
MRSI. In February 2002, we acquired MRSI, a leading supplier of automated
assembly and dispensing systems to the fiber optic communications, microwave and
semiconductor industries. MRSI offers a line of automated systems for the
manufacture of fiber optic modules, microwave modules, radio frequency (RF)
modules and semiconductor devices, including:
---------------------------------------------------------------------------------------------------------------------
Product Application
---------------------------------------------------------------------------------------------------------------------
MRSI-375 Precision Assembly Work Cell Automated assembly of fiber optic modules, microwave
modules and semiconductor devices
---------------------------------------------------------------------------------------------------------------------
MRSI-505 Ultra Precision Assembly Work Cell Automated assembly of fiber optic modules, microwave
modules and semiconductor devices
---------------------------------------------------------------------------------------------------------------------
MRSI-5005 OPTO Optical Assembly Work Cell Automated assembly of laser submounts
---------------------------------------------------------------------------------------------------------------------
MRSI-175 Ag Conductive Epoxy Dispenser Automated dispensing of conductive epoxy for assembly
of fiber optic modules, microwave modules and
semiconductor devices
---------------------------------------------------------------------------------------------------------------------
MRSI-175 ENCore Encapsulation System Automated dispensing of epoxy for under fill and
encapsulation
---------------------------------------------------------------------------------------------------------------------
Engineering and Manufacturing Services. Due to our experience in fiber optic
device assembly, packaging and testing technology, we have a deep knowledge base
and expertise in the processes and technologies necessary to build
high-precision fiber optic components. In addition, our acquisitions of Unique
and DTC have expanded our knowledge base and expertise in the use of robotics
and flexible automation solutions for the manufacture of fiber optic components,
and our acquisition of MRSI has expanded our knowledge base in the integration
of production lines for chip packaging and module assembly. We apply this
expertise to assist our customers in designing device packaging, developing
manufacturing processes, developing and producing tooling and programming
customized process automation software. These services help customers
significantly reduce the development cycle for their products and improve the
productivity, yields and quality of their manufacturing processes. In addition
to helping customers become more productive, these services assist us in
establishing a long-term relationship with our customers and allow us to
identify additional opportunities for new products. We also offer device
manufacturing and packaging services to enable customers to design and test new
products.
Industrial and Scientific Technologies
Our Industrial and Scientific Technologies division's products are used across a
wide range of industrial markets for applications that range from basic research
and development activities to high-precision manufacturing. In addition, we sell
subsystems to third parties that integrate these products into larger systems,
particularly for semiconductor manufacturing. Our industrial and scientific
products address a wide range of markets, including fiber optic communications,
semiconductor equipment, life and health sciences, aerospace and research. These
products and technologies also form the foundation of certain of the integrated,
automated systems sold by our Fiber Optics and
Page 6
Photonics division. We believe that Industrial and Scientific Technologies
customers develop an appreciation for the quality of our products which makes
them more likely to buy integrated, automated systems from us as the need for
production and test systems grows. Our Industrial and Scientific Technologies
division's product lines include:
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Category Products Applications
---------------------------------------------------------------------------------------------------------------------
Robotic and Motion Control . Semiconductor wafer handling . Automation of wafer handling in
Devices, Systems and robots semiconductor fabrication and
Subsystems metrology
. Linear and rotational stages
. High-precision positioning and
. Elevational devices motion control apparatus for
manufacturing and test applications
. Actuators
. Precision alignment in fiber
. Simple and programmable motion optic, telecommunication and laser
controllers for linear devices assembly
stepping and DC motors
. Precision positioning of
. Motion systems semiconductor wafers for metrology
and fabrication
. Precision air bearing stages
. Sample sorting and sequencing for
DNA research
---------------------------------------------------------------------------------------------------------------------
Vibration Isolation Systems . Optical benches and support . Reduction of impact of external
and Subsystems systems forces on high-precision research,
manufacturing test and assembly
. Workstations systems
. Active and passive isolation . Structures for optical fiber
systems fabrication
. Honeycomb, granite and rigid . Scanning electron
structures microscope/atomic force microscope
base isolation
. Elastomeric mounts
. Wire bonding equipment base
isolation
. Isolated floor for wafer stepper
equipment
---------------------------------------------------------------------------------------------------------------------
Manual Positioning . Optical mounts . Manual, high-precision alignment
Components of optical instruments
. Bases and brackets
. Manual assembly of fiber optic
. Posts and rod systems devices
. Translation and rotation stages . Subsystems used for high-speed
cell sorting for genomic research
. Laser-to-fiber couplers
. Semiconductor reticule inspection
. Manual fiber optic positioners equipment
. Educational kits
---------------------------------------------------------------------------------------------------------------------
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Category Products Applications
---------------------------------------------------------------------------------------------------------------------
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Optics . Fast steering mirrors . Laser beam stabilization for
industrial metrology applications
. Lenses
. Components for research and
. Mirrors product development activities
. Prisms and windows . Deep UV illumination optics for
semiconductor lithography
. Filters and attenuators
. Thin film measurement of
. Collimators semiconductor wafers for defect
inspection
. Ultrafast laser optics
. Beamsplitters and polarization
optics
. Optical systems
---------------------------------------------------------------------------------------------------------------------
We also offer subassemblies that are a value-added combination of standard and
custom products drawn from the components, optics, robotics, motion control and
vibration isolation product lines. We combine these items with additional
engineering to create more highly integrated products to meet customer needs.
These products are often subsystems of our original equipment manufacturer (OEM)
customers' products. This product line offers a strategic competitive advantage
allowing us to differentiate ourselves from competitors that offer a more
limited product selection.
Industrial Metrology Systems
The Industrial Metrology Systems division's products provide a broad range of
vision, touch and multi-sensor measurement and inspection products for a number
of industrial markets, including the aerospace, automotive manufacturing,
industrial manufacturing, life and health sciences, research, semiconductor and
transportation manufacturing markets. The systems and subsystems from this
division incorporate years of experience and expertise in core technologies such
as precision motion, vibration control and measurement. The Industrial Metrology
Systems division's product lines include:
------------------------------------------------------------------------------------------------------
Product Application
------------------------------------------------------------------------------------------------------
Sprint/MetriVie Manual Vision Metrology High-precision manual dimensional
Systems measurements to verify manufacturing
tolerances
------------------------------------------------------------------------------------------------------
Starlite/MetriVie Motorized Vision Metrology High-precision motorized, manual
Systems dimensional measurements to verify
manufacturing tolerances
------------------------------------------------------------------------------------------------------
Onyx/MetriVie Multi-Sensor Metrology Systems High-precision optical, touch and laser
dimensional measurements to verify
manufacturing tolerances
------------------------------------------------------------------------------------------------------
Video Direct Microscopes High magnification for visual/video
inspection and assembly of small parts
------------------------------------------------------------------------------------------------------
Ruby/JoWin Automated Portable Coordinate High-precision, portable, automated CMM to
Measurement Machine (CMM) verify manufacturing tolerances
------------------------------------------------------------------------------------------------------
Topaz/JoWin CMM High-precision, automated CMM to verify
manufacturing tolerances
------------------------------------------------------------------------------------------------------
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Product Application
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Saphir/JoWin CMM High-precision, shop-floor, automated CMM
to verify manufacturing tolerances
------------------------------------------------------------------------------------------------------
Opal/JoWin CMM High-precision, high-speed, automated CMM
to verify manufacturing tolerances
------------------------------------------------------------------------------------------------------
Financial information regarding our three business segments is included in Note
14 of the Notes to Consolidated Financial Statements included in this Annual
Report on Form 10-K. A discussion of our net sales by market segment and
geographic market is included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Sales and Marketing
We market components and systems through an internal sales and marketing staff,
an internal field sales organization, an international network of distributors
and sales representatives, technical catalogs and our website. In the United
States, as of December 31, 2001, our Industrial and Scientific Technologies and
Fiber Optics and Photonics divisions collectively had 23 company-employed field
sales persons, and our Industrial Metrology Systems division had 7
company-employed field sales persons and 74 independent representatives and
distributors. Internationally, as of December 31, 2001, our Industrial and
Scientific Technologies and Fiber Optics and Photonics divisions collectively
had 34 company-employed field sales persons based in Canada, China, France,
Germany, Italy, the Netherlands, Sweden, Switzerland, Taiwan, and the United
Kingdom, and our Industrial Metrology Systems division had 20 company-employed
field sales persons based in Denmark, France, Germany, Italy, Sweden and the
United Kingdom. Also internationally, as of December 31, 2001, we had 144
independent representatives and distributors, 121 of which were associated with
our Industrial Metrology Systems division. Our customers often have unique
technical specifications and manufacturing processes, and may require specific
system, subsystem or component designs. This requires close cooperation between
the sales representatives and distributors and the engineering staff, and
results in long sales cycles for products.
We have written agreements with each of our representatives and distributors. In
some cases we have granted representatives and distributors exclusive
authorization to sell certain of our products to a specific geographic area.
These agreements generally have terms of one year and are renewable on an annual
basis, and are generally terminable by either party for convenience following a
specified notice period. These agreements are generally not assignable without
prior approval. Most agreements are structured to provide distributors with
sales discounts below the domestic list price. Representatives are generally
paid commissions for sales of products. No single independent representative or
distributor accounted for more than 5% of revenues in 2001, and all independent
representatives and distributors combined accounted for less than 10% of
revenues in 2001.
In addition to sales representatives and distributors, we also market our
standard products through our product catalog and website. Our principal
marketing tool for the scientific market is our comprehensive product catalog,
The Newport ResourceTM. This catalog, numbering approximately 1,400 pages,
provides detailed product information as well as extensive technical and
applications data. We publish this catalog in English, French and German and
mail it annually to more than 50,000 potential customers. Our website provides
customers with access to the latest products, a literature and information
request form, technical/tutorial and application related material, market
surveys, sales information (including catalogs), and the ability to purchase a
majority of our standard products.
Research and Product Development
We continually seek to improve our technological leadership position through
internal research, product development and licensing, and acquisitions of
complementary technologies. As of December 31, 2001, we had 223 employees
engaged in research and development. We continually work to enhance our existing
products and to develop and introduce innovative new products to satisfy the
needs of customers. In addition, we regularly investigate new ways to combine
components manufactured by our various divisions to produce innovative
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technological solutions for the markets we serve. Research and development
expenses were $30.7 million, or 9.6% of net sales, in 2001, $24.4 million, or
8.6% of net sales, in 2000, and $16.6 million, or 10.4% of net sales, in 1999.
We are committed to continued product development and expect that research and
development expenditures will increase in absolute dollars in the current and
future years.
We believe that the continual development or acquisition of innovative new
products will be critical to our future success. Failure to develop, or
introduce on a timely basis, new products or product enhancements that achieve
market acceptance could have a material adverse effect on our business,
operating results or financial condition.
Competition
The markets for our products are intensely competitive and characterized by
rapidly changing technology. In the fiber optic communications market, our
primary competitors are currently Adept Technology, Inc., Agilent Technologies,
Inc., Anritsu, AOI Sansho, ATS Automation Tooling Systems, Inc., EXFO
Electro-Optical, Inc., and Palomar Technologies for our assembly automation
systems; and EXFO Electro-Optical Inc., Moritex, and Racal, Inc. for our test
and measurement systems. We also face competition from certain of our existing
and potential customers who have developed or may develop their own
manufacturing and test equipment.
In our industrial and scientific technologies business, we currently compete in
several specialized markets against a number of specialized companies. Our
primary competitors are currently Aerotech Inc., Anorad Corporation, and Dover
Corp. for our motion control systems; Brooks Automation, Inc., Kawasaki
Robotics (USA), Inc., PRI Automation, Inc., and Yaskawa Electric Corp. for our
semiconductor wafer handling robotics; Kinetic Systems, Melles Griot, and
Technical Manufacturing Corp. for our vibration control products; and CVI Laser
Corporation, Corning Tropel Corporation, Melles Griot, and Thor Labs for our
optics and optomechanical products.
In the industrial metrology market, our primary competitors are currently Brown
& Sharpe, Carl Zeiss, and Mitutoyo for our coordinate measurement machines; and
MicroView, Mitutoyo, Nikon, and Optical Gauging Products for our vision
metrology systems.
We believe that the primary competitive factors in our markets are:
. product features and performance;
. quality, reliability and service support;
. customer relationships;
. ability to manufacture and deliver products on a timely basis;
. pricing; and
. ability to customize products to customer specifications.
We believe that we currently compete effectively with respect to each of these
factors. However, we may not be able to compete successfully in the future
against existing or new competitors.
We compete in various markets against a number of companies, some of which have
longer operating histories, greater name recognition and significantly greater
technical, financial, manufacturing and marketing resources than we do. In
addition, some of these companies have long established relationships with our
customers and potential customers in our markets. In addition to current
competitors, we believe that new competitors, some of whom may have
substantially greater financial, technical and marketing resources than us, will
seek to provide products to one or more of our markets in the future. Such
future competition could harm our business.
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Intellectual Property and Proprietary Rights
Our success and competitiveness depends to an extent on our technology and other
intellectual property such as trade secrets, patents and trademarks. We protect
our technology by controlling access to our proprietary information and by
maintaining confidentiality agreements with our employees and consultants and
our customers and partners, and, in some cases, through the use of patents,
trademark registrations, and licenses. We have been granted a number of patents
in the U.S. and foreign jurisdictions. We also have trademarks registered in the
U.S. and foreign jurisdictions. We actively pursue applications for new patents
and trademarks as we deem appropriate.
It is possible that, despite our efforts, other parties may use, obtain or try
to copy our products and technology. Policing unauthorized use of our products
and technology is difficult and time consuming. We cannot guarantee that the
steps we take to protect our rights will prevent any misappropriation of our
products or technology. This is particularly the case in foreign jurisdictions,
where the intellectual property laws may not afford our intellectual property
rights the same protection as the laws of the United States. In addition,
infringement, invalidity, right to use or ownership claims by third parties may
be asserted against us in the future, which claims could materially harm our
business, operating results or financial condition, regardless of the outcome.
Manufacturing
We assemble, test and package components and systems at domestic manufacturing
facilities located in Chandler, Arizona; Garden Grove, California; Irvine,
California; Richmond, California; Santa Ana, California; Billerica,
Massachusetts; and Plymouth, Minnesota. International manufacturing facilities
are located in France and Sweden. In addition, we subcontract the manufacture of
various products and components to a number of third-party subcontract
manufacturers.
Our manufacturing processes are diverse and consist of: purchasing raw
materials, principally stainless steel, aluminum and glass; processing the raw
materials into components, subassemblies and finished products; purchasing
components, assembling and testing components and subassemblies; and, for our
larger products, assembling the subassemblies and components into integrated
systems. We primarily design and manufacture components internally, although on
a limited basis, we purchase completed products from certain third-party
suppliers and resell those products through our distribution system. Most of
these completed products are produced to our specifications and carry our logo.
We currently procure various components from single-sources due to unique
component designs as well as certain quality and performance requirements. In
addition, we manufacture certain components internally, and there are no readily
available third-party suppliers of these components. If single-sourced
components were to become unavailable or were to become unavailable on terms
satisfactory to us, we would be required to purchase comparable components from
other sources. If for any reason we could not obtain comparable replacement
components from other sources in a timely manner, our business, results of
operations or financial condition could be adversely affected.
Employees
As of February 28, 2002, we had 1,653 employees worldwide. None of our employees
are represented by a union. We believe that our relationships with our employees
are good.
Backlog
Our consolidated backlog of products totaled $55.3 million and $195.5 million at
December 31, 2001 and 2000, respectively. Orders for many of the products we
sell to the fiber optic communications and semiconductor equipment markets,
which comprise the majority of our sales, are often subject to cancellation or
rescheduling by the customer, and we have from time to time experienced
significant cancellations and pushouts of orders from these markets, which
negatively affected our operating results in those periods. In addition, because
we manufacture a significant portion of our standard catalog products for
inventory, we often make shipments of these products upon
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or within a short time period following receipt of an order. As a result, our
backlog of orders at any particular date may not be an accurate indicator of our
sales for succeeding periods.
Investments
In addition to the ownership of subsidiaries detailed in Exhibit 21.1 to this
Form 10-K, we from time to time make investments in small privately-held
companies involved in developing products and technologies related to our
business, and we currently hold minority ownership interests in a number of such
companies. These investments are designed to further our strategic objectives
and to support our key business initiatives. We want to support growth in new
technologies, particularly in the fiber optic component market, in order to
create and expand markets for our products. While financial returns are not our
primary goal, our strategic investment program seeks to invest in companies that
can succeed and have a positive impact on their market segment. At December 31,
2001, the carrying value of our investments totaled $5.6 million. Investments in
early-stage technology companies involve significant risks, including the risks
that such companies may be unable to raise additional required operating capital
on acceptable terms or at all, or may not achieve or maintain market acceptance
of their technology or products. In the event that any of such risks occurs, the
value of our investment could decline significantly. In addition, because there
is no public market for the securities we acquire, our ability to liquidate our
investments is limited, and such markets may not develop in the future. In the
event that we are required to materially write-down the carrying value of one or
more of our investments, our earnings could be materially and adversely
affected.
ITEM 2 Properties
Our corporate headquarters is located in Irvine, California. We lease this
facility under a twenty-year lease expiring in February 2012. Our primary
manufacturing operations are located in the following facilities:
--------------------------------------------------------------------------------
Division Primary Facilities
--------------------------------------------------------------------------------
Fiber Optics and Photonics Chandler, Arizona
Santa Ana, California
Billerica, Massachusetts
--------------------------------------------------------------------------------
Industrial and Scientific Garden Grove, California
Technologies Irvine, California
Richmond, California
Plymouth, Minnesota
Beaune, France
La Boulonnie, France
--------------------------------------------------------------------------------
Industrial Metrology Systems Irvine, California
Eskilstuna, Sweden
--------------------------------------------------------------------------------
We own the La Boulonnie, France facility and lease all other facilities. In
addition to these primary facilities, we lease approximately 15 facilities
worldwide for administration, research and development, sales and/or service. We
believe that our facilities are adequate for our current needs and that suitable
additional or substitute space will be available in the future on commercially
reasonable terms to accommodate expansion of our operations.
ITEM 3 Legal Proceedings
In August 1999, Newport Electronics, Inc., a manufacturer of electronic devices,
filed suit against us in the Federal District Court in Connecticut, claiming
that our use of the "Newport" trademark infringes its rights with respect to
such mark. In January 2002, a trial was held with respect to this litigation.
The jury returned a verdict in our favor on all of Newport Electronics' claims.
Newport Electronics has filed a motion for a new trial, which we have opposed.
No hearing on such motion has yet been scheduled. In the event that Newport
Electronics' motion is granted or the verdict is overturned on appeal, and the
litigation is, on retrial, adversely determined, it could have
Page 12
material adverse effects on our business, including potential monetary damages
and being enjoined from using the "Newport" trademark in conjunction with
certain classes of products.
From time to time, we may be involved in litigation relating to claims arising
out of our operations in the normal course of business. Except for the Newport
Electronics litigation discussed above, we currently are not a party to any
legal proceedings, the adverse outcome of which, in management's opinion,
individually or in the aggregate, would have a material adverse effect on our
results of operations or financial position.
ITEM 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.
PART II
ITEM 5 Market for the Registrant's Common Equity and Related Security
Holder Matters
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market under the symbol NEWP.
As of February 28, 2002, we had 1,230 common stockholders of record based upon
the records of our transfer agent which do not include beneficial owners of
common stock whose shares are held in the names of various securities brokers,
dealers and registered clearing agencies. The quarterly high and low sales
prices of our common stock, and information regarding our payment of dividends,
for the fiscal years ended December 31, 2001 and 2000 are included in Note 16,
Supplementary Quarterly Consolidated Financial Data (Unaudited), of the Notes to
Consolidated Financial Statements on page F-23.
Page 13
ITEM 6 Selected Financial Data
The table below presents selected consolidated financial data of the Company and
its subsidiaries as of and for the years ended December 31, 2001, 2000, 1999,
1998, and 1997. Financial data presented incorporates the results of operations
and financial position of Unique and KLI, which were accounted for as poolings
of interests, for all periods presented. This data has been derived from our
audited consolidated financial statements and should be read in conjunction with
the full consolidated financial statements and notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for such periods.
(In thousands, except percent, per share and worldwide employment)
FOR THE YEAR: 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Net sales $ 318,869 $ 284,005 $ 159,525 $ 163,850 $ 172,239
Cost of sales (1) 217,669 154,365 88,887 88,809 93,373
--------- --------- --------- --------- ---------
Gross profit 101,200 129,640 70,638 75,041 78,866
Selling, general and administrative 69,495 57,148 38,203 35,704 38,739
Research and development 30,739 24,415 16,625 14,708 11,853
Restructuring and impairment charges (1) 13,438 -- -- -- --
Acquisition and other non-recurring charges (1) 10,683 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) from operations (23,155) 48,077 15,810 24,629 28,274
Interest and other income (expense), net 13,794 6,041 (1,833) (1,686) (2,097)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (9,361) 54,118 13,977 22,943 26,177
Income tax provision (benefit) (2) (3,089) 12,145 2,956 3,365 3,030
--------- --------- --------- --------- ---------
Net income (loss) ($ 6,272) $ 41,973 $ 11,021 $ 19,578 $ 23,147
========= ========= ========= ========= =========
Percent of net sales:
Gross profit 31.7% 45.6% 44.3% 45.8% 45.8%
Selling, general and administrative 21.8 20.1 24.0 21.8 22.5
Research and development 9.6 8.6 10.4 9.0 6.9
Restructuring and impairment charges 4.2 -- -- -- --
Acquisition and other non-recurring charges 3.4 -- -- -- --
Income (loss) from operations (7.3) 16.9 9.9 15.0 16.4
Net income (loss) (2.0) 14.8 6.9 11.9 13.4
PER SHARE: (3)
Net income (loss)
Basic ($ 0.17) $ 1.25 $ 0.36 $ 0.64 $ 0.76
Diluted (0.17) 1.17 0.34 0.62 0.74
Dividends paid 0.01 0.02 0.01 0.01 0.01
Equity per diluted share 13.33 13.43 2.65 2.70 2.30
AT YEAR END:
Cash and marketable securities $ 281,601 $ 306,642 $ 9,241 $ 14,503 $ 9,780
Working capital 389,318 426,294 51,762 59,169 50,828
Total assets 543,877 557,020 140,292 129,768 122,030
Total debt 9,598 17,130 26,070 23,635 23,407
Stockholders' equity 489,007 485,965 83,246 85,893 71,868
MISCELLANEOUS STATISTICS:
Common shares outstanding (3) 36,693 36,196 31,413 31,049 30,545
Shares used in calculating diluted
earnings per share (3) 36,405 35,835 32,075 31,842 31,229
Annual average worldwide employment 1,802 1,306 990 961 943
Sales per employee $ 177 $ 217 $ 161 $ 170 $ 183
(1) For 2001, includes inventory reserves ($24.4 million),
acquisition-related charges ($9.2 million), facility closure costs ($8.2
million), asset writedowns ($4.8 million), and employee severance ($3.4
million). See "Restructuring and Other Non-Recurring Charges" on pages 17
and 18.
(2) Excludes pro forma tax provisions of $5.7 million, $1.3 million, $3.4
million and $5.2 million for 2000, 1999, 1998 and 1997, respectively, on
earnings attributable to the KLI pooling of interests combination for
which no tax provisions were recorded due to KLI's S-Corporation income
tax status prior to the acquisition.
(3) Share and per share amounts have been adjusted as necessary to reflect
the May 2000 three-for-one stock split.
Page 14
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Item contains forward-looking statements that involve risks and
uncertainties and actual results could differ materially from those anticipated
in such statements as a result of various factors including those described
below in "Risks Relating To Our Business."
OVERVIEW
The following is a discussion and analysis of certain factors that have affected
the results of operations and financial condition during the periods included in
the accompanying financial statements. This discussion should be read in
conjunction with the financial statements and associated notes.
In October 1999, we acquired the west coast commercial optics operation of
Corning OCA Corporation, a subsidiary of Corning Incorporated (renamed Newport
Precision Optics Corporation or "NPOC"), which manufactures specialized
precision optical and optomechanical products and systems. In August 2000, we
acquired Unique Equipment Co. ("Unique"), a systems integrator specializing in
the use of robotics for the fiber optics and semiconductor industries. In
December 2000, we acquired the business of CEJohansson AB ("CEJ"), a Swedish
global supplier of advanced metrology systems. In February 2001, we acquired
Kensington Laboratories, Inc. ("KLI"), a manufacturer of high-precision robotic
and motion control equipment for the semiconductor and fiber optic
communications industries. We issued approximately 3,526,000 shares of common
stock to the KLI shareholders in the transaction. Also in February 2001, we
acquired Design Technology Corporation ("DTC"), a systems integrator
specializing in the use of robotics and flexible automation solutions for
manufacturing processes. The NPOC, CEJ and DTC acquisitions were accounted for
using the purchase method. The Unique and KLI acquisitions were accounted for
using the pooling of interests method. This discussion includes the effects of
the acquisitions of Unique and KLI for all years presented and the effects of
the acquisitions of NPOC, CEJ and DTC from the dates of their respective
acquisition.
Amounts in 1999 include net sales of $2.5 million representing one extra month
of sales from our European operations. The additional net sales stem from a
reporting change in the second quarter of 1999 that eliminated a one-month lag
in the reporting of European results. Without the change, 1999 net sales would
have been $157.0 million, while net income would not have been materially
different. Earnings per share were not impacted by the change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements included herein,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and related disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis, we
evaluate these estimates and assumptions, including those related to bad debts,
inventories, investments, intangible assets, income taxes, warranty obligations,
restructuring, contingencies and litigation. We base these estimates on
historical experience and on various other factors which we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. These estimates and assumptions by
their nature involve risks and uncertainties, and may prove to be inaccurate. In
the event that any of our estimates or assumptions are inaccurate in any
material respect, it could have a material adverse effect on our reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
The following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Page 15
Revenue Recognition. We record a sale after all significant obligations have
been met, collectibility is probable and title has passed, which typically
occurs upon shipment or completion of services. Customers generally have 30 days
from the original invoice date (generally 60 days for international customers)
to return a catalog product purchase for exchange or credit. The catalog product
must be returned in its original condition and meet certain other criteria.
Product returns of catalog items have historically been insignificant and are
charged against revenue in the period returned. Custom configured and certain
other products as defined in our Customer Satisfaction and Product Guarantee
Policy cannot be returned. Unless otherwise stated in our product literature, we
provide a one-year warranty from the original invoice date on all product
material and workmanship. Defective products will be either repaired or
replaced, at our option, upon meeting certain criteria.
Accounts Receivable. We estimate the collectibility of customer receivables on
an ongoing basis by periodically reviewing balances outstanding over a certain
period of time. We have recorded reserves for receivables deemed to be at risk
for collection as well as a general reserve based on our historical experience.
A considerable amount of judgment is required in assessing the ultimate
realization of these receivables, including the current credit-worthiness of
each customer. In recent periods we have increased our reserves for
uncollectible accounts due to adverse changes in the financial condition of
certain of our customers in the fiber optic communications market. If the
financial condition of our customers deteriorate, resulting in an impairment of
their ability to make required payments, additional allowances may be required
which could adversely affect our operating results.
Inventory. We state our inventories at the lower of cost or market and provide
reserves for potentially excess and obsolete inventory. In assessing the
ultimate realization of inventories, we make judgments as to future demand
requirements and compare that with the current or committed inventory levels.
Reserves are established for inventory levels that exceed future demand. We have
recorded significant reserves, primarily for excess inventory, in recent periods
due to deterioration in our primary target markets, fiber optic communications
and semiconductor capital equipment. It is possible that additional changes in
required inventory reserves may occur in the future due to changes in market
conditions.
Impairment of Assets and Restructuring. We assess the impairment of goodwill and
other identifiable intangibles whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The determination of
related estimated useful lives and whether or not these assets are impaired
involves significant judgments, related primarily to the future profitability
and/or future value of the assets. Changes in our strategic plan and/or market
conditions could significantly impact these judgments and require adjustments to
recorded asset balances. We hold minority interests in companies having
operations or technologies in areas within or adjacent to our strategic focus,
all of which are non-publicly traded and whose values are difficult to
determine. We record an investment impairment charge in any reporting period
where we believe an investment has experienced a decline in value that is other
than temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in an
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
In 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets
("Statement 142"), which we adopted on January 1, 2002. Under the new rules,
goodwill will be subject to annual impairment tests based upon a comparison of
the fair value of each of our reporting units, as defined, and the carrying
value of the reporting units' net assets, including goodwill. Pursuant to
Statement 142, we are currently testing our goodwill for impairment and expect
to record an impairment charge in the first quarter of 2002 in the range of $6.0
million to $16.0 million, after tax, which is expected to reduce our earnings in
the first quarter by between $0.16 and $0.44 per diluted share based on the
weighted average shares outstanding at December 31, 2001.
During 2001, we recorded significant reserves in connection with our
restructuring and cost reduction program. These reserves include estimates
pertaining to employee separation costs and facility closure costs. Although we
do not anticipate significant changes, the actual costs to settle such
liabilities may differ from the amounts estimated.
Deferred Taxes. We currently have significant deferred tax assets, which are
subject to periodic recoverability assessments. Realization of our deferred tax
assets is principally dependent upon our achievement of future taxable
Page 16
income, the estimation of which requires significant management judgment. Our
judgments regarding future profitability may change due to many factors,
including future market conditions and our ability to successfully execute our
business plans. These changes, if any, may require material adjustments to these
deferred tax asset balances.
RESTRUCTURING AND OTHER NON-RECURRING CHARGES
In 2001, due to the continued weak economic environment in our key end markets,
we revised our sales forecasts and announced a cost reduction program designed
to bring the operating structure in line with the current business outlook.
These initiatives included headcount reductions, facility consolidations and
product rationalizations.
During the third quarter of 2001, we announced planned workforce reductions
primarily at our Garden Grove, CA, Irvine, CA, San Luis Obispo, CA and Longmont,
CO operations. Severance and other costs related to such reductions totaled $3.4
million. Such reductions represented 20% of our worldwide workforce, or
approximately 400 employees. At December 31, 2001, 329 employees had been
terminated.
We consolidated the manufacturing operations of our San Luis Obispo, CA, Garden
Grove, CA, and Longmont, CO operations into an expanded campus in Irvine, CA. We
also consolidated our metrology manufacturing into our operations in Sweden. We
expect all consolidation activities to be completed by June 30, 2002. Costs
related to the facility consolidations totaled $9.3 million and include reserves
for asset impairments of $5.4 million, facility lease termination costs of $2.1
million and the write-off of goodwill of $1.8 million.
The following table summarizes the activities in the restructuring reserves:
Employee Facility
(In thousands) Severance Consolidations Other Total
--------- -------------- ----- -----
Restructuring and asset
impairment charges $ 3,366 $ 9,348 $ 724 $ 13,438
Cash payments (1,010) (46) (123) (1,179)
Asset write-offs (337) (5,861) (601) (6,799)
-------- -------- -------- --------
Accrued restructuring reserves at December 31, 2001 $ 2,019 $ 3,441 $ -- $ 5,460
We expect to utilize most of the reserves in 2002, although the facility lease
termination costs included in these reserves will continue to be paid through
the various lease terms.
In addition to the workforce reductions and facility consolidations discussed
above, we revised our sales forecasts given current market conditions, and as a
result, established reserves for excess and obsolete inventory and wrote off
certain other assets.
The table below summarizes these reserves and write-offs and where those charges
have been reflected in the accompanying consolidated statement of operations for
the year ended December 31, 2001:
Cost of Selling, General &
(In thousands) Sales Administrative Total
----- -------------- -----
Inventory reserves $24,393 $ -- $24,393
Asset write-offs and other charges 710 631 1,341
------- ------- -------
$25,103 $ 631 $25,734
======= ======= =======
Page 17
The restructuring and asset impairment charges, inventory reserves and other
charges relate to the following business segments:
(In thousands)
Fiber Optics & Photonics $28,636
Industrial Metrology Systems 3,883
Industrial & Scientific Technologies 3,684
Non-segment related 2,969
-------
$39,172
=======
In addition, during the first quarter of 2001, we recorded non-recurring charges
of $12.5 million. These charges were comprised of $9.2 million for investment
banking, legal and accounting fees related to our acquisition of KLI, a charge
to cost of sales of $1.8 million for asset writedowns related to integration
charges in connection with our December 2000 acquisition of the business of CEJ,
and a charge of $1.5 million related to the acceleration of stock options held
by a retiring employee.
Pro forma net income excluding the restructuring and impairment charges, the
acquisition and other non-recurring charges and the reserves for excess and
obsolete inventory incurred in 2001 and reflecting the pro forma tax effect of
the conversion of KLI from an S-Corporation to a C-Corporation for 2000 and 1999
is presented below:
Years Ended December 31,
------------------------
(In thousands except per share amounts) 2001 2000 1999
---- ---- ----
Income before income taxes $42,330 $54,118 $13,977
Income tax provision 13,969 17,807 4,217
------- ------- -------
Net income $28,361 $36,311 $ 9,760
======= ======= =======
Earnings per share:
Basic $ 0.78 $ 1.09 $ 0.32
Diluted $ 0.75 $ 1.01 $ 0.30
The pro forma information presented above is not based on generally accepted
accounting principles, nor is it a substitute for such information, but rather
is provided to clarify the impact of certain actions taken that management
believes are non-recurring in nature and to present the results of our ongoing
operations on a more comparable basis.
SUBSEQUENT EVENT
In February 2002, we acquired Micro Robotics Systems, Inc. ("MRSI"), a privately
held manufacturer of high precision, fully automated assembly and dispensing
systems for the fiber optic communications, microwave and semiconductor
equipment markets for approximately 2,100,000 shares of common stock (including
shares issuable upon the exercise of assumed stock options) valued at
approximately $50.0 million and $15.0 million in cash. We currently expect MRSI
to have 2002 net sales in the range of $13.0 million to $16.0 million, and we
currently expect MRSI's financial results to be slightly accretive to our
earnings per share for the full year 2002.
Page 18
RESULTS OF OPERATIONS
Financial Analysis. The following table sets forth, for the periods indicated,
certain income and expense items expressed as a percent of net sales and as
period-to-period percent increases or decreases:
Period-to-Period
Percent of Net Sales Increase (Decrease)
-------------------- --------------------
2001 2000 1999 2001 2000
----- ----- ----- ---- ----
Net sales 100.0% 100.0% 100.0% 12.3% 78.0%
Cost of sales 68.3 54.4 55.7 41.0 73.7
----- ----- -----
Gross profit 31.7 45.6 44.3 (21.9) 83.5
Selling, general and
administrative expense 21.8 20.1 24.0 21.6 49.6
Research and development expense 9.6 8.6 10.4 25.9 46.9
Restructuring and impairment charges 4.2 -- -- 100.0 --
Acquisition and other non-recurring charges 3.4 -- -- 100.0 --
----- ----- -----
Income (loss) from operations (7.3) 16.9 9.9 NM 204.1
Interest and other income (expense), net 4.4 2.2 (1.1) 128.3 NM
----- ----- -----
Income (loss) before income taxes (2.9) 19.1 8.8 NM 287.2
Income tax provision (benefit) (0.9) 4.3 1.9 NM 310.9
----- ----- -----
Net income (loss) (2.0) 14.8 6.9 NM 280.8
===== ===== =====
NM = Not Meaningful
Net Sales. For 2001, 2000 and 1999, our net sales totaled $318.9 million, $284.0
million and $159.5 million, respectively. Net sales for 2001 increased $34.9
million, or 12.3%, as compared with 2000, due primarily to sales increases to
the semiconductor equipment and general metrology markets, offset in part by a
decline in sales to the fiber optic communications market. Approximately $15.1
million of the increase in sales to the general metrology market was due to the
inclusion of sales from businesses acquired for which there were no comparable
sales in the 2000 period. Net sales for 2000 increased $124.5 million, or 78.0%,
as compared with 1999, due primarily to sales increases in the fiber optic
communications and semiconductor equipment markets.
For 2001, 2000 and 1999, sales to the fiber optic communications market were
$102.4 million, $110.7 million and $34.3 million, respectively. Sales to this
market in 2001 decreased $8.3 million, or 7.5%, as compared with 2000. Sales to
this market declined substantially during the second half of 2001, from $80.7
million during the first half of the year to $21.7 million during the second
half of the year, reflecting the severe decline in this market. Sales to this
market in 2000 increased $76.4 million, or 222.8%, as compared with 1999. Growth
in this market in 2000 reflected the increased demand for our products from
fiber optic component manufacturers to build their manufacturing capacity to
support the high component demand then forecasted.
Sales to the semiconductor equipment market were $90.6 million, $72.5 million
and $29.2 million for 2001, 2000 and 1999, respectively. Sales to this market in
2001 increased $18.1 million, or 25.0%, as compared with 2000. Sales to the
semiconductor equipment market declined substantially during the second half of
the year, from $55.2 million during the first half of the year to $35.4 million
in the second half of the year, reflecting the significant downturn in this
market. In 2000, sales to this market increased $42.9 million, or 144.9%, as
compared with 1999. The sales increases in 2001 and 2000 reflected the strong
demand by semiconductor manufacturers for capital equipment through the second
quarter of 2001, which led to strong demand for the subsystems we sell to this
market during this period.
Sales to the general metrology market were $74.0 million, $49.5 million and
$44.0 million for 2001, 2000 and 1999, respectively. Sales to this market in
2001 increased $24.5 million, or 49.3%, as compared with 2000. The increase in
sales was due primarily to the inclusion of sales from businesses acquired for
which there were no comparable sales in the 2000 period. In 2000, sales to this
market increased $5.5 million, or 12.5%, as compared with 1999.
Page 19
In 2001, 2000 and 1999, sales to the other market segments, which are comprised
of aerospace and research and computer peripherals, were $51.9 million, $51.3
million and $51.6 million, respectively.
For 2001, 2000 and 1999, domestic sales were $212.4 million, $201.2 million and
$107.3 million, respectively. Domestic sales in 2001 increased $11.2 million, or
5.6%, as compared with 2000, due primarily to sales increases in the
semiconductor equipment, general metrology, and aerospace and research markets
of $18.6 million, or 27.5%, $4.4 million, or 14.3%, and $2.1 million, or 8.9%,
respectively. This increase was offset by decreases in the fiber optic
communications and computer peripherals markets of $10.9 million, or 15.1%, and
$2.9 million, or 35.9%, respectively. Domestic sales in 2000 increased $94.0
million, or 87.6%, as compared with 1999, due primarily to sales increases in
the fiber optic communications, semiconductor equipment and general metrology
markets of $49.7 million, or 220.2%, $41.4 million, or 163.0%, and $4.1 million,
or 15.4%, respectively. The sales increase in 2000 was offset by sales declines
in the other markets combined of $1.1 million, or 3.5%.
International sales totaled $106.5 million, $82.8 million and $52.3 million for
2001, 2000 and 1999, respectively. For 2001, international sales increased $23.7
million, or 28.6%, as compared with 2000. The increase in international sales in
2001 as compared with 2000 was primarily due to an increase of $2.6 million, or
6.6%, in the fiber optic communications market, an increase of $20.0 million, or
105.8%, in the general metrology market and an increase of $1.6 million, or
9.1%, in the aerospace and research market. The increased international sales to
the general metrology market were due primarily to the inclusion of sales from
acquired businesses accounted for using the purchase method for which there were
no comparable sales in 2000. Geographically, the increase in 2001 sales was
driven by increased sales to European customers of $31.3 million, or 76.9%,
due primarily to the aforementioned increase in general metrology sales. This
was offset in part by decreased sales to Canadian and Pacific Rim customers of
$4.7 million, or 30.5%, and $4.5 million, or 18.6%, respectively. International
sales in 1999 included net sales of $2.5 million representing one extra month of
sales from our European operations, due to a reporting change in the second
quarter of 1999 that eliminated a one-month lag in the reporting of European
results. Without such change, 1999 international sales would have been $49.7
million. The increase in international sales in 2000 as compared with 1999 was
due primarily to an increase of $26.8 million, or 227.8%, in sales to
international fiber optic communications customers, an increase of $1.5 million,
or 36.4%, in sales to the semiconductor equipment market, and an increase in
international sales to all other market segments combined of $2.1 million, or
6.1%. Geographically, the increase in 2000 sales was driven primarily by sales
to European, Canadian and Pacific Rim customers with increases of $8.3 million,
or 25.4%, $13.0 million, or 113.2%, and $9.1 million, or 144.9%, respectively,
over 1999.
Our business is subject to risks arising from market conditions in the
semiconductor equipment and fiber optic communications markets, as well as from
general economic conditions. During 2001, the semiconductor equipment and fiber
optic communications markets experienced severe downturns, which have continued
in 2002. Additionally, the general economic recession constrained capital
spending in many of our end markets. The timing of any recovery from these
conditions is difficult to predict and represents a significant uncertainty with
respect to our operating results. We expect that our sales to the aerospace and
research markets will show a long-term growth trend in line with growth in the
United States gross domestic product.
Gross Margin. Gross margin was 31.7%, 45.6% and 44.3% for 2001, 2000 and 1999,
respectively. The gross margin in 2001 was negatively impacted by inventory and
asset writedowns of $26.9 million, that were taken to reflect the significant
downturn in our primary target markets and the resulting reductions in our
forecasted sales to these markets. (See "Restructuring And Other Non-Recurring
Charges" on pages 17-18.) Excluding these writedowns, gross margin for 2001
would have been 40.2%. The decrease in gross margin from 2000 to 2001 was due
primarily to the additional manufacturing capacity and infrastructure added at
KLI and in our Fiber Optics and Photonics division during late 2000 and early
2001 to be able to meet customer demand, and to the lower absorption of fixed
overhead caused by the sharp decline in sales volume through the latter part of
2001. Gross margin in 2001 was also negatively impacted by a mix shift towards
sales to semiconductor original equipment manufacturer (OEM) customers, which
generally have lower gross margins but lower associated operating expenses. The
gross margin increase from 2000 to 1999 was primarily attributable to a mix
shift towards higher margin product and system sales to the fiber optic
communications market. Sales of these higher margin product and systems sales
were offset partially by higher growth rates in lower gross margin sales to
semiconductor OEM customers.
Page 20
We expect that our gross margin will fluctuate in future periods due to factors
including absorption of fixed overhead due to sales volume, product mix and the
proportion of sales to OEM customers, material costs, changes in the carrying
value of inventory and manufacturing efficiencies. In particular, because a
significant portion of our manufacturing overhead is fixed in the short term,
the impact of increases or decreases in sales on our gross margin will typically
be proportionately greater than the changes in sales. Additionally, if the
proportion of our sales to OEM customers increases, we would expect such
increase to have a negative impact on our overall gross margin, but a positive
effect on our overall operating margin. In addition, during 2001 we adjusted the
carrying value of certain of our inventory to reflect the significant downturn
in our primary target markets and the resulting reductions in our forecasted
sales to those markets, which reduced the net realizable value of that
inventory. In the event that our sales of those products exceed this forecast,
such writedown in inventory cost would have a positive impact upon our gross
margin. Conversely, if our forecasted sales were to be further reduced, we could
further adjust our inventory value, which would negatively affect our gross
margin, financial position and results of operations.
Selling, General and Administrative (SG&A) Expense. SG&A expenses totaled $69.5
million, or 21.8% of net sales, $57.1 million, or 20.1% of net sales, and $38.2
million, or 24.0% of net sales, for 2001, 2000 and 1999, respectively. SG&A
expenses in 2001 increased $12.3 million, or 21.6%, as compared with 2000,
primarily due to costs of the additional infrastructure added to be able to
support the sales growth forecasted in late 2000 and early 2001, offset in part
by the effects of certain of the cost reduction efforts initiated in the second
half of 2001 in response to the downturn in our primary end markets. In 2000,
SG&A expenses increased $18.9 million, or 49.6%, as compared with 1999,
primarily due to increases in expenses tied to the sales and profit growth we
experienced during that year.
We expect that our total SG&A expenses will decrease in 2002 as compared with
2001 due to the effects of the cost reduction efforts initiated in 2001.
However, we expect that SG&A as a percentage of sales will fluctuate in the
future based on our sales level in any given period. Because a significant
portion of our SG&A expenses are fixed in the short term, these fluctuations may
be proportionately greater than the changes in sales.
Research and Development (R&D) Expense. R&D expenses totaled $30.7 million,
$24.4 million and $16.6 million for 2001, 2000 and 1999, respectively. R&D
expenses represented 9.6%, 8.6% and 10.4% of net sales in 2001, 2000 and 1999,
respectively. R&D expenses increased $6.3 million, or 25.9%, in 2001 as compared
with 2000, and $7.8 million, or 46.9%, in 2000 as compared with 1999. The
increases in both years were attributable primarily to increased personnel costs
related to the development of a number of new products and product enhancements
including the improvement of laser beam stabilization and the expanded
performance and range of our automated packaging and testing systems, including
the introduction of the AMS AutoAlign packaging workstation, development of new
semi- and fully-automated systems for laser diode characterization and sorting,
semi- and fully-automated solutions for vertical cavity surface emitting laser
("VCSEL") device assembly, development of next-generation systems for burn-in
and testing of laser diodes, and enhancements to the performance, functionality
and material handling capabilities on our existing automation platforms.
We believe that the continued development and advancement of our key products
and technologies is critical to our future success. Accordingly, we intend to
increase our total R&D spending in future periods to develop additional new
products and product improvements. We expect that R&D expenses as a percentage
of sales will fluctuate in the future based on our sales level in any given
period. Because of our commitment to continued product development, and because
a significant portion of our R&D expenses are fixed in the short term, these
fluctuations may be proportionately greater than the changes in sales.
Restructuring and Impairment Charges. Restructuring and impairment charges of
$13.4 million were recorded in 2001. The charges related to the cost reduction
initiatives described in "Restructuring and Other Non-Recurring Charges" on
pages 17-18.
Acquisition and Other Non-Recurring Charges. Acquisition and other non-recurring
charges of $10.7 million were recorded in 2001. The charges related primarily to
investment banking, legal and accounting fees associated with transactions and
are described in "Restructuring and Other Non-Recurring Charges" on pages 17-18.
Page 21
Interest and Other Income (Expense), Net. Interest and other income, net,
totaled $13.8 million and $6.0 million for 2001 and 2000, respectively. Interest
and other expense, net, for 1999 totaled $1.8 million. In the third quarter of
2000, we completed a secondary public offering for which we received proceeds of
$329.9 million (after underwriting discounts and commissions). Interest and
other income in 2001 and 2000 were primarily attributable to the investment of
the proceeds from the secondary offering.
Interest income will fluctuate based on cash balances and changes in interest
rates. Although a majority of our debt is at fixed interest rates, we anticipate
that interest expense for 2002 will decrease slightly from 2001 because the
long-term debt will be reduced by principal payments of $1.5 million in the
second quarter and $1.0 million in the fourth quarter.
Taxes Based On Income. The effective tax rates for 2001, 2000 and 1999 were
33.0%, 22.4% and 21.1%, respectively. The increase in the effective tax rates
from 2000 and 1999 was impacted by the earnings attributable to our acquisition
of KLI, which was accounted for as a pooling of interests. Prior to its
acquisition, KLI was treated as an S-Corporation for U.S. tax purposes and
accordingly, recorded no income tax provision. On a pro forma basis assuming
that KLI was taxed as a C-Corporation for all periods presented, our effective
tax rates would have been 32.9% and 30.2% in 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities in 2001 of $14.6 million was
primarily attributable to collections of customer receivables and income tax
receivables, partially offset by our net loss, before non-cash charges for
depreciation, amortization and asset reserves, and by an increase in
inventories. Customer receivables decreased by $34.4 million, or 49.0%, in 2001,
while the days sales outstanding ratio improved to 61 days in 2001 from 68 days
in 2000. Inventories increased 19.7% in 2001 over 2000 levels, due primarily to
increases in inventories during the first half of 2001 to support the customer
demand forecasted at the beginning of 2001 and to meet our goal of maintaining
competitive manufacturing lead times. Inventory turns decreased to 2.2 times in
2001 from 2.6 times in 2000.
Net cash used in investing activities of $17.1 million for 2001 was primarily
attributable to purchases of property, plant and equipment and acquisitions of
businesses, partially offset by net sales of marketable securities.
Net cash used in financing activities in 2001 of $6.8 million was primarily
attributable to payments on long-term borrowings, cash dividends and other
distributions to shareholders, offset in part by the sales of common stock in
connection with stock option exercises and employee stock purchase plans, which
generated $5.2 million in proceeds and resulted in the issuance of approximately
557,000 shares.
At December 31, 2001, we had marketable securities of $274.5 million. These
securities are divided into three portfolios, each managed by a professional
investment management firm, under the oversight of the Investment Committee of
our Board of Directors and our senior financial management team. Such portfolio
managers invest the funds allocated to them in accordance with our Investment
Policy, which is reviewed regularly by the Investment Committee and our senior
financial management. We expect that our portfolio balances will fluctuate in
the future based on factors such as cash requirements for ongoing operations,
acquisitions, investments in third parties, capital expenditures and contractual
obligations, as well as changes in interest rates.
At December 31, 2001, we had in place two unsecured lines of credit of $10.0
million each, expiring March 2002 and March 2004, respectively. In March 2002,
we amended the terms of such lines of credit to change the rates of interest and
extend the expiration of one line from March 2002 to March 2003. Both lines bear
interest at either the prevailing prime rate, or the prevailing London Interbank
Offered Rate plus 1.4%, at our option, plus an unused line fee of 0.325% per
year. At December 31, 2001, there was no outstanding balance under either line
of credit, with $18.7 million available under the combined lines, after
considering outstanding letters of credit of $1.3 million. Our outstanding debt
consists of $6.2 million in short-term borrowings and long-term debt of $3.4
million. At December 31, 2001, we were not in compliance with certain covenants
under these lines of credit due to the non-recurring
Page 22
charges recorded in 2001. Our lender has waived this noncompliance through
September 30, 2002. Excluding these non-recurring charges, we believe we will be
in compliance with our debt covenants on an ongoing basis.
Contractual obligations at December 31, 2001 are summarized below:
(In thousands) Payments Due By Period
-------------------------------------------------------------------
2006
Total 2002 2003 2004 2005 and beyond
Operating lease obligations $27,355 $ 6,776 $ 6,352 $ 4,939 $ 4,380 $ 4,908
Term notes:
8.25% senior notes 6,500 3,500 2,000 1,000 -- --
7.00% promissory note 518 518 -- -- -- --
Shareholder notes to the
former owners of KLI 1,867 1,867 -- -- -- --
Capitalized lease obligations 631 222 202 145 62 --
Equipment loans and other 82 82 -- -- -- --
------- ------- ------- ------- ------- -------
$36,953 $12,965 $ 8,554 $ 6,084 $ 4,442 $ 4,908
======= ======= ======= ======= ======= =======
Subsequent to December 31, 2001, we utilized net cash of $8.5 million in our
acquisition of MRSI, and paid $1.9 million to satisfy the shareholder notes
referenced above.
We believe our current working capital position together with estimated cash
flows from operations and existing credit availability are adequate to fund
operations in the ordinary course of business, anticipated capital expenditures,
debt payment requirements and other contractual obligations, for the foreseeable
future. However, this belief is based upon many assumptions and is subject to
numerous risks (see "Risks Relating To Our Business," on pages 24-29), and there
can be no assurance that we will not require additional funding in the future.
Although we have no present agreements or commitments with respect to any
material acquisitions of other businesses, products, product rights or
technologies, we continue to evaluate acquisitions of products, technologies or
companies that complement our business and may make such acquisitions in the
future. Accordingly, there can be no assurance that we will not need to obtain
additional sources of capital in the future to finance any such acquisitions.
Recent Accounting Pronouncements
We adopted FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities ("Statement 133") as of 2001. Statement 133 requires certain
derivative instruments to be recorded at fair value. Derivative instruments held
by us are comprised of foreign exchange contracts held to mitigate the risks
associated with certain foreign currency transactions entered into in the
ordinary course of business, primarily foreign currency denominated receivables.
The adoption of this standard did not have a material impact on our results of
operations, financial position or cash flows.
In 2001, the FASB issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("Statement 144"), which we adopted on January 1,
2002. Under Statement 144, assets held for sale will be included in discontinued
operations if the operations and cash flows will be or have been eliminated from
the ongoing operations of the entity and the entity will not have any
significant continuing involvement in the operations of the component. We are
currently assessing the effect that the adoption of Statement 144 will have on
our consolidated results of operations and financial position.
In 2001, the FASB issued Statement No. 141, Business Combinations ("Statement
141"), and No. 142, Goodwill and Other Intangible Assets ("Statement 142"),
which we adopted on January 1, 2002. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but, instead, will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. We will apply
Page 23
the new rules on accounting for goodwill and other intangible assets beginning
in the first quarter of 2002. Application of the non-amortization provisions of
Statement 142 is expected to result in an increase in net income of
approximately $1.6 million per year (or $0.04 per diluted share based on the
weighted average shares outstanding at December 31, 2001). At December 31, 2001,
we had goodwill of approximately $27.1 million. Pursuant to Statement 142, we
are currently testing our goodwill for impairment and expect to record an
impairment charge in the first quarter of 2002 in the range of $6.0 million to
$16.0 million, after tax, which is expected to reduce our earnings in the first
quarter by between $0.16 and $0.44 per diluted share based on the weighted
average shares outstanding at December 31, 2001.
RISKS RELATING TO OUR BUSINESS
OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT, AND IF WE FAIL TO MEET THE
EXPECTATIONS OF INVESTORS AND/OR SECURITIES ANALYSTS, THE MARKET PRICE OF OUR
COMMON STOCK WILL LIKELY DECLINE SIGNIFICANTLY.
Our operating results in any given quarter have fluctuated and will likely
continue to fluctuate. These fluctuations are typically unpredictable and can
result from numerous factors including:
. the timing of product shipments within a given quarter;
. fluctuations in the capital spending, cyclicality and other
economic conditions within the markets we serve;
. demand for our products and the products sold by our customers;
. the level of orders within a given quarter and preceding quarters;
. the timing and level of cancellations and delays of orders for our
products;
. our ability to manufacture a sufficient quantity of our products
to meet customer demand;
. variations in the mix of products we sell in each of the markets
in which we do business;
. our timing in introducing new products;
. changes in our pricing policies or in the pricing policies of our
competitors or suppliers;
. market acceptance of any new or enhanced versions of our products;
. the availability and cost of key components we use to manufacture
our products;
. fluctuations in foreign currency exchange rates;
. timing of our competitors in introducing new products; and
. our levels of expenses.
We may in the future choose to reduce prices, increase spending, or add or
eliminate products in response to actions by competitors or as an effort to
pursue new market opportunities. These actions may also adversely affect our
business and operating results and may cause our quarterly results to be lower
than the results of previous quarters. We believe that quarter-to-quarter
comparisons of results from operations, or any other similar period-to-period
comparisons, should not be construed as reliable indicators of our future
performance. In any period, our results may be below the expectations of market
analysts and investors, which would likely cause the trading price of our common
stock to drop.
Page 24
WE ARE HIGHLY DEPENDENT ON THE SEMICONDUCTOR AND FIBER OPTIC COMMUNICATIONS
INDUSTRIES AND ON OUR CUSTOMERS WHO SERVE THESE VERY CYCLICAL INDUSTRIES.
A substantial portion of our current and expected future business comes from
sales to manufacturers of semiconductor fabrication and metrology equipment and
sales to companies that manufacture components for fiber optic communications
systems. Our sales to these markets are directly tied to the capital spending
patterns of our customers in these markets.
The semiconductor market is characterized by sudden and severe cyclical
variations in product supply and demand. The timing, severity and duration of
these market cycles are difficult to predict, and we may not be able to respond
effectively to these cycles. The fiber optic communications market, which is at
a much earlier stage in its development, experienced dramatic growth through the
first half of 2001, followed by a sudden, severe downturn, which is continuing.
During industry downturns, our revenues from these markets may decline suddenly
and significantly. Our ability to rapidly and effectively reduce our cost
structure in response to such downturns is limited by the fixed nature of many
of our expenses in the near term and by our need to continue our investment in
next-generation product technology and to support and service our products. In
addition, due to the relatively long manufacturing lead times for some of the
systems and subsystems we sell to these markets, we may incur expenditures or
purchase raw materials or components for products we cannot sell. Accordingly,
downturns in our primary markets may materially harm our operating results.
Conversely, when upturns in our primary markets occur, we must be able to
rapidly and effectively increase our manufacturing capacity to meet increases in
customer demand that may be extremely rapid, and if we fail to do so we may lose
business to our competitors and our relationships with our customers may be
harmed.
The semiconductor and fiber optic communications markets are also characterized
by rapid technological change, frequent product introductions, changing customer
requirements and evolving industry standards. Because our customers face
uncertainties with regard to the growth and requirements of these markets, their
products and components may not achieve, or continue to achieve, anticipated
levels of market acceptance. If our customers are unable to deliver products
that gain market acceptance, it is likely that these customers will not purchase
our products or will purchase smaller quantities of our products. We often
invest substantial resources in helping our customers develop products and
manufacturing processes in advance of significant sales of our products to such
customers. A failure on the part of our customers' products to gain market
acceptance, or a failure of either or both of the semiconductor and fiber optic
communications markets to grow would have a significant negative effect on our
business and results of operations.
THE MARKETS AND INDUSTRIES THAT WE SERVE ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, AND IF WE DO NOT INTRODUCE NEW AND INNOVATIVE PRODUCTS OR IMPROVE OUR
EXISTING PRODUCTS, OUR BUSINESS AND RESULTS OF OPERATIONS WILL BE NEGATIVELY
AFFECTED.
Our markets are characterized by rapid technological advances, evolving industry
standards, shifting customer needs and new product introductions and
enhancements. Products in our markets often become outdated quickly and without
warning. We depend to a significant extent upon our ability to enhance our
existing products, to address the demands of the marketplace for new and
improved technology, either through internal development or by acquisitions, and
to be price competitive. We may not be successful in acquiring, developing,
manufacturing or marketing new products on a timely or cost-effective basis. If
we fail to adequately introduce new, competitive products on a timely basis, our
business and results of operations would be harmed.
WE OFFER PRODUCTS FOR MULTIPLE INDUSTRIES AND MUST FACE THE CHALLENGES OF
SUPPORTING THE DISTINCT NEEDS OF EACH OF THE MARKETS WE SERVE.
We market products for the fiber optic component, semiconductor capital
equipment, industrial metrology, life and health science, aerospace and research
markets. Because we operate in multiple markets, we must work constantly to
understand the needs, standards and technical requirements of several different
industries and must devote significant resources to developing different
products for these industries. Product development is costly and time consuming.
Many of our products are used by our customers to develop, manufacture and test
their own products. As a result, we must anticipate trends in our customers'
industries and develop products before our customers' products are
Page 25
commercialized. If we do not accurately predict our customers' needs and future
activities, we may invest substantial resources in developing products that do
not achieve broad market acceptance. Our decision to continue to offer products
to a given market or to penetrate new markets is based in part on our judgment
of the size, growth rate and other factors that contribute to the attractiveness
of a particular market. If our product offerings in any particular market are
not competitive or our analyses of a market are incorrect, our business and
results of operations would be harmed.
BECAUSE OUR SALES CYCLE IS LONG AND DIFFICULT TO PREDICT, AND OUR ORDERS ARE
SUBJECT TO RESCHEDULING OR CANCELLATION, WE MAY EXPERIENCE FLUCTUATIONS IN OUR
OPERATING RESULTS.
Many of our products are complex, and customers for these products require
substantial time to make purchase decisions. These customers often perform, or
require us to perform, elaborate testing and evaluation of our products before
committing to purchasing them. The sales cycle for our products from initial
contact through shipment typically varies, is difficult to predict and can last
as long as one year. The orders comprising our backlog are often subject to
cancellation and changes in delivery schedules by our customers without
significant penalty. We have from time to time experienced order reschedulings
and cancellations that have caused our revenues in a given period to be
materially less than would have been expected based on our backlog at the
beginning of the period. If we experience such reschedulings and/or
cancellations in the future, our operating results will fluctuate from period to
period. These fluctuations could harm our results of operations and cause our
stock price to drop.
WE FACE SIGNIFICANT RISKS FROM DOING BUSINESS IN FOREIGN COUNTRIES.
Our business is subject to risks inherent in conducting business
internationally. In 2001, 2000 and 1999, our international revenues accounted
for approximately 33.4%, 29.1% and 32.7%, respectively, of total net sales, with
a substantial portion of sales originating in Europe. We expect that
international revenues will continue to account for a significant percentage of
total net sales for the foreseeable future. As a result of our international
operations, we face various risks, which include:
. adverse changes in the political or economic conditions in
countries or regions where we manufacture or sell our products;
. challenges of administering our business globally;
. compliance with multiple and potentially conflicting regulatory
requirements including export requirements, tariffs and other
trade barriers;
. longer accounts receivable collection periods;
. overlapping, differing or more burdensome tax structures;
. adverse currency fluctuations;
. differing protection of intellectual property;
. difficulties in staffing and managing each of our individual
foreign operations; and
. trade restrictions and licensing requirements.
As a result of our international operations, fluctuations in foreign exchange
rates could affect the sales price in local currencies of our products in
foreign markets, potentially making our products less competitive. In addition,
exchange rate fluctuations could increase the costs and expenses of our foreign
operations or require us to modify our current business practices. If we
experience any of the risks associated with international business, our business
and results of operations could be significantly harmed.
Page 26
WE FACE SUBSTANTIAL COMPETITION, AND IF WE FAIL TO COMPETE EFFECTIVELY, OUR
OPERATING RESULTS WILL SUFFER.
The markets for our products are intensely competitive, and we believe that
competition from both new and existing competitors will increase in the future.
We compete in several specialized market segments, against a limited number of
companies. We also face competition in some of our markets from our existing and
potential customers who have developed or may develop products that are
competitive to ours. Many of our existing and potential competitors are more
established, enjoy greater name recognition and possess greater financial,
technological and marketing resources than we do. Other competitors are small,
and highly specialized firms that are able to focus on only one aspect of a
market. We compete on the basis of product features, quality, reliability and
price and on our ability to manufacture and deliver our products on a timely
basis. We may not be able to compete successfully in the future against existing
or new competitors. In addition, competitive pressures may force us to reduce
our prices, which could negatively affect our operating results. If we do not
respond adequately to competitive challenges, our business and results of
operations would be harmed.
ACQUISITIONS OF ADDITIONAL BUSINESS, PRODUCTS OR TECHNOLOGIES WE MAY MAKE COULD
NEGATIVELY AFFECT OUR BUSINESS.
We have historically achieved growth through a combination of internally
developed new products and acquisitions. In recent years we have acquired
several companies and technologies, and we expect to continue to pursue
acquisitions of other companies, technologies and complementary product lines in
the future to expand our product offerings and technology base to further our
strategic goals. Each of our recent acquisitions involves, and any future
acquisition would involve risks, including:
. our ability to integrate the acquired business' operations,
products and personnel;
. our ability to retain key personnel of the acquired businesses;
. our ability to manufacture and sell the products of the acquired
businesses;
. a decline in demand by our customers for the acquired business'
products;
. our ability to expand our financial and management controls and
reporting systems and procedures to integrate the acquired
businesses;
. diversion of management's time and attention;
. customer dissatisfaction or performance problems with the products
or services of an acquired firm;
. assumption of unknown liabilities, or other unanticipated events
or circumstances; and
. the need to record significant charges or write down the carrying
value of intangible assets, which could lower our earnings.
We cannot assure that any business that we may acquire will achieve anticipated
revenues and operating results. Any of these risks could materially harm our
business, financial condition and results of operations.
IF WE ARE DELAYED IN INTRODUCING OUR NEW PRODUCTS INTO THE MARKETPLACE, OR IF
OUR NEW PRODUCTS CONTAIN DEFECTS, OUR OPERATING RESULTS WILL SUFFER.
Because our products are sophisticated and complex, we may experience delays in
introducing new products or enhancements to our existing products. If we do not
introduce our new products or enhancements into the marketplace in a timely
fashion, our customers may choose to use competitors' products. Our inability to
introduce new or enhanced products in a timely manner could cause our business
and results of operations to suffer. Our products may also contain defects or
undetected errors. As a result, we could incur substantial expenses in fixing
any
Page 27
defects or undetected errors, which could result in damage to our competitive
position and harm our business and results of operations.
IF WE ARE UNABLE TO ATTRACT NEW EMPLOYEES AND RETAIN AND MOTIVATE EXISTING
EMPLOYEES, OUR BUSINESS AND RESULTS OF OPERATIONS WILL SUFFER.
Our ability to maintain and grow our business is directly related to the service
of our employees in each area of our operations. Our future performance will be
directly tied to our ability to hire, train, motivate and retain qualified
personnel. Competition for personnel in the technology marketplace is intense,
and if we are unable to hire sufficient numbers of employees with the experience
and skills we need or to retain our employees, our business and results of
operations would be harmed.
WE RELY ON SEVERAL SOLE-SOURCE AND LIMITED SOURCE SUPPLIERS.
We obtain some of the materials used to build our systems and subsystems, such
as the sheet steel used in some of our vibration isolation tables, from single
or limited sources due to unique component designs as well as specialized
quality and performance requirements needed to manufacture our products. If our
components or raw materials are unavailable in adequate amounts or are
unavailable on satisfactory terms, we may be required to purchase them from
alternative sources, if available, which could increase our costs and cause
delays in the production and distribution of our products. If we do not obtain
comparable replacement components from other sources in a timely manner, our
business and results of operations will be harmed. Many of our suppliers require
long lead-times to deliver the quantities of components that we need. If we fail
to accurately forecast our needs, or if we fail to obtain sufficient quantities
of components that we use to manufacture our products, then delays or reductions
in production and shipment could occur, which would harm our business and
results of operations.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY, WE
MAY LOSE OUR COMPETITIVE ADVANTAGE.
Our success and ability to compete depend in large part upon protecting our
proprietary technology. We rely on a combination of patent, trademark and trade
secret protection and nondisclosure agreements to protect our proprietary
rights. The steps we have taken may not be sufficient to prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. The patent and trademark law and trade secret protection may not be
adequate to deter third party infringement or misappropriation of our patents,
trademarks and similar proprietary rights. In addition, patents issued to us may
be challenged, invalidated or circumvented. Our rights granted under those
patents may not provide competitive advantages to us, and the claims under our
patent applications may not be allowed. We may be subject to or may initiate
interference proceedings in the United States Patent and Trademark Office, which
can demand significant financial and management resources. The process of
seeking patent protection can be time consuming and expensive and patents may
not be issued from currently pending or future applications. Moreover, our
existing patents or any new patents that may be issued may not be sufficient in
scope or strength to provide meaningful protection or any commercial advantage
to us. We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors,
which claims could result in costly litigation and the diversion of our
technical and management personnel. For example, we have notified several
manufacturers of semiconductor wafer handling robots that we believe that they
are infringing upon one or more of our U.S. patents. We will take such actions
where we believe that they are of sufficient strategic or economic importance to
us to justify the cost.
WE HAVE EXPERIENCED, AND MAY IN THE FUTURE EXPERIENCE, INTELLECTUAL PROPERTY
INFRINGEMENT CLAIMS.
We have from time to time received communications from third parties alleging
that we are infringing certain trademarks, patents or other intellectual
property rights of others. For example, Newport Electronics, Inc., a
manufacturer of electronic devices, filed suit against us claiming that our use
of the "Newport" trademark infringes its rights with respect to such mark.
Whenever claims arise, we evaluate their merits. Any claims of infringement
brought by third parties could result in protracted and costly litigation, and
we could become subject to damages for
Page 28
infringement, or to an injunction preventing us from selling one or more of our
products or using one or more of our trademarks. Such claims could also result
in the necessity of obtaining a license relating to one or more of our products
or current or future technologies, which may not be available on commercially
reasonable terms or at all. Any intellectual property litigation and the failure
to obtain necessary licenses or other rights could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the terms of our customer contracts typically require us to indemnify
the customer in the event of any claim of infringement brought by a third party
based on our products. Any such claims of this kind may have a material adverse
effect on our business, financial condition or results of operations.
NATURAL DISASTERS OR POWER OUTAGES COULD DISRUPT OR SHUT DOWN OUR OPERATIONS.
Our operations are susceptible to damages from earthquakes, floods, fire, loss
of power or water supplies, or other similar contingencies. We have significant
facilities in areas with above average seismic activity. If any of our
facilities were to experience a catastrophic loss, it could disrupt our
operations, delay production, shipments and revenue, and result in large
expenses to repair or replace the facility, any of which would harm our
business. In addition, a significant portion of our manufacturing operations are
located in California, which has recently experienced power shortages and
resulted in "rolling blackouts." If these blackouts were to recur, it could
cause disruptions to our operations and the operations of certain of our
suppliers, distributors and customers. We are predominantly uninsured for losses
and interruptions caused by earthquakes and power outages.
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
The principal market risks (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed are foreign exchange rates
which may generate translation and transaction gains and losses and interest
rate risk.
Foreign Currency Risk
Operating in international markets sometimes involves exposure to volatile
movements in currency exchange rates. The economic impact of currency exchange
rate movements on our operating results is complex because such changes are
often linked to variability in real growth, inflation, interest rates,
governmental actions and other factors. These changes, if material, may cause us
to adjust our financing and operating strategies. Consequently, isolating the
effect of changes in currency does not incorporate these other important
economic factors.
We use forward exchange contracts to mitigate the risks associated with certain
foreign currency transactions entered into in the ordinary course of business,
primarily foreign currency denominated receivables. We do not engage in currency
speculation. The forward exchange contracts generally require us to exchange
U.S. dollars for foreign currencies at maturity, at rates agreed to at inception
of the contracts. If the counterparties to the exchange contracts (AA or A+
rated banks) do not fulfill their obligations to deliver the contracted
currencies, we could be at risk for any currency related fluctuations.
Transaction gains and losses are included in current earnings. Foreign exchange
contracts totaled $6.3 million at December 31, 2001. Net foreign exchange gains
and losses were not material to our earnings for the last three years.
Operating profit from international operations totaled $12.7 million and $9.4
million for 2001 and 2000, respectively. As currency exchange rates change,
translation of the income statements of international operations into U.S.
dollars affects year-over-year comparability of operating results. We do not
generally hedge translation risks because cash flows from international
operations are generally reinvested locally. We do not enter into hedges to
minimize volatility of reported earnings because we do not believe it is
justified by the exposure or the cost.
Changes in currency exchange rates that would have the largest impact on
translating future international operating profit include the euro, British
pound, Canadian dollar, Swedish krona and Swiss franc. We estimate that a 10%
change in foreign exchange rates would have affected reported operating profit
by approximately $0.7 million for the year ended December 31, 2001. We believe
that this quantitative measure has inherent limitations because, as
Page 29
discussed in the first paragraph of this section, it does not take into account
any governmental actions or changes in either customer purchasing patterns or
financing and operating strategies.
Interest Rate Risk
Our exposure to interest rate risk is limited to our unsecured lines of credit
and our investments in marketable securities. Our lines of credit bear interest
at either the prevailing prime rate, or the prevailing London Interbank Offered
Rate plus 1.4%, at our option. No amounts were outstanding under these lines of
credit as of December 31, 2001. Our long term debt instruments carry fixed
interest rates. Our investments in marketable securities, which totaled $274.5
million at December 31, 2001, are sensitive to changes in the general level of
U.S. interest rates. We estimate that a 10% decline in the interest earned on
our investment portfolio would have resulted in an after tax decline in our net
income of $0.9 million for the year ended December 31, 2001.
The sensitivity analyses presented in the interest rate and foreign exchange
discussions above disregard the possibility that rates can move in opposite
directions and that gains from one category may or may not be offset by losses
from another category and vice versa.
ITEM 8 Financial Statements and Supplementary Data
The financial statements required by this item are included in Part IV, Item 14
of this Form 10-K and are presented beginning on page F-1. The supplementary
financial information required by this item is included in Note 16,
Supplementary Quarterly Consolidated Financial Data (Unaudited), of the Notes to
Consolidated Financial Statements on page F-23.
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10 Directors and Executive Officers of the Registrant
The information required hereunder is incorporated herein by reference to our
Proxy Statement to be filed within 120 days of December 31, 2001 and delivered
to stockholders in connection with our Annual Meeting of Stockholders to be held
on May 22, 2002.
ITEM 11 Executive Compensation
The information required hereunder is incorporated herein by reference to our
Proxy Statement to be filed within 120 days of December 31, 2001 and delivered
to stockholders in connection with our Annual Meeting of Stockholders to be held
on May 22, 2002.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated herein by reference to our
Proxy Statement to be filed within 120 days of December 31, 2001 and delivered
to stockholders in connection with our Annual Meeting of Stockholders to be held
on May 22, 2002.
ITEM 13 Certain Relationships and Related Transactions
The information required hereunder is incorporated herein by reference to our
Proxy Statement to be filed within 120 days of December 31, 2001 and delivered
to stockholders in connection with our Annual Meeting of Stockholders to be held
on May 22, 2002.
Page 30
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements.
See Index to Financial Statements and Schedules on page F-1.
(2) Financial Statement Schedules.
See Index to Financial Statements and Schedules on page F-1. All
other schedules are omitted as the required information is not
present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or notes
thereto.
(3) Exhibits.
The following exhibits are filed (or incorporated by reference
herein) as part of this Form 10-K:
Exhibit
Number Description of Exhibit
------- -----------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of December 22,
2000, by and among the Company, KLI Acquisition Corp.,
Kensington Laboratories, Inc. and the Shareholders of
Kensington Laboratories, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on February 20, 2001).
3.1 Restated Articles of Incorporation of the Company filed
November 19, 1987 (incorporated by reference to exhibit in
the Company's 1987 Proxy Statement).
3.2 Certificate of Amendment to Articles of Incorporation of
the Company, as filed May 30, 2000 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-3, No. 333-40878 (the "Form S-3")).
3.3 Certificate of Amendment to Articles of Incorporation of
the Company, as filed June 26, 2001 (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the
quarter ended June 30, 2001).
3.4 Restated Bylaws of the Company, as amended to date
(incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the year ended July 31,
1992).
10.1 Lease Agreement dated March 27, 1991, as amended,
pertaining to premises located in Irvine, California
(incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the year ended July 31,
1992).
10.2 First Amendment to Lease, dated January 31, 2002, between
the Company and IRP Muller Associates, LLC pertaining to
premises located in Irvine, California.
Page 31
Exhibit
Number Description of Exhibit
------- -----------------------------------------------------------
10.3 Lease Agreement dated November 1, 2000, between the Company
and Arden Realty Limited Partnership pertaining to premises
located in Santa Ana, California (incorporated by reference
to Exhibit 10.2 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10.4 First Amendment to Lease, dated May 23, 2001, between the
Company and Arden Realty Limited Partnership pertaining to
premises located in Santa Ana, California.
10.5* 1992 Incentive Stock Plan (incorporated by reference to
exhibit in the Company's 1992 Proxy Statement).
10.6* 1999 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).
10.7* Amendment to 1999 Stock Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company's Form S-3).
10.8* 2001 Stock Incentive Plan (incorporated by reference to
Appendix B to the Company's Definitive Proxy Statement
filed on April 27, 2001).
10.9* Form of Nonqualified Stock Option Agreement (incorporated
by reference to Exhibit 4.2 of the Company's Registration
Statement of Form S-8, File No. 333-74076, filed on
November 28, 2001).
10.10* Employee Stock Purchase Plan, as amended.
10.11* Form of Severance Compensation Agreement between the
Company and certain of its executive officers
(incorporated by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.12* Severance Compensation Agreement dated as of April 8, 1996,
between the Company and Robert J. Phillippy, Vice President
and General Manager (incorprated by reference to Exhibit
10.2 of the Company's Form 10-Q for the quarter ended
September 30, 1996).
10.13* Severance Compensation Agreement dated as of May 1, 1996,
between the Company and Robert G. Deuster, President and
Chief Executive Officer (incorporated by reference to
Exhibit 10.3 of the Company's Form 10-Q for the quarter
ended September 30, 1996).
10.14 364-Day $10,000,000 Credit Agreement dated as of October
29, 1999 between the Company and ABN AMRO Bank, N.V.
(incorporated by reference to Exhibit 10.9 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.15 3-Year $15,000,000 Credit Agreement dated as of October 29,
1999 between the Company and ABN AMRO Bank, N.V.
(incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
Page 32
Exhibit
Number Description of Exhibit
------- -----------------------------------------------------------
10.16 Amendment to 364-Day $10,000,000 Revolving Credit
Agreement, dated as of May 31, 2000, between the Company
and ABN AMRO Bank, N.V. (incorporated by reference to
Exhibit 10.10 to the Company's Form S-3).
10.17 Amendment to 3-Year $15,000,000 Revolving Credit Agreement,
dated as of May 31, 2000, between Newport Corporation and
ABN AMRO Bank, N.V. (incorporated by reference to Exhibit
10.12 to the Company's Form S-3).
10.18 Amendment to 364 Day $10,000,000 Revolving Credit
Agreement, dated as of March 9, 2001, between the Company
and ABN AMRO Bank, N.V. (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10.19 Amendment to 3 Year $15,000,000 Revolving Credit Agreement,
dated as of March 9, 2001, between the Company and ABN AMRO
Bank, N.V. (incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.20 Omnibus Amendment to Credit Agreements, dated as of
February 15, 2002, between the Company and ABN AMRO Bank,
N.V.
10.21 Note Agreement dated as of May 2, 1996 between the Company
and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10.1 of the Company's
Form 10-Q for the quarter ended March 31, 1996).
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Auditors.
-------------
* This exhibit is identified as a management contract or
compensatory plan or arrangement pursuant to Item 14(a)(3)
of Form 10-K.
(b) Reports on Form 8-K.
We filed no Current Reports on Form 8-K during the quarter ended
December 31, 2001.
Page 33
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, on March 29, 2002.
NEWPORT CORPORATION
By: /s/ ROBERT G. DEUSTER
----------------------------------------
Robert G. Deuster
President, Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
The undersigned directors and officers of Newport Corporation constitute and
appoint Robert G. Deuster and Charles F. Cargile, or either of them, as their
true and lawful attorney and agent with power of substitution, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that said attorney and agent shall do or cause to be done
by virtue hereof. 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.
SIGNATURE TITLE DATE
/S/ ROBERT G. DEUSTER Chairman of the Board, President and March 29, 2002
------------------------------------------ Chief Executive Officer (Principal
Robert G. Deuster Executive Officer)
/S/ CHARLES F. CARGILE Vice President and Chief Financial March 29, 2002
------------------------------------------ Officer (Principal Financial Officer)
Charles F. Cargile
/S/ DELIA S. VAN KAMPEN Corporate Controller (Principal March 29, 2002
------------------------------------------ Accounting Officer)
Delia S. Van Kampen
/S/ R. JACK APLIN
------------------------------------------ Director March 29, 2002
R. Jack Aplin
/S/ ROBERT L. GUYETT
------------------------------------------ Director March 29, 2002
Robert L. Guyett
/S/ C. KUMAR N. PATEL
------------------------------------------ Director March 29, 2002
C. Kumar N. Patel
/S/ KENNETH F. POTASHNER
------------------------------------------ Director March 29, 2002
Kenneth F. Potashner
Page 34
SIGNATURE TITLE DATE
/S/ WILLIAM R. RAUTH
------------------------------------------ Director March 29, 2002
William R. Rauth
------------------------------------------ Director March __, 2002
Richard E. Schmidt
Page 35
Newport Corporation
Index to Financial Statements and Schedules
Page
----
Report of Ernst & Young LLP, Independent Auditors .............................................. F-2
Report of PricewaterhouseCoopers LLP, Independent Auditors ...................................... F-3
Consolidated statements of operations for the years ended December 31, 2001, 2000 and 1999 ...... F-4
Consolidated statements of comprehensive income (loss) for the years ended
December 31, 2001, 2000 and 1999 ........................................................... F-4
Consolidated balance sheets at December 31, 2001 and 2000 ....................................... F-5
Consolidated statements of cash flows for the years ended
December 31, 2001, 2000 and 1999 ............................................................ F-6
Consolidated statements of stockholders' equity for the years ended
December 31, 2001, 2000 and 1999 ........................................................... F-7
Notes to consolidated financial statements ...................................................... F-8
Financial Statement Schedule - Schedule II - Consolidated valuation accounts .................... F-25
Page F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
of Newport Corporation
We have audited the accompanying consolidated balance sheets of Newport
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Kensington Laboratories, Inc., a wholly owned subsidiary, as of December 31,
2000 and for the two years in the period then ended. Those financial statements
reflect total assets constituting 4.8% in 2000, and total revenues constituting
11.0% in 2000, and 9.7% in 1999 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Kensington
Laboratories, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Newport Corporation at December 31, 2001
and 2000, and the consolidated results of its operations and cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, based on our audits and the report of other auditors, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ ERNST & YOUNG LLP
Orange County, California
January 24, 2002 except for Note 17,
as to which the date is February 19, 2002
Page F-2
Report of PricewaterhouseCoopers LLP, Independent Auditors
To the Board of Directors and Stockholders
of Newport Corporation
In our opinion, the balance sheet and the related statements of income and
retained earnings and of cash flows of Kensington Laboratories, Inc. (not
presented separately herein) present fairly, in all material respects, its
financial position at December 31, 2000 and the results of its operations and
its cash flows for the years ended December 31, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of Kensington Laboratories, Inc.'s
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
financial statements of Kensington Laboratories, Inc. for any period subsequent
to December 31, 2000.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 2, 2001
Page F-3
NEWPORT CORPORATION
Consolidated Statements of Operations
(In thousands except share and per share amounts) Years Ended December 31,
-----------------------------------------------
2001 2000 1999
---- ---- ----
Net sales $ 318,869 $ 284,005 $ 159,525
Cost of sales 217,669 154,365 88,887
--------- --------- ---------
Gross profit 101,200 129,640 70,638
Selling, general and administrative expense 69,495 57,148 38,203
Research and development expense 30,739 24,415 16,625
Restructuring and impairment charges 13,438 -- --
Acquisition and other non-recurring charges 10,683 -- --
--------- --------- ---------
Income (loss) from operations (23,155) 48,077 15,810
Interest and other income (expense), net 13,794 6,041 (1,833)
--------- --------- ---------
Income (loss) before income taxes (9,361) 54,118 13,977
Income tax provision (benefit) (3,089) 12,145 2,956
--------- --------- ---------
Net income (loss) $ (6,272) $ 41,973 $ 11,021
========= ========= =========
Earnings (loss) per share
Basic $ (0.17) $ 1.25 $ 0.36
Diluted (0.17) $ 1.17 $ 0.34
Number of shares used to calculate earnings (loss) per share
Basic 36,405 33,464 30,939
Diluted 36,405 35,835 32,075
Dividends per share $ 0.01 $ 0.02 $ 0.01
Consolidated Statements of Comprehensive Income (Loss)
(In thousands) Years Ended December 31,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Net income (loss) ($ 6,272) $ 41,973 $ 11,021
Foreign currency translation losses (3,379) (1,501) (2,719)
Unrealized gain on marketable securities 1,481 901 --
-------- -------- --------
Comprehensive income (loss) ($ 8,170) $ 41,373 $ 8,302
======== ======== ========
See accompanying notes.
Page F-4
NEWPORT CORPORATION
Consolidated Balance Sheets
(In thousands except share and per share data) December 31,
-----------------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 7,107 $ 16,861
Marketable securities 274,494 289,781
Customer receivables, net 35,833 70,241
Inventories 96,424 80,585
Deferred tax assets 11,091 17,720
Other current assets 15,172 11,946
--------- ---------
Total current assets 440,121 487,134
Property, plant and equipment, at cost, net 45,460 41,308
Goodwill, net 27,056 18,805
Deferred tax assets 22,240 --
Investments and other assets 9,000 9,773
--------- ---------
$ 543,877 $ 557,020
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,939 $ 24,797
Accrued payroll and related expenses 12,813 13,313
Current portion of long-term debt 6,189 7,590
Accrued restructuring costs 5,460 --
Deferred revenue 823 2,696
Other current liabilities 12,579 12,444
--------- ---------
Total current liabilities 50,803 60,840
Long-term debt 3,409 9,540
Deferred tax liabilities -- 675
Other liabilities 658 --
Commitments and contingencies
Stockholders' equity:
Common stock, $0.1167 stated value, 200,000,000 shares authorized and
36,693,000 issued and outstanding at December 31, 2001; 75,000,000 shares
authorized and 36,196,000 shares issued and
outstanding at December 31, 2000 4,282 4,224
Capital in excess of stated value 389,526 374,895
Unamortized deferred compensation (293) (996)
Accumulated other comprehensive loss (9,133) (7,235)
Retained earnings 104,625 115,077
--------- ---------
Total stockholders' equity 489,007 485,965
--------- ---------
$ 543,877 $ 557,020
========= =========
See accompanying notes.
Page F-5
NEWPORT CORPORATION
Consolidated Statements of Cash Flows
(In thousands) Years Ended December 31,
----------------------------------------------
2001 2000 1999
---- ---- ----
Operating activities:
Net income (loss) $ (6,272) $ 41,973 $ 11,021
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and non-goodwill amortization 12,230 11,349 7,747
Goodwill amortization 2,471 1,083 1,056
Provision for losses on receivables,
inventories and investments 28,408 3,914 1,260
Deferred income taxes (16,286) (13,726) 251
Tax benefit from stock option exercises 7,708 16,995 673
Other non-cash items, net 9,100 (78) (484)
Changes in operating assets and liabilities:
Receivables 27,961 (33,164) (6,309)
Income tax receivable 7,793 (4,108) --
Inventories (41,423) (40,290) (5,569)
Other current assets (2,054) (3,965) (1,539)
Other assets (875) (820) 198
Accounts payable and other accrued expenses (11,135) 25,164 (110)
Deferred revenue (3,612) (364) 1,218
Other, net 601 804 --
--------- --------- ---------
Net cash provided by operating activities 14,615 4,767 9,413
--------- --------- ---------
Investing activities:
Purchases of property, plant and equipment (19,605) (18,663) (7,237)
Disposition of property, plant and equipment -- 503 201
Acquisition of businesses, net of cash acquired (12,984) (50) (6,559)
Purchases of marketable securities (746,174) (314,451) --
Sales of marketable securities 762,943 25,571 --
Payments for equity investment (1,250) (1,510) (1,074)
Proceeds from sale of equity investments -- 1,430 1,054
Payments for in-process technology -- (1,157) (2,261)
--------- --------- ---------
Net cash used in investing activities (17,070) (308,327) (15,876)
--------- --------- ---------
Financing activities:
Increase (decrease) in credit line -- (10,000) 10,000
Payments on long-term borrowings (7,502) (11,453) (2,898)
Cash dividends paid (690) (555) (478)
Other distributions to shareholders (3,821) (4,013) (5,875)
Repurchase of common stock -- -- (1,589)
Proceeds from sale of common stock, net -- 329,851 --
Issuance of common stock under employee plans 5,242 7,240 1,756
--------- --------- ---------
Net cash provided by (used in) financing activities (6,771) 311,070 916
--------- --------- ---------
Effect of foreign exchange rate changes on cash (528) 110 285
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (9,754) 7,620 (5,262)
Cash and cash equivalents at beginning of year 16,861 9,241 14,503
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,107 $ 16,861 $ 9,241
========= ========= =========
See accompanying notes.
Page F-6
NEWPORT CORPORATION
Consolidated Statements of Stockholders' Equity
(In thousands) Years Ended December 31
-----------------------------------------------
2001 2000 1999
---- ---- ----
Common stock:
Shares outstanding at beginning of year 36,196 31,413 31,049
Issuance of common shares through secondary offering -- 3,100 --
Issuance of common shares through employee plans 493 1,503 698
Grants of restricted stock, net 4 60 --
Repurchase of common shares -- -- (334)
Other -- 120 --
--------- --------- ---------
Shares outstanding at end of year 36,693 36,196 31,413
========= ========= =========
Common stock:
Balance at beginning of year $ 4,224 $ 3,666 $ 3,623
Issuance of common stock through secondary offering -- 362 --
Issuance of common stock through employee plans 58 175 82
Grants of restricted stock, net -- 7 --
Repurchase of common stock -- -- (39)
Other -- 14 --
--------- --------- ---------
Balance at end of year $ 4,282 $ 4,224 $ 3,666
========= ========= =========
Capital in excess of stated value:
Balance at beginning of year $ 374,895 $ 8,960 $ 8,163
Issuance of common stock through secondary offering -- 329,489 --
Issuance of common stock through employee plans 5,184 7,065 1,674
Tax benefits of employee plans 7,708 16,995 673
Grants of restricted stock, net 304 2,400 --
Repurchase of common stock -- -- (1,550)
Other 1,435 9,986 --
--------- --------- ---------
Balance at end of year $ 389,526 $ 374,895 $ 8,960
========= ========= =========
Unamortized deferred compensation:
Balance at beginning of year $ (996) $ (417) $ (548)
Grants of restricted stock, net (304) (2,407) --
Amortization of deferred compensation 1,007 1,828 131
--------- --------- ---------
Balance at end of year $ (293) $ (996) $ (417)
========= ========= =========
Accumulated other comprehensive loss:
Balance at beginning of year $ (7,235) $ (6,635) $ (3,916)
Foreign currency translation loss (3,379) (1,501) (2,719)
Unrealized gain on marketable securities 1,481 901 --
--------- --------- ---------
Balance at end of year $ (9,133) $ (7,235) $ (6,635)
========= ========= =========
Retained earnings:
Balance at beginning of year $ 115,077 $ 77,672 $ 78,604
Dividends (359) (609) (366)
Distribution of S-Corp earnings (3,821) (3,959) (11,587)
Net income (loss) (6,272) 41,973 11,021
--------- --------- ---------
Balance at end of year $ 104,625 $ 115,077 $ 77,672
========= ========= =========
Total stockholders' equity $ 489,007 $ 485,965 $ 83,246
========= ========= =========
See accompanying notes.
Page F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Newport Corporation is a global leader in the design and
manufacture of high-precision components, instruments and integrated systems for
the fiber optic communications, semiconductor equipment, aerospace, research and
industrial metrology markets. The Company's innovative products are designed to
enhance productivity and capabilities in test and measurement and automated
assembly for precision manufacturing, engineering and research applications.
Customers include Fortune 500 corporations, technology companies and research
laboratories in commercial, academic and government sectors worldwide. Newport
is part of the Russell 2000 Index and the Standard and Poor's Midcap 400 Index.
Consolidation. The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiaries and reflect the acquisitions of Unique
Equipment Co. and Kensington Laboratories, Inc. (see Note 2) which have been
accounted for as poolings of interests. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior year amounts to conform to current year presentation. Amounts
in 1999 include net sales of $2.5 million representing one extra month of sales
from Newport's European operations. The additional net sales stem from a
reporting change in the second quarter of 1999 that eliminated a one-month lag
in the reporting of European results. Without the change, 1999 net sales would
have been $157.0 million, while net income would not have been materially
different. Earnings per share were not impacted by the change.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, inventory reserves, warranty
obligations, restructuring reserves, asset impairment valuation and income tax
valuation.
Sales. A sale is recorded after all significant obligations have been met,
collectibility is probable and title has passed, which typically occurs upon
shipment or completion of services. Customers generally have 30 days from the
original invoice date (generally 60 days for international customers) to return
a catalog product purchase for exchange or credit. The catalog product must be
returned in its original condition and meet certain other criteria. Product
returns of catalog items have historically been insignificant and are charged
against revenue in the period returned. Custom configured and certain other
products as defined in the Company's Customer Satisfaction and Product Guarantee
Policy cannot be returned. Unless otherwise stated in its product literature,
the Company provides a one-year warranty from the original invoice date on all
product material and workmanship. Defective products will be either repaired or
replaced, at the Company's option, upon meeting certain criteria.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
reviews its sales contracts on an ongoing basis to ensure sales are recorded in
compliance with SAB No. 101. The adoption of SAB No. 101 had no material effect
on our results of operations, financial position or cash flow.
Income Taxes. The Company recognizes the amount of current and deferred taxes
payable or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements and as measured by
the provisions of enacted laws.
Depreciation and Amortization. Property, plant and equipment is depreciated on a
straight line basis over estimated useful lives of the assets ranging from three
to twenty years. Leasehold improvements are generally amortized over the related
lease term.
Advertising. The Company expenses the costs of advertising as incurred, except
for direct-response advertising, which is capitalized and amortized over its
expected period of future benefits. Direct-response advertising consists
Page F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of product catalogs. The Company uses its principal catalog, The Newport
Resource(TM), as its principal marketing tool for the scientific market. Sales
to this market approximated 14% of the Company's 2001 annual revenues. The
catalog provides detailed product information as well as extensive technical and
applications data. The catalog is published in English, French and German and is
mailed worldwide to more than 50,000 potential customers.
Advertising costs were $2.1 million, $1.6 million and $1.6 million for 2001,
2000 and 1999, respectively, and are expensed as incurred.
Earnings (Loss) per Share. Basic earnings per share is computed using the
weighted average number of shares of common stock outstanding during the
periods, excluding restricted stock. Diluted earnings per share is computed
using the weighted average number of shares of common stock outstanding during
the periods, excluding restricted stock, and the dilutive effects of common
stock equivalents (restricted stock and stock options) outstanding during the
periods, determined using the treasury stock method. Diluted loss per share
excludes the antidilutive effects of common stock equivalents outstanding during
the periods (see Note 13).
In May 2000, the Company affected a three-for-one stock split of its shares of
common stock. Share and per share information for all periods presented have
been adjusted to reflect the stock split.
Cash and Cash Equivalents. Cash and cash equivalents consist primarily of
interest bearing investments with original maturities of 90 days or less at the
date of purchase.
Fair Values of Financial Instruments. Fair values of cash and cash equivalents,
accounts receivable, accounts payable, short-term borrowings and the current
portion of long-term debt approximate the carrying value because of the short
period of time to maturity. The fair value of long-term debt approximates its
carrying value because their rates of interest approximate current market rates.
The carrying amounts of the foreign exchange contracts, if any, equal fair value
and are adjusted each balance sheet date for changes in exchange rates.
Marketable Securities. The Company considers all liquid interest-earning
investments with a maturity of more than three months at the date of purchase to
be marketable securities. Marketable securities generally mature between three
months and three years from the purchase date. All marketable securities are
classified as available for sale and are recorded at market value using the
specific identification method; unrealized gains and losses are reflected in
other comprehensive income (loss).
Marketable securities consist of the following:
(In thousands) December 31,
----------------------
2001 2000
-----------------------
Commercial paper $ 9,471 $ 84,731
U.S. government and agency securities 41,894 20,208
Corporate notes and bonds 79,422 74,435
Asset backed securities 18,329 32,015
Municipal notes and bonds 116,413 63,578
Certificates of deposit 8,965 14,814
-------- --------
$274,494 $289,781
======== ========
Maturity distribution of the marketable securities at December 31, 2001 is as
follows:
(In thousands)
0 - 1 Year $107,356
1 - 2 Years 93,204
2 - 3 Years 73,934
--------
$274,494
========
Page F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill. Goodwill, representing the excess of the purchase price over the fair
value of the net assets of acquired entities, is amortized on a straight-line
basis over its estimated useful life of fourteen to twenty years. Accumulated
amortization totaled $6.9 million and $6.1 million at December 31, 2001 and
2000, respectively.
The Company examines the carrying value of goodwill for impairment when
indicators of impairment are present. If such circumstances are present and
undiscounted future cash flows are not expected to be sufficient to recover the
assets' carrying amount, the goodwill is written down to its fair value.
In 2001 the FASB issued Statement No. 141, Business Combinations ("Statement
141"), and No. 142, Goodwill and Other Intangible Assets ("Statement 142"),
which the Company adopted on January 1, 2002. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but, instead, will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. At December 31,
2001, the Company had goodwill of approximately $27.1 million. Application of
the non-amortization provisions of Statement 142 is expected to result in an
increase in net income of approximately $1.6 million per year (or $0.04 per
diluted share based on the weighted average shares outstanding at December 31,
2001). The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Pursuant to Statement
142, the Company is currently testing its goodwill for impairment and expects to
record an impairment charge in the first quarter of 2002 in the range of $6.0
million and $16.0 million, after tax, which is expected to reduce its earnings
in the first quarter by between $0.16 and $0.44 per diluted share based on the
weighted average shares outstanding at December 31, 2001.
Foreign Currency. Balance sheet accounts denominated in foreign currency are
translated at exchange rates as of the date of the balance sheet and income
statement accounts are translated at average exchange rates for the period.
Translation gains and losses are accumulated as a separate component of
Comprehensive Income (Loss). The Company has adopted local currencies as the
functional currencies for its subsidiaries because their principal economic
activities are most closely tied to the respective local currencies.
Stock-Based Compensation. The Company accounts for stock-based employee
compensation arrangements in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock-Issued to Employees ("APB No. 25") and related
interpretations, and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Under APB No. 25, compensation cost is recognized based on the difference, if
any, on the date of the grant between the fair value of the Company's stock and
the amount the employee must pay to acquire the stock.
Comprehensive Income (Loss). The accumulated other comprehensive income (loss)
presented in the balance sheet consists of the following:
(In thousands) December 31,
-----------------------
2001 2000
---- ----
Cumulative foreign currency translation losses ($11,515) ($ 8,136)
Unrealized gains on marketable securities 2,382 901
-------- --------
($ 9,133) ($ 7,235)
======== ========
Derivative Instruments. As of January 1, 2001, the Company adopted Financial
Accounting Standards Board Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133") and its amendments
Statements 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 and 138,
Accounting for Derivative Instruments and Certain Hedging Activities
(collectively referred to as "Statement 133"). The transition adjustment upon
adoption was not material.
As a result of the adoption of Statement 133, the Company recognizes all
derivative financial instruments in the consolidated financial statements at
fair value regardless of the purpose or intent for holding the instrument. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments,
the Company must designate the
Page F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
hedging instrument, based upon the exposure being hedged, as a fair value hedge,
cash flow hedge or a hedge of a net investment in a foreign operation. Changes
in the fair values of derivatives not qualifying as hedges are reported in
income.
The Company does not engage in hedging transactions as defined by Statement 133.
However, the Company uses forward exchange contracts to mitigate the risks
associated with certain foreign currency transactions entered into in the
ordinary course of business, primarily foreign currency denominated receivables.
The Company does not engage in currency speculation. The forward exchange
contracts generally require the Company to exchange U.S. dollars for foreign
currencies at maturity, at rates agreed to at inception of the contracts. If the
counterparties to the exchange contracts (AA or A+ rated banks) do not fulfill
their obligations to deliver the contracted currencies, the Company could be at
risk for any currency related fluctuations. Transaction gains and losses are
included in current earnings. Foreign exchange contracts totaled $6.3 million
and $4.3 million at December 31, 2001 and 2000, respectively. At December 31,
2001, all contracts outstanding matured by January 31, 2002. In addition, none
of the outstanding contracts qualified for hedge accounting, and at December 31,
2001, an unrealized loss on outstanding contracts of approximately $50,000 is
included in current earnings.
NOTE 2 ACQUISITIONS, RESTRUCTURING AND OTHER NON-RECURRING CHARGES
In October 1999, the Company entered into a stock purchase agreement providing
for the acquisition of the west coast commercial optics business of Corning OCA
Corporation, a subsidiary of Corning Incorporated. The transaction was accounted
for as a purchase and the commercial optics subsidiary (renamed Newport
Precision Optics Corporation or "NPOC"), a manufacturer of specialized precision
optical products and systems, became a wholly owned subsidiary of the Company.
NPOC's results from the date of acquisition are included in the Industrial and
Scientific Technologies reportable segment in Note 14.
In August 2000, the Company acquired Unique Equipment Co. ("Unique"), based in
Chandler, Arizona. Unique was a privately held systems integrator specializing
in the use of robotics for the fiber optics and semiconductor industries. The
transaction was accounted for as a pooling of interests, and accordingly, the
accompanying consolidated financial statements incorporate the results of
operations, financial position and cash flows of Unique, the effects of which
are immaterial to all periods presented. Unique's results are included in the
Fiber Optics and Photonics reportable segment in Note 14.
In December 2000, the Company acquired the business of CEJohansson AB ("CEJ"), a
privately held, Swedish global supplier of advanced metrology systems. The
acquisition was accounted for as a purchase. CEJ's results from the date of
acquisition are included in the Industrial Metrology Systems reportable segment
in Note 14.
In February 2001, the Company acquired Design Technology Corporation ("DTC"), a
systems integrator specializing in the use of robotics and flexible automation
solutions for manufacturing processes. The acquisition was accounted for using
the purchase method. The Company recorded goodwill of approximately $9.9 million
in connection with this acquisition. DTC's results from the date of acquisition
are included in the Fiber Optic and Photonics reportable segment in Note 14.
Pro forma information for the above-mentioned acquisitions is not presented as
they are not material to the Company's consolidated sales or net income.
In February 2001, the Company acquired Kensington Laboratories, Inc. ("KLI"), a
manufacturer of high-precision robotic and motion control equipment for the
semiconductor and fiber optic communications industries, via a merger. The
Company issued approximately 3,526,000 shares of its common stock to the KLI
shareholders in the transaction. The transaction was accounted for as a pooling
of interests, and, accordingly, the accompanying consolidated financial
statements incorporate the results of operations, financial position and cash
flows of KLI for all periods presented. KLI's results are included in our
Industrial and Scientific Technologies reportable segment in Note 14.
Page F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net sales and net income information assuming the acquisition had occurred on
January 1, 1999 is presented below:
(In thousands except per share amounts) Years Ended December 31,
-------------------------------------------
2001 2000 1999
---- ---- ----
Net sales:
Newport $ 272,371 $ 252,853 $ 144,112
KLI 51,763 38,828 18,853
Less: Intercompany sales (5,265) (7,676) (3,440)
--------- --------- ---------
Combined $ 318,869 $ 284,005 $ 159,525
========= ========= =========
Net income (loss):
Newport $ (15,987) $ 27,819 $ 7,868
KLI 9,715 14,154 3,153
--------- --------- ---------
Combined $ (6,272) $ 41,973 $ 11,021
========= ========= =========
Earnings (loss) per share:
Basic
Newport $ (0.44) $ 0.93 $ 0.29
KLI 0.27 0.32 0.07
--------- --------- ---------
Combined $ (0.17) $ 1.25 $ 0.36
========= ========= =========
Diluted
Newport $ (0.44) $ 0.86 $ 0.28
KLI 0.27 0.31 0.06
--------- --------- ---------
Combined $ (0.17) $ 1.17 $ 0.34
========= ========= =========
Number of shares used to calculate
earnings (loss) per share:
Basic 36,405 33,464 30,939
Diluted 36,405 35,835 32,075
Prior to the Company's acquisition of KLI, KLI was an S-Corporation for U.S. tax
purposes. The pro forma results assuming that KLI was acquired on January 1,
1999 and its earnings were taxed as a C-Corporation is as follows:
(In thousands except per share amounts) Years Ended December 31,
------------------------
2000 1999
---- ----
Net income $36,311 $9,760
Basic earnings per share $1.09 $0.32
Diluted earnings per share $1.01 $0.30
The Company recorded non-recurring charges of $12.5 million in the first quarter
of 2001. These charges were comprised of $9.2 million for investment banking,
legal and accounting fees related to the Company's acquisition of KLI, a charge
to cost of sales of $1.8 million for asset writedowns related to integration
charges in connection with its December 2000 acquisition of the business of CEJ,
and a charge of $1.5 million related to the acceleration of stock options held
by a retiring employee.
Page F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes where the above non-recurring charges recorded in the
first quarter of 2001 have been reflected in the accompanying consolidated
statement of operations for the year ended December 31, 2001:
Acquisition and
Cost of Other Non-
(In thousands) Sales Recurring Charges Total
----- ----------------- -----
Acquisition and other non-recurring charges $ -- $10,683 $10,683
Asset writedowns 1,788 -- 1,788
------- ------- -------
$ 1,788 $10,683 $12,471
======= ======= =======
In the third quarter of 2001, due to the continued weak economic environment in
its key end markets, the Company revised its sales forecasts and announced a
cost reduction program designed to bring the operating structure in line with
the business outlook. These initiatives included headcount reductions, facility
consolidations and product rationalizations.
During the third quarter of 2001, the Company announced planned workforce
reductions primarily at its Garden Grove, CA, Irvine, CA, San Luis Obispo, CA
and Longmont, CO operations. Severance and other costs related to such
reductions totaled $3.4 million. Such reductions represented 20% of the
Company's worldwide workforce, or approximately 400 employees. At December 31,
2001, 329 employees had been terminated.
The Company also consolidated the manufacturing operations of its San Luis
Obispo, CA, Garden Grove, CA, and Longmont, CO operations into an expanded
campus in Irvine, CA, and consolidated its metrology manufacturing into its
operations in Sweden. All consolidation activities are expected to be completed
by June 30, 2002. Costs related to the facility consolidations totaled $9.3
million and include reserves for asset impairments of $5.4 million, facility
lease termination costs of $2.1 million and the write-off of goodwill of $1.8
million.
The following table summarizes the activities in the restructuring reserves:
Employee Facility
(In thousands) Severance Consolidations Other Total
--------- -------------- -------- --------
Restructuring and asset
impairment charges $ 3,366 $ 9,348 $ 724 $ 13,438
Cash payments (1,010) (46) (123) (1,179)
Asset write-offs (337) (5,861) (601) (6,799)
-------- -------- -------- --------
Accrued restructuring at December 31, 2001 $ 2,019 $ 3,441 $ -- $ 5,460
======== ======== ======== ========
The Company expects to utilize most of the reserves in 2002, although facility
lease termination costs included in these reserves will continue to be paid
through the various lease terms.
In addition to the workforce reductions and facility consolidations discussed
above, the Company also revised its sales forecasts given current market
conditions, and as a result established reserves for excess and obsolete
inventory and wrote off certain other assets.
The table below summarizes theses reserves and write-offs and where those
charges have been reflected in the accompanying consolidated statement of
operations for the year ended December 31, 2001:
Cost of Selling, General &
(In thousands) Sales Administrative Total
----- ------------------- -------
Inventory reserves $24,393 $ -- $24,393
Asset writeoffs and other charges 710 631 1,341
------- ------- -------
$25,103 $ 631 $25,734
======= ======= =======
Page F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 CUSTOMER RECEIVABLES
The Company maintains reserves for potential credit losses. Such losses have
been minimal and within management's estimates. Receivables from customers are
generally unsecured.
Customer receivables consist of the following:
(In thousands) December 31,
---------------------
2001 2000
---- ----
Customer receivables $37,193 $70,918
Less allowance for doubtful accounts 1,360 677
------- -------
$35,833 $70,241
======= =======
NOTE 4 INVENTORIES
Inventories are stated at cost, determined on either a first-in, first-out
(FIFO) or average cost basis and do not exceed net realizable value.
Inventories consist of the following:
(In thousands) December 31,
-----------------------
2001 2000
---- ----
Raw materials and purchased parts $43,352 $24,949
Work in process 22,413 17,124
Finished goods 30,659 38,512
------- -------
$96,424 $80,585
======= =======
NOTE 5 INCOME TAXES
The provision (benefit) for taxes based on income (loss) consists of the
following:
(In thousands) Years Ended December 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
Current:
Federal $ 7,329 $ 20,620 $ 2,038
State 1,542 3,859 340
Foreign 4,326 1,392 327
-------- -------- --------
13,197 25,871 2,705
Deferred:
Federal (14,150) (13,605) 262
State (1,439) (4,062) (16)
Foreign (697) 3,941 5
-------- -------- --------
(16,286) (13,726) 251
-------- -------- --------
$ (3,089) $ 12,145 $ 2,956
======== ======== ========
Page F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision (benefit) for taxes based on income (loss) differs from the amount
obtained by applying the statutory tax rate as follows:
(In thousands) Years Ended December 31,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Income tax provision (benefit) at statutory rate ($ 3,276) $ 14,057 $ 3,834
Increase (decrease) in taxes resulting from:
Foreign rate variance 2,076 4,706 (314)
Income tax credits (995) (2,681) (120)
Decrease in valuation allowance (1,763) (3,569) (607)
Tax exempt income (1,076) (41) --
Non-deductible acquisition costs 1,391 -- --
Other, net 554 (327) 163
-------- -------- --------
($ 3,089) $ 12,145 $ 2,956
======== ======== ========
Deferred tax assets and liabilities determined in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, reflect the
impact of temporary differences between amounts of assets and liabilities for
tax and financial reporting purposes. Such amounts are measured by tax laws and
the expected future tax consequences of net operating loss carryforwards.
Temporary differences and net operating loss carryforwards, which give rise to
deferred tax assets and liabilities recognized in the balance sheet, are as
follows:
(In thousands) December 31,
--------------------------
2001 2000
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 17,087 $ 11,164
Accruals not currently deductible for tax purposes and other 11,986 3,250
Tax credit carryforwards 8,094 7,454
Valuation allowance -- (1,763)
-------- --------
Total deferred tax asset 37,167 20,105
-------- --------
Deferred tax liabilities:
Accelerated depreciation methods used for tax purposes 1,635 849
State taxes 1,857 1,638
Other 344 573
-------- --------
Total deferred tax liability 3,836 3,060
-------- --------
Net deferred tax asset $ 33,331 $ 17,045
======== ========
The Company has federal and state net operating loss carryforwards totaling
approximately $46.3 million and $9.8 million, respectively. These losses relate
primarily to employee stock option exercises, the benefit for which has been
allocated directly to capital in excess of stated value. Federal net operating
loss carryforwards begin to expire in 2020, while state net operating loss
carryforwards begin to expire in 2010.
The Company has utilized all of the foreign net operating loss carryforwards
totaling approximately $3.0 million by December 31, 2001 and, accordingly,
released the valuation allowance that has been associated with these assets.
Approximately $2.1 million of the valuation allowance realized in 2000 was
allocated to goodwill.
The Company's federal and state income tax credit carryforwards expire in years
2005 through 2021.
Net income taxes paid for 2001, 2000 and 1999 totaled $2.2 million, $3.5 million
and $2.8 million, respectively.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $25.0 million, $20.0 million and $10.0 million at December 31,
2001, December 31, 2000 and December 31, 1999, respectively. Those earnings are
considered to be indefinitely reinvested and, accordingly, no provision for U.S.
federal and state taxes
Page F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
has been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries.
United States and foreign earnings (losses) before taxes are as follows:
(In thousands) Years Ended December 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
United States ($20,222) $ 42,033 $ 9,911
Foreign 10,861 12,085 4,066
-------- -------- --------
($ 9,361) $ 54,118 $ 13,977
======== ======== ========
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, including capitalized lease assets,
consists of the following:
(In thousands) December 31,
--------------------
2001 2000
---- ----
Land $ 687 $ 920
Buildings 4,010 5,304
Leasehold improvements 19,477 14,725
Machinery and equipment 56,575 49,652
Office equipment 24,552 20,786
-------- --------
105,301 91,387
Less accumulated depreciation 59,841 50,079
-------- --------
$ 45,460 $ 41,308
======== ========
Depreciation expense, including the amortization of capital lease assets,
totaled $10.6 million, $7.8 million and $6.7 million for 2001, 2000 and 1999,
respectively.
NOTE 7 INVESTMENTS AND OTHER ASSETS
Investments and other assets consist of the following:
(In thousands) December 31,
----------------------
2001 2000
---- ----
Nonmarketable investments $5,619 $4,088
Other assets 3,381 5,685
------ ------
$9,000 $9,773
====== ======
Nonmarketable investments consist primarily of investments in private companies,
including a $1.5 million investment in a U.S. supplier and a $4.0 million
investment in a photonics manufacturer. The Company made purchases of
approximately $5.9 million, $4.8 million and $3.8 million from the U.S. supplier
during 2001, 2000 and 1999, respectively.
Other assets consist primarily of capitalized software, patents and license
agreements.
Page F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) December 31,
--------------------------
2001 2000
---- ----
Revolving credit agreements:
$10.0 million, expiring March 2002 $ -- $ --
$10.0 million, expiring March 2004 -- --
Term notes:
8.25% senior notes, maturing May 2004 6,500 11,500
7.00% promissory note, maturing December 2002 518 700
Capitalized lease obligations, payable in installments to 2005 631 888
Shareholder notes payable to the former owners of KLI:
4.64% promissory note, maturing January 2002 1,867 3,734
Equipment loans and other 82 308
------- -------
Total 9,598 17,130
Less current portion 6,189 7,590
------- -------
Long-Term Debt $ 3,409 $ 9,540
======= =======
To support its worldwide operations, at December 31, 2001, the Company had in
place two unsecured lines of credit of $10.0 million each, expiring March 2002
and March 2004, respectively. In March 2002, the Company amended the terms of
such lines of credit to change the rates of interest and extend the expiration
of one line from March 2002 to March 2003. Both lines bear interest at either
the prevailing prime rate, or the prevailing London Interbank Offered Rate plus
1.4%, at the Company's option, plus an unused line fee of 0.325% per year. At
December 31, 2001, there was no outstanding balance under either line of credit,
with $18.7 million available under the combined lines, after considering
outstanding letters of credit of $1.3 million. The Company's outstanding debt
consists of $6.2 million in short-term borrowings and long-term debt of $3.4
million. At December 31, 2001, the Company was not in compliance with certain
covenants under these lines of credit due to the non-recurring charges recorded
in 2001. The Company's lender has waived this noncompliance through September
30, 2002. Excluding these non-recurring charges, the Company believes it will be
in compliance with its debt covenants on an ongoing basis.
During May 1996, the Company obtained $20.0 million of long-term financing from
an insurance company. These senior notes, sold at par, are unsecured, carry an
8.25% annual coupon and mature in May 2004. Interest is payable semiannually and
semiannual principal payments commenced during November 1998. At December 31,
2001, the Company was not in compliance with certain covenants due to the
non-recurring charges recorded in 2001. The Company's lender has waived this
noncompliance through September 30, 2002. Excluding these non-recurring charges,
the Company believes it will be in compliance with its debt covenants on an
ongoing basis.
At December 31, 2001, in connection with its acquisition of KLI, the Company had
outstanding shareholder notes payable to the former owners of KLI of $1.9
million, payable in January 2002.
Capitalized lease obligations relate to real estate and equipment located in
France. The original cost of assets under capital leases at December 31, 2001
and December 31, 2000, was approximately $2.6 million. Accumulated amortization
totaled approximately $1.6 million and approximately $1.7 million at December
31, 2001 and December 31, 2000, respectively. Required annual payments are as
follows:
(In thousands) Capitalized
Lease Borrowings and
For years ending December 31, Obligations Term Notes
----------- ----------
2002 $ 304 $5,967
2003 252 2,000
2004 181 1,000
2005 78 --
2006 -- --
------ ------
815 8,967
Less interest 184 --
------ ------
$ 631 $8,967
====== ======
Page F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest paid totaled $1.6 million, $2.4 million and $1.9 million for 2001, 2000
and 1999, respectively.
NOTE 9 COMMITMENTS
The Company leases certain of its manufacturing and office facilities and
equipment under non-cancelable operating leases. Minimum rental commitments
under terms of these leases are as follows for years ending December 31:
(In thousands)
2002 $6,776
2003 6,352
2004 4,939
2005 4,380
2006 2,860
Thereafter 2,048
Rental expense under all leases totaled $6.1 million, $5.2 million and $4.1
million for 2001, 2000 and 1999, respectively.
NOTE 10 CONTINGENCIES
In August 1999, Newport Electronics, Inc., a manufacturer of electronic devices,
filed suit against the Company in the Federal District Court in Connecticut,
claiming that the Company's use of the "Newport" trademark infringes its rights
with respect to such mark. In January 2002, a trial was held with respect to
this litigation. The jury returned a verdict in favor of the Company on all of
Newport Electronics' claims. Newport Electronics has filed a motion for a new
trial, which the Company has opposed. No hearing on such motion has been
scheduled. In the event that Newport Electronics' motion is granted or the
verdict is subsequently overturned on appeal, and the litigation is, on retrial,
adversely determined, it could have material adverse effects on the Company's
business, including potential monetary damages and being enjoined from using the
"Newport" trademark in conjunction with certain classes of products.
From time to time, the Company may be involved in litigation relating to claims
arising out of its operations in the normal course of business. Except for the
Newport Electronics litigation discussed above, the Company currently is not a
party to any legal proceedings, the adverse outcome of which, in management's
opinion, individually or in the aggregate, would have a material adverse effect
on its results of operations or financial position.
NOTE 11 STOCK OPTION PLANS
On February 13, 2001, the Company's Board of Directors approved, subject to
stockholder approval, the 2001 Stock Incentive Plan (the "2001 Plan"). The
stockholders approved the 2001 Plan on May 30, 2001. The purposes of the 2001
Plan are to enhance the Company's ability to attract, motivate and retain the
services of qualified employees, officers and directors, consultants and other
service providers upon whose judgment, initiative and efforts the success of the
Company's business largely depends, by providing them with an opportunity to
participate in the ownership of the Company and thereby have an interest in the
success and increased value of the Company. Options have been granted to
directors, officers and employees at a price not less than the fair market value
at the dates of grants for terms of not more than ten years. Accordingly, no
charges have been made to income in accounting for these options. The tax
benefits, if any, resulting from the exercise of options are credited to capital
in excess of stated value. The fair market value of restricted stock at date of
grant is amortized to expense over the vesting period, which is generally five
years.
The 2001 Plan authorizes the Company to grant options and/or rights to purchase
up to 6,000,000 shares of Common Stock, including such number of shares as was
formerly available for grant under the Company's 1992 Stock Option Plan and 1999
Stock Incentive Plan (the "Prior Plans"), subject to adjustment in the number
and kind of shares subject to the 2001 Plan and to outstanding shares in the
event of stock splits, stock dividends or certain other similar changes in the
capital structure of the Company. Upon the adoption of the 2001 Plan by the
Company's stockholders, the Prior Plans were terminated for purposes of future
grants. Options to purchase a total of 2,539,360 shares were granted in 2001
under the Company's plans.
Page F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes option plan and restricted stock activity for the
years ended December 31, 2001, 2000 and 1999:
Under Plan Weighted Average
Available for --------------------------------------------- Exercise Price
Option Grant Restricted of Option Shares
or Award Stock Options Total Under Plan
-------- ----- ------- ----- ----------
Balance, December 31, 1998 668,859 289,875 3,811,077 4,100,952 $ 3.32
Authorized 1,453,893 -- -- -- --
Granted (725,100) -- 725,100 725,100 7.10
Exercised -- (89,250) (401,025) (490,275) 3.12
Forfeited 173,928 -- (173,928) (173,928) 4.57
---------- ---------- ---------- ----------
Balance, December 31, 1999 1,571,580 200,625 3,961,224 4,161,849 3.99
Authorized 1,552,800 -- -- -- --
Granted (1,626,039) 69,039 1,557,000 1,626,039 34.39
Exercised -- (86,625) (1,563,099) (1,649,724) 3.04
Forfeited 97,308 (22,500) (97,308) (119,808) 12.05
---------- ---------- ---------- ----------
Balance, December 31, 2000 1,595,649 160,539 3,857,817 4,018,356 16.44
Authorized 5,410,334 -- -- -- --
Granted (2,539,360) 4,000 2,535,360 2,539,360 34.16
Exercised -- (130,164) (387,872) (518,036) 6.47
Forfeited under prior plans -- -- (333,686) (333,686) 43.19
Forfeited 148,602 (1,500) (147,102) (148,602) 15.33
---------- ---------- ---------- ---------
Balance, December 31, 2001 4,615,225 32,875 5,524,517 5,557,392 23.44
========== ========== ========== ==========
The weighted average per share fair value of restricted stock granted during
2001 and 2000 was $75.75 and $36.32, respectively. There were no grants of
restricted stock in 1999.
At December 31, 2001, options on 1,811,934 shares were exercisable with a
weighted average exercise price of $10.24 per share. The following table
summarizes information concerning options outstanding and exercisable at
December 31, 2001 (Contractual life in years):
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$ 1.65 - 4.00 700,130 3.9 $ 2.8 700,130 $ 2.80
4.15 - 9.00 1,158,293 6.4 5.10 710,950 4.94
11.00 - 25.00 2,401,500 9.0 13.66 302,560 14.16
25.35 - 54.00 321,750 8.6 36.33 34,500 41.94
61.50 - 180.00 942,844 8.9 81.83 63,794 115.18
--------- ---------
5,524,517 1,811,934
========= =========
Page F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense for employee stock options with
exercise prices equal to the Company's stock price at date of grant is
recognized. Costs related to restricted stock grants, representing the
difference between the grant date fair value of the award and the related
exercise price, if any, are fixed at the date of grant and amortized over the
vesting period. Pro forma amounts adjusted for the effect of recording
compensation cost for the Company's stock option and employee stock purchase
plans determined based upon the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123") is presented below:
(In thousands except per share amounts) 2001 2000 1999
---- ---- ----
Net income (loss) - reported $ (6,272) $41,973 $11,021
Net income (loss) - pro forma $(35,647) $23,998 $ 9,397
Diluted earnings (loss) per share - reported $ (0.17) $ 1.17 $ 0.34
Diluted earnings (loss) per share - adjusted $ (0.98) $ 0.67 $ 0.29
The fair value of each option grant in 2001 was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: annualized dividend yield of 0.02%, applicable to
grants dated prior to the cancellation of the dividend in August 2001; expected
annual volatility of 86.00%; risk-free interest rate of 4.47%; expected lives of
5 years; and expected turnover rate of 12.90%. The fair value of each option
grant in 2000 and 1999 was estimated on the date of the grant using the
following weighted-average assumptions: dividend yield of 0.02% and 0.23%
respectively; expected annual volatility of 76.00% and 50.50%, respectively,
risk-free interest rates of 6.33% and 4.93%, respectively, expected lives of 5
years and expected turnover rate of 12.90%. The weighted average per share fair
value of options granted in 2001, 2000 and 1999 was $23.99, $34.43 and $2.89,
respectively. The pro forma amounts shown for the impact of SFAS No. 123 are not
necessarily indicative of future results because of the phase in rules and
differences in number of grants, stock price and assumptions for future years.
Effective January 1, 1995 the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan") to provide employees of the Company with an opportunity to
purchase common stock through payroll deductions. The purchase price is the
lower of 85% of the fair market value of the stock on the first or last day of
each quarter. The Purchase Plan expires on December 31, 2004. An aggregate of
1,950,000 shares of common stock is available for purchase under the Purchase
Plan. There were 165,049, 68,180 and 297,408 shares issued under the Purchase
Plan during 2001, 2000 and 1999, respectively.
NOTE 12 INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, consisted of the following:
(In thousands) Years Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
Interest and dividend income $ 13,314 $ 8,704 $ 296
Interest expense (1,149) (2,242) (2,188)
Exchange gains (losses), net 98 (59) (226)
Gains (losses) on sale of investments, net 1,328 (8) 275
Other 203 (354) 10
-------- -------- --------
$ 13,794 $ 6,041 ($ 1,833)
======== ======== ========
Page F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share under SFAS No. 128:
(In thousands except per share amounts) Years Ended December 31,
------------------------------------------------
2001 2000 1999
---- ---- ----
Numerator:
Net income (loss) ($ 6,272) $ 41,973 $ 11,021
Denominator:
Weighted average shares outstanding 36,453 33,627 31,140
Weighted unvested restricted stock outstanding (48) (163) (201)
-------- -------- --------
Denominator for basic earnings per
share - weighted-average shares 36,405 33,464 30,939
Effect of dilutive securities:
Employee stock options -- 2,273 1,016
Restricted stock -- 98 120
-------- -------- --------
Dilutive potential common shares -- 2,371 1,136
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 36,405 35,835 32,075
======== ======== ========
Basic earnings (loss) per share $(0.17) $1.25 $0.36
Diluted earnings (loss) per share $(0.17) $1.17 $0.34
NOTE 14 BUSINESS SEGMENT INFORMATION
The Company operates in three reportable segments, Industrial and Scientific
Technologies, Fiber Optics and Photonics and Industrial Metrology Systems. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that certain
non-operating income and expenses, such as interest, are not allocated to the
segments. In addition, certain assets, including cash and cash equivalents,
deferred taxes and certain long-lived and intangible assets are not allocated to
the segments.
The Industrial and Scientific Technologies segment consists primarily of motion
control devices and systems, wafer handling robots, vibration isolation
products, optics, mechanical components, instruments and subassemblies. The
Fiber Optics and Photonics segment consists primarily of device testing and
characterization systems and process automation workstations for fiber optics
and photonics manufacturing. The Industrial Metrology Systems segment consists
primarily of measurement and inspection systems.
Page F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Selected financial information for the Company's reportable segments for the
years ended December 31, 2001, 2000 and 1999 follows:
(In thousands) Industrial Industrial
and Scientific Fiber Optics Metrology
Technologies and Photonics Systems Total
------------ ------------- ------- -----
Year Ended December 31, 2001:
-----------------------------
Sales to external customers $199,369 $ 95,696 $ 23,804 $318,869
Depreciation and amortization 4,297 4,971 1,737 11,005
Restructuring, impairment and other
non-recurring charges (see Note 2) 3,684 28,636 3,883 36,203
Segment income (loss) 46,776 (8,823) (9,465) 28,488
Segment assets 125,057 68,756 31,575 225,388
Expenditures for long-lived assets 6,429 8,971 1,308 16,708
Year Ended December 31, 2000:
-----------------------------
Sales to external customers $184,008 $ 91,036 $ 8,961 $284,005
Depreciation and amortization 6,349 1,148 1,223 8,720
Segment income (loss) 44,134 11,058 (7,115) 48,077
Segment assets 146,781 70,226 21,810 238,817
Expenditures for long-lived assets 7,857 3,210 227 11,294
Year Ended December 31, 1999:
-----------------------------
Sales to external customers $111,991 $ 37,617 $ 9,917 $159,525
Depreciation and amortization 5,716 914 484 7,114
Segment income (loss) 15,822 3,353 (3,365) 15,810
Segment assets 92,838 25,503 10,897 129,238
Expenditures for long-lived assets 4,871 754 304 5,929
The following reconciles segment income to consolidated income before income
taxes and segment assets and depreciation and amortization to consolidated
assets and consolidated depreciation and amortization.
(In thousands) 2001 2000 1999
---- ---- ----
Income:
Segment income $ 28,488 $ 48,077 $ 15,810
Segment-related restructuring, impairment and other
non-recurring charges (36,203) -- --
Unallocated amounts:
Unallocated restructuring, impairment, acquisition
and other non-recurring charges (see Note 2) (15,440) -- --
Interest and other income (expense), net 13,794 6,041 (1,833)
--------- --------- -----------
Income (loss) before income taxes $ (9,361) $ 54,118 $ 13,977
========= ========= ===========
Assets:
Assets for reportable segments $ 225,388 $ 238,817 $ 129,238
Assets held at corporate 318,489 318,203 11,054
--------- --------- -----------
Total assets $ 543,877 $ 557,020 $ 140,292
========= ========= ===========
Expenditures for long-lived assets for reportable segments $ 16,708 $ 11,294 $ 5,929
Expenditures for long-lived assets held at corporate 2,897 7,369 1,308
--------- --------- -----------
Total expenditures for long-lived assets $ 19,605 $ 18,663 $ 7,237
========= ========= ===========
Page F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) 2001 2000 1999
---- ---- ----
Depreciation and amortization:
Depreciation and amortization for reportable segments $ 11,005 $ 8,720 $ 7,114
Depreciation and amortization for assets held at corporate 3,696 3,712 1,689
-------- -------- --------
Total depreciation and amortization $ 14,701 $ 12,432 $ 8,803
======== ======== ========
Selected financial information for the Company's operations by geographic
segment is as follows:
(In thousands) 2001 2000 1999
---- ---- ----
Geographic area revenue:
United States $212,422 $201,245 $107,266
Europe 72,113 40,769 32,516
Pacific Rim 19,914 24,460 11,474
Other 14,420 17,531 8,269
-------- -------- --------
$318,869 $284,005 $159,525
======== ======== ========
Geographic area long-lived assets:
United States $ 38,778 $ 35,016 $ 23,949
Europe 6,417 6,226 6,634
Other 265 66 81
-------- -------- --------
$ 45,460 $ 41,308 $ 30,664
======== ======== ========
NOTE 15 DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan. Generally, all U.S. employees
are eligible to participate in and contribute to this plan. Company
contributions to the plan are determined based on a percentage of contributing
employees' compensation. Expense recognized for the plan totaled $3.4 million,
$1.9 million and $1.3 million for 2001, 2000 and 1999, respectively.
NOTE 16 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (unaudited)
(In thousands except per share amounts) Diluted
Net Earnings Dividends High Low
Net Gross Income (Loss) Per Per Share Share
Three months ended Sales Profit (Loss) Share (1) Share Price Price
------------------ ----- ------ ------ --------- ----- ------ -----
December 31, 2001 $ 50,326 $ 17,686 $ 103 $ 0.00 $ -- $ 20.70 $ 13.15
September 30, 2001 62,903 (3,100) (25,459) (0.70) -- 27.84 13.16
June 30, 2001 98,899 41,037 12,142 0.32 0.01 45.19 21.10
March 31, 2001 106,741 45,577 6,942 0.18 -- 113.63 29.26
December 31, 2000
Previously reported $ 86,723 $ 38,024 $ 12,302 $ 0.36 $ 0.01 $ 176.25 $ 57.00
Pooling of interests (2) 10,107 5,732 3,358 .05
-------- -------- -------- --------
Restated 96,830 43,756 15,660 0.41 0.01 176.25 57.00
September 30, 2000
Previously reported 66,594 28,660 8,179 0.25 -- 189.25 82.44
Pooling of interests (2) 7,035 4,010 3,035 0.05
-------- -------- -------- --------
Restated 73,629 32,670 11,214 0.30 -- 189.25 82.44
June 30, 2000
Previously reported 51,742 22,948 4,199 0.14 0.01 110.00 29.33
Pooling of interests (2) (3) 9,367 5,952 4,668 0.12
-------- -------- -------- --------
Restated 61,109 28,900 8,867 0.26 0.01 110.00 29.33
Page F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts) Diluted
Net Earnings Dividends High Low
Net Gross Income (Loss) Per Per Share Share
Three months ended Sales Profit (Loss) Share Share Price Price
------------------ ----- ------ ------ ----- ----- ------ -----
March 31, 2000
Previously reported $45,612 $20,009 $ 3,012 $ 0.10 -- $ 59.50 $ 14.31
Pooling of interests (2) (3) 6,825 4,305 3,220 0.08
------- ------- ------- -------
Restated 52,437 24,314 6,232 0.18 -- 59.50 14.31
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share information may
not equal the annual earnings (loss) per share.
(2) Represents the results of the KLI pooling of interests transaction.
(3) Represents the results of the Unique pooling of interests transaction.
In 2001, the Company announced the cancellation of its semi-annual dividend.
NOTE 17 SUBSEQUENT EVENTS
In February 2002, the Company acquired MRSI, a privately held manufacturer of
high precision, fully automated assembly and dispensing systems for the fiber
optic communications, microwave and semiconductor equipment markets for
approximately 2,100,000 shares of common stock (including shares issuable upon
the exercise of assumed stock options) valued at approximately $50.0 million and
$15.0 million in cash. The Company currently expects MRSI to have 2002 net sales
in the range of $13.0 million to $16.0 million, and the Company currently
expects MRSI's financial results to be slightly accretive to the Company's
earnings per share for the full year 2002.
Page F-24
NEWPORT CORPORATION
Schedule II
Consolidated Valuation Accounts
(In thousands)
Balance at Additions Balance
Beginning Charged to Costs Other Charges at End
Description of Period and Expenses Write-Offs (1) Add (Deduct) (2) of Period
----------- --------- ------------ -------------- ---------------- ---------
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 677 $ 1,251 $ (529) $ (39) $ 1,360
Reserve for inventory obsolescence 5,866 26,424 (12,934) -- 19,356
Warranty reserve 467 5,261 (4,064) -- 1,664
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 436 $ 417 $ (164) $ (12) $ 677
Reserve for inventory obsolescence 3,768 3,682 (2,394) 810 5,866
Warranty reserve 403 1,965 (1,901) -- 467
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 304 $ 278 $ (116) $ (30) $ 436
Reserve for inventory obsolescence 4,304 982 (1,330) (188) 3,768
Warranty reserve 336 1,575 (1,508) -- 403
(1) Amounts are net of recoveries.
(2) Amounts reflect the effect of exchange rate changes on translating valuation
accounts of foreign subsidiaries in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation, the effects of
acquisitions, and certain reclassifications between balance sheet accounts.
Page F-25
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- -----------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of December 22,
2000, by and among the Company, KLI Acquisition Corp.,
Kensington Laboratories, Inc. and the Shareholders of
Kensington Laboratories, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on February 20, 2001).
3.1 Restated Articles of Incorporation of the Company filed
November 19, 1987 (incorporated by reference to exhibit in
the Company's 1987 Proxy Statement).
3.2 Certificate of Amendment to Articles of Incorporation of
the Company, as filed May 30, 2000 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-3, No. 333-40878 (the "Form S-3")).
3.3 Certificate of Amendment to Articles of Incorporation of
the Company, as filed June 26, 2001 (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the
quarter ended June 30, 2001).
3.4 Restated Bylaws of the Company, as amended to date
(incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the year ended July 31,
1992).
10.1 Lease Agreement dated March 27, 1991, as amended,
pertaining to premises located in Irvine, California
(incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the year ended July 31,
1992).
10.2 First Amendment to Lease, dated January 31, 2002, between
the Company and IRP Muller Associates, LLC pertaining to
premises located in Irvine, California.
Exhibit
Number Description of Exhibit
------- -----------------------------------------------------------
10.3 Lease Agreement dated November 1, 2000, between the Company
and Arden Realty Limited Partnership pertaining to premises
located in Santa Ana, California (incorporated by reference
to Exhibit 10.2 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10.4 First Amendment to Lease, dated May 23, 2001, between the
Company and Arden Realty Limited Partnership pertaining to
premises located in Santa Ana, California.
10.5* 1992 Incentive Stock Plan (incorporated by reference to
exhibit in the Company's 1992 Proxy Statement).
10.6* 1999 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).
10.7* Amendment to 1999 Stock Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company's Form S-3).
10.8* 2001 Stock Incentive Plan (incorporated by reference to
Appendix B to the Company's Definitive Proxy Statement
filed on April 27, 2001).
10.9* Form of Nonqualified Stock Option Agreement (incorporated
by reference to Exhibit 4.2 of the Company's Registration
Statement of Form S-8, File No. 333-74076, filed on
November 28, 2001).
10.10* Employee Stock Purchase Plan, as amended.
10.11* Form of Severance Compensation Agreement between the
Company and certain of its executive officers
(incorporated by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.12* Severance Compensation Agreement dated as of April 8, 1996,
between the Company and Robert J. Phillippy, Vice President
and General Manager (incorprated by reference to Exhibit
10.2 of the Company's Form 10-Q for the quarter ended
September 30, 1996).
10.13* Severance Compensation Agreement dated as of May 1, 1996,
between the Company and Robert G. Deuster, President and
Chief Executive Officer (incorporated by reference to
Exhibit 10.3 of the Company's Form 10-Q for the quarter
ended September 30, 1996).
10.14 364-Day $10,000,000 Credit Agreement dated as of October
29, 1999 between the Company and ABN AMRO Bank, N.V.
(incorporated by reference to Exhibit 10.9 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1999).
10.15 3-Year $15,000,000 Credit Agreement dated as of October 29,
1999 between the Company and ABN AMRO Bank, N.V.
(incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
Exhibit
Number Description of Exhibit
------- -----------------------------------------------------------
10.16 Amendment to 364-Day $10,000,000 Revolving Credit
Agreement, dated as of May 31, 2000, between the Company
and ABN AMRO Bank, N.V. (incorporated by reference to
Exhibit 10.10 to the Company's Form S-3).
10.17 Amendment to 3-Year $15,000,000 Revolving Credit Agreement,
dated as of May 31, 2000, between Newport Corporation and
ABN AMRO Bank, N.V. (incorporated by reference to Exhibit
10.12 to the Company's Form S-3).
10.18 Amendment to 364 Day $10,000,000 Revolving Credit
Agreement, dated as of March 9, 2001, between the Company
and ABN AMRO Bank, N.V. (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10.19 Amendment to 3 Year $15,000,000 Revolving Credit Agreement,
dated as of March 9, 2001, between the Company and ABN AMRO
Bank, N.V. (incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.20 Omnibus Amendment to Credit Agreements, dated as of
February 15, 2002, between the Company and ABN AMRO Bank,
N.V.
10.21 Note Agreement dated as of May 2, 1996 between the Company
and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10.1 of the Company's
Form 10-Q for the quarter ended March 31, 1996).
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Auditors.
-------------
* This exhibit is identified as a management contract or
compensatory plan or arrangement pursuant to Item 14(a)(3)
of Form 10-K.