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, 1999
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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
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NEWPORT CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 94-0849175
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1791 Deere Avenue, Irvine, CA 92606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 863-3144
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Stated Value $0.35 per Share
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(Title of Class)
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 ___
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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.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $1,193,966,000 as of March 17, 2000.
The number of shares outstanding of each of the issuer's classes of common stock
as of March 17, 2000, was 9,379,475.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 17, 2000 are incorporated by reference into Part
III.
Page 1 of 45 Pages
Exhibit Index on Sequentially Numbered Page 24
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 "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 their 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 and vibration isolation
technology and high resolution non-contact visual measurement and inspection. 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, integrated 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. We
also provide sophisticated high-precision equipment to commercial, academic and
governmental research institutions worldwide that engage in advanced research
and development activities.
For nearly three decades we have serviced the needs of research laboratories for
precision equipment. In 1991, we acquired the micro-positioning business of
Micro-Controle S.A. and commenced our evolution from a provider of discrete
components for research applications to a company that manufactures both
components and integrated systems for research and commercial applications. The
acquisition also provided us with a significant manufacturing and distribution
base in Europe. In February 1995, we acquired RAM Optical Instrumentation, Inc.
("ROI") in order to increase our participation in the computer peripherals and
semiconductor test and measurement markets. The acquisition of ROI also
increased our expertise in developing software and manufacturing integrated
systems. In March 1995, we acquired Light Control Instruments, Inc. ("LCI"), a
participant in the fiber optic test and measurement market. The acquisition of
LCI expanded our fiber optic product offering by adding laser diode test
equipment to our internally developed product line. In January 1996, we
acquired MikroPrecision Instruments, Inc. ("MPI") further increasing our
participation in the semiconductor equipment and computer peripherals markets.
In October 1998, we acquired Environmental Optical Sensors, Inc ("EOSI"),
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 or "NPOC"). The commercial optics
operation manufactures specialized precision optical products and systems. As a
result of our internal growth and strategic acquisitions, we are a leading
supplier of high precision optics, instruments, micro-positioning and
measurement products and systems to manufacturers of fiber optic communications
equipment, computer peripherals and semiconductor equipment worldwide. In
addition, we continue to focus on our core strengths in research test and
measurement equipment to provide ultra-precision motion and measurement
technologies for research
Page 2
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 and manufacturing,
micropositioning and measurement systems and subsystems to markets where ultra-
high precision is critical. Our products are used in mission-critical
applications in industries including fiber optic device manufacturing,
semiconductor and computer peripheral manufacturing and life and health
sciences. We develop and manufacture our products within three distinct
business units, organized around customer and manufacturing requirements. This
structure enables us to quickly incorporate customer feedback into new products
and to respond more rapidly to changing market requirements.
Fiber Optics and Photonics
Our fiber optics and photonics division offers a complete suite of automated
manufacturing solutions. These products address a broad 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
solutions enable component manufacturers to significantly increase the
productivity and capacity of their manufacturing operations. In addition, we
provide our customers with value-added product and process engineering services,
as well as device manufacturing and packaging services.
Pre-Test. Our pre-test products automate verification of devices used in
manufacturing 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 that increase the efficiency of the pre-test process, including:
. Automated Laser Diode Bar Test Stations
. Automated Broad Area Test Stations
. Photonics Test Instrumentation
. AutoAlign(TM) Characterization Workstations
Assembly and Packaging. The assembly and packaging of fiber optic devices
requires a high degree of precision. Manufacturers have traditionally used
manual assembly techniques for fiber optic components, which are costly, result
in low production yields and produce inconsistent quality. We offer a line of
integrated assembly and packaging solutions which automate these processes and
thereby reduce manufacturing times, increase yields and enhance quality. Our
assembly and packaging products include:
. AutoAlign(TM) Waveguide Assembly Workstations
. Orion(TM) Semi-Automated Fiber Optic Alignment Systems
. LaserWeld(TM) Automated Photonics Packaging Systems
Final Device Testing and Burn-In. Fiber optic devices must meet rigorous
reliability and performance specifications, including a requirement for 20 to 30
year life cycles and the ability to perform in harsh weather conditions or even
underwater. These performance standards require manufacturers to perform
extensive testing of the completed devices. We offer standardized solutions
which automate the burn-in and test process, including:
. Laser Diode Life and Age Test Stations
. High-Power Laser Diode Test Systems
. Automated Passive Component Test Systems and Instrumentation
. Model 8800 Photonics Test System
Page 3
Instruments. We offer several lines of electronic instruments to complement our
other products serving optical laboratories. These products are concentrated in
the areas of light measurement and control, and light sources. We design and
manufacture a majority of our electronic products and also distribute the
products of others. Examples of the electronic instruments which we manufacture
or distribute include:
. Power Meters
. Laser Diode Instruments
. Spectrum Analyzers
. Electronic Shutters and Modulators
. Lasers, Lamps and Accessories
Engineering and Manufacturing Services. Our experience as a pioneer in fiber
optic device assembly, packaging and testing technology has given us a great
volume of knowledge and expertise in these areas, which we use to create value-
added solutions for our customers. We assist our customers in designing device
packaging, developing manufacturing processes, developing and producing tooling
and in the customized programming of process automation software. These services
help our customers significantly reduce the development cycle for their products
and improve the productivity, yields and quality of their manufacturing
processes. In addition to helping our customers become more productive, our
services assist us in establishing a long-term relationship with our customers
and allow us to identify additional opportunities for new products. We also
provide device manufacturing and packaging services on an outsourced basis to
enable emerging customers to design and test new products.
Video Metrology
As semiconductor manufacturers move to increasingly complex circuit design and
deep sub-micron process technology, they are experiencing a greater need to
monitor and measure the performance of their fabrication systems because of the
increased number of parts included on an individual wafer and the increased size
of wafers themselves. Our Video Metrology systems and subsystems provide a
broad range of non-contact video-based measurement and inspection products for
the semiconductor equipment manufacturing market as well as other industrial
markets, such as computer peripherals and life and health sciences markets. Our
video metrology systems and subsystems incorporate our experience and expertise
in core technologies such as precision motion, vibration control and
measurement.
Our Video Metrology product line includes:
. video direct microscopes
. Sprint(TM), DataStar(TM), OMIS(TM) II and OMIS(TM) III
. Polaris magnetic head pole geometry system
. LaserMAP and Galaxy(TM) software
The Polaris magnetic head pole geometry system is specifically designed to
measure pole geometry features on thin film disk drive heads. The LaserMAP
software integrates video and laser technology for critical dimensional
measurement applications in the semiconductor, electronic packaging, computer
peripherals and medical device markets.
Page 4
Industrial and Scientific Technologies
Our Industrial and Scientific Technologies division sells elements of our core
technology such as micropositioning, vibration isolation and optical components,
systems, and accessories. These products are used across a wide range of
industrial markets for applications that range from basic research and
development activities to high-precision, low-volume manufacturing. In
addition, we sell systems and subsystems to third parties that will integrate
our products into larger systems, particularly for semiconductor manufacturing.
These products and technologies form the foundation of our integrated, automated
solutions that we sell in our other divisions. Our Industrial and Scientific
Technologies customers develop an appreciation for the quality of our products
that we believe makes them more likely to buy integrated, automated systems from
us as their need for production and test systems grows.
Motion Control Devices and Systems. We offer an extensive line of manually
operated and motorized positioning devices for both industrial and research
applications. These products include linear and rotational stages,
elevational devices and actuators, as well as simple and programmable
motion controllers for linear, stepping and DC motors. We also manufacture
a line of positioning sub-systems, for both industrial and research
applications. Our system integration capability allows us to satisfy a
wide variety of industrial process application needs to serve the
application-specific research, test and measurement, and inspection
markets.
Vibration Isolation Products. Laser and other high technology applications
require a virtually vibration-free environment. Our isolation systems
provide a stable working environment by greatly reducing vibrations due to
noise, ground motion and excitations caused by external forces or system-
mounted active components. Our isolation systems provide rigid surfaces
using an internally damped honeycomb structure mounted on pneumatic
supports. Our product line includes over 350 standard vibration isolation
systems and we have the capability to manufacture custom systems.
Optics. We manufacture and market a line of high-precision optics and
optomechanical components. These products include lenses, mirrors, prisms,
laser beam expanders, collimators, attenuators, variable beamsplitters and
spatial filters. We have the capability to produce custom optical designs
and coatings for specific applications.
Manual Positioning Components. We offer a comprehensive line of mechanical
components compatible with, and complementary to, our vibration isolation
systems. These mechanical components include products such as mirror
mounts, holders, positioners, and other accessories which are essential
elements for prototype laser and optical systems.
Subassemblies. We manufacture subassemblies that consist of a combination
of our standard products drawn from our components, optics, motion control
and vibration control product lines and custom products. We combine these
items with additional engineering to create more highly integrated
solutions to meet customer needs or for integration into our OEM customers'
products. This product line offers a strategic competitive advantage
allowing us to differentiate ourselves from competitors who only offer a
limited product selection.
Sales and Marketing
We sell our products to thousands of companies and institutions throughout the
world by means of our technically trained marketing staff, our worldwide network
of subsidiary sales offices and sales representatives, and our technical
catalogs.
We market our components and systems through our internal sales and marketing
staff, our internal field sales organization and our international network of
distributors and sales representatives. As of December 31, 1999, we had 25
company-employed field sales persons and 40 independent representatives and
Page 5
distributors located in the United States. In our international markets, we
have 25 field sales personnel based in France, Germany, the United Kingdom,
Switzerland, Italy, the Netherlands, Canada and Taiwan, together with 35
independent representatives and distributors located in countries where we do
not have a direct presence. Our customers often have unique technical
specifications and manufacturing processes, and may require specific system,
subsystem or component designs. This requires close cooperation between our
sales representatives and distributors and our engineering staff, and results in
long sales cycles for our products, up to 12 months.
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. Either party can terminate the agreement without cause by 90 days
written notice to the other party or immediately by written notice to the other
party, upon the occurrence of certain specified events. These agreements are
generally not assignable without our prior approval. Most agreements are
structured to provide distributors with sales discounts off of our domestic list
price. Representatives are generally paid commissions for sales of our
products. No single independent representative or distributor accounted for
more than 4% of our revenues in 1999 and all independent representatives and
distributors combined accounted for less than 10% of our revenues in 1999.
In addition to our sales representatives and distributors, we also market our
standard products through our product catalogs and our website. Our principal
marketing tool for the scientific market is our comprehensive set of product
catalogs. These documents, numbering approximately 1100 pages in total, provide
detailed product information as well as extensive technical and applications
data. We publish these catalogs in English, French, German and Japanese and
mail them annually to more than 100,000 potential customers. Our site on the
World Wide Web (http://www.newport.com) addresses the large and rapidly growing
Internet-savvy portion of our customer base. As the World Wide Web continues to
gain acceptance within our core markets, this tool will provide us and our
customers with even greater advantages. Our Web site provides our customers
with access to our latest products, a literature and information request form,
technical/tutorial and application related material, market surveys, sales
information (including our catalogs), the ability to purchase a majority of our
standard products and comprehensive company and financial overviews.
Research and Product Development
We continually seek to improve our technological position through internal
research and product development and licensing and acquisitions of complementary
technologies. We currently have 149 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 our
customers. In addition, we regularly investigate new ways to combine components
manufactured by our various divisions to produce innovative technological
solutions for the markets we serve. Our research and development expenses were
$13.3 million, or 9.4% of net sales, in 1999 and $11.7 million, or 8.7% of net
sales, in 1998. We are committed to continued product development and expect
that R&D expenditures will increase in absolute dollars in future periods.
Our research and development efforts may not be successful, our new products may
not be developed on a timely basis or achieve customer acceptance, and our
customers' products may not achieve market acceptance. Failure to develop, or
introduce on a timely basis, new products or product enhancements that achieve
market acceptance could materially adversely affect our business, operating
results or financial condition.
Page 6
Competition
The markets for our products are intensely competitive and characterized by
rapidly changing technology. We believe that the primary competitive factors in
our markets are:
. product features and performance;
. quality and reliability;
. 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 our various markets against a number of companies, many 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 the fiber optic
communications market, our primary competition currently comes from certain of
our existing and potential customers, who have developed or may develop their
own manufacturing and test equipment. In the video metrology market, our
primary competitors are currently Optical Gauging Products, Mitutoyo, View
Engineering and Deltronic.
In addition to our current competitors, we believe that new competitors, some of
which 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.
Intellectual Property and Proprietary Rights
We have a number of patents, trademarks, exclusive marketing rights and
licenses. We believe that our business relies primarily on our product
performance, experience and marketing skill, and is not dependent upon patent
rights. Although we continue to implement protective measures, including
requiring all of our employees and certain key suppliers and consultants to sign
nondisclosure agreements, and we intend to defend our proprietary rights,
policing unauthorized use of our technology or products is difficult and these
measures may not be successful. 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 our components and systems at our domestic
manufacturing facilities located in Irvine, Garden Grove and San Luis Obispo,
California, Longmont, Colorado and Plymouth, Minnesota. Our international
manufacturing facilities are located in France. A portion of our research and
development facilities, our corporate headquarters and other critical business
operations are located near major earthquake faults. Operating results could be
materially affected in the event of an earthquake or other natural disasters.
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 seek to design and manufacture components internally for our
integrated systems, although on a limited basis we purchase
Page 7
completed products from certain 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. 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 December 31, 1999, we had 903 employees worldwide. None of our employees
are represented by a union. We believe that our relationship with our employees
is good.
Backlog
The consolidated backlog of all our products totaled $31.7 million, $22.5
million and $22.6 million at December 31, 1999, 1998 and 1997, respectively. We
manufacture a significant portion of our products for inventory to provide the
capability to make shipments upon receipt of an order. The remainder of our
products are made to order with typical lead times of three to twelve weeks.
Because of these short response times and because orders are generally
cancelable with little or no penalty, we do not believe that our backlog of
orders at any particular date is a meaningful indicator of our sales for any
succeeding period.
As a result of manufacturing products in advance of receiving orders, we may at
any given time have excess levels of inventory. Such excess levels of
inventories increase our expenses and the amount of our resources invested in
working capital. In addition, as our markets are characterized by rapid
technological change, excess inventory levels increase the risk of product
obsolescence.
Investments
Apart from the ownership of subsidiaries detailed in Exhibit 21 of this Form 10-
K, we have minority ownership interests in several domestic companies involved
in manufacturing laser-related and other high technology products.
ITEM 2 Properties
Our headquarters and principal California manufacturing operations are located
in Irvine, California. We lease this facility under a fifteen-year lease
expiring in March 2007. In addition, we have manufacturing operations in owned
facilities at Beaune and La Boulonnie, France and in leased facilities at Garden
Grove, California, San Luis Obispo, California, Longmont, Colorado and Plymouth,
Minnesota. We lease office space in Santa Clara, California for our Western
Region sales, service and application center. We own a sales and administration
office in Evry, France and lease sales and service offices in Germany, England,
Switzerland, Italy, the Netherlands, Canada and Taiwan, with leases expiring at
various dates through 2011. Our centralized European distribution center,
formerly located at leased facilities in the Netherlands, was relocated to our
facility in Beaune, France during the second quarter of 1999. We believe that
these facilities are adequate for our current needs and that suitable additional
or substitute space will be available in the future to accommodate expansion of
our operations. In 1991, we acquired, in connection with the acquisition of
Micro-Controle, a building and land in Garden City, New York and several
properties and buildings at various locations in France. During the first
quarter of 1995 we relocated our Garden City, New York manufacturing operations
to Irvine, California and leased the New York property. In 1998, we sold this
property for approximately $2.0 million.
Page 8
ITEM 3 Legal Proceedings
In August 1999 Newport Electronics, a manufacturer of electronic devices, filed
suit against us in Federal District Court in Connecticut, claiming that our use
of the "Newport" trademark infringes their rights with respect to such mark. We
have filed a counterclaim, and have filed an opposition to their trademark
before the Trademark Trial and Appeal Board. We intend to vigorously defend
this litigation, however, due to the fact that discovery has not yet occurred,
we are unable to predict the outcome of the cases. These cases, if adversely
determined, could have certain adverse effects on our business, including
potential monetary damages and being enjoined from using the "Newport" mark in
conjunction with certain classes of products.
Other than the foregoing, we are not a party to any material litigation.
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, 1999.
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 NASDAQ symbol
NEWP. As of December 31, 1999, we had 1,408 common stockholders of record.
Refer to Note 15, Supplementary Quarterly Consolidated Financial Data
(Unaudited), of Notes to Consolidated Financial Statements on page 44 for
quarterly share price and dividend payments.
Page 9
ITEM 6 Selected Financial Data
The following table presents selected financial data of the Company and its
subsidiaries as of and for the years ended December 31, 1999, 1998, 1997, 1996,
and 1995, restated to include financial information of ROI and LCI which were
accounted for as poolings of interests
(In thousands, except percent, per share and worldwide employment):
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
FOR THE YEAR:
Net sales $141,945 $134,359 $132,594 $119,910 $101,961
Cost of sales 80,194 75,491 74,844 67,103 55,421
-------- -------- -------- -------- --------
Gross profit 61,751 58,868 57,750 52,807 46,540
Selling, general and administrative 35,593 33,017 35,825 36,741 34,441
Research and development 13,300 11,738 9,490 8,204 6,765
-------- -------- -------- -------- --------
Income from operations 12,858 14,113 12,435 7,862 5,334
Interest expense (1,785) (1,891) (1,992) (1,931) (1,593)
Other income (expense), net 166 121 (349) 477 1,137
-------- -------- -------- -------- --------
Income before income taxes 11,239 12,343 10,094 6,408 4,878
Income tax provision 2,956 3,365 3,030 1,705 1,003
-------- -------- -------- -------- --------
Net income $ 8,283 $ 8,978 $ 7,064 $ 4,703 $ 3,875
======== ======== ======== ======== ========
Percent of net sales:
Gross profit 43.5% 43.8% 43.6% 44.0% 45.6%
Selling, general and administrative 25.1 24.6 27.0 30.6 33.8
Research and development 9.4 8.7 7.2 6.9 6.6
Income from operations 9.1 10.5 9.4 6.5 5.2
Net income 5.8 6.7 5.3 3.9 3.8
PER SHARE: (1)
Net income
Basic $ 0.91 $ 1.00 $ 0.80 $ 0.54 $ 0.47
Diluted 0.88 0.96 0.77 0.52 0.45
Dividends paid 0.04 0.04 0.04 0.04 0.04
Equity (diluted) 8.16 7.56 6.61 6.39 6.18
AT YEAR END:
Cash and marketable securities $ 2,721 $ 5,335 $ 7,456 $ 3,375 $ 1,524
Customer receivables, net 32,239 25,798 23,372 23,418 19,767
Inventories 36,386 31,260 28,326 28,954 22,744
Other current assets 5,794 6,713 7,850 6,782 4,868
-------- -------- -------- -------- --------
Current assets 77,140 69,106 67,004 62,529 48,903
Investments and other assets 8,461 6,451 5,830 5,191 4,557
Property, plant and equipment 25,738 22,696 22,994 24,045 22,327
Goodwill, net 10,914 12,220 10,133 11,612 8,161
-------- -------- -------- -------- --------
Total assets $122,253 $110,473 $105,961 $103,377 $ 83,948
======== ======== ======== ======== ========
Current liabilities $ 30,968 $ 20,608 $ 22,689 $ 20,787 $ 20,330
Long-term debt 12,715 17,536 21,027 23,464 9,899
Other liabilities 1,407 1,359 1,587 1,697 1,032
Stockholders' equity 77,163 70,970 60,658 57,429 52,687
-------- -------- -------- -------- --------
Total liabilities and equity $122,253 $110,473 $105,961 $103,377 $ 83,948
======== ======== ======== ======== ========
MISCELLANEOUS STATISTICS
Working capital $ 46,172 $ 48,498 $ 44,315 $ 41,742 $ 28,573
Common shares outstanding 9,232 9,119 8,951 8,890 8,699
Annual average worldwide employment 827 803 766 728 640
Sales per employee $ 172 $ 167 $ 173 $ 165 $ 159
(1) Net income and equity per share (diluted) for all periods prior to 1997
have been restated as necessary to conform with the requirements of Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
Page 10
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 our 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 significant factors that
have affected our results of operations and financial condition during the
period included in the accompanying financial statements. This discussion
should be read in conjunction with the financial statements and associated
notes.
In October 1998, we acquired Environmental Optical Sensors, Inc ("EOSI"), a
provider of high precision assembly and test equipment for the fiber optic
communications market. 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 products and systems. These
acquisitions were accounted for using the purchase method, as described more
fully in Note 2 to the consolidated financial statements on page 34 of this Form
10-K. This discussion includes the effect of our acquisitions of EOSI for 1999
and 1998, and the effect of our acquisition of NPOC for 1999.
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 $139.4 million, while net income would not have been materially
different. Earnings per share were not impacted by the change.
RESULTS OF OPERATIONS
Financial Analysis The following table sets forth, for the periods indicated,
certain income and expense items expressed as a percent of our net sales and as
period-to-period percent increases or decreases:
Period-to-Period
Percent of Net Sales Increase (Decrease)
-------------------- -------------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 5.6% 1.3%
Cost of sales 56.5 56.2 56.4 6.2 0.9
----- ----- -----
Gross profit 43.5 43.8 43.6 4.9 1.9
Selling, general and
administrative expense 25.1 24.6 27.0 7.8 (7.8)
Research and
development expense 9.4 8.7 7.2 13.3 23.7
----- ----- -----
Income from operations 9.1 10.5 9.4 (8.9) 13.5
Interest expense (1.3) (1.4) (1.5) (5.6) (5.1)
Other income (expense), net 0.1 0.1 (0.3) 37.2 134.7
----- ----- -----
Income before income taxes 7.9 9.2 7.6 (8.9) 22.3
Income tax provision 2.1 2.5 2.3 (12.2) 11.1
----- ----- -----
Net income 5.8 6.7 5.3 (7.7) 27.1
===== ===== =====
Net Sales For 1999, 1998 and 1997, our net sales totaled $141.9 million, $134.4
million and $132.6 million, respectively. Net sales for 1999 increased $7.5
million, or 5.6%, as compared with 1998, due
Page 11
primarily to sales increases in the fiber optic communications and semiconductor
markets, offset partially by decreases in sales to the computer peripherals and
aerospace and research markets. Net sales for 1998 increased $1.8 million, or
1.3%, as compared with 1997, due primarily to sales increases in the fiber optic
communications and research markets, offset in part by sales declines in the
semiconductor and computer peripherals markets.
Our sales to the fiber optic communications market segment in 1999 were $34.3
million, an increase of $13.3 million, or 63.0%, as compared with 1998. Our
sales to the industrial metrology market in 1999 were $67.4 million, an increase
of $1.1 million, or 1.8%, as compared with the prior year. Our 1999 sales to the
aerospace and research market were $40.2 million, a decrease of $6.9 million, or
14.6%, as compared with 1998. In 1998, our sales to the fiber optic
communications market were $21.0 million, an increase of $7.2 million, or 52.3%,
over 1997. Our 1998 sales to the industrial metrology market segment were $66.3
million, a decrease of $5.8 million, or 8.2%, versus 1997. Our 1998 sales to the
aerospace and research market were $47.1 million, an increase of $0.4 million,
or 1.0%, over 1997.
For 1999, 1998 and 1997, domestic sales were $90.2 million, $87.6 million and
$85.7 million, respectively. Domestic sales in 1999 increased $2.6 million, or
3.0%, versus 1998, due primarily to sales increases in the fiber optic
communications and semiconductor markets of $10.5 million, or 89.6%, and $1.5
million, or 16.4%, respectively, offset partially by a decrease of $4.6 million,
or 35.6%, in sales to the computer peripherals market and a decrease of $4.5
million, or 16.4%, in sales to the aerospace and research market. Domestic sales
in 1998 increased $1.9 million, or 2.1%, as compared with 1997, due principally
to sales increases of $5.4 million, or 86.0%, and $2.1 million, or 8.4%, to the
fiber optic communications and aerospace and research markets, respectively,
offset partially by sales declines in the semiconductor and computer peripherals
markets of $3.6 million, or 27.8%, and $2.1 million, or 13.9%, respectively. The
domestic semiconductor and computer peripherals markets were negatively impacted
by the economic situation in Asia and overcapacity throughout much of 1998, both
of which resulted in lower demand for the capital equipment we supply to these
markets.
International sales totaled $51.7 million, $46.8 million and $46.9 million for
1999, 1998 and 1997, respectively. For 1999, international sales increased $4.9
million, or 10.7%, versus 1998. 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 $49.2 million. The increase in
international sales in 1999 as compared with 1998 was due primarily to an
increase of $2.8 million, or 29.9%, in sales to international fiber optic
communications customers, an increase of $4.3 million, or 31.9%, in sales of
metrology products to international life and health science OEM customers, and
an increase in international sales to the semiconductor market of $0.3 million,
or 12.2%, offset in part by a decline in sales to international aerospace and
research customers of $2.4 million, or 12.1%. Geographically, European, Canadian
and Pacific Rim sales in 1999 increased $2.2 million, or 7.1%, $2.5 million, or
65.3%, and $1.5 million, or 16.2%, respectively, over 1998, while sales to Latin
American customers decreased $1.2 million, or 53.1%. International sales in 1998
decreased $0.1 million versus 1997. Sales in 1998 to European markets,
reflecting our efforts to expand commercial market penetration, grew $2.7
million, or 10%, over 1997, with sales in France, Germany, the Netherlands, the
United Kingdom and Switzerland accounting for most of the increase. Negative
foreign exchange rate effects on European sales in 1998 totaled $0.7 million.
Sales to Asian markets in 1998 declined $5.5 million, or 37%, as compared with
1997, with Hong Kong, Korea, Taiwan and the ASEAN countries accounting for most
of the decrease and sales into Japan increasing $0.7 million. Sales into Canada
and Latin America grew $2.7 million, or 82%, over 1997. Canada and Latin America
sales were also negatively impacted by a foreign exchange rate effect, which
totaled $0.2 million.
Gross Margin Gross margin was 43.5%, 43.8% and 43.6% for 1999, 1998 and 1997,
respectively. Our gross margin remained essentially unchanged for all three
years. A mix shift in sales towards our photonics product lines, which generally
have higher margins, have been offset primarily by higher growth rates in sales
to OEM customers, which generally have lower margins, and lower sales and
marketing
Page 12
expenses. We anticipate that these offsetting trends are likely to continue in
future periods.
Selling, General and Administrative (SG&A) Expense SG&A expenses totaled $35.6
million, $33.0 million and $35.8 million for 1999, 1998 and 1997, respectively,
representing 25.1%, 24.6% and 27.0% of net sales in the respective years. Our
SG&A expenses in 1999 increased $2.6 million, or 7.8%, versus 1998, due in part
to the inclusion of an additional month of expenses from the change in European
reporting, which added $0.9 million of expenses to 1999, and to the inclusion of
EOSI for a full year in 1999 and the acquisition of NPOC, which collectively
added $0.6 million of expenses in 1999 for which there were no comparable
expenses in 1998. Finally, higher international trade show activity and
increased sales commissions also contributed to the increase in expenses versus
1998. SG&A expenses in 1998 decreased by $2.8 million, or 7.8% versus 1997, due
primarily to decreased costs for incentive compensation programs, lower
advertising expenses, reduced sales and marketing expenses in Europe that
resulted from changes made in 1997 to the European sales organization and to a
favorable exchange rate effect in Europe of $0.3 million.
Research and Development (R&D) Expense R&D expenses totaled $13.3 million,
$11.7 million and $9.5 million for 1999, 1998 and 1997, respectively. R&D
expenses represented 9.4%, 8.7% and 7.2% of net sales in 1999, 1998 and 1997,
respectively. Our R&D expenses in 1999 increased $1.6 million, or 13.3%, and our
R&D expenses in 1998 increased $2.2 million, or 23.7%, as compared with 1997.
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 extending the range of our automated packaging and test
equipment product lines for the fiber optic communications market, technology
enhancements to the LaserWeld and AutoAlign packaging workstation, development
of laser diode burn-in and characterization systems and new products and
software for our Video Metrology Division. We are committed to continued product
development and expect that R&D expenditures will increase in absolute dollars
in future periods.
Interest Expense Our interest expense totaled $1.8 million, $1.9 million and
$2.0 million for 1999, 1998 and 1997, respectively. Although a majority of our
debt is at fixed interest rates, we anticipate that interest expense for 2000
will decrease slightly from 1999 because our long term debt will be reduced by
principal payments of $1.5 million in the second quarter and $2.5 million in the
fourth quarter.
Taxes Based On Income The effective tax rates for 1999, 1998 and 1997 were
26.3%, 27.3% and 30.0%, respectively. The decrease in the effective tax rate for
1999 compared with 1998 and 1998 compared with 1997 was primarily the result of
improved profitability at our European operations resulting in the increased
utilization of foreign tax loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by our operating activities in 1999 of $3.7 million was
primarily attributable to our operating income plus non-cash items, principally
depreciation and amortization, offset in part by changes in operating assets and
liabilities. Our customer receivables increased by $6.4 million, or 25.0%, in
1999, while our sales grew by 5.6% during the same period. Substantially all of
this sales growth occurred in the fourth quarter of 1999, thus resulting in a
disproportionate increase in customer receivables relative to sales. Our
inventories increased 16.4% in 1999 over 1998 levels, due primarily to
production planning associated with our goal of maintaining competitive
manufacturing lead times, maintaining higher levels of certain inventory items
in conjunction with our Year 2000 preparation, and to the inclusion of inventory
from NPOC in 1999 for which there was no comparable inventory in 1998. We
believe that we must maintain certain levels of inventory in order to ensure
that the lead times to our customers remain competitive. Our accounts payable
increased $0.6 million, or 10.3%, in 1999 compared with 1998, primarily as a
result of higher inventory levels.
Net cash used in investing activities in 1999 of $13.4 million was attributable
principally to our purchases of property, plant and equipment ($4.8 million),
costs associated with our acquisitions of businesses ($6.6
Page 13
million), payments for an equity investment ($1.1 million) and capitalization of
software development costs ($2.3 million), partially offset by the net proceeds
on the sale of an equity investment and other property ($1.3 million).
Net cash provided by financing activities in 1999 of $6.9 million was
attributable principally to an increase in the utilization of our line of credit
and the issuance of common stock in connection with stock option and purchase
plans. This increase was offset in part by a decrease in long-term borrowings
and the repurchase of stock under our share repurchase program. During 1999, we
repurchased 111,000 shares under our share repurchase program for an aggregate
purchase price of $1.6 million.
At December 31, 1999, we had in place a $15.0 million unsecured line of credit
expiring October 29, 2002 and a $10.0 million unsecured line of credit expiring
October 27, 2000. 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 December 31, 1999, there was $10.0
million outstanding under the $15.0 million line of credit, with $14.4 million
available under the combined lines, after considering outstanding letters of
credit.
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 continuation of the share repurchase program over
at least the next year. However, this belief is based upon many assumptions and
is subject to numerous risks (see "Risks Relating To Our Business," below), 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 to finance any such acquisitions.
Impact of Year 2000
In prior years, we have discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe that those systems
successfully responded to the Year 2000 date change. Our remediation efforts
consisted primarily of upgrading the hardware and software of our primary
enterprise systems and were accomplished as part of the normal course of
upgrading our systems to support current and anticipated growth. Accordingly,
the $1.5 million cost of acquiring the upgraded computer hardware and software
has been capitalized. We are not aware of any material problems resulting from
Year 2000 issues, either with our products, our internal systems, or the
products and services of third parties. We will continue to monitor our mission
critical computer applications and those of our suppliers and vendors throughout
the year 2000 to ensure that any residual Year 2000 matters that may arise are
addressed promptly.
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
Page 14
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 our 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.
Pending Adoption of Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards
for recording derivatives in interim and annual financial reports requiring that
all derivative instruments be recorded as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and therefore we will adopt the new requirements effective with the filing
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. We do
not anticipate that the adoption of SFAS No. 133 will have a significant impact
on our results of operations, financial position or cash flow.
RISKS RELATING TO OUR BUSINESS
Our markets and industry are subject to rapid technological change, and if we do
not introduce new innovative products nor 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 and
improve our existing products, to meet the demands of the marketplace for new
and improved technology, and be price competitive. We may not be successful in
selecting, developing, manufacturing or marketing new products on a timely or
cost-effective basis. If we fail to adequately achieve any one of these
objectives, our business and results of operations would be harmed.
We face significant and unpredictable risks from doing business in foreign
countries.
Our business is subject to risks inherent in conducting business
internationally. In 1999, 1998 and 1997, our international revenues accounted
for approximately 36.5%, 34.8% and 35.3%, respectively, of our total net sales,
with a substantial portion of this in Europe. We expect that international
revenues will continue to account for a significant percentage of our total net
sales for the foreseeable future. A significant portion of our operations are
located in Europe. As a result of our international sales and presence, we face
various risks, which include:
. changes in the political or economic conditions in a country or region where
we manufacture or sell our products;
. currency fluctuations;
. a greater difficulty of administering our business globally;
. difficulties in staffing and managing each of our individual foreign
operations;
Page 15
. compliance with multiple and potentially conflicting regulatory requirements
such as export requirements, tariffs, and other barriers;
. longer accounts receivable cycles;
. overlapping or differing tax structures;
. differing protection of intellectual property; and
. trade restrictions and licensing requirements.
As a result of our international sales and operations, our exposure to
fluctuations in foreign exchange rates is particularly acute and could affect
the sales price in local currencies of our products in foreign markets. In
addition, exchange rate fluctuations could increase the costs and expenses of
our foreign operations or require us to modify our current business practices.
Significant negative changes in exchange rates could significantly harm our
results of operations.
Our quarterly operating results are difficult to predict, and if we fail to meet
the expectations of investors or securities analysts, the market price of our
common stock would likely decline significantly.
Our operating results in any given quarter have fluctuated and will likely
continue to fluctuate. The fluctuations are typically unpredictable, and are
the result of numerous factors including:
. the timing of customer orders within a given quarter;
. fluctuations in economic conditions in the markets for our products;
. our timing in introducing new products;
. the demand for our products and the products sold by our customers;
. 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 mix of products we sell in each of the markets in which we do business;
. the availability and cost of key components we require to manufacture and
distribute our products;
. fluctuations in foreign currency exchange rates;
. the timing of our competitors in introducing new products;
. levels of expenses; and
. our manufacturing capacity.
Page 16
In addition, we may in the future choose to reduce prices, increase spending, or
add or eliminate products in response to actions by our competitors or as an
effort to pursue new market opportunities. This may also adversely affect our
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, are
not meaningful and should not be construed as reliable indicators of our future
performance. Given all of the factors that can affect quarterly revenue
results, our results may be below the expectations of market analysts and
investors in any given future quarter, which would likely cause the trading
price of our common stock to drop.
Cyclical declines in the markets for our products could negatively affect our
business.
We do business in several cyclical industries and we are susceptible to any
downturns in each. In particular, the semiconductor industry, where we do a
substantial amount of our business, is particularly prone to abrupt downward
turns, as was the case in 1998 and 1999. When the business cycle of one of
these industries is in decline, the businesses of companies that supply products
to that particular industry, such as our company, also generally experience a
downturn since the demand for capital equipment to manufacture the products of
that industry is also generally reduced. Other industries in which we do
business can be seasonal in the demand for products. If one or more of the
industries in which we operate experiences a downturn, our business and results
of operations could be significantly harmed.
We are highly dependent on the growth of the fiber optic communications industry
and on our customers who serve this industry.
A substantial portion of our current and future business comes from sales to
companies that manufacture components for fiber optic communications systems.
The fiber optics communications market is 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 this market, 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 with fiber optic systems vendors, it is likely that such 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 the fiber optic
communications market as a whole to grow, would have a significant negative
effect on our business and results of operations.
We offer products for multiple industries and must face the challenges of
supporting the distinct needs of each of our markets.
We market products for the fiber optic component, semiconductor capital
equipment, industrial metrology, aerospace and research markets. Because we
operate in multiple markets, we must work constantly to understand the product
needs, required standards and technical challenges of several different
industries and must devote significant resources to developing different
products for these industries. Product development is costly and time
consuming, and if our product offerings in any particular market are not
competitive, our business and results of operations would be harmed.
Furthermore, our decision to continue to offer products for a given market or to
enter new markets is based in part on our judgment of the size, growth rate and
other factors that determine the attractiveness of a particular market. If our
analyses of a market are incorrect, our business and results of operations would
be harmed. 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 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, which would have a negative effect
on our business and results of operations.
Page 17
If we are unable to attract, retain and motivate our 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,
particularly for employees with expertise in fiber optics. If we are unable to
hire sufficient numbers of employees with the experience and skills we need, our
business and results of operations would be harmed.
Any decline in our customers' research budgets will negatively impact our
operating results.
A significant amount of our revenues are derived from selling our products to
research institutions in the United States and various foreign countries. We
anticipate that sales to such institutions will continue to account for a
significant portion of our revenues in the foreseeable future. Thus, our future
performance is directly dependent in part upon the capital expenditure budgets
of our research institution customers and the continued demand by such customers
for our products. Domestic and foreign research institutions could experience
constraints on their capital expenditure budgets due to factors such as reduced
governmental funding of research activities, changes in research focus and
reduced defense spending. Our operating results may be subject to fluctuations
as a consequence of funding constraints. If funding constraints are imposed and
if they persist for an extended period of time, our business and results of
operations would be harmed.
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 solutions on their
own. Many of our existing and potential competitors are more established, enjoy
higher name recognition and possess greater financial, technological and
marketing resources. Other competitors are relatively small and highly
specialized firms, which enjoy the ability 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.
We may acquire additional businesses, products or technologies, which could
negatively affect our business.
We have historically achieved growth through a combination of internally
developed new products and acquisitions. As part of our strategy to sustain
growth, we expect to continue to pursue acquisitions of other companies,
technologies and complementary product lines. Any acquisition would involve
risks, including:
. our ability to manufacture and sell the products of the businesses acquired;
. a decline in demand by our customers for these acquired products;
. our ability to integrate the acquired business' operations, products and
personnel;
. our ability to retain key personnel of the acquired businesses;
. our ability to expand our financial and management controls and reporting
systems and
Page 18
procedures to incorporate the acquired businesses;
. diversion of management's time and attention;
. customer dissatisfaction or performance problems with the products or
services of an acquired firm; and
. assumption of unknown liabilities, or other unanticipated events or
circumstances.
Any of these risks could materially harm our business, financial condition and
results of operations. We cannot assure you that any business that we may
acquire will achieve anticipated revenues and operating results, which could
decrease the value of the acquisition to us.
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 are unavailable in adequate numbers 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 results of operations.
If any third parties claim that we infringe upon their intellectual property
rights, we could face substantial licensing or litigation costs, or could be
forced to stop selling some of our products.
Our products are complex and include substantial technology. It is possible
that technology incorporated in our products, or the trademarks under which they
are marketed, may infringe the intellectual property rights of others. Third
parties who believe that our products or trademarks infringe upon their
intellectual property may assert such rights, which could result in litigation.
For example, we are currently engaged in litigation with a third party that
claims that our use of the "Newport" mark infringes their rights. Any
litigation over intellectual property rights, whether with or without merit,
would be time consuming, expensive and distracting to our management.
Litigation could also subject us to extensive liabilities, including monetary
damages and injunctions preventing us from selling certain of our products or
from using one or more of our trademarks. Moreover, we could be forced to enter
into licensing agreements or sell the rights to our products or technology on
unfavorable terms, in order to avoid claims of infringement. Unfavorable
outcomes regarding claims of infringement of the intellectual property rights of
third parties could harm our business.
We must protect and enforce our intellectual property rights to remain
competitive.
Our success depends in part on our ability to protect our intellectual property
rights such as patents, trademarks, copyrights, trade secrets, confidentiality
agreements and license agreements. If we are unsuccessful in protecting and
enforcing our intellectual property rights, our business and results of
operations could be harmed. In addition, our pending and future patent and
trademark applications may be rejected, or our competitors may contest the scope
or validity of our applications or existing rights, which could weaken our
competitive position.
Third parties may infringe our intellectual property rights or devise designs
that circumvent our intellectual property, and we may not be able to detect this
unauthorized use or effectively enforce our rights. If any
Page 19
third parties infringe our intellectual property rights, we could incur
significant costs in defending our rights. Since we do business in foreign
countries, we face the additional challenge of protecting and enforcing our
intellectual property rights worldwide. The laws of many foreign countries may
not protect our intellectual property rights as fully as those of the United
States. Unauthorized use or misappropriation of our intellectual property, and
our ability to remedy the misuse, could materially harm our business.
We are required to comply with government regulations, and we may incur
significant expenses complying with these regulations.
Many of our products are subject to government regulations on the federal, state
and local levels, as well as to the government regulations of any of the foreign
countries where we do business. In addition, our products must comply with
relevant industry standards, such as ISO 9000 and NEBS. We are required to make
substantial efforts to ensure compliance with these regulations and standards
and to remedy any deficiencies. If we fail to comply with all required
government regulations, we could incur fines or be forced to curtail segments of
our business. In addition, many of our customers operate in regulated
industries, which means that we must comply with any applicable regulations and
standards within these industries. Our failure to comply with any of the
regulations and standards will likely impair our ability to remain competitive
and could harm our business and results of operations.
We may be subject to the rules and regulations governing government contracts,
and failure to comply could result in a decline in our operating results.
We regularly enter into contracts with government agencies, or subcontracts with
government contractors, which require us to abide by the special rules and
regulations governing government contracts. We may also be required to submit
to investigations by government agencies to ensure compliance with the rules and
regulations governing government contracts or with the provisions of any such
government contracts. If any governmental agency elected to investigate or
review our practices with respect to government contracts, we would be required
to cooperate with the investigation, which would likely result in significant
distraction for management and other key employees. If we fail to abide by the
rules and regulations governing government contracts or to abide by the
provisions of any government contracts, our business and operating results could
be harmed.
Our sales cycle is long and difficult to predict, which may cause fluctuations
in our operating results.
Many of our products are complex, and customers for such products require
substantial time to make purchase decisions. These customers often perform, and
require us to perform, elaborate testing and evaluation of our products before
committing to purchasing them. Our sales cycle for such products typically
varies and is difficult to predict, but can last as long as one year. Orders
expected to be shipped in one quarter may slip to subsequent quarters, which
would cause our operating results to fluctuate from period to period, or cause
us not to meet the expectations of investors or market analysts.
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 contain defects
or undetected errors. As a result we could incur substantial expenses in fixing
any defects or undetected errors, which could result in damage to our
competitive position and harm our results of operations and business.
We may incur expenses incident to complying with environmental regulations.
Page 20
There are aspects of our business that involve substances that could pose a
threat of contamination to the environment. Although we believe we have
complied with all environmental regulations and that we have implemented all
necessary safeguards, we may in the future incur expenses from environmental
remediation, or in connection with complying with current or future
environmental regulations. Environmental remediation is costly, time consuming
and could result in lengthy proceedings that could distract our management. If
we are required to remediate any environmental hazard, our business, results of
operations and financial conditions could be harmed.
Natural disasters 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.
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
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.
International operations constituted approximately 7% of our 1999 consolidated
operating profit. 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 and Swiss franc. We estimate that a 10% change in foreign
exchange rates would not have a material impact on our reported operating
profit. We believe that this quantitative measure has inherent limitations
because, as we 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.
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. The impact of unrealized foreign exchange translation gains and
losses is disclosed in the Consolidated Statement of Comprehensive Income on
page 31.
Page 21
Interest Rate Risk
Our exposure to interest rate risk is limited to our unsecured lines of credit
which 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% change in
interest rates would not have a material impact on our reported operating profit
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
Consolidated financial statements of the Company as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, the
report of independent auditors thereon and the Company's unaudited quarterly
financial data for 1999 and 1998 are referenced in Item 14 herein.
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Page 22
PART III
ITEM 10 Directors and Executive Officers of the Registrant
The information required hereunder is incorporated by reference to the Company's
Proxy Statement to be filed within 120 days of December 31, 1999 in connection
with its May 17, 2000 Annual Meeting of Stockholders.
ITEM 11 Executive Compensation
The information required hereunder is incorporated by reference to the Company's
Proxy Statement to be filed within 120 days of December 31, 1999 in connection
with its May 17, 2000 Annual Meeting of Stockholders.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated by reference to the Company's
Proxy Statement to be filed within 120 days of December 31, 1999 in connection
with its May 17, 2000 Annual Meeting of Stockholders.
ITEM 13 Certain Relationships and Related Transactions
In November 1996, the Company entered into a Consulting Agreement with Richard
E. Schmidt, a director of the Company and the Company's former Chairman and
Chief Executive Officer, pursuant to which Mr. Schmidt provides consulting
services to the Company in exchange for a consulting fee equal to $100,000 per
year. Such Agreement was renewable by the Company for additional one-year terms
through December 31, 2001. In connection with such Agreement, the Compensation
Committee of the Board of Directors amended certain option and restricted stock
agreements with Mr. Schmidt to provide that (1) the vesting of the options was
accelerated and such options were exercisable during the term of the Consulting
Agreement and (2) the restricted stock would continue to vest in accordance with
the original time schedule. In January 2000, the Company terminated the
remaining two years of the Agreement with Mr. Schmidt and granted him 3,013
shares of restricted stock in lieu of renewing the Agreement. The shares fully
vest one year after the grant.
The Company has entered into Severance Compensation Agreements with certain of
its officers. See response to Item 11 above.
Page 23
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K
(a) 1. Financial Statements and Financial Statement Schedules
Report of Independent Auditors 27
FINANCIAL STATEMENTS:
Consolidated income statement
for the years ended December 31, 1999, 1998 and 1997 28
Consolidated balance sheet
at December 31, 1999 and 1998 29
Consolidated statement of cash flows
for the years ended December 31, 1999, 1998 and 1997 30
Consolidated statement of stockholders' equity
for the years ended December 31, 1999, 1998 and 1997 31
Consolidated statement of comprehensive income
for the years ended December 31, 1999, 1998 and 1997 31
Notes to consolidated financial statements 32 - 44
FINANCIAL STATEMENT SCHEDULES:
II - Consolidated valuation accounts 45
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.
2. Exhibits
The exhibits set forth below are filed as part of this Annual Report:
Exhibit 3.1 Restated Articles of Incorporation of Newport
Corporation, a Nevada Corporation, as amended to date
(incorporated by reference to exhibit in the Company's
1987 Proxy Statement).
Exhibit 3.2 Restated Bylaws of Newport Corporation, a Nevada
Corporation, 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).
Exhibit 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).
Exhibit 10.2 1992 Incentive Stock Plan (incorporated by reference to
exhibit in the Company's 1992 Proxy Statement).*
Exhibit 10.3 Employee Stock Purchase Plan, as amended (incorporated
by reference to Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).*
Page 24
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K
- -------------------------------------------------------------------------
(Cont'd)
--------
Exhibit 10.4 Form of Severance Compensation Agreement between Newport
Corporation and certain 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).*
Exhibit 10.5 Note Agreement dated as of May 2, 1996 between Newport
Corporation and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10.8 of the Company's
Form 10-Q for the quarter ended March 31, 1996).
Exhibit 10.6 Severance Compensation Agreement dated as of April 8, 1996,
between Newport Corporation, a Nevada Corporation, and
Robert J. Phillippy, Vice President and General Manager
(incorporated by reference to Exhibit 10.2 of the Company's
Form 10-Q for the quarter ended September 30, 1996).*
Exhibit 10.7 Severance Compensation Agreement dated as of May 1, 1996,
between Newport Corporation, a Nevada Corporation, 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).*
Exhibit 10.8 Consulting Agreement dated November 7, 1997 between Newport
Corporation, a Nevada Corporation, and Richard E. Schmidt, a
director of the Company (incorporated by reference to
Exhibit 10.14 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
Exhibit 10.9 364-Day $10,000,000 Credit Agreement dated as of October 29,
1999 between Newport Corporation and ABN AMRO Bank, N.V.
Exhibit 10.10 3-Year $15,000,000 Credit Agreement dated as of October 29,
1999 between Newport Corporation and ABN AMRO Bank, N.V.
Exhibit 10.11 1999 Stock Incentive Plan*
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Auditors
Exhibit 27 Financial Data Schedule (Article 5 of Regulation S-X)
_____________
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(a) (3) of Form 10-K
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the quarter ended December 31,
1999.
Page 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEWPORT CORPORATION
/s/ ROBERT G. DEUSTER March 29, 2000
- -------------------------------------------------------------------------------------------
Robert G. Deuster, President and Chief Executive Officer Date
(Principal Executive Officer)
/s/ ROBERT C. HEWITT March 29, 2000
- -------------------------------------------------------------------------------------------
Robert C. Hewitt, Vice President, Chief Financial Officer and Secretary Date
(Chief Financial Officer)
/s/ WILLIAM R. ABBOTT March 29, 2000
- -------------------------------------------------------------------------------------------
William R. Abbott, Vice President and Corporate Controller Date
(Principal Accounting Officer)
POWER OF ATTORNEY
The undersigned directors and officers of Newport Corporation constitutes and
appoints Robert G. Deuster and Robert C. Hewitt, 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.
/s/ R. JACK APLIN March 29, 2000
- -------------------------------------------------------------------------------
R. Jack Aplin, Member of the Board Date
/s/ ROBERT L. GUYETT March 29, 2000
- -------------------------------------------------------------------------------
Robert L. Guyett, Member of the Board Date
/s/ C. KUMAR N. PATEL March 29, 2000
- -------------------------------------------------------------------------------
C. Kumar N. Patel, Member of the Board Date
/s/ KENNETH F. POTASHNER March 29, 2000
- -------------------------------------------------------------------------------
Kenneth F. Potashner, Member of the Board Date
/s/ RICHARD E. SCHMIDT March 29, 2000
- -------------------------------------------------------------------------------
Richard E. Schmidt, Member of the Board Date
/s/ JOHN T. SUBAK March 29, 2000
- -------------------------------------------------------------------------------
John T. Subak, Member of the Board Date
Page 26
Report of Independent Auditors
The Board of Directors and Stockholders
Newport Corporation
We have audited the accompanying consolidated balance sheet of Newport
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index at 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 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 provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Newport
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, 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 25, 2000
Page 27
NEWPORT CORPORATION
Consolidated Income Statement
(In thousands, except per share amounts) Years Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Net sales $141,945 $134,359 $132,594
Cost of sales 80,194 75,491 74,844
-------- -------- --------
Gross profit 61,751 58,868 57,750
Selling, general and administrative expense 35,593 33,017 35,825
Research and development expense 13,300 11,738 9,490
-------- -------- --------
Income from operations 12,858 14,113 12,435
Interest expense (1,785) (1,891) (1,992)
Other income (expense), net 166 121 (349)
-------- -------- --------
Income before income taxes 11,239 12,343 10,094
Income tax provision 2,956 3,365 3,030
-------- -------- --------
Net income $ 8,283 $ 8,978 $ 7,064
======== ======== ========
Net income per share
Basic $ 0.91 $ 1.00 $ 0.80
Diluted $ 0.88 $ 0.96 $ 0.77
Number of shares used to calculate net income per share
Basic 9,083 8,989 8,865
Diluted 9,461 9,384 9,179
Dividends per share $ 0.04 $ 0.04 $ 0.04
See accompanying notes.
Page 28
NEWPORT CORPORATION
Consolidated Balance Sheet
(In thousands, except share data) December 31,
------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,721 $ 5,335
Customer receivables, net 32,239 25,798
Other receivables 684 2,367
Inventories 36,386 31,260
Deferred tax assets 2,626 2,703
Other current assets 2,484 1,643
-------- --------
Total current assets 77,140 69,106
Investments and other assets 8,461 6,451
Property, plant and equipment, at cost, net 25,738 22,696
Goodwill, net 10,914 12,220
-------- --------
$122,253 $110,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,816 $ 6,180
Accrued payroll and related expenses 5,536 5,566
Taxes based on income 1,235 95
Line of credit 10,000 -
Current portion of long-term debt 4,645 3,699
Other current liabilities 2,736 5,068
-------- --------
Total current liabilities 30,968 20,608
Long-term debt 12,715 17,536
Deferred tax liabilities 1,407 1,359
Commitments
Stockholders' equity:
Common stock, $0.35 stated value, 20,000,000
shares authorized; 9,232,000 shares
issued and outstanding at December 31, 1999;
9,119,000 shares at December 31, 1998 3,231 3,192
Capital in excess of stated value 9,398 8,573
Unamortized deferred compensation (417) (548)
Accumulated other comprehensive loss (6,635) (3,916)
Retained earnings 71,586 63,669
-------- --------
Total stockholders' equity 77,163 70,970
-------- --------
$122,253 $110,473
======== ========
See accompanying notes.
Page 29
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Operating activities:
Net income $ 8,283 $ 8,978 $ 7,064
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,011 6,075 5,830
Increase in provision for losses on
receivables, inventories and investments 1,260 1,073 1,906
Deferred income taxes 251 704 87
Other non-cash items, net (489) (481) 345
Changes in operating assets and liabilities:
Receivables (6,007) (1,532) (1,269)
Inventories (5,027) (3,472) (2,051)
Other current assets (1,532) (196) (1,261)
Other assets 327 280 (78)
Accounts payable and other accrued expenses (1,530) (2,107) 925
Taxes based on income 1,126 (2,283) 798
Other, net - (1) 1
-------- ------- -------
Net cash provided by operating activities 3,673 7,038 12,297
-------- ------- -------
Investing activities:
Purchases of property, plant and equipment (4,799) (5,378) (5,034)
Disposition of property, plant and equipment 201 2,323 396
Acquisition of business, net of cash acquired (6,559) (3,561) (879)
Payments for equity investment (1,074) - -
Proceeds from sales of investments
and marketable securities 1,054 720 -
Software development costs (2,261) (779) (728)
-------- ------- -------
Net cash used in investing activities (13,438) (6,675) (6,245)
-------- ------- -------
Financing activities:
Increase in credit line 10,000 - -
Decrease in long-term borrowings (3,632) (2,360) (790)
Cash dividends paid (366) (362) (357)
Repurchase of common stock (1,589) (2,879) (3,996)
Issuance of common stock under employee
agreements including associated tax benefit 2,453 3,218 2,910
-------- ------- -------
Net cash provided by (used in) financing activities 6,866 (2,383) (2,233)
-------- ------- -------
Effect of foreign exchange rate changes on cash 285 (101) 262
-------- ------- -------
Increase (decrease) in cash and cash equivalents (2,614) (2,121) 4,081
Cash and cash equivalents at beginning of year 5,335 7,456 3,375
-------- ------- -------
Cash and cash equivalents at end of year $ 2,721 $ 5,335 $ 7,456
======== ======= =======
See accompanying notes.
Page 30
NEWPORT CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Common shares:
Shares outstanding at beginning of year 9,119 8,951 8,890
Issuance of common shares 224 340 351
Repurchase of common shares (111) (172) (290)
------- ------- -------
Shares outstanding at end of year 9,232 9,119 8,951
======= ======= =======
Common stock:
Balance at beginning of year $ 3,192 $ 3,132 $ 3,110
Issuance of common stock 75 113 117
Grants of restricted stock, net - 7 7
Repurchase of common stock (36) (60) (102)
------- ------- -------
Balance at end of year 3,231 3,192 3,132
======= ======= =======
Capital in excess of stated value:
Balance at beginning of year 8,573 8,026 8,959
Issuance of common stock 2,378 3,105 2,793
Grants of restricted stock, net - 261 168
Repurchase of common stock (1,553) (2,819) (3,894)
------- ------- -------
Balance at end of year 9,398 8,573 8,026
======= ======= =======
Unamortized deferred compensation:
Balance at beginning of year (548) (519) (548)
Grants of restricted stock, net - (268) (175)
Amortization of deferred compensation 131 239 204
------- ------- -------
Balance at end of year (417) (548) (519)
======= ======= =======
Accumulated other comprehensive loss:
Balance at beginning of year (3,916) (5,036) (2,442)
Unrealized translation gain (loss) (2,719) 1,120 (2,594)
------- ------- -------
Balance at end of year (6,635) (3,916) (5,036)
======= ======= =======
Retained earnings:
Balance at beginning of year 63,669 55,055 48,350
Dividends (366) (364) (359)
Net income 8,283 8,978 7,064
------- ------- -------
Balance at end of year 71,586 63,669 55,055
======= ======= =======
Total stockholders' equity $77,163 $70,970 $60,658
======= ======= =======
Consolidated Statement of Comprehensive Income
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Net income $ 8,283 $ 8,978 $ 7,064
Unrealized translation gain (loss) (2,719) 1,120 (2,594)
------- ------- -------
Comprehensive income $ 5,564 $10,098 $ 4,470
======= ======= =======
See accompanying notes.
Page 31
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization Newport Corporation designs, manufactures and markets high
precision components, instruments and integrated systems for the fiber optic
communications, semiconductor equipment, computer peripherals and scientific
research markets. The Company's high precision products enhance productivity and
capabilities of test and measurement and automated assembly for precision
manufacturing, engineering and research applications.
Consolidation The accompanying financial statements consolidate the accounts of
the Company and its wholly owned subsidiaries. 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 $139.4 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 obsolescence reserves,
income tax valuation and warranty reserves.
Sales A sale is recorded upon customer acceptance after all significant
obligations have been met, collectibility is probable and title has passed to
the customer. Customers have 30 days from the original invoice date (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
immaterial. 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.
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 thirty one years. In 1997 the Company changed the depreciation method for
certain machinery and equipment from an accelerated method based on a declining
balance formula to a straight line method to conform with the method used to
depreciate its other machinery and equipment. The effect of this change on the
Company's 1997 financial position, results of operations and cash flow was not
material nor does the Company expect this change to have a material impact on
future periods. Leasehold improvements are generally amortized over the term of
the lease.
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
primarily of product catalogs. The Company uses these product catalogs as its
principal marketing tools for the scientific market. Sales to this market
approximate 28% of the Company's annual revenues. The catalogs provide detailed
product information as well as extensive technical and applications data. The
catalogs are published in English, French, German and Japanese languages and are
mailed worldwide to more than 100,000 potential customers.
Page 32
The Company believes that after a period of generally 12 to 18 months, no future
benefit can be realized from these catalogs due to price changes, technological
enhancements to existing products and new product releases. As such, the Company
has established benefit periods for its various catalogs ranging from 12 to 18
months and amortizes catalog costs over this timeframe. Advertising materials of
$0.8 million and $0.2 million were reported as assets at December 31, 1999 and
1998, respectively. Advertising expense was $1.5 million, $1.4 million and $1.6
million for 1999, 1998 and 1997, respectively.
Net Income per Share Basic net income per share is computed using the weighted
average number of shares of common stock outstanding during the periods,
excluding restricted stock. Diluted net income 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 (see Note 12).
Cash and Cash Equivalents Cash and cash equivalents consist of cash-on-hand,
short-term certificates of deposit and other securities readily convertible to
cash with original maturities of less than three months.
Fair Values of Financial Instruments Fair values of cash and cash equivalents,
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.
Investments Nonmarketable investments are stated at cost, adjusted for the
Company's proportionate share of undistributed earnings.
Intangible Assets 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 fifteen to twenty years.
Patents are amortized using the straight-line method over the lives of the
patents. Licenses are amortized on a straight-line basis over the estimated
economic lives of the related assets. Accumulated amortization of intangible
assets, principally goodwill, totaled $5.2 million and $4.5 million at December
31, 1999 and 1998, respectively.
The Company examines the carrying value of goodwill and other intangible assets
to determine whether there are any impairment losses. If indicators of
impairment were present in intangible assets used in operations, and future cash
flows were not expected to be sufficient to recover the assets' carrying amount,
an impairment loss would be charged to expense in the period identified. No
event has been identified that would indicate an impairment of the value of
material intangible assets recorded in the accompanying consolidated financial
statements.
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
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 (Note 11). Foreign exchange
contracts totaled $4.3 million and $4.2 million at December 31, 1999 and 1998,
respectively.
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 complies with
the disclosures provisions of Statement of Financial
Page 33
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 The only item of accumulated other comprehensive income is
a cumulative foreign currency translation adjustment.
Pending Adoption of Statement of Financial Accounting Standards No. 133 In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording
derivatives in interim and annual financial reports requiring that all
derivative instruments be recorded as assets or liabilities, measured at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and therefore the Company will adopt the new requirements effective with
the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31,
2001. Management does not anticipate that the adoption of SFAS No. 133 will have
a significant impact on the Company's results of operations, financial position
or cash flow.
NOTE 2 ACQUISITIONS
On October 13, 1998, the Company acquired, for $3.5 million in cash plus
additional consideration based upon achievement of future milestones, all the
outstanding capital stock of EOSI, a manufacturer of tunable external cavity
diode laser systems and other components. The company is located in Longmont,
Colorado. The acquisition was accounted for as a purchase. In 1999, the Company
paid the sellers an additional $0.2 million for achieving certain milestones
which has been recorded as additional goodwill. In connection with this
acquisition the Company recorded goodwill totaling $2.8 million.
In October 1999, the Company entered into a stock purchase agreement providing
for the acquisition of the west coast commercial optics subsidiary of Corning
OCA Corporation, a subsidiary of Corning Incorporated, based in Garden Grove,
California. The transaction, completed on October 21, 1999, was accounted for
as a purchase and the commercial optics subsidiary (renamed Newport Precision
Optics Corporation), a manufacturer of specialized precision optical products
and systems, became a wholly owned subsidiary of Newport. In connection with
this acquisition the Company paid $6.3 million in cash, subject to final
settlement adjustment.
Pro-forma information for these acquisitions is not presented as neither are
material to the Company's consolidated sales or net income.
NOTE 3 CUSTOMER RECEIVABLES
The Company maintains adequate 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,
----------------
1999 1998
------- -------
Customer receivables $32,650 $26,077
Less allowance for doubtful accounts 411 279
------- -------
$32,239 $25,798
======= =======
Page 34
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,
------------------
1999 1998
------- -------
Raw materials and purchased parts $12,128 $12,412
Work in process 7,391 5,301
Finished goods 16,867 13,547
------- -------
$36,386 $31,260
======= =======
NOTE 5 INCOME TAXES
The provision for taxes based on income consists of the following:
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Current:
Federal $2,038 $ 1,999 $ 2,329
State 340 225 321
Foreign 327 437 293
Deferred:
Federal 262 674 48
State (16) 35 39
Foreign 5 (5) -
------ ------- -------
$2,956 $ 3,365 $ 3,030
====== ======= =======
The provision for taxes based on income differs from the amount obtained by
applying the statutory tax rate as follows:
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Income tax provision at statutory rate $ 3,834 $ 4,220 $ 3,432
Increase (decrease) in taxes resulting from:
Non deductible goodwill amortization 250 142 153
Foreign losses not benefited - 2 107
State income taxes, net of federal income tax benefit 214 171 238
Utilization of foreign losses (314) (21) (57)
Reduction in valuation allowance (607) (237) -
Tax credits (240) (490) -
Foreign sales corporation income (370) (516) (734)
Other, net 189 94 (109)
------- ------- -------
$ 2,956 $ 3,365 $ 3,030
======= ======= =======
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.
Page 35
In 1999 the Company reduced the valuation allowance applicable to foreign net
operating loss carryforwards by approximately $1,012,000, of which $405,000 was
allocated to goodwill, because of improvements in earnings of certain of its
European subsidiaries.
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,
------------
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 8,449 $ 9,336
Accruals not currently deductible for tax purposes and other 1,609 1,811
Valuation allowance (7,432) (8,444)
------- -------
Total deferred tax asset 2,626 2,703
------- -------
Deferred tax liabilities:
Accelerated depreciation methods used for tax purposes 977 854
Other 430 505
------- -------
Total deferred tax liability 1,407 1,359
------- -------
Net deferred tax asset $ 1,219 $ 1,344
======= =======
The Company has foreign net operating loss carryforwards totaling approximately
$23.4 million at December 31, 1999, principally expiring in the years 2007
through 2012. For financial reporting purposes, a valuation allowance has been
recorded primarily to offset the deferred tax asset related to foreign net
operating loss carryforwards. Approximately $2.1 million of the valuation
allowance will be allocated to reduce goodwill when realized. Approximately $0.4
million and $0.2 million of the valuation allowance realized was allocated to
goodwill for 1999 and 1998, respectively. As the Company's net operating loss
carryforwards and valuation allowance are largely denominated in foreign
currencies, they are subject to foreign currency translation adjustments as
described in Note 1 above and to the risks associated therewith. (See also Item
7A, Quantitative and Qualitative Disclosures About Market Risk, on Page 21 for
further discussion of exchange rate risk.) The exchange loss related to gross
net operating loss carryforwards is largely offset by a corresponding exchange
fluctuation in the valuation allowance. Accordingly, the net effect of currency
fluctuations on the net operating loss carryforwards, net of valuation
allowance, is not material.
Net income taxes paid for 1999, 1998 and 1997 totaled $2.8 million, $4.3 million
and $2.0 million, respectively.
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, including capitalized lease assets,
consists of the following:
(In thousands) December 31,
------------
1999 1998
---- ----
Land $ 1,106 $ 1,287
Buildings 6,202 7,218
Leasehold improvements 8,455 8,715
Machinery and equipment 29,161 24,063
Office equipment 13,687 11,715
------- -------
58,611 52,998
Less accumulated depreciation 32,873 30,302
------- -------
$25,738 $22,696
======= =======
Page 36
NOTE 7 INVESTMENTS AND OTHER ASSETS
Investments and other assets consist of the following:
(In thousands) December 31,
------------
1999 1998
---- ----
Nonmarketable investments $4,015 $3,661
Other assets 4,446 2,790
------ ------
$8,461 $6,451
====== ======
Nonmarketable investments consist primarily of investments in private companies,
including a $1.4 million investment in a U.S. supplier, a $1.4 million
investment in a company active in laser and electro-optical technology and a
$1.1 million investment in a photonics manufacturer. The Company made purchases
of approximately $3.8 million, $4.3 million and $4.3 million from the U.S.
supplier during 1999, 1998 and 1997, respectively.
Other assets consist primarily of capitalized software, patents and license
agreements.
NOTE 8 LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) December 31,
------------
1999 1998
---- ----
Revolving credit agreements:
$15.0 million, expiring October 2002 $10,037 $ -
$10.0 million, expiring October 2000 - -
Term notes:
8.25% senior notes, maturing May 2004 15,500 18,500
Capitalized lease obligations, payable in installments to 2005,
in French francs 1,224 1,783
Equipment loans 599 952
------- -------
27,360 21,235
Less current portion 14,645 3,699
------- -------
$12,715 $17,536
======= =======
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.
To support its worldwide operations, at December 31, 1999, the Company had in
place a $15.0 million unsecured line of credit expiring October 29, 2002 and a
$10.0 million unsecured line of credit expiring October 27, 2000. Both lines
bear interest at either the prevailing prime rate, or the prevailing London
Interbank Offered Rate plus 1.0%, at the Company's option, plus an unused line
fee of 0.2% per year. At December 31, 1999, there was $10.0 million outstanding
under the $15.0 million line of credit, with $14.4 million available under the
combined lines, after considering outstanding letters of credit.
Page 37
Capitalized lease obligations of 8.0 million French francs (approximately $1.2
million) relate to real estate and equipment located in France. The original
cost of assets under capital leases at December 31, 1999 and 1998, was 19.1
million French francs (approximately $2.9 million at December 31, 1999).
Accumulated amortization totaled 11.1 million French francs (approximately $1.7
million) and 9.2 million French francs (approximately $1.6 million) at December
31, 1999 and 1998, respectively. Required annual payments are as follows:
(In thousands) Capitalized
Lease Borrowings and
For years ending December 31, Obligations Term Notes
----------- ----------
2000 $ 340 $14,473
2001 299 5,163
2002 304 3,500
2003 269 2,000
2004 194 1,000
Thereafter 83 -
------ -------
1,489
Less interest 265
------
$1,224 $26,136
====== =======
Interest paid totaled $1.9 million for each of the 1999, 1998 and 1997 years.
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)
2000 $3,019
2001 2,958
2002 2,181
2003 2,016
2004 1,967
Thereafter 3,974
The principal lease expires in 2007. Rental expense under all leases totaled
$2.8 million, $2.6 million and $2.6 million for 1999, 1998 and 1997,
respectively.
NOTE 10 STOCK OPTION PLANS
The Company's stock option plan provides that the number of shares available for
issuance as either stock options or restricted stock increases on the last day
of each fiscal year by an amount equal to 2% of the then outstanding shares.
Options have been granted to directors, officers and key employees at a price
not less than 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 of five years.
Page 38
Effective November 18, 1999, the Company's Board of Directors adopted the
Newport Corporation 1999 Stock Incentive Plan to enhance the Company's ability
to attract and retain qualified managers (excluding Board members, officers and
key employees) and to align their interests with stockholders. The Plan
authorizes the granting of non-incentive stock options and restricted stock up
to an aggregate of 300,000 shares, of which 60,500 shares were granted in 1999.
The term of the Plan is 10 years.
The following table summarizes option plan and restricted stock activity for the
years ended December 31, 1999, 1998 and 1997:
Weighted Average
Available for Under Plan Exercise Price
-----------------------------------
Option Grant Restricted of Option Shares
or Award Stock Options Total Under Plan
-------- ---- ------- ----- ----------
Balance, December 31, 1996 462,922 96,750 1,163,491 1,260,241 $ 7.37
Authorized 179,027 - - - -
Granted (222,000) 20,500 201,500 222,000 8.90
Exercised - (16,000) (224,616) (240,616) 7.35
Forfeited 78,316 - (78,316) (78,316) 7.07
-------- ------- --------- ---------
Balance, December 31, 1997 498,265 101,250 1,062,059 1,163,309 7.69
Authorized 182,388 - - - -
Granted (489,600) 20,000 469,600 489,600 13.50
Exercised - (24,625) (229,400) (254,025) 6.57
Forfeited 31,900 - (31,900) (31,900) 10.50
-------- ------- --------- ---------
Balance, December 31, 1998 222,953 96,625 1,270,359 1,366,984 9.97
Authorized 484,631 - - - -
Granted (241,700) - 241,700 241,700 21.31
Exercised - (29,750) (133,675) (163,425) 9.37
Forfeited 57,976 - (57,976) (57,976) 13.71
-------- ------- --------- ---------
Balance, December 31, 1999 523,860 66,875 1,320,408 1,387,283 $11.97
======== ======= ========= =========
There were no grants of restricted stock in 1999. The weighted average per share
fair value of restricted stock granted during 1998 and 1997 was $13.38 and
$8.76, respectively.
At December 31, 1999, options on 672,484 shares were exercisable with a weighted
average exercise price of $8.64 per share. The following table summarizes
information concerning options outstanding and exercisable at December 31, 1999
(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
- --------------- ----------- ---- ----- ----------- -----
$ 5.00 - 10.00 700,142 4.4 7.97 572,262 7.77
12.50 - 21.00 559,766 8.3 14.81 100,222 13.67
--------- -------
1,259,908 672,484
========= =======
Page 39
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 has been recognized for its stock-
based compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option and employee stock purchase
plans been 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), the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
(In thousands) 1999 1998 1997
------ ------ ------
Net income - reported $8,283 $8,978 $7,064
Net income - pro forma $6,659 $7,524 $6,707
Diluted earnings per share - reported $ 0.88 $ 0.96 $ 0.77
Diluted earnings per share - pro forma $ 0.70 $ 0.80 $ 0.73
The fair value of each option grant in 1999 was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions: dividend yield of 0.23%; expected annual volatility of
50.5%; risk-free interest rate of 4.93%; expected lives of 5 years; and expected
turnover rate of 12.90%. The fair value of each option grant in 1998 and 1997
was estimated on the date of the grant using the following weighted-average
assumptions: dividend yield of 0.33%; expected annual volatility of 41.01% and
34.00%, respectively, risk-free interest rates of 5.44% and 6.36%, respectively,
expected lives of 5 years and expected turnover rate of 12.90%. The weighted
average per share fair value of options granted in 1999, 1998, and 1997 was
$8.68, $5.81 and $3.56, 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 and selected
subsidiaries 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, 2005. An aggregate of 650,000 shares of common stock is available
for purchase under the Purchase Plan. There were 99,136, 82,201, and 87,662
shares issued under the Purchase plan during 1999, 1998, and 1997, respectively.
The amounts included in the pro forma net income disclosures related to the
impact of the Purchase Plan totaled $0.2 million, $0.2 million and $0.1 million
for the years 1999, 1998, and 1997, respectively.
NOTE 11 OTHER INCOME (EXPENSE), NET
Other income (expense), net, consisted of the following:
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Interest and dividend income $ 102 $ 458 $ 210
Exchange losses, net (226) (261) (497)
Gains on sale of investments, net 275 134 14
Other 15 (210) (76)
----- ----- -----
$ 166 $ 121 $(349)
===== ===== =====
Page 40
NOTE 12 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,
------------------------
1999 1998 1997
---- ---- ----
Numerator:
Net income $8,283 $8,978 $7,064
Denominator:
Denominator for basic earnings per
share - weighted-average shares 9,083 8,989 8,865
Effect of dilutive securities:
Employee stock options 338 337 252
Restricted stock 40 58 62
------ ------ ------
Dilutive potential common shares 378 395 314
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 9,461 9,384 9,179
====== ====== ======
Basic earnings per share $ 0.91 $ 1.00 $ 0.80
Diluted earnings per share $ 0.88 $ 0.96 $ 0.77
Page 41
NOTE 13 BUSINESS SEGMENT INFORMATION
The Company operates in three reportable segments, Industrial & Scientific
Technologies, Fiber Optics & Photonics and Video Metrology. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies except that certain 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, 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 Optic and Photonics manufacturing.
The Video Metrology segment consists primarily of Video-Based Measurement and
Inspection Systems.
Selected financial information for the Company's reportable segments for the
years ended December 31, 1999, 1998 and 1997 follows:
(In thousands) Industrial
& Scientific Fiber Optics Video
Technologies & Photonics Metrology Total
------------ ------------- ---------- --------
Year Ended December 31, 1999:
- -----------------------------
Sales to external customers $ 96,578 $35,450 $ 9,917 $141,945
Depreciation and amortization 4,011 827 484 5,322
Segment income (loss) 12,418 3,805 (3,365) 12,858
Segment assets 77,110 23,192 10,897 111,199
Expenditures for long-lived assets 2,558 629 304 3,491
Year Ended December 31, 1998:
- -----------------------------
Sales to external customers $ 97,792 $24,079 $12,488 $134,359
Depreciation and amortization 4,034 383 258 4,675
Segment income (loss) 14,667 1,639 (2,193) 14,113
Segment assets 68,143 15,555 9,445 93,143
Expenditures for long-lived assets 3,231 457 615 4,303
Year Ended December 31, 1997:
- -----------------------------
Sales to external customers $100,102 $16,099 $16,393 $132,594
Depreciation and amortization 3,891 353 228 4,472
Segment income (loss) 12,274 (1,232) 1,393 12,435
Segment assets 67,358 8,558 7,957 83,873
Expenditures for long-lived assets 2,196 150 422 2,768
Page 42
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) 1999 1998 1997
---- ---- ----
Income:
Segment income $ 12,858 $ 14,113 $ 12,435
Unallocated amounts:
Interest expense (1,785) (1,891) (1,992)
Other income (expense) 166 121 (349)
-------- -------- --------
Income before income taxes $ 11,239 $ 12,343 $ 10,094
======== ======== ========
Assets:
Assets for reportable segments $111,199 $ 93,143 $ 83,873
Assets held at corporate 11,054 17,330 22,088
-------- -------- --------
Total assets $122,253 $110,473 $105,961
======== ======== ========
Expenditures for long-lived assets for reportable segments $ 3,491 $ 4,303 $ 2,768
Expenditures for long-lived assets held at corporate 1,308 1,075 2,266
-------- -------- --------
Total expenditures for long-lived assets $ 4,799 $ 5,378 $ 5,034
======== ======== ========
Depreciation and amortization:
Depreciation and amortization for reportable segments $ 5,322 $ 4,675 $ 4,472
Depreciation and amortization for assets held at corporate 1,689 1,400 1,358
-------- -------- --------
Total depreciation and amortization $ 7,011 $ 6,075 $ 5,830
======== ======== ========
Selected financial information for the Company's operations by geographic
segment is as follows:
(In thousands) 1999 1998 1997
---- ---- ----
Geographic area revenue:
United States $ 90,153 $ 87,561 $ 85,749
Europe (1) 32,516 30,358 27,659
Pacific Rim 11,006 9,468 14,974
Other 8,270 6,972 4,212
-------- -------- --------
$141,945 $134,359 $132,594
======== ======== ========
Geographic area long-lived assets:
United States $ 19,022 $ 14,094 $ 14,855
Europe 6,634 8,508 8,074
Other 82 94 65
-------- -------- --------
$ 25,738 $ 22,696 $ 22,994
======== ======== ========
(1) Europe revenues disclosed in the geographic segment include all revenues
from sales to European-based customers whereas Europe segment revenues are
comprised of sales from the Company's Europe operations.
Page 43
NOTE 14 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 $1.3 million,
$1.3 million and $1.0 million for 1999, 1998 and 1997, respectively.
NOTE 15 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)
Diluted Net Dividends High Low
Net Gross Net Income Per Per Share Share
Three months ended Sales Profit Income Share Share Price Price
- ------------------ ------- ------- ------ ----- ----- -------- ---------
December 31, 1999 $41,494 $17,594 $2,982 $0.31 $0.02 $45 3/4 $ 16 1/4
September 30, 1999 35,427 15,488 2,332 0.25 - 20 5/8 13 3/4
June 30, 1999 35,576 15,860 2,055 0.22 0.02 15 3/4 11 15/16
March 31, 1999 29,448 12,809 914 0.10 - 19 1/2 12 3/8
December 31, 1998 $33,407 $14,708 $2,565 $0.28 $0.02 $17 3/4 $ 8 7/8
September 30, 1998 33,456 14,517 2,218 0.24 - 19 3/4 10 5/8
June 30, 1998 33,833 15,163 2,189 0.23 0.02 22 7/8 17 3/4
March 31, 1998 33,663 14,480 2,006 0.21 - 21 3/4 12 1/4
Page 44
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, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 279 $ 278 $ (116) $ (30) $ 411
Reserve for inventory obsolescence 4,304 982 (1,330) (188) 3,768
Warranty reserve 336 1,575 (1,508) - 403
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 485 $ (97) $ (120) $ 11 $ 279
Reserve for inventory obsolescence 4,119 1,170 (1,460) 475 4,304
Warranty reserve 426 966 (1,056) - 336
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 524 $ 134 $ (122) $ (51) $ 485
Reserve for inventory obsolescence 4,065 1,772 (1,401) (317) 4,119
Warranty reserve - 982 (556) - 426
(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, and certain
reclassifications between balance sheet accounts.
Page 45