UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
***
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (IRS Employer
of incorporation or organization) Identification No.)
1791 Deere Avenue, Irvine, CA 92606
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 863-3144
--------------------------
N/A
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
The number of shares outstanding of the issuer's common stock as of September
30, 2001, was 36,647,105.
Page 1 of 20
Exhibit Index on Sequentially Numbered Page 20
NEWPORT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1: Financial Statements:
Consolidated Statement of Operations and Condensed
Consolidated Statement of Stockholders' Equity for the Three and
Nine Months ended September 30, 2001 and 2000. 3
Consolidated Balance Sheet at September 30, 2001 and
December 31, 2000. 4
Consolidated Statement of Cash Flows for the Nine
Months ended September 30, 2001 and 2000. 5
Notes to Condensed Consolidated Financial Statements. 6-12
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-19
Item 3: Quantitative and Qualitative Disclosures About Market Risk. 19-20
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K. 20
SIGNATURE 20
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEWPORT CORPORATION
Consolidated Statement of Operations and
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 62,903 $ 73,629 $268,543 $187,175
Cost of sales (see Note 2) 66,003 40,959 185,029 101,291
--------- -------- -------- --------
Gross profit (loss) (3,100) 32,670 83,514 85,884
Selling, general and administrative
expense (see Note 2) 16,880 14,201 55,344 37,492
Research and development expense 7,689 6,449 24,133 17,227
Restructuring and impairment charges (see Note 2) 13,438 - 13,438 -
Acquisition and other non-recurring charges (see Note 3) - - 10,683 -
--------- -------- -------- --------
Income (loss) from operations (41,107) 12,020 (20,084) 31,165
Interest and other income, net 3,108 3,135 10,569 1,893
--------- -------- -------- --------
Income (loss) before income taxes (37,999) 15,155 (9,515) 33,058
Income tax provision (benefit) (12,540) 3,941 (3,140) 6,745
--------- -------- -------- --------
Net income (loss) ($25,459) $ 11,214 ($6,375) $ 26,313
========= ======== ======== ========
Net income (loss) per share:
Basic ($0.70) $0.32 ($0.18) $0.81
Diluted ($0.70) $0.30 ($0.18) $0.75
Number of shares used to calculate net income per share:
Basic 36,487 34,514 36,335 32,679
Diluted 36,487 36,827 36,335 35,126
Pro forma information reflecting the tax effect of the conversion of
Kensington Laboratories, Inc. from an S-Corporation to a C-Corporation
Income (loss) before income taxes ($37,999) $ 15,155 ($9,515) $ 33,058
Income tax provision (benefit) (12,540) 5,155 (3,140) 11,064
--------- -------- -------- --------
Net income (loss) ($25,459) $ 10,000 ($6,375) $ 21,994
========= ======== ======== ========
Earnings (loss) per share:
Basic ($0.70) $0.29 ($0.18) $0.67
Diluted ($0.70) $0.27 ($0.18) $0.63
Stockholders' equity, beginning of period $ 507,208 $103,131 $485,965 $ 83,246
Net income (loss) (25,459) 11,214 (6,375) 26,313
Dividends - - (358) (284)
Other distributions to shareholders - (677) (3,821) (2,374)
Other comprehensive income (loss) 2,756 (1,827) 795 (2,799)
Deferred compensation 412 479 673 (1,058)
Issuance of common stock 1,145 337,731 9,183 347,007
--------- -------- -------- --------
Stockholders' equity, end of period $ 486,062 $450,051 $486,062 $450,051
========= ======== ======== ========
See accompanying notes
Page 3
NEWPORT CORPORATION
Consolidated Balance Sheet
(In thousands, except share data)
September 30, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 4,477 $ 16,861
Marketable securities 263,921 289,781
Customer receivables, net 58,298 70,241
Income tax receivable - 4,110
Inventories 94,421 80,585
Deferred tax assets 27,423 17,720
Other current assets 9,218 7,836
-------- --------
Total current assets 457,758 487,134
Property, plant and equipment, at cost, net 47,567 41,308
Goodwill, net 27,433 18,805
Investments and other assets 8,890 9,773
-------- --------
$541,648 $557,020
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,259 $ 24,797
Accrued payroll and related expenses 13,013 13,313
Deferred revenue 673 2,696
Other current liabilities 13,910 12,444
Current portion of long-term debt 7,958 7,590
-------- --------
Total current liabilities 49,813 60,840
Long-term debt 4,479 9,540
Other liabilities 1,294 675
Commitments and contingencies
Stockholders' equity:
Common stock, $.1167 par value, 200,000,000 shares authorized;
36,647,000 shares issued and outstanding at September 30, 2001;
36,168,000 shares at December 31, 2000 4,275 4,220
Capital in excess of par value 384,106 374,978
Unamortized deferred compensation (321) (996)
Accumulated other comprehensive loss (6,440) (7,235)
Retained earnings 104,442 114,998
-------- --------
Total stockholders' equity 486,062 485,965
-------- --------
$541,648 $557,020
======== ========
See accompanying notes
Page 4
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
----------------------
2001 2000
--------- ---------
Operating activities:
Net income (loss) ($6,375) $ 26,313
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 11,120 8,836
Increase in receivables and inventory provisions 27,217 2,431
Other non-cash items, net (1,030) (272)
Changes in operating assets and liabilities:
Customer receivables 12,151 (18,365)
Income tax receivable, net 3,922 (9,580)
Inventories (38,381) (25,529)
Other current assets (1,831) (1,518)
Other assets (470) (40)
Accounts payable and other accrued expenses (8,174) 12,671
Deferred revenue (3,762) 1,206
Other, net 616 (60)
--------- ---------
Net cash used in operating activities (4,997) (3,907)
--------- ---------
Investing activities:
Purchases of property, plant and equipment (19,395) (10,650)
Acquisition of businesses, net of cash acquired (12,833) (50)
Purchases of marketable securities (473,962) (311,653)
Sales of marketable securities 502,529 -
Payments for equity investment (1,250) (1,510)
Proceeds from sale of equity investment - 1,430
Payments for in-process technology - (834)
--------- ---------
Net cash used in investing activities (4,911) (323,267)
Financing activities:
Payments on long-term borrowings (4,861) (4,169)
Cash dividends paid (690) (468)
Other distributions to shareholders (3,821) (2,372)
Proceeds from sale of common stock, net - 329,851
Issuance of common stock under employee
agreements, including associated tax benefit 7,444 14,949
Payments on line of credit - (10,150)
--------- ---------
Net cash provided by (used in) financing activities (1,928) 327,641
--------- ---------
Effect of foreign exchange rate changes on cash (548) (304)
--------- ---------
Net increase (decrease) in cash and cash equivalents (12,384) 163
Cash and cash equivalents at beginning of period 16,861 9,241
--------- ---------
Cash and cash equivalents at end of period $ 4,477 $ 9,404
========= =========
Cash paid in the period for:
Interest $ 553 $ 1,411
Taxes 950 3,536
See accompanying notes
Page 5
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
1. Interim Reporting
General
The accompanying unaudited financial statements consolidate the accounts of the
Company and its wholly owned subsidiaries and have been restated to reflect the
acquisition of Kensington Laboratories, Inc. (see Note 2) which has been
accounted for as a pooling of interests. The unaudited financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information.
In the opinion of management, all adjustments necessary for a fair presentation
of the information in the unaudited condensed consolidated financial statements
have been made and consist of only normal recurring accruals. Operating results
for the nine-month period ended September 30, 2001, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnotes normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission, and consequently, these statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto, contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
Earnings (Loss) per Share
Basic earnings (loss) 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, including restricted
stock, and the dilutive effects of common stock equivalents (stock options),
determined using the treasury stock method, outstanding during the periods.
Diluted loss per share excludes the antidilutive effects of common stock
equivalents outstanding during the periods.
New Accounting Standards
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("Statement 144") effective for fiscal years
beginning after December 15, 2001. 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. The Company is required to adopt Statement 144 in
its fiscal year beginning January 1, 2002. The Company is currently assessing
the expected financial impact of Statement 144 on its consolidated financial
statements.
The Company adopted FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" as of the beginning of fiscal 2001. FAS 133 requires certain
derivative instruments to be recorded at fair value. Derivative instruments
held by the Company are comprised of foreign exchange contracts held as a hedge
against foreign currency denominated receivables. The adoption of this standard
did not have a material impact on the results of operations, financial position
or cash flows of the Company.
In June 2001 the FASB issued Statement No. 141, Business Combinations
("Statement 141"), and No. 142, Goodwill and Other Intangible Assets ("Statement
142"), effective for fiscal years beginning after December 15, 2001. 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
in accordance with Statements 141 and 142. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply 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 share outstanding at September 30,
2001). During 2002, the Company will perform the first of the required
See accompanying notes
Page 6
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 and has not yet determined what effect, if any, applying those
tests will have on the Company's financial position and results of operations.
Foreign Currency
Balance sheet accounts denominated in foreign currencies are translated at
exchange rates as of the date of the balance sheet. Income statement accounts
denominated in foreign currencies are translated at average exchange rates for
the period. Translation gains and losses are accumulated as a separate
component of stockholders' equity. 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.
The Company may enter into foreign exchange contracts as a hedge against foreign
currency denominated receivables. It does not engage in currency speculation.
Market value gains and losses on contracts are recognized currently, offsetting
gains or losses on the associated receivables. Foreign currency transaction
gains and losses are included in current earnings. Foreign exchange contracts
totaled $6.4 million and $4.3 million at September 30, 2001, and December 31,
2000, respectively.
2. Restructuring and Impairment Charges
In July and September 2001, due to the continued weak economic environment in
the Company's key end markets, the Company reduced its sales forecasts and
announced a cost reduction program designed to bring its operating structure in
line with its current business outlook. These initiatives included headcount
reductions, facility consolidations and product rationalizations.
During the third quarter of 2001, the Company reduced its workforce 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 and
represented 20% of the Company's worldwide workforce, or approximately 400
employees.
Facility consolidations included the consolidation of the San Luis Obispo, CA,
Garden Grove, CA, and Longmont, CO operations into expanded facilities in
Irvine, CA. The Company expects all consolidation activities to be completed by
June 30, 2002. Costs related to the facility consolidations totaled $9.3
million and included reserves for asset impairments of $5.4 million, 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 Company's restructuring
reserves (in thousands):
Employee Facility
Severance Consolidations Other Total
---------- --------------- ------ --------
Restructuring and asset
impairment charges $3,366 $ 9,348 $ 724 $13,438
Cash payments (518) (31) (116) (665)
Write-offs (337) (5,861) (601) (6,799)
------ ------- ----- -------
Accrued restructuring at
September 30, 2001 $2,511 $ 3,456 $ 7 $ 5,974
====== ======= ===== =======
The accrued restructuring reserve is included in other current liabilities in
the accompanying consolidated balance sheet.
In addition to the workforce reductions and facility consolidations discussed
above, the Company revised its sales forecasts given current market conditions,
and as a result established reserves for excess and obsolete inventory in the
amount of $24.4 million.
See accompanying notes
Page 7
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
The Company also established reserves in the amount of $0.7 million related to
capitalized software costs and $0.6 million for other costs related to the
restructuring.
The table below summarizes the reserves established in connection with the cost
reduction program and where those charges have been reflected in the
accompanying consolidated statement of operations for the three- and nine-months
ended September 30, 2001 (in thousands):
Cost of Selling, General &
Sales Administrative Total
----- -------------- -----
Inventory reserves $24,393 $ - $24,393
Other 710 631 1,341
------- ---- -------
Total $25,103 $631 $25,734
======= ==== =======
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
-------
Total $39,172
=======
3. Mergers and Acquisitions
Kensington Laboratories, Inc.
In February 2001, the Company merged with Kensington Laboratories, Inc. ("KLI"),
a manufacturer of high-precision robotic and motion control equipment for the
semiconductor and fiber optic communications industries. The Company issued
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 unaudited condensed consolidated financial statements have been
restated to 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 10.
See accompanying notes
Page 8
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
Net sales and net income of Newport and KLI were the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net sales:
Newport $ 52,430 $66,594 $ 229,081 $166,130
KLI 11,031 9,080 44,181 26,231
Less: intercompany sales (558) (2,045) (4,719) (5,186)
--------- ------- --------- --------
Combined $ 62,903 $73,629 $ 268,543 $187,175
========= ======= ========= ========
Net income:
Newport ($27,456) $ 8,179 ($13,533) $ 15,517
KLI 1,997 3,035 7,158 10,796
--------- ------- --------- --------
Combined ($25,459) $11,214 ($6,375) $ 26,313
========= ======= ========= ========
Earnings per share:
Basic
Newport $ (0.75) $ 0.26 ($0.37) $ 0.54
KLI 0.05 0.06 0.19 0.27
--------- ------- --------- --------
Combined ($0.70) $ 0.32 ($0.18) $ 0.81
========= ======= ========= ========
Diluted
Newport ($0.75) 0.24 ($0.37) $ 0.49
KLI 0.05 0.06 0.19 0.26
--------- ------- --------- --------
Combined ($0.70) $ 0.30 ($0.18) $ 0.75
========= ======= ========= ========
Design Technology Corporation
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.
In connection with these acquisitions, during the three-month period ended March
31, 2001, the Company recorded non-recurring charges of $12.5 million. Of this
amount, $9.2 million was related to the acquisition of Kensington Laboratories,
Inc. ("KLI") and consisted of investment banking, legal and accounting fees.
The Company also recorded a charge of $1.8 million for asset writedowns related
to integration charges in connection with its December 2000 acquisition of the
business of CE Johansson AB.
The table below summarizes where the above non-recurring charges have been
reflected in the accompanying consolidated statement of operations for the
period ended September 30, 2001:
Cost of Selling, General &
Sales Administrative Total
----- -------------- -----
Acquisition and other one-time charges $ - $10,683 $10,683
Asset writedown 1,788 - 1,788
------ ------- -------
Total related charges $1,788 $10,683 $12,471
====== ======= =======
See accompanying notes
Page 9
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
4. Marketable Securities
Marketable securities consist of money market funds, certificates of deposit,
commercial paper and funding agreements, U.S. agency notes, corporate notes and
bonds and asset-backed securities. These securities are stated at current fair
market value. The excess of fair market value over book value is included as a
component of comprehensive income (see Note 8).
5. 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:
September 30, December 31,
(In thousands) 2001 2000
---- ----
Customer receivables $59,864 $70,918
Less allowance for doubtful accounts 1,566 677
------- -------
$58,298 $70,241
======= =======
6. 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:
September 30, December 31,
(In thousands) 2001 2000
------ -------
Raw materials and purchased parts $28,095 $24,949
Work in process 19,553 17,124
Finished goods 46,773 38,512
------- -------
$94,421 $80,585
======= =======
7. Property, Plant and Equipment
Property, plant and equipment consist of the following:
September 30, December 31,
(In thousands) 2001 2000
---- ----
Land $ 888 $ 920
Buildings 5,120 5,304
Leasehold improvements 19,175 14,725
Machinery and equipment 57,428 49,652
Office equipment 24,556 20,786
------- -------
107,167 91,387
Less accumulated depreciation 59,600 50,079
------- -------
$ 47,567 $41,308
======= =======
See accompanying notes
Page 10
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
8. Interest and Other Income, Net
Interest and other income, net, consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30
------------- ------------
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Interest and dividend income $ 2,980 $ 3,521 $ 10,405 $ 3,734
Interest expense (301) (493) (920) (1,841)
Exchange gains 492 215 472 170
Gains (losses) on sale of investments, net 84 (8) 1,013 (8)
Other (147) (100) (401) (162)
--------- -------- --------- --------
$ 3,108 $ 3,135 $ 10,569 $ 1,893
========= ======== ========= ========
9. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of related tax, are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(In thousands) 2001 2000 2001 2000
---- ----- ---- ----
Net income (loss) ($25,459) $ 11,214 ($6,375) $ 26,313
Foreign currency translation gain (loss) 1,405 620 (1,911) (1,546)
Unrealized gain on marketable securities 1,351 - 2,706 -
--------- -------- -------- --------
($22,703) $ 11,834 ($5,580) $ 24,767
========= ======== ======== ========
10. Segment Reporting
The Company operates in three reportable segments, Industrial & Scientific
Technologies, Fiber Optics & Photonics and Industrial Metrology Systems
(formerly Video Metrology). Selected financial information for these segments
for the three- and nine-months ended September 30, 2001 and 2000 follows:
(In thousands) Industrial Industrial
& Scientific Fiber Optics Metrology
Technologies & Photonics Systems Total
------------ ----------- ------- -----
Three Months Ended September 30, 2001:
- --------------------------------------
Sales to external customers $ 42,591 $15,436 $ 4,876 $ 62,903
Segment income (loss) 6,700 (6,196) (2,439) (1,935)
Three Months Ended September 30, 2000:
- --------------------------------------
Sales to external customers $ 47,480 $24,542 $ 1,607 $ 73,629
Segment income (loss) 11,285 2,497 (1,762) 12,020
Nine Months Ended September 30, 2001:
- -------------------------------------
Sales to external customers $164,423 $86,352 $17,768 $268,543
Segment income (loss) 40,961 (2,176) (7,226) 31,559
Nine Months Ended September 30, 2000:
- -------------------------------------
Sales to external customers $124,554 $57,478 $ 5,143 $187,175
Segment income (loss) 29,380 6,819 (5,034) 31,165
See accompanying notes
Page 11
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(Unaudited)
The following reconciles segment income to consolidated income before income
taxes.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Segment income ($1,935) $12,020 $ 31,559 $31,165
Unallocated restructuring, acquisition and
other non-recurring charges (see Notes 2 and 3) (39,172) - (51,643) -
Interest and other income (expense), net 3,108 3,135 10,569 1,893
-------- ------- -------- -------
Income before income taxes ($37,999) $15,155 ($9,515) $33,058
======== ======= ======== =======
See accompanying notes
Page 12
NEWPORT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation for the Three Month and Nine Month Periods Ended September 30, 2001
and 2000
INTRODUCTORY NOTE
This Quarterly Report on Form 10-Q 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 Form 10-Q that refer to expectations,
projections or other characterizations of future events or circumstances are
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 forward-looking statements include (i) information contained in Note 1 to
the Financial Statements included herein regarding the expected effect of the
application of FASB Statement No. 142 on the Company's future operating results,
and (ii) the need for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on certain assumptions, including that we will not lose a
significant customer or customers or experience increased fluctuations of demand
or cancellation or rescheduling of purchase orders, that our markets will
continue to grow, that our products will remain accepted within their respective
markets and will not be replaced by new technology, that competitive conditions
within our markets will not change materially or adversely, that we will retain
key technical and management personnel, that our forecasts will accurately
anticipate market demand, that there will be no material adverse change in our
operations or business, that fluctuations in foreign currency exchange rates do
not have a material adverse impact on our competitive position in international
markets, that we will not experience significant supply shortages with respect
to purchased components, sub-systems or raw materials, that we will successfully
integrate our acquired and to-be-acquired companies, that terrorist activity and
acts of ware and the resulting economic uncertainly will not have a material
adverse effect on our business or operating results, and that power
interruptions and electricity rate increases will not have a material adverse
effect on our business or operating results. Assumptions relating to the
foregoing involve judgments and risks with respect to, among other things,
future economic, competitive and market conditions, including those in Europe
and Asia and those related to our strategic markets, whether our products,
particularly those targeting our strategic markets, will continue to achieve
customer acceptance, and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions underlying the forward-looking
statements will be realized, our business and operations are subject to
substantial risks that increase the uncertainty inherent in the forward-looking
statements. Certain of these risks are discussed in more detail in our Annual
Report on Form 10-K for the year ended December 31, 2000. In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives or plans will be
achieved. We undertake no obligation to revise the forward-looking statements
contained herein to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following is our discussion and analysis of certain significant factors that
have affected our earnings and financial position during the period included in
the accompanying financial statements. This discussion compares the three- and
nine-month periods ended September 30, 2001, with the three- and nine-month
periods ended September 30, 2000. This discussion should be read in conjunction
with the financial statements and associated notes.
MERGERS AND ACQUISITIONS AND OTHER 2001 EVENTS
Current 2001 Events
In July and September 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 its operating structure in line with its
current
Page 13
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
business outlook. These initiatives included headcount reductions, facility
consolidations and product rationalizations.
During the third quarter of 2001, we reduced our workforce at its Garden Grove,
Irvine, San Luis Obispo, CA and Longmont, CO operations. Severance and other
costs related to such reductions totaled $3.4 million and represented 20% of our
worldwide workforce, or approximately 400 employees.
Facility consolidations included the consolidation of the San Luis Obispo, CA,
Garden Grove, CA, and Longmont, CO operations into an expanded campus in Irvine,
CA. 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, lease termination costs of $2.1
million and the write-off of goodwill of $1.8 million.
The following table summarizes the activities in our restructuring reserves (in
thousands):
Employee Facility
Severance Consolidations Other Total
---------- --------------- ------ --------
Restructuring and asset
impairment charges $3,366 $ 9,348 $ 724 $13,438
Cash payments (518) (31) (116) (665)
Write-offs (337) (5,861) (601) (6,799)
------ ------- ----- -------
Accrued restructuring at
September 30, 2001 $2,511 $ 3,456 $ 7 $ 5,974
====== ======= ===== =======
The accrued restructuring reserve is included in other current liabilities in
the accompanying consolidated balance sheet.
In addition to the workforce reduction 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 in the amount of
$24.4 million.
We also established reserves in the amount of $0.7 million related to
capitalized software costs and $0.6 million for other costs related to the
restructuring.
The table below summarizes the reserves established in connections with the cost
reduction program and where those charges have been reflected in the
accompanying consolidated statement of operations for the three- and nine-months
ended September 30, 2001:
Cost of Selling, General &
Sales Administrative Total
------- ------------------ -------
Inventory reserves $24,393 $ - $24,393
Other 710 631 1,341
------- ---- -------
Total $25,103 $631 $25,734
======= ==== =======
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
-------
Total $39,172
=======
Page 14
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
Other 2001 Events
During the three-month period ended March 31, 2001, we recorded non-recurring
charges of $12.5 million related primarily to mergers and acquisitions. Of this
amount, $9.2 million was related to the merger with Kensington Laboratories,
Inc. ("KLI") and consisted of investment banking, legal and accounting fees. We
also recorded a charge of $1.8 million for asset writedowns related to
integration charges in connection with our December 2000 acquisition of the
business of CE Johansson AB.
Pro forma net income excluding the non-recurring charges incurred during the
three- and nine-month periods ended September 30, 2001, and reflecting the pro
forma tax effect of the conversion of KLI from an S-Corporation to a C-
Corporation on the three- and nine-month periods ended September 30, 2000 is
presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
(In thousands) 2001 2000 2001 2000
------ ------- ------- -------
Income before income taxes $1,173 $15,155 $42,176 $33,058
Income tax provision 387 5,155 13,918 11,064
------ ------- ------- -------
Net income $ 786 $10,000 $28,258 $21,994
Earnings per share:
Basic $ 0.02 $ 0.29 $ 0.78 $ 0.67
Diluted $ 0.02 $ 0.27 $ 0.75 $ 0.63
Kensington Laboratories, Inc.
In February 2001, we merged with KLI, a manufacturer of high-precision robotic
and motion control equipment for the semiconductor and fiber optic
communications industries. We issued 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 financial statements
have been restated to incorporate the results of operations, financial position
and cash flows of KLI for all periods presented.
Design Technology Corporation
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 acquisition was accounted for using the
purchase method.
Page 15
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
RESULTS OF OPERATIONS
FINANCIAL ANALYSIS Period-to-Period
Increase (Decrease)
-------------------
Three Nine
Percentage of Net Sales Months Months
-------------------------
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30,
-------------------- ------------------- --------------
2001 2000 2001 2000 2001 2001
----- ----- ----- ----- ------ ------
Net sales 100.0% 100.0% 100.0% 100.0% (14.6%) 43.5%
Cost of sales 104.9 55.6 68.9 54.1 61.1 82.7
----- ----- ----- -----
Gross profit (loss) (4.9) 44.4 31.1 45.9 (109.5) (2.8)
Selling, general and administrative
expense 26.8 19.3 20.6 20.0 18.9 47.6
Research and development expense 12.2 8.8 9.0 9.2 19.2 40.1
Restructuring and impairment charges 21.4 - 5.0 - 100.0 -
Acquisition and other non-
recurring charges - - 4.0 - - 100.0
----- ----- ----- -----
Income (loss) from operations (65.3) 16.3 (7.5) 16.7 (442.0) (164.4)
Interest and other income 4.9 4.3 4.0 1.0 (0.1) 458.3
----- ----- ----- -----
Income (loss) before income taxes (60.4) 20.6 (3.5) 17.7 (350.7) (128.8)
Income taxes (benefit) (19.9) 5.4 (1.1) 3.6 (418.2) (146.6)
----- ----- -----
Net income (loss) (40.5) 15.2 (2.4) 14.1 (327.0) (124.2)
===== ===== ===== =====
Net Sales Net sales for the three- and nine-month periods ended September 30,
2001 were $62.9 million and $268.5 million, respectively, compared with $73.6
million and $187.2 million, respectively, for the three- and nine-month periods
ended September 30, 2000. The results reflect a decrease of 14.6% and an
increase of 43.5%, respectively, when compared with the corresponding periods of
the previous year. The sales decrease for the three-month period was due
primarily to a reduction in sales to the fiber optic communications market
partially offset by sales increases in the semiconductor equipment market as
well as by the inclusion of sales from acquired businesses accounted for using
the purchase method for which there were no comparable sales in the 2000 period.
The sales increase for the nine-month period was due to sales increases in all
market segments as well as by the inclusion of sales from acquired businesses
accounted for using the purchase method for which there were no comparable sales
in the 2000 period.
Three- and nine-month sales to the fiber optic communications market were $14.6
million and $95.4 million, respectively, reflecting a decrease of $16.9 million,
or 53.5%, and an increase of $25.3 million, or 36.1, compared with the
corresponding prior year periods. Sales to the semiconductor equipment market
totaled $22.5 million and $77.8 million for the three- and nine-month periods
ended September 30, 2001, reflecting increases of $5.7 million, or 33.4%, and
$32.9 million, or 73.3%, respectively, compared with the corresponding periods
in 2000. Three- and nine-month sales to the general metrology market were $16.1
million and $57.5 million, respectively, reflecting increases of $3.5 million,
or 27.6%, and $23.0 million, or 66.5%, compared with the corresponding prior
year periods. The increases in sales to the general metrology market in both
periods 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 the 2000 periods. Third quarter 2001 sales to our other market segments,
including aerospace and research and computer peripherals, were $9.7 million,
reflecting a decrease of $3.0 million, or 23.7%, compared with the corresponding
prior year period. Sales to these other market segments during the nine-month
period were $37.8 million, comparable with the $37.7 million recorded in the
prior year period.
Page 16
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
Domestic sales totaled $43.7 million and $181.5 million for the three- and nine-
month periods ended September 30, 2001, respectively, reflecting a decrease of
$9.0 million, or 17.1%, when compared to the corresponding three-month period in
2000 and an increase of $46.5 million, or 34.4%, when compared with the
corresponding nine-month period in 2000. The decrease for the quarter was due
to sales declines in the fiber optic communications market of $13.3 million, or
64.4%, which was partially offset by an increase in sales to the semiconductor
equipment and general metrology markets of $4.9 million, or 29.4%, and $0.5
million, or 6.1%, respectively. Domestic sales to the other market segments
during the third quarter decreased $1.1 million, or 14.5%, over the third
quarter of 2000. The increase for the nine-month period ended September 30,
2001 was primarily due to sales increases in the fiber optic communications,
semiconductor equipment and general metrology markets of $10.0 million, or
21.4%, $30.9 million, or 72.0%, and $6.2 million, or 28.6%, respectively,
compared with the corresponding prior year period, offset in part by a decrease
in sales to the other market segments of $0.7 million, or 3.0%, compared with
the prior year period. The increase in domestic sales to the general metrology
market was partly due to the inclusion of sales from acquired businesses
accounted for using the purchase method for which there were no comparable sales
in the 2000 periods.
International sales totaled $19.2 million and $87.0 million for the three- and
nine-month periods ended September 30, 2001, respectively, reflecting a decrease
of $1.7 million, or 8.2%, and an increase of $34.9 million, or 66.9%,
respectively, compared with the corresponding periods in 2000. The decrease for
the quarter was due primarily to a decrease in sales to the fiber optic
communications market of $3.6 million, or 33.1%, partially offset by sales
increases in the semiconductor equipment and general metrology markets of $0.8
million, or 219.5%, and $3.0 million, or 65.7%, respectively. International
sales to the other market segments decreased $1.9 million, or 37.4%, when
compared with the third quarter of 2000. The increase for the nine-month period
was due primarily to sales increases in the fiber optic communications,
semiconductor equipment and general metrology markets of $15.2 million, or
65.7%, $2.1 million, or 104.8%, and $16.7 million, or 131.8%, respectively,
compared with the corresponding prior year period. International sales to our
other market segments increased $0.9 million, or 6.0%, compared with the prior
year nine-month period. Geographically, third quarter 2001 sales to customers
in Europe increased $5.8 million, or 56.2%, over the third quarter of 2000.
Third quarter 2001 sales to customers in the Pacific Rim decreased $4.8 million,
or 83.1%, while third quarter 2001 sales to customers in Canada decreased $3.0
million, or 69.3%, when compared to the prior year period. For the nine-month
period ended September 30, 2001, sales to customers in Europe increased $31.2
million, or 115.7%, over the corresponding prior year period. Sales to
customers in the Pacific Rim increased $3.0 million, or 22.4%, when compared
with the prior year period. Sales to customers in Canada decreased $0.5
million, or 5.2%, over the prior year period. Increased European 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. European sales for the three- and nine-month
periods were reduced by $0.4 million and $1.7 million, respectively, compared
with the same periods in 2000, because of a negative foreign exchange rate
impact due to the strength of the U.S. dollar versus the euro in the current
year periods.
Gross Margin Gross margins for the three- and nine-month periods ended
September 30, 2001 were (4.9%) and 33.1%, respectively, and were negatively
impacted by inventory and other asset writedowns of $25.1 million and $26.9
million, respectively. Excluding these writedowns, gross margin for the three-
and nine-month periods would have been 35.0% and 41.1%, compared with margins of
44.4% and 45.9% in the corresponding periods in 2000. The decrease in gross
margins for both the three- and nine-month periods was due primarily to the
lower absorption of fixed overhead caused by the sharp decline in sales.
Further, gross margins for the three- and nine-month periods in 2000 reflect
significantly higher than usual margins in KLI's operations, whereas gross
margins for the 2001 periods reflect additional costs resulting from the
expanded infrastructure at KLI's operations.
Selling, General and Administrative (SG&A) Expense SG&A expenses totaled $16.9
million, or 26.8% of net sales, and $55.3 million, or 20.6% of net sales, for
the three- and nine-month periods ended September 30, 2001, increases of $2.7
million, or 18.9%, and $17.9 million, or 47.6%, respectively. The increase in
total SG&A dollars resulted primarily from increases in expenses from recently
acquired businesses as well as from additional costs required to support the
year to date sales growth.
Page 17
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
Research and Development (R&D) Expense R&D expenses totaled $7.7 million, or
12.2% of net sales, and $24.1 million, or 9.0% of net sales, for the three- and
nine-month periods ended September 30, 2001, increases of $1.2 million, or
19.2%, and $6.9 million, or 40.1%, respectively. The three- and nine-month
period increases were attributable to increases in expenses from recently
acquired businesses as well as increased costs related to the development of
three-dimensional multi-sensor measurement capabilities for our video metrology
software and development efforts to improve active laser beam stabilization.
Restructuring, Acquisition and Other One-Time Charges Restructuring,
acquisition and other one-time charges of $13.4 million and $24.1 million were
recorded in the three- and nine-month periods ended September 30, 2001,
respectively. The third quarter charge related to the cost reduction
initiatives is described in Note 2 to the Financial Statements included herein.
The charge recorded in the first quarter of 2001 consisted primarily of
investment banking, legal and accounting fees associated with transactions and
is described in Note 3.
Interest and Other Income, Net Interest and other income, net, totaled $3.1
million and $10.6 million for the three- and nine-month periods ended September
30, 2001, compared with $3.1 million and $1.9 million for the corresponding
prior year periods. The increase for the nine-month period is a result of
interest income attributable to the investment of proceeds from the secondary
offering completed in July 2000.
Income Taxes The effective tax rate for the three- and nine-month periods ended
September 30, 2001, was 33.0% versus 26.0% and 20.4%, for the corresponding
prior year periods. The increase in the effective tax rate was primarily the
result of earnings attributable to KLI for which a tax provision was not
recorded in the prior year due to KLI's S-Corp income tax status.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in our operating activities of $5.0 million for the nine-month
period September 30, 2001 was attributable to our $6.4 million net loss and an
increase in net operating assets of $26.9 million, net of non-cash charges for
depreciation, amortization and asset reserves of $28.3 million. Our customer
receivables decreased by $11.9 million, or 17.0%, from the end of 2000. The
days sales outstanding ratio improved to 55 days at the end of the third quarter
2001 from 68 days at the end of the fourth quarter of 2000. Our inventories
increased $13.8 million, or 17.2%, at the end of the third quarter of 2001
compared with the end of the fourth quarter of 2000 due primarily to production
planning during the first two quarters of 2001 associated with our goal of
maintaining competitive manufacturing lead times and to meet requirements of
existing customer orders. Inventory turns were consistent with prior year-end
levels.
Net cash used in investing activities of $4.9 million for the nine-month period
ended September 30, 2001, was principally attributable to purchases of property,
plant and equipment, as well as to certain recent acquisitions of businesses,
offset in part by net sales of marketable securities.
Net cash used in financing activities of $1.9 million for the nine-month period
ended September 30, 2001, was principally attributable to the payment of cash
dividends and other distributions to the former KLI shareholders and to payments
on long-term borrowings, offset in part by the issuance of common stock in
connection with employee stock option and purchase plans. In September 2001,
the Company announced that it was terminating its semi-annual cash dividend.
At September 30, 2001, we had in place a $10.0 million unsecured line of credit
expiring March 5, 2004 and a $10.0 million unsecured line of credit expiring
March 4, 2002. Both lines bear interest at either the prevailing prime rate, or
the prevailing London Interbank Offered Rate plus 1.0%, at our option, plus an
unused line fee of 0.2% per year. At September 30, 2001, there were no balances
outstanding under the lines of credit, with $18.7 million available under the
combined lines, after considering outstanding letters of credit of $1.3 million.
We believe our current working capital position together with estimated cash
flows from operations and existing credit availability will be adequate to fund
our operations in the ordinary course of business, our anticipated capital
expenditures and our debt payment requirements for at least the next twelve
months. However, this belief is based upon many assumptions and is subject to
numerous risks, and there can be no assurance that we will not require
additional funding in the future.
Page 18
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
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 to finance any such acquisitions.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
European Economic and Monetary Union (EMU) - New European Currency
On January 1, 1999, member countries of the European Economic and Monetary Union
established fixed conversion rates between their existing national currencies
and one common currency - the euro. The euro trades on currency exchanges and,
during a three-year dual-currency transition period, either the euro or the
national currencies may be used in business transactions. Beginning in January
2002, new euro-denominated bills and coins will be issued, and the national
currencies will be withdrawn from circulation. Our operating subsidiaries
affected by the euro conversion have implemented and are implementing plans to
address the systems and business issues raised by the euro currency conversion.
These issues include, among others, (1) the need to adapt computer and other
business systems and equipment to accommodate euro-denominated transactions; and
(2) the competitive impact of cross-border price transparency, which may make it
more difficult for businesses to charge different prices for the same products
on a country-by-country basis, particularly once the euro currency is issued in
2002. While we anticipate that the euro conversion will not have a material
adverse impact on our financial condition or results of operations, there can be
no assurance that key vendors, customers and distributors will not be affected
by such euro currency issues, which could have an adverse effect on our
business, operating results and financial condition. Further, there can be no
assurance that the currency market volatility will not increase, which could
have an adverse effect on our euro exposures.
Item 3. 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.
Operating profit from international operations totaled $1.5 million and $10.3
million for the three- and nine-month periods ended September 30, 2001. 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 net income by
approximately $0.1 million and $0.7 million for the three- and nine-month
periods ended September 30, 2001. We believe that this quantitative measure has
inherent limitations because, as 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.
Page 19
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Nine Months Ended September 30, 2001
Transaction gains and losses arise from monetary assets and liabilities
denominated in currencies other than a subsidiary's functional currency. Net
foreign exchange gains and losses were not material to our earnings for the last
three years.
Interest Rate Risk
The interest rates we pay on certain of our debt instruments are subject to
interest rate risk. Our unsecured lines of credit bear interest at either the
prevailing prime rate, or the prevailing London Interbank Offered Rate plus
1.0%, at our option. Our long term debt instruments carry fixed interest rates.
We estimate that a 10% increase in interest rates on our unsecured lines of
credit would not have a material impact on our reported net income.
Our investments in marketable securities, which totals $263.9 million at
September 30, 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 $0.2 million and $0.7 million for both the three- and nine-month
periods ended September 30, 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWPORT CORPORATION
(Registrant)
Dated: November 14, 2001
By: /S/CHARLES F. CARGILE
----------------------------------------
Charles F. Cargile, Principal Financial
Officer, duly authorized to sign on
behalf of the Registrant
See accompanying notes
Page 20