-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OX7aUZRWk5iz1lHJb6F1WAjwb7ltjL0X69vwiggJuxcgqbZXJ+Yp8FUeae5O2XId SPmkgtUR+CsvZ/qcmFHAsw== 0001017062-00-000804.txt : 20000411 0001017062-00-000804.hdr.sgml : 20000411 ACCESSION NUMBER: 0001017062-00-000804 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWPORT CORP CENTRAL INDEX KEY: 0000225263 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 940849175 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-01649 FILM NUMBER: 583234 BUSINESS ADDRESS: STREET 1: 1791 DEERE AVE CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 7148633144 FORMER COMPANY: FORMER CONFORMED NAME: DOLE JAMES CORP DATE OF NAME CHANGE: 19910905 10-K 1 NEWPORT CORPORATION 10-K 12/31/1999 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 ------------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _____________ Commission File Number 0-1649 ---------- NEWPORT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 94-0849175 - -------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1791 Deere Avenue, Irvine, CA 92606 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (949) 863-3144 ---------------------- Securities registered pursuant to Section 12(b) of the Act: None ----------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, Stated Value $0.35 per Share ------------------------------------------ (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 ___ --- 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 EX-10.9 2 364-DAY $10,000,000 CREDIT AGREEMENT Exhibit 10.9 ================================================================================ 364-Day $10,000,000 Revolving Credit Agreement Dated as of October 29, 1999 between Newport Corporation and ABN AMRO Bank N.V. ================================================================================ -1- Table of Contents
Section Description Page Section 1. The Credits....................................................................... 1 Section 1.1. Revolving Credit.................................................................. 1 Section 1.2. Revolving Credit Loans............................................................ 1 Section 1.3. [Intentionally Blank]............................................................. 1 Section 1.4. Manner and Disbursement of Loans.................................................. 1 Section 2. Interest and Change in Circumstances.............................................. 2 Section 2.1. Interest Rate Options............................................................. 2 Section 2.2. Minimum Amounts................................................................... 3 Section 2.3. Computation of Interest........................................................... 3 Section 2.4. Manner of Rate Selection.......................................................... 3 Section 2.5. Change of Law..................................................................... 3 Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR............... 4 Section 2.7. Taxes and Increased Costs......................................................... 4 Section 2.8. Change in Capital Adequacy Requirements........................................... 5 Section 2.9. Funding Indemnity................................................................. 5 Section 2.10. Lending Branch.................................................................... 6 Section 2.11. Discretion of Bank as to Manner of Funding........................................ 6 Section 3. Fees, Prepayments, Terminations and Applications. 6 Section 3.1. Commitment Fee.................................................................... 6 Section 3.2. Voluntary Prepayments............................................................. 6 Section 3.3. Terminations...................................................................... 7 Section 3.4. Place and Application of Payments................................................. 7 Section 3.5. Notations......................................................................... 7 Section 4. Definitions; Interpretation....................................................... 8 Section 4.1. Definitions....................................................................... 8 Section 4.2. Interpretation.................................................................... 15 Section 5.1. Organization and Qualification.................................................... 16 Section 5.2. Subsidiaries...................................................................... 16 Section 5.3. Corporate Authority and Validity of Obligations................................... 16 Section 5.4. Use of Proceeds; Margin Stock..................................................... 17 Section 5.5. Financial Reports................................................................. 17 Section 5.6. No Material Adverse Change........................................................ 17 Section 5.7. Full Disclosure................................................................... 18 Section 5.8. Good Title........................................................................ 18 Section 5.9. Litigation and Other Controversies................................................ 18 Section 5.10. Taxes............................................................................. 18
-i- Section 5.11. Approvals......................................................................... 18 Section 5.12. Affiliate Transactions............................................................ 18 Section 5.13. Investment Company; Public Utility Holding Company................................ 18 Section 5.14. ERISA............................................................................. 19 Section 5.15. Compliance with Laws.............................................................. 19 Section 5.16. Other Agreements.................................................................. 19 Section 5.17. No Default........................................................................ 19 Section 6. Conditions Precedent.............................................................. 19 Section 6.1. All Advances...................................................................... 19 Section 6.2. Initial Advance................................................................... 20 Section 7. Covenants......................................................................... 21 Section 7.1. Maintenance of Business........................................................... 21 Section 7.2. Maintenance of Properties......................................................... 21 Section 7.3. Taxes and Assessments............................................................. 21 Section 7.4. Insurance......................................................................... 21 Section 7.5. Financial Reports................................................................. 22 Section 7.6. Inspection........................................................................ 23 Section 7.7. Quick Ratio....................................................................... 23 Section 7.8. Leverage Ratio.................................................................... 24 Section 7.9. Tangible Net Worth................................................................ 24 Section 7.10. Net Income........................................................................ 24 Section 7.11. Interest Coverage Ratio........................................................... 24 Section 7.12. Capital Expenditures.............................................................. 24 Section 7.13. Indebtedness for Borrowed Money................................................... 24 Section 7.14. Liens............................................................................. 25 Section 7.15. Investments, Acquisitions, Loans, Advances and Guaranties......................... 26 Section 7.16. Mergers, Consolidations and Sales................................................. 27 Section 7.17. Maintenance of Subsidiaries....................................................... 28 Section 7.18. Dividends and Certain Other Restricted Payments................................... 28 Section 7.19. ERISA............................................................................. 28 Section 7.20. Compliance with Laws.............................................................. 28 Section 7.21. Burdensome Contracts With Affiliates.............................................. 28 Section 7.22. No Changes in Fiscal Year......................................................... 29 Section 7.23. Formation of Subsidiaries......................................................... 29 Section 7.24. Change in the Nature of Business.................................................. 29 Section 7.25. Limitation on Certain Restrictions on Subsidiaries................................ 29 Section 7.26. European Monetary Union........................................................... 29 Section 8. Events of Default and Remedies.................................................... 30 Section 8.1. Events of Default................................................................. 30 Section 8.2. Non-Bankruptcy Defaults........................................................... 32 Section 8.3. Bankruptcy Defaults............................................................... 33
-ii- Section 8.4. [Intentionally Blank]............................................................... 33 Section 9. Miscellaneous....................................................................... 33 Section 9.1. Non-Business Day.................................................................... 33 Section 9.2. No Waiver, Cumulative Remedies...................................................... 33 Section 9.3. Amendments, Etc..................................................................... 33 Section 9.4. Costs and Expenses.................................................................. 34 Section 9.5. Documentary Taxes................................................................... 34 Section 9.6. Survival of Representations......................................................... 34 Section 9.7. Survival of Indemnities............................................................. 34 Section 9.8. Notices............................................................................. 34 Section 9.9. Currency............................................................................ 35 Section 9.10. Currency Equivalence................................................................ 36 Section 9.11. Headings............................................................................ 36 Section 9.12. Severability of Provisions.......................................................... 36 Section 9.13. Counterparts........................................................................ 36 Section 9.14. Binding Nature, Governing Law, Etc.................................................. 36 Section 9.15. Submission to Jurisdiction; Appointment of Agent for Process; Waiver of Jury Trial.. 37
Exhibit A - Revolving Credit Note Exhibit B - Compliance Certificate Exhibit C - Existing Liens Exhibit D - Certain Investment Descriptions Schedule 5.2 - Subsidiaries -iii- Exhibit 10.9 Credit Agreement ABN AMRO Bank N.V. Los Angeles, California Ladies and Gentlemen: The undersigned, Newport Corporation, a Nevada corporation (the "Company"), applies to you (the "Bank") for your commitment, subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, to extend credit to the Company, all as more fully hereinafter set forth. Section 1. The Credits. Section 1.1. Revolving Credit. Subject to the terms and conditions hereof, the Bank agrees to extend a revolving credit (the "Revolving Credit") to the Company which may be availed of by the Company from time to time during the period from and including the date hereof to but not including the Termination Date, at which time the commitment of the Bank to extend credit under the Revolving Credit shall expire; provided, however, the Revolving Credit hereunder shall not be available to the Company until the Company has fully utilized the facilities available under the 3-Year Agreement. The Revolving Credit may be utilized by the Company in the form of Loans, all as more fully hereinafter set forth, provided that the aggregate principal amount of Loans outstanding at any one time shall not exceed $10,000,000 (the "Commitment", as such amount may be reduced pursuant to Section 3.3 hereof). During the period from and including the date hereof to but not including the Termination Date, the Company may use the Commitment by borrowing, repaying and reborrowing Loans in whole or in part. Section 1.2. Revolving Credit Loans. Subject to the terms and conditions hereof, the Revolving Credit may be availed of by the Company in the form of loans (individually a "Loan" and collectively the "Loans"). Each Loan shall be in a minimum amount of $100,000. Each Loan shall be made against and evidenced by a single promissory note of the Company in the form (with appropriate insertions) attached hereto as Exhibit A (the "Note") payable to the order of the Bank in the principal amount of $10,000,000. The Note shall be dated the date of issuance thereof, be expressed to bear interest as set forth in Section 2 hereof, and be expressed to mature on the Termination Date. Without regard to the principal amount of the Note stated on its face, the actual principal amount at any time outstanding and owing by the Company on account of the Note shall be the sum of all Loans made hereunder less all payments of principal actually received by the Bank. Section 1.3. [Intentionally Blank]. Section 1.4. Manner and Disbursement of Loans. The Company shall give written or telephonic notice to the Bank (which notice shall be irrevocable once given and, if given by telephone, shall be promptly confirmed in writing) by no later than 11:00 a.m. (Los Angeles -1- time) on the date the Company requests the Bank to make a Loan hereunder. Each such notice shall specify the date of the Loan requested (which must be a Business Day) and the amount of such Loan. Each Loan shall initially constitute part of the Domestic Rate Portion except to the extent the Company has otherwise timely elected as provided in Section 2 hereof. The Company agrees that the Bank may rely upon any written or telephonic notice given by any person the Bank in good faith believes is an Authorized Representative without the necessity of independent investigation and, in the event any telephonic notice conflicts with the written confirmation, such telephonic notice shall govern if the Bank has acted in reliance thereon. Subject to the provisions of Section 6 hereof, the proceeds of each Loan shall be made available to the Company at the principal office of the Bank in New York, New York, in immediately available funds. Section 2. Interest and Change in Circumstances. Section 2.1. Interest Rate Options. (a) Subject to all of the terms and conditions of this Section 2, portions of the principal indebtedness evidenced by the Note (all of the indebtedness evidenced by the Note bearing interest at the same rate for the same period of time being hereinafter referred to as a "Portion") may, at the option of the Company, bear interest with reference to the Domestic Rate (the "Domestic Rate Portion") or with reference to an Adjusted LIBOR ("LIBOR Portions"), and Portions may be converted from time to time from one basis to the other. All of the indebtedness evidenced by the Note which is not part of a Fixed Rate Portion shall constitute a single Domestic Rate Portion. All of the indebtedness evidenced by the Note which bears interest with reference to a particular Adjusted LIBOR for a particular Interest Period shall constitute a single LIBOR Portion. Anything contained herein to the contrary notwithstanding, the obligation of the Bank to create, continue or effect by conversion any Fixed Rate Portion shall be conditioned upon the fact that at the time no Default or Event of Default shall have occurred and be continuing. The Company hereby promises to pay interest on each Portion at the rates and times specified in this Section 2. (b) Domestic Rate Portion. The Domestic Rate Portion shall bear interest at the rate per annum equal to the Domestic Rate as in effect from time to time, provided that if the Domestic Rate Portion or any part thereof is not paid when due (whether by lapse of time, acceleration or otherwise) such Portion shall bear interest, whether before or after judgment, until payment in full thereof at the rate per annum determined by adding 2% to the interest rate which would otherwise be applicable thereto from time to time. Interest on the Domestic Rate Portion shall be payable monthly on the last day of each month in each year (commencing October 31, 1999) and at maturity of the Note, and interest after maturity (whether by lapse of time, acceleration or otherwise) shall be due and payable upon demand. Any change in the interest rate on the Domestic Rate Portion resulting from a change in the Domestic Rate shall be effective on the date of the relevant change in the Domestic Rate. (c) Libor Portions. Each LIBOR Portion shall bear interest for each Interest Period selected therefor at a rate per annum determined by adding 1% to the Adjusted LIBOR for such Interest Period, provided that if any LIBOR Portion is not paid when due (whether by lapse of time, acceleration or otherwise) such Portion shall bear interest, whether before or after judgment, until payment in full thereof through the end of the Interest Period then applicable thereto at the rate per annum determined by adding 2% to the interest rate which would otherwise -2- be applicable thereto, and effective at the end of such Interest Period such LIBOR Portion shall automatically be converted into and added to the Domestic Rate Portion and shall thereafter bear interest at the interest rate applicable to the Domestic Rate Portion after default. Interest on each LIBOR Portion shall be due and payable on the last day of each Interest Period applicable thereto and, with respect to any Interest Period applicable to a LIBOR Portion in excess of three (3) months, on the date occurring every three (3) months after the date such Interest Period began and at the end of such Interest Period, and interest after maturity (whether by lapse of time, acceleration or otherwise) shall be due and payable upon demand. The Company shall notify the Bank on or before 11:00 a.m. (Los Angeles time) on the third Business Day preceding the end of an Interest Period applicable to a LIBOR Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which event the Company shall notify the Bank of the new Interest Period selected therefor, and in the event the Company shall fail to so notify the Bank, such LIBOR Portion shall automatically be converted into and added to the Domestic Rate Portion as of and on the last day of such Interest Period. Section 2.2. Minimum Amounts. Each Fixed Rate Portion shall be in an amount equal to $1,000,000 or such greater amount which is an integral multiple of $100,000. Section 2.3. Computation of Interest. All interest on the Note shall be computed on the basis of a year of 360 days for the actual number of days elapsed. Section 2.4. Manner of Rate Selection. The Company shall notify the Bank by 11:00 a.m. (Los Angeles time) at least three (3) Business Days prior to the date upon which the Company requests that any LIBOR Portion be created or that any part of the Domestic Rate Portion be converted into a LIBOR Portion (each such notice to specify in each instance the amount thereof and the Interest Period selected therefor). If any request is made to convert a Fixed Rate Portion into another type of Portion available hereunder, such conversion shall only be made so as to become effective as of the last day of the Interest Period applicable thereto. All requests for the creation, continuance and conversion of Portions under this Agreement shall be irrevocable. Such requests may be written or oral and the Bank is hereby authorized to honor telephonic requests for creations, continuances and conversions received by it from any person the Bank in good faith believes to be an Authorized Representative without the necessity of independent investigation, the Company hereby indemnifying the Bank from any liability or loss ensuing from so acting, Section 2.5. Change of Law. Notwithstanding any other provisions of this Agreement or the Note, if at any time the Bank shall determine that any change in applicable laws, treaties or regulations or in the interpretation thereof makes it unlawful for the Bank to create or continue to maintain any Fixed Rate Portion, it shall promptly so notify the Company and the obligation of the Bank to create, continue or maintain any such Fixed Rate Portion under this Agreement shall terminate until it is no longer unlawful for the Bank to create, continue or maintain such Fixed Rate Portion. The Company, on demand, shall, if the continued maintenance of any such Fixed Rate Portion is unlawful, thereupon prepay the outstanding principal amount of the affected Fixed Rate Portion, together with all interest accrued thereon and all other amounts payable to the Bank with respect thereto under this Agreement; provided, however, that the Company may -3- elect to convert the principal amount of the affected Portion into another type of Portion available hereunder, subject to the terms and conditions of this Agreement. Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR. Notwithstanding any other provision of this Agreement or the Note, if prior to the commencement of any Interest Period, the Bank shall determine that deposits in the amount of any LIBOR Portion scheduled to be outstanding during such Interest Period are not readily available to the Bank in the relevant market or, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining Adjusted LIBOR, then the Bank shall promptly give notice thereof to the Company and the obligations of the Bank to create or effect by conversion any such Fixed Rate Portion in such amount and for such Interest Period shall terminate until deposits in such amount and for the Interest Period selected by the Company shall again be readily available in the relevant market and adequate and reasonable means exist for ascertaining Adjusted LIBOR. Section 2.7. Taxes and Increased Costs. With respect to any Fixed Rate Portion, if the Bank shall determine that any change in any applicable law, treaty, regulation or guideline (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or any new law, treaty, regulation or guideline, or any interpretation of any of the foregoing by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending branch or the Fixed Rate Portions contemplated by this Agreement (whether or not having the force of law), shall: (i) impose, increase, or deem applicable any reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, or any other acquisition of funds or disbursements by, the Bank which is not in any instance already accounted for in computing the interest rate applicable to such Fixed Rate Portion; (ii) subject the Bank, any Fixed Rate Portion or the Note to the extent it evidences such a Portion to any tax (including, without limitation, any United States interest equalization tax or similar tax however named applicable to the acquisition or holding of debt obligations and any interest or penalties with respect thereto), duty, charge, stamp tax, fee, deduction or withholding in respect of this Agreement, any Fixed Rate Portion or the Note to the extent it evidences such a Portion, except such taxes as may be measured by the overall net income or gross receipts of the Bank or its lending branches and imposed by the jurisdiction, or any political subdivision or taxing authority thereof, in which the Bank's principal executive office or its lending branch is located; (iii) change the basis of taxation of payments of principal and interest due from the Company to the Bank hereunder or under the Note to the extent it evidences any Fixed Rate Portion (other than by a change in taxation of the overall net income or gross receipts of the Bank); or -4- (iv) impose on the Bank any penalty with respect to the foregoing or any other condition regarding this Agreement, any Fixed Rate Portion, or its disbursement, or the Note to the extent it evidences any Fixed Rate Portion; and the Bank shall determine that the result of any of the foregoing is to increase the cost (whether by incurring a cost or adding to a cost) to the Bank of creating or maintaining any Fixed Rate Portion hereunder or to reduce the amount of principal or interest received or receivable by the Bank (without benefit of, or credit for, any prorations, exemption, credits or other offsets available under any such laws, treaties, regulations, guidelines or interpretations thereof), then the Company shall pay on demand to the Bank from time to time as specified by the Bank such additional amounts as the Bank shall reasonably determine are sufficient to compensate and indemnify it for such increased cost or reduced amount. If the Bank makes such a claim for compensation, it shall provide to the Company a certificate setting forth the computation of the increased cost or reduced amount as a result of any event mentioned herein in reasonable detail and such certificate shall be conclusive if reasonably determined. Section 2.8. Change in Capital Adequacy Requirements. If the Bank shall determine that the adoption after the date hereof of any applicable law, rule or regulation regarding capital adequacy, or any change in any existing law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any of its branches) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations hereunder or for the credit which is the subject matter hereof to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to liquidity and capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within fifteen (15) days after demand by the Bank, the Company shall pay to the Bank such additional amount or amounts reasonably determined by the Bank as will compensate the Bank for such reduction. Section 2.9. Funding Indemnity. In the event the Bank shall incur any loss, cost or expense (including, without limitation, any loss (including loss of profit), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired or contracted to be acquired by the Bank to fund or maintain any Fixed Rate Portion or the relending or reinvesting of such deposits or other funds or amounts paid or prepaid to the Bank) as a result of: (i) any payment of a Fixed Rate Portion on a date other than the last day of the then applicable Interest Period for any reason, whether before or after default, and whether or not such payment is required by any provision of this Agreement; or (ii) or any failure by the Company to create, borrow, continue or effect by conversion a Fixed Rate Portion on the date specified in a notice given pursuant to this Agreement; -5- then upon the demand of the Bank, the Company shall pay to the Bank such amount as will reimburse the Bank for such loss, cost or expense. If the Bank requests such a reimbursement, it shall provide to the Company a certificate setting forth the computation of the loss, cost or expense giving rise to the request for reimbursement in reasonable detail and such certificate shall be conclusive if reasonably determined. Section 2.10. Lending Branch. The Bank may, at its option, elect to make, fund or maintain Portions of the Loans hereunder at or through such of its branches or offices as the Bank may from time to time elect. Section 2.11. Discretion of Bank as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, the Bank shall be entitled to fund and maintain its funding of all or any part of the Note in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, without limitation, determinations under Sections 2.6, 2.7 and 2.9 hereof) shall be made as if the Bank had actually funded and maintained each Fixed Rate Portion during each Interest Period applicable thereto through the purchase of deposits in the relevant market in the amount of such Fixed Rate Portion, having a maturity corresponding to such Interest Period, and bearing an interest rate equal to the LIBOR for such Interest Period. Section 3. Fees, Prepayments, Terminations and Applications. Section 3.1. Commitment Fee. For the period from and including the date hereof to but not including the Termination Date, the Company shall pay to the Bank a commitment fee at the rate of 0.20% per annum (computed on the basis of a year of 360 days for the actual number of days elapsed) on the average daily unused portion of the Commitment. Such commitment fee shall be payable quarter- annually in arrears on the last day of each March, June, September and December in each year (commencing October 31, 1999) and on the Termination Date. Section 3.2. Voluntary Prepayments. (a) Domestic Rate Portion. The Company may prepay without premium or penalty and in whole or in part (but if in part, then in an amount not less than $100,000 or the total amount then outstanding, whichever is less) the Domestic Rate Portion of the Note at any time upon notice to the Bank prior to 11:00 a.m. (Los Angeles time) on the date fixed for prepayment, each such prepayment to be made by the payment of the principal amount to be prepaid. (b) Fixed Rate Portions. The Company may prepay any Fixed Rate Portion of the Note only on the last date of the then applicable Interest Period, in whole or in part (but if in part, then in an amount not less than $100,000 or such greater amount which is an integral multiple of $100,000), upon three (3) Business Days' prior notice to the Bank (which notice shall be irrevocable once given, must be received by the Bank no later than 11:00 a.m. (Los Angeles time) on the third Business Day preceding the date of such prepayment, and shall specify the principal amount to be repaid); provided, however, that the outstanding principal amount of any Fixed Rate Portion of the Note prepaid in part shall not be less than $1,000,000 or such greater amount which is an integral multiple of $100,000 after giving effect to such prepayment. Any -6- such prepayment shall be effected by payment of the principal amount to be prepaid and accrued interest thereon to the end of the applicable Interest Period. Section 3.3. Terminations. The Company shall have the right at any time and from time to time, upon three (3) Business Days' prior notice to the Bank, to terminate without premium or penalty and in whole or in part (but if in part, then in an amount not less than $1,000,000) the Commitment, provided that the Commitment may not be reduced to an amount less than the aggregate principal amount of the Loans and Letters of Credit then outstanding. Any termination of the Commitment pursuant to this Section may not be reinstated. Section 3.4. Place and Application of Payments. All payments of principal, interest, fees and all other Obligations payable hereunder and under the other Loan Documents shall be made to the Bank at (a) its principal office in Los Angeles, California (or at such other place as the Bank may specify) or (b) if such payment is to be made in an Alternative Currency, no later than 11:00 a.m. local time at the place of payment to such office as the Bank has previously notified the Company. Payments received by the Bank after 11:00 a.m. shall be deemed received as of the opening of business on the next Business Day. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without set-off or counterclaim and without reduction for, and free from, any and all present or future taxes, levies, imposts, duties, fees, charges, deductions, withholdings, restrictions and conditions of any nature imposed by any government or any political subdivision or taxing authority thereof (but excluding any taxes imposed on or measured by the net income of the Bank). Unless the Company otherwise directs, principal payments shall be applied first to the Domestic Rate Portion until payment in full thereof, with any balance applied to the Fixed Rate Portions in the order in which their Interest Periods expire. Section 3.5. Notations. All Loans made against the Note, the status of all amounts evidenced by the Note as constituting part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the rates of interest and Interest Periods applicable to such Portions shall be recorded by the Bank on its books and records or, at its option in any instance, endorsed on a schedule to the Note and the unpaid principal balance and status, rates and Interest Periods so recorded or endorsed by the Bank shall be prima facie evidence in any court or other proceeding brought to enforce the Note of the principal amount remaining unpaid thereon, the status of the Loans evidenced thereby and the interest rates and Interest Periods applicable thereto; provided that the failure of the Bank to record any of the foregoing shall not limit or otherwise affect the obligation of the Company to repay the principal amount of the Note together with accrued interest thereon. Prior to any negotiation of the Note, the Bank shall record on a schedule thereto the status of all amounts evidenced thereby as constituting part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the rates of interest and the Interest Periods applicable thereto. Section 4. Definitions; Interpretation. Section 4.1. Definitions. The following terms when used herein shall have the following meanings: -7- "Acquisition" shall mean any transaction, or any series of related transactions, consummated after the date of this Agreement, by which the Company or any of its Subsidiaries (i) acquires any ongoing business or all or substantially all of the assets of any Person or division thereof, whether through purchase of assets, merger or otherwise, or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the voting stock of a corporation or other firm. "Adjusted LIBOR" means a rate per annum determined by the Bank in accordance with the following formula: Adjusted LIBOR = LIBOR ----------------------- 100%-Reserve Percentage "Reserve Percentage" means, for the purpose of computing Adjusted LIBOR, the daily average for the applicable Interest Period of the maximum rate at which reserves (including, without limitation, any marginal, emergency, supplemental or other special reserves) are imposed during such Interest Period by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on "eurocurrency liabilities" (as such term is defined in Regulation D) (or in respect of any other category of liabilities that includes deposits by reference to which the interest rate on LIBOR Portions is determined or any category of extensions of credit or other assets that include loans by non-United States offices of the Bank to United States residents), but subject to any amendments to such reserve requirement by such Board or its successor, and taking into account any transitional adjustments thereto becoming effective during such Interest Period. For purposes of this definition, LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in Regulation D without benefit of or credit for prorations, exemptions or offsets under Regulation D. "LIBOR" means, for each Interest Period, the arithmetic average of the rates of interest per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which deposits in U. S. Dollars in immediately available funds are offered to the Bank at 11:00 a.m. (London, England time) two (2) Business Days before the beginning of such Interest Period by three (3) or more major banks in the interbank eurodollar market selected by the Bank for a period equal to such Interest Period and in an amount equal or comparable to the applicable LIBOR Portion scheduled to be outstanding from the Bank during such Interest Period. Each determination of LIBOR made by the Bank shall be conclusive and binding absent manifest error. "Affiliate" means any Person directly or indirectly controlling or controlled by, or under direct or indirect Common control with, another Person. A Person shall be deemed to control another Person for the purposes of this definition if such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the other Person, whether through the ownership of voting, securities, common directors, trustees or officers, by contract or otherwise; provided that, in any event for purposes of this definition, any Person that owns, directly or indirectly, 5% or more of the securities having the ordinary voting power for the election of directors or governing body of a corporation or 5% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. -8- "Agreement" means this Credit Agreement, as the same may be amended, modified or restated from time to time in accordance with the terms hereof. "Alternative Currency" means a currency other than U.S. Dollars acceptable to the Bank in its reasonable discretion. "Authorized Representative" means those persons shown on the lists of officers provided the Company pursuant to Section 6.2(a) hereof or on any update of any such list provided by the Company to the Bank, or any further or different officer of the Company so named by any Authorized Representative of the Company in a written notice to the Bank. "Bank" is defined in the introductory paragraph hereof. "Business Day" means any day other than a Saturday or Sunday on which the Bank is not authorized or required to close in Los Angeles, California and New York, New York and, when used with respect to LIBOR Portions, a day on which the Bank is also dealing in United States Dollar deposits in the interbank market in London, England and when used with respect to any Letter of credit issued in an Alternative Currency, on which banks and foreign exchange markets are open for business in the city where issuance, or payments in respect of such Letter of Credit are being made. "Capital Lease" means any lease of Property which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee. "Capitalized Lease Obligation" means the amount of the liability shown on the balance sheet of any Person in respect of a Capital Lease determined in accordance with GAAP. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto. "Commitment" is defined in Section 1.1 hereof. "Company" is defined in the introductory paragraph hereof. "Consolidated Subsidiary" means any Subsidiary whose accounts are required to be consolidated with those of the Company in accordance with GAAP. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Corning Acquisition" means the Acquisition of the assets of a division of Corning, Incorporated relating to the letter of intent issued by the Company to Corning, International with a total purchase price not to exceed $12,000,000. -9- "Default" means any event or condition the occurrence of which would, with the passage of time or the giving of notice, or both, constitute an Event of Default. "Domestic Rate" means, for any day, the greater of (i) the rate of interest announced by the Bank from time to time as its prime rate for U.S. dollar loans, as in effect on such day; and (ii) the sum of (x) the Federal Funds Rate plus (y) 1/2 of 1% (.500%). "Domestic Rate Portion" is defined in Section 2. 1 (a) hereof. "Domestic Restricted Subsidiary" means a Restricted Subsidiary which is organized under the laws of the United States or any State thereof and which conducts substantially all of its business and has substantially all of its assets within the United States. "EBITDA" means, with reference to any period, Net Income for such period plus all amounts deducted in arriving at such Net Income amount in respect of (i) Interest Expense for such period, plus (ii) federal, state and local income taxes for such period, plus (iii) all amounts properly charged for depreciation of fixed assets and amortization of intangible assets during such period on the books of the Company and its Subsidiaries. "EMU" shall mean economic and monetary union as contemplated in the Treaty on European Union. "EMU Commencement" shall mean the date of commencement of the third stage of EMU, namely January 1, 1999. "EMU Legislation" shall mean legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency (whether known as the "euro" or otherwise), being in part the implementation of the third stage of EMU. "Equity Offering" means any issuance of equity securities (whether common or preferred stock or otherwise), other than common stock issued in connection with the exercise of employee stock options. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto. "Euro" shall mean the single currency of Euro Members of the European Union. "Eurocurrency Loans" shall have the meaning set forth in Section 3.1 hereof. "Euro Member" shall mean each state described as a "participating member state" in any EMU Legislation. "Euro Unit" shall mean the currency unit of the Euro. "Event of Default" means any event or condition identified as such in Section 8.1 hereof. -10- "Facilities" means the loans made under the 3-Year Agreement and the Loans made hereunder. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day (as provided in clause (i)), the Federal Funds Rate for such day shall be the average rate quoted to ABN AMRO Bank N.V., Los Angeles Branch on such day on such transactions as determined by the Bank. "Fixed Rate Portions" means and includes the LIBOR Portions. "GAAP" means generally accepted accounting principles as in effect from time to time, applied by the Company and its Subsidiaries on a basis consistent with the preparation of the Company's most recent financial statements furnished to the Bank pursuant to Section 5.5 hereof. "Indebtedness for Borrowed Money" means for any Person (without duplication) all of the obligations of such Person which, in accordance with GAAP, would be included on the liability side of the balance sheet of such Person prepared at such time, and shall include (i) all indebtedness created, assumed or incurred in any manner by such Person representing money borrowed (including, by the issuance of debt securities), (ii) all indebtedness for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business which are not more than 90 days past due), (iii) all indebtedness secured by any Lien upon Property of such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness, (iv) all Capitalized Lease Obligations of such Person and (v) all obligations of such Person on or with respect to letters of credit, bankers' acceptances and other extensions of credit whether or not representing obligations for borrowed money. "Interest Expense" means, with reference to any period, the sum of all interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of the Company and its Subsidiaries for such period determined in accordance with GAAP. "Interest Period" means, with respect to any LIBOR Portion, the period commencing on, commencing as the case may be, the creation, continuation or conversion date with respect to such LIBOR Portion and ending one (1), two (2), three (3) or six (6) months thereafter as selected by the Company in its notice as provided herein; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day which is not a Business Day, that interest Period shall be extended to the next succeeding Business Day, -11- unless in the case of an Interest Period for a LIBOR Portion the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) no Interest Period may extend beyond the final maturity date of the Note; (iii) the interest rate to be applicable to each Portion for each Interest Period shall apply from and including the first day of such Interest Period to but excluding the last day thereof; and (iv) no Interest Period may be selected if after giving effect thereto the Company will be unable to make a principal payment scheduled to be made during such Interest Period without paying part of a Fixed Rate Portion on a date other than the last day of the Interest Period applicable thereto. For purposes of determining an Interest Period, a month means a period starting on one day in a calendar month and ending on a numerically corresponding day in the next calendar month, provided, however, if an Interest Period begins on the last day of a month or if there is no numerically corresponding day in the month in which an Interest Period is to end, then such Interest Period shall end on the last Business Day of such month. "LIBOR Portions" is defined in Section 2.1 (a) hereof. "Lien" means any mortgage, lien, security interest, pledge, charge or encumbrance of any kind in respect of any Property, including the interests of a vendor or lessor under any conditional sale, Capital Lease or other title retention arrangement. "Loan" is defined in Section 1.2 hereof. "Loan Documents" means this Agreement and the Note. "Materially Adverse Effect" means, in relation to any event or occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), (a) a materially adverse effect on the business, Property, operations, prospects or condition, financial or otherwise, of the Company and its Subsidiaries, taken as a whole; (b) an adverse effect on the ability of the Company to perform any of its payment or other material Obligations under any Loan Document; or (c) an impairment of the validity or enforceability of any Loan Document or any material impairment of the rights, remedies or benefits available to the Bank under any Loan Document. -12- "Net Income" means, with reference to any period, the net income (or net loss) of the Company and its Subsidiaries for such period as computed on a consolidated basis in accordance with GAAP, and, without limiting the foregoing, after deduction from gross income of all expenses and reserves, including reserves for all taxes on or measured by income, but excluding extraordinary profits and also excluding any taxes on such profits. "Note" is defined in Section 1.2 hereof. "Obligations" means all obligations of the Company to pay principal and interest on the Loans, all fees and charges payable hereunder, and all other payment obligations of the Company and the Guarantors arising under or in relation to any Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. "Outstanding Letters of Credit" means all outstanding letters of credit heretofore issued by the Bank (whether directly or through one of its branches or affiliates) for the account of the Company, including but not limited to, letters of credit issued under the Prior Credit Agreement. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof. "Plan" means any employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code that either (i) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Portion" is defined in Section 2. 1 (a) hereof. "Prior Credit Agreement" means that certain Credit Agreement dated as of February 26, 1998 between the Company and the Bank, as amended. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Quick Ratio" means, as of any time the same is to be determined, the ratio of current assets minus inventory of the Company and its Subsidiaries to current liabilities of the Company and its Subsidiaries, all as determined on a consolidated basis in accordance with GAAP, but subject nevertheless to the express limitations and restrictions hereinafter set forth. There shall he excluded from current assets all deferred assets, prepaid expenses, the surrender value of -13- insurance and investments in and loans and advances to any Person, other than investments permitted by Section 7.15(a)-(c), both inclusive, of this Agreement and further provided that there shall be excluded from current liabilities all obligations of the Company with respect to the Facilities. "Restricted Subsidiary" means any Subsidiary the total assets of which constitutes 10% or more of total assets of the Company and its Subsidiaries computed on a consolidated basis in accordance with GAAP, and of which 100% (by number of votes) of the voting stock is at all times owned by the Company and/or one or more Restricted Subsidiaries. "Revolving Credit" is defined in Section 1.1 hereof. "Subsidiary" means any corporation or other Person more than 50% of the outstanding ordinary voting shares or other equity interests of which is at the time directly or indirectly owned by the Company, by one or more of its Subsidiaries, or by the Company and one or more of its Subsidiaries. "Tangible Net Worth" means, as of any time the same is to be determined, the total shareholders' equity (including capital stock, additional paid-in- capital and retained earnings after deducting treasury stock, but excluding minority interests in Subsidiaries) which would appear on the balance sheet of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP, less the sum of (i) all notes receivable from officers and employees of the Company and its Subsidiaries, (ii) the aggregate book value of all assets which would be classified as intangible assets under GAAP, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and deferred research and development expense) and similar assets and (iii) the write-up of assets above cost. "Termination Date" means September 30, 2000, or such earlier date on which the Commitment is terminated in whole pursuant to Section 3.3, 8.2 or 8.3 hereof. "3-Year Agreement" means that certain 3-Year $15,000,000 Revolving Credit Agreement dated as of October 29, 1999 between the Company and the Bank. "Treaty on European Union" shall mean the Treaty of Rome of March 25, 1957, as amended by the Single European Act of 1986 and the Maastricht Treaty (which was signed at Maastricht on February 7, 1992, and came into force on November 1, 1993, as amended from time to time). "Total Liabilities" means, as of any time the same is to be determined, the aggregate of all indebtedness, obligations, liabilities, reserves and any other items which would be listed as a liability on a balance sheet of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP, and in any event including all indebtedness and liabilities of any other Person which the Company or any Subsidiary may guarantee or otherwise be responsible or liable for (other than any liability arising out of the endorsement of commercial paper for deposit or collection received in the ordinary course of business), all indebtedness and -14- liabilities secured by any Lien on any Property of the Company or any Subsidiary, whether or not the same would be classified as a liability on a balance sheet, the liability of the Company or any Subsidiary in respect of banker's acceptances and letters of credit, and the aggregate amount of rentals or other consideration payable by the Company or any Subsidiary in accordance with GAAP over the remaining unexpired term of all Capital Leases, but excluding all general contingency reserves and reserves for deferred income taxes and investment credit. "Unfunded Vested Liabilities" means, for any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds, the fair the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "U.S. Dollars" means the lawful currency of the United States of America. "U.S. Dollar Equivalent" means the amount of U.S. Dollars which would be realized by converting an Alternative Currency into U.S. Dollars in the spot market at the exchange rate quoted by the Bank at approximately 11:00 a.m. (London, England time) two Business Days prior to the date on which a computation thereof is required to be made, to major banks in the interbank market for the purchase of U.S. Dollars for such Alternative Currency. "Welfare Plan" means a "welfare plan" as defined in Section 3(1) of ERISA. "Wholly-Owned Subsidiary" means a Subsidiary of which all of the issued and outstanding shares of capital stock (other than directors' qualifying shares as required by law) or other equity interests are owned by the Company and/or one or more Wholly-Owned Subsidiaries within the meaning of this definition. Section 4.2. Interpretation. The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words "hereof", "herein", and "hereunder" and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All references to time of day herein are references to Los Angeles, California time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. Section 5. Representations and Warranties. The Company represents and warrants to the Bank as follows: Section 5.1. Organization and Qualification. The Company is duly organized, validly existing and in good standing as a corporation under the laws of the State of Nevada, has full and adequate corporate power to own its Property and conduct its business as now conducted, and is -15- duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying except where the failure to so qualify or be licensed would not result in a Materially Adverse Effect. Section 5.2. Subsidiaries. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized, as may be, has full and adequate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying except where the failure to so qualify or be licensed would not result in a Materially Adverse Effect. Schedule 5.2 hereto identifies each Subsidiary, the jurisdiction of its incorporation or organization, as the case may be, the percentage of issued and outstanding shares of each class of its capital stock or other equity interests owned by the Company and the Subsidiaries and, if such percentage is not 100% (excluding directors' qualifying shares as required by law), a description of each class of its authorized capital stock and other equity interests and the number of shares of each class issued and outstanding. All of the outstanding shares of capital stock and other equity interests of each Subsidiary are validly issued and outstanding shares, and fully paid and nonassessable and all such shares and other equity interests indicated on Schedule 5.2 as owned by the Company or a Subsidiary are owned, beneficially and of record, by the Company or such Subsidiary free and clear of all Liens. There are no outstanding commitments or other obligations of any Subsidiary to issue, and no options, warrants or other rights of any Person to acquire, any shares of any class of capital stock or other equity interests of any Subsidiary. Section 5.3. Corporate Authority and Validity of Obligations. The Company has full right and authority to enter into this Agreement and the other Loan Documents and to perform all of its obligations hereunder and under the other Loan Documents. The Loan Documents delivered by the Company have been duly authorized, executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law); and this Agreement and the other Loan Documents do not, nor does the performance or observance by the Company of any of the matters and things herein or therein provided for, contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Company or any provision of the charter, articles of incorporation or by-laws of the Company or any covenant, indenture or agreement of or affecting the Company or any of its Properties, except where such default would not constitute a Materially Adverse Effect or result in the creation or imposition of any Lien on any Property of the Company. Section 5.4. Use of Proceeds; Margin Stock. The Company shall use the proceeds of the Loans and other extensions of credit made available hereunder solely for the refinancing of the indebtedness (other than the Outstanding Letters of Credit) owing to the Bank under the Prior Credit Agreement and for its general working capital purposes. The initial Loans hereunder shall be in an amount necessary to so refinance and concurrently therewith the Prior Credit Agreement -16- shall terminate. Neither the Company nor any Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan or any other extension of credit made hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Section 5.5. Financial Reports. The consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1998 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the fiscal year then ended, and accompanying notes thereto, which financial statements are accompanied by the audit report of Ernst & Young, independent public accountants, and the unaudited interim consolidated balance sheet of the Company and its Subsidiaries as at June 30, 1999 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the six (6) months then ended, heretofore furnished to the Bank, fairly present the consolidated financial condition of the Company and its Subsidiaries as at said dates and the consolidated results of their operations and cash flows for the periods then ended in conformity with generally accepted accounting principles applied on a consistent basis subject in the case of interim balance sheet to normal year-end adjustment and in the absence of footnotes. Neither the Company nor any Subsidiary has contingent liabilities which are material to it other than as indicated on such financial statements or, with respect to future periods, on the financial statements furnished pursuant to Section 7.5 hereof. Section 5.6. No Material Adverse Change. Since June 30, 1999, there has been no change in the condition (financial or otherwise) or business prospects of the Company or any Subsidiary except those occurring in the ordinary course of business, none of which individually or in the aggregate constitute a Materially Adverse Effect. Section 5.7. Full Disclosure. The statements and information furnished to the Bank, in connection with the negotiation of this Agreement and the other Loan Documents and the commitment by the Bank to provide all or part of the financing contemplated hereby do not contain any untrue statements of a material fact or omit a material fact necessary to make the material statements contained herein or therein not misleading, the Bank acknowledging that as to any projections furnished to the Bank, the Company only represents that the same were prepared on the basis of information and estimates the Company believed to be reasonable at the time made. Section 5.8. Good Title. The Company and its Subsidiaries each have good and valid title to their assets as reflected on the most recent consolidated balance sheet of the Company and its Subsidiaries furnished to the Bank (except for sales of assets by the Company and its Subsidiaries in the ordinary course of business), subject to no Liens other than such thereof as are permitted by Section 7.14 hereof. Section 5.9. Litigation and Other Controversies. There is no litigation or governmental proceeding or labor controversy pending, nor to the knowledge of the Company threatened, -17- against the Company or any Subsidiary which if adversely determined would result in a Materially Adverse Effect. Section 5.10. Taxes. All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary or upon any of their respective Properties, income or franchises, which are shown to be due and payable in such returns, have been paid. The Company does not know of any proposed additional tax assessment against it or its Subsidiaries for which adequate provision in accordance with GAAP has not been made on its accounts. Adequate provisions in accordance with GAAP for taxes on the books of the Company and each Subsidiary have been made for all open years, and for its current fiscal period. Section 5.11. Approvals. No authorization, consent, license, or exemption from, or filing or registration with, any court or governmental department, agency or instrumentality, nor any approval or consent of the stockholders of the Company or any other Person, is or will be necessary to the valid execution, delivery or performance by the Company of this Agreement or any other Loan Document except as have been made or obtained prior to the date hereof. Section 5.12. Affiliate Transactions. Neither the Company nor any Subsidiary is a party to any contracts or agreements with any of its Affiliates (other than with Wholly-Owned Subsidiaries) on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts or agreements between Persons not affiliated with each other. Section 5.13. Investment Company; Public Utility Holding Company. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "public utility holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 5.14. ERISA. The Company and each other member of its Controlled Group has fulfilled its obligations under the minimum funding standards of and is in compliance in all material respects with ERISA and the Code to the extent applicable to it and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. Neither the Company nor any Subsidiary has any contingent liabilities with respect to any post-retirement benefits under a Welfare Plan, other than liability for continuation coverage described in article 6 of Title I of ERISA. Section 5.15. Compliance with Laws. The Company and each of its Subsidiaries are in compliance with the requirements of all federal, state and local laws, rules and regulations applicable to or pertaining to their Properties or business operations (including, without limitation, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, and laws and regulations establishing quality criteria and standards for air, water, land and toxic or hazardous wastes and substances), non- compliance with which could result in a Materially Adverse Effect. Neither the Company nor any Subsidiary has received notice to the effect that its operations are not in compliance with any of the requirements of applicable federal, -18- state or local environmental, health and safety statutes and regulations or are the subject of any governmental investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could result in a Materially Adverse Effect. Section 5.16. Other Agreements. Neither the Company nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting the Company, any Subsidiary or any of their Properties, which default if uncured would have a material adverse effect on the financial condition, Properties, business or operations of the Company or any Subsidiary. Section 5.17. No Default. No Default or Event of Default has occurred and is continuing. Section 6. Conditions Precedent. The obligation of the Bank to make any Loan under this Agreement is subject to the following conditions precedent: Section 6.1. All Advances. As of the time of the making of each extension of credit (including the initial extension of credit) hereunder: (a) each of the representations and warranties set forth in Section 5 hereof and in the other Loan Documents shall be true and correct as of such time, except to the extent the same expressly relate to an earlier date; (b) the Company shall be in full compliance with all of the terms and conditions of this Agreement and of the other Loan Documents, and no Default or Event of Default shall have occurred and be continuing or would occur as a result of making such extension of credit; (c) after giving effect to such extension of credit the aggregate principal amount of all Loans outstanding under this Agreement shall not exceed the Commitment; and (d) such extension of credit shall not violate any order, judgment or decree of any court or other authority or any provision of law or regulation applicable to the Bank (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) as then in effect. The Company's request for any Loan shall constitute its warranty as to the facts specified in subsections (a) through (d), both inclusive, above. Section 6.2. Initial Advance. At or prior to the making of the initial extension of credit hereunder, the following conditions precedent shall also have been satisfied: -19- (a) the Bank shall have received the following (each to be properly executed and completed) and the same shall have been approved as to form and substance by the Bank: (i) the Note; (ii) copies of resolutions of the Board of Directors or other appropriate body of the Company authorizing the execution and delivery of the Loan Documents to which it is a party, certified by the Secretary or Assistant Secretary of the Company and of all other legal documents or proceedings taken in connection with the execution and delivery of this Agreement and the other Loan Documents to the extent the Bank or its counsel may reasonably request; (iii) an incumbency certificate containing the name, title and genuine signatures of each of the Company's Authorized Representatives; and (iv) certified copies of the articles of incorporation or charter and bylaws of the Company; (b) the Bank shall have received the initial fees called for hereby; (c) the Bank shall have received such valuations and certifications as it may reasonably require in order to satisfy itself as to, the financial condition of the Company and its Subsidiaries, and the lack of material contingent liabilities of the Company and its Subsidiaries; (d) legal matters incident to the execution and delivery of this Agreement and the other Loan Documents and to the transactions contemplated hereby shall be reasonably satisfactory to the Bank and its counsel; and the Bank shall have received the favorable written opinion of counsel for the Company in form and substance reasonably satisfactory to the Bank and its counsel; (e) the Bank shall have received a good standing certificate for the Company (dated as of the date no earlier than thirty (30) days prior to the date hereof) from the office of the secretary of state of the state of its incorporation and each state in which it is qualified to do business as a foreign corporation; and (g) the Bank shall have received such other agreements, instruments, documents, certificates and opinions as the Bank may reasonably request. Section 7. Covenants. The Company agrees that, so long as any credit is available to or in use by the Company hereunder, except to the extent compliance in any case or cases is waived in writing by the Bank: -20- Section 7.1. Maintenance of Business. The Company shall, and shall cause each Subsidiary to, preserve and maintain its existence. The Company shall, and shall cause each Subsidiary to, preserve and keep in force and effect all licenses, permits and franchises necessary to the proper conduct of its business. Section 7.2. Maintenance of Properties. The Company shall maintain, preserve and keep its property, plant and equipment in good repair, working order and condition (ordinary wear and tear excepted) and shall from time to time make all needful and proper repairs, renewals, replacements, additions and betterments thereto so that at all times the efficiency thereof shall be fully preserved and maintained, and shall cause each Subsidiary to do so in respect of Property owned or used by it. Section 7.3. Taxes and Assessments. The Company shall duly pay and discharge, and shall cause each Subsidiary to duly pay and discharge, all taxes, rates, assessments, fees and governmental charges upon or against it or its Properties, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves are provided therefor. Section 7.4. Insurance. The Company shall insure and keep insured, and shall cause each Subsidiary to insure and keep insured, with good and responsible insurance companies, all insurable Property owned by it which is of a character usually insured by Persons similarly situated and operating like Properties against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like Properties; and the Company shall insure, and shall cause each Subsidiary to insure, such other hazards and risks (including employers' and public liability risks) with good and responsible insurance companies as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Company shall upon request furnish to the Bank a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section. Section 7.5. Financial Reports. The Company shall, and shall cause each Subsidiary to, maintain a standard system of accounting in accordance with GAAP and shall furnish to the Bank and its duly authorized representatives such information respecting the business and financial condition of the Company and its Subsidiaries as the Bank may reasonably request; and without any request, shall furnish to the Bank: (a) as soon as available, and in any event within forty-five (45) days after the close of each quarterly accounting period of the Company, a copy of the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the last day of such period and the consolidated and consolidating statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the quarter and the fiscal year to date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Company in accordance with GAAP and certified to by the President or chief financial officer of the Company; -21- (b) as soon as available, and in any event within one hundred twenty (120) days after the close of each annual accounting period of the Company, a copy of the consolidated balance sheet of the Company and its Subsidiaries as of the close of such period and the consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such period, and accompanying notes thereto, each in reasonable detail showing in comparative form the figures for the previous fiscal year, accompanied by an unqualified opinion thereon of Ernst & Young or another firm of independent public accountants of recognized national standing, selected by the Company and satisfactory to the Bank, to the effect that the financial statements have been prepared in accordance with GAAP and present fairly in all material respects in accordance with GAAP the consolidated financial condition of the Company and its Subsidiaries as of the close of such fiscal year and the results of their operations and cash flows for the fiscal year then ended; (c) within the period provided in subsection (b) above, the written statement of the accountants who certified the audit report thereby required that in the course of their audit they have obtained no knowledge of any Default or Event of Default, or, if such accountants have obtained knowledge of any such Default or Event of Default, they shall disclose in such statement the nature and period of the existence thereof; (d) promptly upon the filing or making thereof, copies of each filing and report made by the Company or any Subsidiary with or to any securities exchange or the Securities and Exchange Commission, and of each communication from the Company or any Subsidiary to shareholders generally; (e) promptly after receipt thereof, any additional written reports, management letters or other detailed information contained in writing concerning significant aspects of the Company's or any Subsidiary's operations and financial affairs given to it by its independent public accountants; (f) as soon as available, and in any event within thirty (30) days following the end of each fiscal year of the Company, a copy of the Company's consolidated and consolidating business plan for the following fiscal year, such business plan to show the Company's projected consolidated and consolidating revenues, expenses, and balance sheet on month-by-month basis, such business plan to be in reasonable detail prepared by the Company and in form reasonably satisfactory to the Bank; and (g) promptly after knowledge thereof shall have come to the attention of any responsible officer of the Company, written notice of any threatened or pending litigation or governmental proceeding or labor controversy against the Company or any Subsidiary which, if adversely determined, would constitute a Materially Adverse Effect or of the occurrence of any Default or Event of Default hereunder. Each of the financial statements furnished to the Bank pursuant to subsections (a) and (b) of this Section shall be accompanied by a written certificate in the form attached hereto as Exhibit B signed by the President or chief financial officer of the Company to the effect that to the best of -22- such officer's knowledge and belief no Default or Event of Default has occurred during the period covered by such statements or, if any such Default or Event of Default has occurred during such period, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Company to remedy the same. Such certificate shall also set forth the calculations supporting such statements in respect of Sections 7.7, 7.8, 7.9, 7.10, 7.11 and 7.12 of this Agreement. Section 7.6. Inspection. The Company shall, and shall cause each Subsidiary to, permit the Bank and its duly authorized representatives and agents to visit and inspect any of the Properties, corporate books and financial records of the Company and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Company and each Subsidiary, and to discuss the affairs, finances and accounts of the Company and each Subsidiary with, and to be advised as to the same by, its officers, employees and independent public accountants (and by this provision the Company hereby authorizes such accountants to discuss with the Bank the finances and affairs of the Company and of each Subsidiary) at such reasonable times and reasonable intervals as the Bank may designate. Section 7.7. Quick Ratio. The Company will at all times maintain a Quick Ratio of not less than 1.0 to 1.0. Section 7.8. Leverage Ratio. The Company will at all times maintain a ratio of Total Liabilities to Tangible Net Worth (the "Leverage Ratio") of not more than 1.35 to 1.00. Section 7.9. Tangible Net Worth. The Company will at all times maintain Tangible Net Worth at not less than the sum of $50,465,000 plus, on a cumulative basis, 75% of positive Net Income for each fiscal year subsequent to the fiscal year ended December 31, 1998 plus, at the time of offering, 75% of Equity Offerings issued after the date of this Agreement. Section 7.10. Net Income. The Company will not permit Net Income to be less than $0 for any two consecutive fiscal quarters nor will it permit any negative Net Income for any single fiscal quarter to exceed the negative equivalent of 10% of Tangible Net Worth. Section 7.11. Interest Coverage Ratio. The Company will, as of the last day of each fiscal quarter of the Company, maintain the ratio of EBITDA for the four fiscal quarters of the Company then ended to Interest Expense for the same four fiscal quarters then ended (the "Interest Coverage Ratio") of not less than 3.5 to 1.0. Section 7.12. Capital Expenditures. The Company will not, nor will it permit any Subsidiary to, expend or become obligated for capital expenditures (as determined in accordance with GAAP) in an aggregate amount in excess of $10,000,000 during any fiscal year of the Company. Section 7.13. Indebtedness for Borrowed Money. The Company shall not, nor shall it permit any Subsidiary to, issue, incur, assume, create or have outstanding any Indebtedness for Borrowed Money; provided, however, that the foregoing shall not restrict nor operate to prevent any of the following ("Permitted Indebtedness"): -23- (a) the Obligations of the Company owing to the Bank and other indebtedness and obligations of the Company or any Subsidiary from time to time owing to the Bank; (b) purchase money indebtedness and Capitalized Lease Obligations secured by Liens permitted by Section 7.14(e) hereof in an aggregate amount not to exceed $7,000,000 at any one time outstanding; (c) Indebtedness secured by Liens of carriers, warehousemen, mechanics, landlords or materialmen that constitute Permitted Liens under Section 7.14(a) below; (d) Indebtedness in respect of liabilities permitted under Section 7.14(c) below; and (e) unsecured term debt owed by Micro-Controle, S.A. to financial institutions as of the date of this Agreement; and (f) Indebtedness in an aggregate amount not to exceed $15,000,000 solely in connection with the Corning Acquisition. Section 7.14. Liens. The Company shall not, nor shall it permit any Subsidiary to, create, incur or permit to exist any Lien of any kind on any Property owned by the Company or any Subsidiary; provided, however, that the foregoing shall not apply to nor operate to prevent: (a) Liens arising by statute in connection with worker's compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges, good faith cash deposits in connection with tenders, contracts or leases to which the Company or any Subsidiary is a party or other cash deposits required to be made in the ordinary course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor; (b) mechanics', workmen's, materialmen's, landlords', carriers', or other similar Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest; (c) the pledge of assets for the purpose of securing an appeal, stay or discharge in the course of any legal proceeding, provided that the aggregate amount of liabilities of the Company and its Subsidiaries secured by a pledge of assets permitted under this subsection, including interest and penalties thereon, if any, shall not be in excess of $1,000,000 at any one time outstanding; (d) the Liens existing as of the date hereof and disclosed on Exhibit C hereto; -24- (e) Liens on property of the Company or any of its Subsidiaries created solely for the purpose of securing indebtedness permitted by Section 7.13(b) hereof, representing or incurred to finance, refinance or refund the purchase price of Property, provided that no such Lien shall extend to or cover other Property of the Company or such Subsidiary other than the respective Property so acquired, and the principal amount of indebtedness secured by any such Lien shall at no time exceed the original purchase price of such Property; and (f) easements, right-of-way, zoning and similar restrictions and other similar encumbrances or title defects which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company; and (g) Liens arising solely in connection with the Corning Acquisition. Section 7.15. Investments, Acquisitions, Loans, Advances and Guaranties. The Company shall not, nor shall it permit any Subsidiary to, directly or indirectly, make, retain or have outstanding any investments (whether through purchase of stock or obligations or otherwise) in, or loans or advances (other than for travel advances and other similar cash advances made to employees in the ordinary course of business) to, any other Person, or acquire all or any substantial part of the assets or business of any other Person or division thereof, or be or become liable as endorser, guarantor, surety or otherwise for any debt, obligation or undertaking of any other Person, or otherwise agree to provide funds for payment of the obligations of another, or supply funds thereto or invest therein or otherwise assure a creditor of another against loss, or apply for or become liable to the issuer of a letter of credit which supports an obligation of another, or subordinate any claim or demand it may have to the claim or demand of any other Person; provided, however, that the foregoing shall not apply to nor operate to prevent: (a) investments in direct obligations of the United States of America or of any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, provided that any such obligations shall mature within one year of the date of issuance thereof; (b) investments in commercial paper rated at least P-1 by Moody's Investors Services, Inc. and at least A-1 by Standard & Poor's Corporation maturing within 270 days of the date of issuance thereof; (c) investments in certificates of deposit issued by any United States commercial bank having capital and surplus of not less than $100,000,000 which have a maturity of one year or less; (d) endorsement of items for deposit or collection of commercial paper received in the ordinary course of business; -25- (e) the present investments, loans and advances by the Company in its Subsidiaries as disclosed on Schedule 5.2 hereof and additional investments, loans and advances by the Company of up to $12,000,000 in and to Subsidiaries; (f) the Company's guarantee of the indebtedness permitted under Section 7.13(c) hereof; (g) Acquisitions by the Company of substantially all of the assets of corporations or Acquisitions of Wholly-Owned Domestic Restricted Subsidiaries from and after the date hereof so long as (i) the aggregate amount of cash consideration payable in connection with such Acquisitions does not exceed $3,000,000, (ii) the aggregate amount of stock consideration payable in connection with such Acquisitions does not exceed $5,000,000, (iii) the Acquisition of a Domestic Restricted Subsidiary shall have been approved by the board of directors of such Person prior to such Acquisition and (iv) such acquired Domestic Restricted Subsidiary shall have complied with the provisions of Section 7.23 hereof; (h) investments in the form of accounts receivable arising from sales of goods or services in the ordinary course of business; (i) investments in the form of advances or prepayments to suppliers in the ordinary course of business; and (j) investments in addition to those otherwise permitted under this Section 7.15 of a type described on Exhibit D hereto which bear the equivalent of at least A-1 or AA by Standard & Poor's Corporation and mature within one year; and (k) existing minority investments in Suskiyou, ILX and Optra, and, after the date hereof, the Company may make additional minority investments of up to $2,000,000 per fiscal year; and (l) the Corning Acquisition. In determining the amount of investments, acquisitions, loans, advances and guarantees permitted under this Section 7.15, investments and acquisitions shall always be taken at the original cost thereof (regardless of any subsequent appreciation or depreciation therein), loans and advances shall be taken at the principal amount thereof then remaining unpaid, and guarantees shall be taken at the amount of obligations guaranteed thereby. Section 7.16. Mergers, Consolidations and Sales. The Company shall not, nor shall it permit any Subsidiary to, be a party to any merger or consolidation, or sell, transfer, lease or otherwise dispose of all or any substantial part of its Property, including any disposition of a substantial part of, its Property as part of a sale and leaseback transaction, or in any event sell or discount (with or without recourse) any of its notes or accounts receivable; provided, however, that this Section shall not apply to nor operate to prevent the Company or any Subsidiary from (a) selling its inventory in the ordinary course of its business, (b) selling its equipment or other -26- tangible Property that is obsolete or no longer useful or necessary to its business in the ordinary course of its business, or (c) selling its cash equivalents or marketable securities in the ordinary course of its business and in a manner consistent with its customary and usual cash management practices. As used in this Section 7.16, a sale, lease, transfer or disposition of assets shall be deemed to be of a "substantial part" of the Company's or any Subsidiary's Property if the book value of such assets, when added to the book value of all other assets sold, leased, transferred or disposed of by the Company or such Subsidiary exceeds 10% of the Company's tangible assets and, further provided, that any Subsidiary of the Company may merge or consolidate with or into or sell, lease or otherwise convey all or a substantial part of its assets to the Company or any Wholly-Owned Domestic Restricted Subsidiary; provided that, in any such merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation. Section 7.17. Maintenance of Subsidiaries. The Company shall not assign, sell or transfer, or permit any Subsidiary to issue, assign, sell or transfer, any shares of capital stock of a Subsidiary except to another Subsidiary or to the Company; provided that the foregoing shall not operate to prevent the issuance, sale and transfer to any person of any shares of capital stock of a Subsidiary solely for the purpose of qualifying, and to the extent legally necessary to qualify, such person as a director of such Subsidiary. Section 7.18. Dividends and Certain Other Restricted Payments. The Company shall not during any fiscal year (a) declare or pay any dividends on or make any other distributions in respect of any class or series of its capital stock (other than dividends payable on its common stock of up to $.04 per share per annum and dividends payable solely in its capital stock and repurchases of up to 50,000 shares of its capital stock per year) or (b) directly or indirectly purchase, redeem or otherwise acquire or retire any of its capital stock, provided, however, that the foregoing shall not apply to nor operate to prevent the common stock share repurchase program approved by the Company's Board of Directors to repurchase and retire shares issued solely for the Company's equity compensation plans and employee stock purchase plan or to repurchase shares at cost pursuant to rights under stock option or restricted stock purchase agreements. Section 7.19. ERISA. The Company shall, and shall cause each Subsidiary to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its Properties. The Company shall, and shall cause each Subsidiary to, promptly notify the Bank of (i) the occurrence of any reportable event (as defined in ERISA) with respect to a Plan, (ii) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor, (iii) its intention to terminate or withdraw from any Plan, and (iv) the occurrence of any event with respect to any Plan which would result in the incurrence by the Company or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement Welfare Plan benefit. Section 7.20. Compliance with Laws. The Company shall, and shall cause each Subsidiary to, comply in all respects with the requirements of all federal, state and local laws, -27- rules, regulations, ordinances and orders applicable to or pertaining to their Properties or business operations, non-compliance with which could result in a Materially Adverse Effect. Section 7.21. Burdensome Contracts With Affiliates. The Company shall not, nor shall it permit any Subsidiary to, enter into any contract, agreement or business arrangement with any of its Affiliates (other than with Wholly-Owned Subsidiaries) on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts, agreements or business arrangements between Persons not affiliated with each other. Section 7.22. No Changes in Fiscal Year. Neither the Company nor any Subsidiary shall change its fiscal year from its present basis without the prior written consent of the Bank. Section 7.23. Formation of Subsidiaries. Except for existing Subsidiaries designated on Schedule 5.2 hereto, the Company shall not, nor shall it permit any Subsidiary to, acquire any Subsidiary without the prior written consent of the Bank, such consent not to be unreasonably withheld. Section 7.24. Change in the Nature of Business. The Company shall not, and shall not permit any Subsidiary to, engage in any business or activity if as a result the general nature of the business of the Company or any Subsidiary would be changed in any material respect from the general nature of the business engaged in by the Company or such Subsidiary on the date of this Agreement. Section 7.25. Limitation on Certain Restrictions on Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise permit to exist or become effective any Lien or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in profits owned by the Company or any Subsidiary or pay any indebtedness owed to the Company or (b) make loans or advances to the Company or any of its Subsidiaries, except for such Liens or restrictions existing under or by reason of (i) applicable law or (ii) this Agreement and the other Loan Documents. Section 7.26. European Monetary Union. (a) If, as a result of the EMU Commencement, (i) any Alternative Currency ceases to be lawful currency of the state issuing the same and is replaced by the Euro or (ii) any Alternative Currency and the Euro are at the same time both recognized by the central bank or comparable governmental authority of the state issuing such currency as lawful currency of such state, then any amount payable hereunder by any party hereto in such Alternative Currency (including, without limitation, any Loan to be made under this Agreement) shall instead be payable in the Euro and the amount so payable shall be determined by redenominating or converting such amount into the Euro at the exchange rate officially fixed by the European Central Bank for the purpose of implementing the EMU, provided, that to the extent any EMU Legislation provides that an amount denominated either in the Euro or in the applicable Alternative Currency can be paid either in Euros or in the applicable Alternative Currency, each party to this Agreement shall be entitled to pay or repay such amount in Euros or in the applicable Alternative Currency. Prior to the occurrence of the event or events described in clause (i) or (ii) of the preceding sentence, each amount payable hereunder in any -28- such Alternative Currency will, except as otherwise provided herein, continue to be payable only in that Alternative Currency. (b) The Company shall from time to time, at the request of the Bank, pay to the Bank the amount of any cost or increased cost incurred by, or of any reduction in any amount payable to or in the effective return on its capital to, or of interest or other return foregone by, the Bank or any holding company of the Bank as a result of the introduction of, changeover to or operation of the Euro in any applicable state to the extent attributable to the Bank's obligations hereunder or for the credit which is the subject matter hereof. (c) With respect to the payment of any amount denominated in the Euro or in any Alternative Currency, the Bank shall not be liable to the Company in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Bank if the Bank shall have taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds (in the Euro Unit or, as the case may be, in any Alternative Currency) to the account with the bank in the principal financial center in the Euro Member which the Company or, as the case may be, the Bank shall have specified for such purpose. In this paragraph (c), "all relevant steps" means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Bank may from time to time determine for the purpose of clearing or settling payments of the Euro. (d) If the basis of accrual of interest or fees expressed in this Agreement with respect to the currency of any state that becomes a Euro Member shall be inconsistent with any convention or practice in the London interbank market for the basis of accrual of interest or fees in respect of the Euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such state becomes a Euro Member; provided, that if any Loan in the currency of such state is outstanding immediately prior to such date, such replacement shall take effect, with respect to such Loan, at the end of the then current Interest Period. (e) In addition, this Agreement (including, without limitation, the definition of Eurocurrency Loans) will be amended to the extent determined by the Bank (acting reasonably and in consultation with the Company) to be necessary to reflect such EMU Commencement and change in currency and to put the Bank and the Company in the same position, so far as possible, that they would have been in if such implementation and change in currency had not occurred. Except as provided in the foregoing provisions of this Section 7.26, no such implementation or change in currency nor any economic consequences resulting therefrom shall (i) give rise to any right to terminate prematurely, contest, cancel, rescind, alter, modify or renegotiate the provisions of this Agreement or (ii) discharge, excuse or otherwise affect the performance of any obligations of Company or the Bank under this Agreement, any Note or any other Loan Documents. -29- Section 8. Events of Default and Remedies. Section 8.1. Events of Default. Any one or more of the following (unless waived in writing by the Bank) shall constitute an "Event of Default" hereunder: (a) default in the payment of any principal of any Obligation or any principal of any other indebtedness or obligation (whether direct, contingent or otherwise) of the Company owing to the Bank when due, whether at the stated maturity thereof or at any time provided for in this Agreement or default for a period of ten (10) days in the payment when due of any interest or other Obligation payable by the Company hereunder or under any other Loan Documents (whether at the stated maturity thereof or at any other time provided for in this Agreement) or default for a period of ten (10) days in the payment when due of any interest or other amount payable in respect or any other indebtedness or obligation (whether direct, contingent or otherwise) of the Company owing to the Bank; or (b) default in the observance or performance of any covenant set forth in Sections 7.7 through 7.12 or 7.16, 7.18, 7.19, 7.24 or 7.25 hereof; or (c) default in the observance or performance of any other provision hereof or of any other Loan Document which is not remedied within thirty (30) days after the earlier of (i) the date on which such failure shall first become known to any officer of the Company or (ii) written notice thereof is given to the Company by the Bank; or (d) any representation or warranty made by the Company herein or in any other Loan Document, or in any statement or certificate furnished by it pursuant hereto or thereto, or in connection with any extension of credit made hereunder, proves untrue in any material respect as of the date of the issuance or making thereof; or (e) any event occurs or condition exists (other than those described in subsections (a) through (d) above) which is specified as an event of default under any of the other Loan Documents, or any of the Loan Documents shall for any reason not be or shall cease to be in full force and effect, or any of the Loan Documents is declared to be null and void, or the Company or any Person acting on its behalf or any shall challenge the validity of any Loan Document or the obligations of the Company thereunder; or (f) default shall occur under any Indebtedness for Borrowed Money in an aggregate principal amount of $500,000 or more issued, assumed or guaranteed by the Company or any Subsidiary, or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated), or any such Indebtedness for Borrowed Money shall not be paid when due (whether by lapse of time, acceleration or otherwise); or -30- (g) any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $500,000 shall be entered or filed against the Company or any Subsidiary or against any of their Property and which remains unvacated, unbonded, unstayed or unsatisfied for a period of thirty (30) days; or (h) the Company or any member of its Controlled Group shall fail to pay when due an amount or amounts aggregating in excess $250,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $250,000 (collectively, a "Material Plan") shall be filed under Title IV of ERISA by the Company or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against the Company or any member of its Controlled Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within thirty (30) days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (i) dissolution or termination of the existence of the Company or any Restricted Subsidiary (other than due to merger of such Restricted Subsidiary with and into the Company); or (j) the Company or any Restricted Subsidiary shall (i) have entered involuntarily against it in an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (vi) take any corporate action in furtherance of any matter described in parts (i) through (v) above, or (vii) fail to contest in good faith any appointment or proceeding described in Section 8.1(k) hereof; or (k) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Company or any Restricted Subsidiary or any substantial part of any of their Property, or a proceeding described in Section 8.1(j)(v) shall be instituted against the Company or any Restricted Subsidiary, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of sixty (60) days. -31- Section 8.2. Non-Bankruptcy Defaults. When any Event of Default described in subsection (a) through (i), both inclusive, of Section 8.1 has occurred and is continuing, the Bank may, by notice to the Company, take one or more of the following actions: (a) terminate the obligation of the Bank to extend any further credit hereunder on the date (which may be the date thereof) stated in such notice; (b) declare the principal of and the accrued interest on the Note to be forthwith due and payable and thereupon the Note, including both principal and interest and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall be and become immediately due and payable without further demand, presentment, protest or notice of any kind; and (c) enforce any and all rights and remedies available to it under the Loan Documents or applicable law. Section 8.3. Bankruptcy Defaults. When any Event of Default described in subsection (j) or (k) of Section 8.1 has occurred and is continuing, then the Note, including both principal and interest, and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind, and the obligation of the Bank to extend further credit pursuant to any of the terms hereof shall immediately terminate. In addition, the Bank may exercise any and all remedies available to it under the Loan Documents or applicable law. Section 8.4. [Intentionally Blank]. Section 9. Miscellaneous. Section 9.1. Non-Business Day. If any payment hereunder becomes due and payable on a day which is not a Business Day, the due date of such payment shall be extended to the next succeeding Business Day on which date such payment shall be due and payable. In the case of any payment of principal falling due on a day which is not a Business Day, interest on such principal amount shall continue to accrue during such extension at the rate per annum then in effect, which accrued amount shall be due and payable on the next scheduled date for the payment of interest. Section 9.2. No Waiver, Cumulative Remedies. No delay or failure on the part of the Bank or on the part of the holder of the Obligations in the exercise of any power or right shall operate as a waiver thereof or as an acquiescence in any default, nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies hereunder of the Bank and of the holder of the Obligations are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. Section 9.3. Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement or of any other Loan Document, nor consent to any departure by -32- the Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and the Company. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. Section 9.4. Costs and Expenses. The Company agrees to pay on demand the reasonable costs and expenses of the Bank in connection with the negotiation, preparation, execution and delivery of any consents hereunder or waivers or amendments to this Agreement or the other Loan Documents, including the fees and expenses of Messrs. Chapman and Cutler counsel for the Bank, with respect to all of the foregoing (whether or not the transactions contemplated hereby are consummated). The Company further agrees to pay to the Bank or any other holder of the Obligations all costs and expenses (including court costs and attorneys' fees), if any, incurred or paid by the Bank or any other holder of the Obligations in connection with any Default or Event of Default or in connection with the enforcement of this Agreement or any of the other Loan Documents or any other instrument or document delivered hereunder or thereunder. The Company further agrees to indemnify the Bank, and any security trustee, and their respective directors, officers and employees, against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor, whether or not the indemnified Person is a party thereto) which any of them may pay or incur arising out of or relating to any Loan Document or any of the transactions contemplated thereby or the direct or indirect application or proposed application of the proceeds of any extension of credit made available hereunder, other than those which arise from the gross negligence or willful misconduct of the party claiming indemnification. The Company, upon demand by the Bank at any time, shall reimburse the Bank for any legal or other expenses incurred in connection with investigating or defending against any of the foregoing except if the same is directly due to the gross negligence or willful misconduct of the party to be indemnified. The obligations of the Company under this Section 9.4 shall survive the termination of this Agreement. Section 9.5. Documentary Taxes. The Company agrees to pay on demand any documentary, stamp or similar taxes payable in respect of this Agreement or any other Loan Document, including interest and penalties, in the event any such taxes are assessed, irrespective of when such assessment is made and whether or not any credit is then in use or available hereunder. Section 9.6. Survival of Representations. All representations and warranties made herein or in any of the other Loan Documents or in certificates given pursuant hereto or thereto shall survive the execution and delivery of this Agreement and the other Loan Documents, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. Section 9.7. Survival of Indemnities. All indemnities and other provisions relative to reimbursement to the Bank of amounts sufficient to protect the yield of the Bank with respect to the Loans, including, but not limited to, Sections 2.7 and 2.9 hereof, shall survive the termination of this Agreement and the payment of the Note. -33- Section 9.8. Notices. Except as otherwise specified herein, all notices hereunder shall be in writing (including cable or telecopy) and shall be given to the relevant party at its address or telecopier number set forth below, or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: to the Company at: Newport Corporation 1791 Deere Avenue Irvine, California 92606 Attention: Robert C. Hewitt Telephone: (949) 253-1405 Telecopy: (949) 253-1671 to the Bank at: ABN AMRO Bank N.V. 300 South Grand Avenue Suite 1115 Los Angeles, California 90071-7519 Attention: Mr. John A. Miller Telephone: (213) 687-2072 Telecopy: (213) 687-2061 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section 9.8 and a confirmation of such telecopy has been received by the sender, (ii) if given by telex, when such telex is transmitted to the telex number specified in this Section 9.8 and the answer back is received by sender, (iii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iv) if given by any other means, when delivered at the addresses specified in this Section 9.8; provided that any notice given pursuant to Section 1 or Section 2 hereof shall be effective only upon receipt. Section 9.9. Currency. Each reference in this Agreement to U.S. Dollars or to an Alternative Currency (the "relevant currency") is of the essence. To the fullest extent permitted by law, the obligation of the Company in respect of any amount due in the relevant currency under this Agreement shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in the relevant currency that the Bank entitled to receive such payment may, in accordance with normal banking procedures, purchase with the sum paid in such other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which such party receives such payment. If the amount in the relevant currency that may be so purchased for any reason falls short of the amount originally due, the Company shall pay such additional amounts, -34- in the relevant currency, as may be necessary to compensate for the shortfall. Any obligations of the Company not discharged by such payment shall, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided herein, shall continue in full force and effect. Section 9.10. Currency Equivalence. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due from the Company hereunder or under the Note in the currency expressed to be payable herein or under the Note (the "specified currency") into another currency, the parties agree that the rate of exchange used shall be that at which in accordance with normal banking procedures the Bank could purchase the specified currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Company in respect of any such sum due to the Bank hereunder or under the Note shall, notwithstanding any judgment in a currency other than the specified currency, be discharged only to the extent that on the Business Day following receipt by the Bank of any sum adjudged to be so due in such other currency, may in accordance with normal banking procedures purchase the specified currency with such other currency. If the amount of the specified currency so purchased is less than the sum originally due to the Bank in the specified currency, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Bank against such loss, and if the amount of the specified currency so purchased exceeds the amount originally due to the Bank in the specified currency. Section 9.11. Headings. Section headings used in this Agreement are for convenience of reference only and are not a part of this Agreement for any other purpose. Section 9.12. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 9.13. Counterparts. This Agreement may be executed in any number of counterparts, and by different parties hereto no separate counterpart signature pages, and all such counterparts taken together shall be deemed to constitute one and the same instrument. Section 9.14. Binding Nature, Governing Law, Etc. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Bank and the benefit of its successors and assigns, including any subsequent holder of the Obligations. The Company may not assign its rights hereunder without the written consent of the Bank. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. This Agreement and the rights and duties of the parties hereto shall be governed by, and construed in accordance with, the internal laws of the State of California without regard to principles of conflicts of laws. Section 9.15. Submission to Jurisdiction; Appointment of Agent for Process; Waiver of Jury Trial. The Company hereby submits to the nonexclusive jurisdiction of the Federal or State courts sitting in Orange County, California for purposes of all legal proceedings arising out of or -35- relating to this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company and the Bank each hereby irrevocably waive any and all right to trial by jury in any legal proceeding arising out of or relating to any Loan Document or the transactions contemplated thereby. [Remainder of this Page Intentionally Blank] -36- Upon your acceptance hereof in the manner hereinafter set forth, this Agreement shall constitute a contract between us for the uses and purposes hereinabove set forth. Dated as of this 29th day of October, 1999. Newport Corporation By:________________________________ Its_____________________________ Accepted and agreed to as of the day and year last above written. ABN AMRO Bank N.V. By:________________________________ Its:____________________________ By:________________________________ Its:____________________________ -37- Exhibit A Newport Corporation Revolving Credit Note $10,000,000 October 29, 1999 On the Termination Date, for value received, the undersigned, Newport Corporation, a Nevada corporation (the "Company"), hereby promises to pay to the order of ABN AMRO Bank N.V. (the "Bank") at its office at 300 South Grand Avenue, Los Angeles, California, the principal sum of (i) Ten Million and no/100 Dollars ($10,000,000), or (ii) such lesser amount as may at the time of the maturity hereof, whether by acceleration or otherwise, be the aggregate unpaid principal amount of all Loans owing from the Company to the Bank under the Revolving Credit provided for in the Credit Agreement hereinafter mentioned. This Note evidences Loans made and to be made to the Company by the Bank under the Revolving Credit provided for under that certain 364-Day $10,000,000 Revolving Credit Agreement dated as of October 29, 1999 between the Company and the Bank (said Credit Agreement, as the same may be amended, modified or restated from time to time, being referred to herein as the "Credit Agreement"), and the Company hereby promises to pay interest at the office described above on such Loans evidenced hereby at the rates and at the times and in the manner specified therefor in the Credit Agreement. Each Loan made under the Revolving Credit against this Note, any repayment of principal hereon, the status of each such Loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the interest rate and Interest Period applicable thereto shall be endorsed by the holder hereof on a schedule to this Note or recorded on the books and records of the holder hereof (provided that such entries shall be endorsed on a schedule to this Note prior to any negotiation hereof). The Company agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the entries endorsed on a schedule to this Note or recorded on the books and records of the holder hereof shall be prima facie evidence of the unpaid principal balance of this Note, the status of each Loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the interest rate and Interest Period applicable thereto. This Note is issued by the Company under the terms and provisions of the Credit Agreement and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms are defined in the Credit Agreement. -38- The Company hereby promises to pay all costs and expenses (including attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Company hereby waives presentment for payment and demand. This Note shall be construed in accordance with, and governed by, the internal laws of the State of California without regard to principles of conflicts of laws. Newport Corporation By:________________________________ Name:______________________________ Its:_______________________________ -39- Exhibit B Compliance Certificate This Compliance Certificate is furnished to ABN AMRO Bank N.V. (the "Bank") pursuant to that certain 364-Day $10,000,000 Revolving Credit Agreement dated as of October 29, 1999, by and between Newport Corporation (the "Company") and the Bank (the "Credit Agreement"). Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. The Undersigned hereby certifies that: 1. I am the duly elected _____________________________________ of the Company; 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Company and its Subsidiaries during the accounting period covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or the occurrence of any event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. The financial statements required by Section 7.5 of the Credit Agreement and being furnished to you concurrently with this certificate are, to the best of my knowledge, true, correct and complete as of the dates and for the periods covered thereby; and 5. The Attachment hereto sets forth financial data and computations evidencing the Company's compliance with certain covenants of the Credit Agreement, all of which data and computations are, to the best of my knowledge, true, complete and correct and have been made in accordance with the relevant Sections of the Credit Agreement. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existing and the action which the Company has taken, is taking, or proposes to take with respect to each such condition or event: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ -1- The foregoing certifications, together with the computations set forth in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this _____ day of ____________, 19__. Newport Corporation By Its:_____________________________ -2- Attachment to Compliance Certificate Newport Corporation Compliance Calculations for Credit Agreement Dated as of October 29, 1999 Calculations as of ____________, 19__ ================================================================================ A. Quick Ratio (Section 7.7) ------------------------- 1. Current assets $___________ A1 2. Inventory $___________ A2 3. Line A1 minus Line A2 $___________ A3 4. Current liabilities (excluding Loans) $___________ A4 5. Ratio of Line A3 to Line A4 ______: 1.0 6. Line A5 ratio must not be less than 1.0: 1.0 Company in compliance? yes/no B. Tangible Net Worth (Section 7.9) -------------------------------- 1. Total shareholder's equity $___________ B1 2. Sum of: (i) intangibles $___________ (ii) write-up of assets $___________ $___________ B2 3. Line B1 minus Line B2 $====== (Tangible Net Worth) B3 4. Line B3 must be greater than or equal to $___________ Company in compliance? yes/no -1- C. Leverage Ratio (Section 7.8) ---------------------------- 1. Total liabilities $___________ C1 2. Tangible Net Worth (line B3 above) $___________ C2 3. Ratio of Line C1 to Line C2 ______: 1.0 4. Line C3 ratio must not be greater than 1.35: 1.0 Company in compliance? yes/no D. Interest Coverage Ratio (Section 7.11) -------------------------------------- 1. Net Income for past 4 quarters $___________ D1 2. Interest Expense for past 4 quarters $___________ D2 3. Federal, state and local income $___________ taxes for past 4 quarters D3 4. Depreciation and amortization for $___________ past 4 quarters D4 5. Add lines D1, D2, D3 and D4 $======= (EBITDA) D5 6. Ratio of Line D5 to Line D2 ______: 1.0 7. Line D6 ratio must not be less than 3.5: 1.0 Company in compliance? yes/no E. Net Income (Section 7.10) ------------------------- 1. Net Income for past quarter $___________ E1 2. Net Income for fiscal quarter preceding $___________ Line E1 quarter E2 3. 10% of Tangible Net Worth (Line B3 above) $___________ E3 4. Line E1 amount must not exceed Line E3 -2- 5. Line E2 amount must exceed $0 Company in compliance yes/no F. Capital Expenditures (Section 7.12) ----------------------------------- 1. Capital expenditures fiscal year to date $___________ F1 2. Line F1 amount must not exceed $10,000,000 Company in compliance? yes/no -3- Exhibit C Existing Liens None, other than those liens permitted under Section 7.14. -1- Exhibit D "U.S. Treasury Securities" - Obligations of the U.S. government. Bills have a maturity of one year or less and are sold on a discount basis. Notes have maturities of one to seven years and bonds have longer maturities; both are interest-bearing. "U.S. Government Agency Securities" - Obligations of the U.S. government agencies or departments - some owned by the federal government, some sponsored by it but privately held. "Domestic" or "Eurodollar Certificates" or "Deposits" - U.S. dollar deposits or certificates of deposit, held domestically or overseas from one day to five years. "Bankers Acceptances" - Time drafts sold on a discount basis with a maturity of six months or less, with a bank accepting primary responsibility for paying the draft whether or not the customer has repaid the bank. "Money Market Funds" - Daily funds invested in a portfolio of short-term instruments, with special funds developed for corporate use. Smith Barney's Money Fund Cash Portfolio Class A and Temporary Investment Fund, Inc. are included in this approved group. "Commercial Paper" - Company short-term unsecured promissory notes with a fixed maturity, sold on a discount basis from one to 270 days. "Municipal Government Notes and Bonds" - Securities issued by a state or local government, usually tax exempt. "Floating Rate Municipal Notes and Bonds" - Variable rate long term municipal bonds which may be "put back" to the issuer at par plus accrued interest at frequent intervals. "Municipal Auction Rate Preferred Stock" - Mutual funds based on a diversified portfolio of municipal bonds, by law backed by assets equal to at least 200% of face value, and bearing interest at auction set rates in frequent intervals. "Taxable Municipal Auction Rate Notes" - Notes issued by non-profit corporations which bear interest at auction set rates on a taxable basis. "Corporate Notes" - Corporate unsecured promissory notes with a fixed maturity from nine months to 15 years. "Corporate Auction Rate Preferred Stock" - Corporate perpetual preferred stock with a floating rate dividend eligible for the 70% intercorporate dividend received deduction. The dividend pricing mechanism ensures that the stock will trade at par on auction dates. -1- Schedule 5.2 Subsidiaries
Jurisdiction of Percentage Name Incorporation Ownership Micro-Controle Benelux S.A. (inactive) Belgium 100* Newport Domestic International Sales Corp. California 100 (inactive) Newport European Distribution Company California 100 Newport Government Systems, Inc. California 100 (inactive) Newport Instruments Canada Corporation Canada 100 MC Holding S.A. France 100* Micro-Controle S.A. (1) France 100* Newport GmbH Germany 100 Micro-Controle Italia SRL Italy 100 Newport BV Netherlands 100 Newport Instruments AG Switzerland 100 Micro-Controle Holdings Ltd. (inactive) (2) United Kingdom 100 Micro-Controle Ltd. (inactive) (2) United Kingdom 100 Micro-Controle UK Ltd. (inactive) (2) United Kingdom 100 Newport Ltd. United Kingdom 100 Newport Foreign Sales Corporation Barbados 100 Environmental Optical Sensors, Inc. Colorado 100
*Director's Shares exist for this Subsidiary (1) Owned directly by MC Holding S.A. (2) Owned directly by Newport Ltd. -1- EX-10.10 3 3-YEAR $15,000,000 CREDIT AGREEMENT Exhibit 10.10 ================================================================================ 3-Year $15,000,000 Revolving Credit Agreement Dated as of October 29, 1999 between Newport Corporation and ABN AMRO Bank N.V. ================================================================================ -1- Table of Contents
Section Description Page Section 1. The Credits....................................................................... 1 Section 1.1. Revolving Credit.................................................................. 1 Section 1.2. Revolving Credit Loans............................................................ 1 Section 1.3. Letters of Credit................................................................. 2 Section 1.4. Manner and Disbursement of Loans.................................................. 3 Section 2. Interest and Change in Circumstances.............................................. 3 Section 2.1. Interest Rate Options............................................................. 3 Section 2.2. Minimum Amounts................................................................... 4 Section 2.3. Computation of Interest........................................................... 5 Section 2.4. Manner of Rate Selection.......................................................... 5 Section 2.5. Change of Law..................................................................... 5 Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR............... 5 Section 2.7. Taxes and Increased Costs......................................................... 6 Section 2.8. Change in Capital Adequacy Requirements........................................... 7 Section 2.9. Funding Indemnity................................................................. 7 Section 2.10. Lending Branch.................................................................... 7 Section 2.11. Discretion of Bank as to Manner of Funding........................................ 7 Section 3. Fees, Prepayments, Terminations and Applications.................................. 8 Section 3.1. Fees.............................................................................. 8 Section 3.2. Voluntary Prepayments............................................................. 8 Section 3.3. Terminations...................................................................... 9 Section 3.4. Place and Application of Payments................................................. 9 Section 3.5. Notations......................................................................... 9 Section 4. Definitions; Interpretation....................................................... 10 Section 4.1. Definitions....................................................................... 10 Section 4.2. Interpretation.................................................................... 17 Section 5. Representations and Warranties.................................................... 18 Section 5.1. Organization and Qualification.................................................... 18 Section 5.2. Subsidiaries...................................................................... 18 Section 5.3. Corporate Authority and Validity of Obligations................................... 18 Section 5.4. Use of Proceeds; Margin Stock..................................................... 19 Section 5.5. Financial Reports................................................................. 19 Section 5.6. No Material Adverse Change........................................................ 20 Section 5.7. Full Disclosure................................................................... 20 Section 5.8. Good Title........................................................................ 20
-i- Section 5.9. Litigation and Other Controversies................................................ 20 Section 5.10. Taxes............................................................................. 20 Section 5.11. Approvals......................................................................... 20 Section 5.12. Affiliate Transactions............................................................ 20 Section 5.13. Investment Company; Public Utility Holding Company................................ 21 Section 5.14. ERISA............................................................................. 21 Section 5.15. Compliance with Laws.............................................................. 21 Section 5.16. Other Agreements.................................................................. 21 Section 5.17. No Default........................................................................ 21 Section 6. Conditions Precedent.............................................................. 22 Section 6.1. All Advances...................................................................... 22 Section 6.2. Initial Advance................................................................... 22 Section 7. Covenants......................................................................... 23 Section 7.1. Maintenance of Business........................................................... 23 Section 7.2. Maintenance of Properties......................................................... 23 Section 7.3. Taxes and Assessments............................................................. 24 Section 7.4. Insurance......................................................................... 24 Section 7.5. Financial Reports................................................................. 24 Section 7.6. Inspection........................................................................ 26 Section 7.7. Quick Ratio....................................................................... 26 Section 7.8. Leverage Ratio.................................................................... 26 Section 7.9. Tangible Net Worth................................................................ 26 Section 7.10. Net Income........................................................................ 26 Section 7.11. Interest Coverage Ratio........................................................... 26 Section 7.12. Capital Expenditures.............................................................. 26 Section 7.13. Indebtedness for Borrowed Money................................................... 26 Section 7.14. Liens............................................................................. 27 Section 7.15. Investments, Acquisitions, Loans, Advances and Guaranties......................... 28 Section 7.16. Mergers, Consolidations and Sales................................................. 29 Section 7.17. Maintenance of Subsidiaries....................................................... 30 Section 7.18. Dividends and Certain Other Restricted Payments................................... 30 Section 7.19. ERISA............................................................................. 30 Section 7.20. Compliance with Laws.............................................................. 31 Section 7.21. Burdensome Contracts With Affiliates.............................................. 31 Section 7.22. No Changes in Fiscal Year......................................................... 31 Section 7.23. Formation of Subsidiaries......................................................... 31 Section 7.24. Change in the Nature of Business.................................................. 31 Section 7.25. Limitation on Certain Restrictions on Subsidiaries................................ 31 Section 7.26. European Monetary Union........................................................... 31 Section 8. Events of Default and Remedies.................................................... 33 Section 8.1. Events of Default................................................................. 33
-ii- Section 8.2. Non-Bankruptcy Defaults........................................................... 35 Section 8.3. Bankruptcy Defaults............................................................... 35 Section 8.4. Collateral for Undrawn Letters of Credit.......................................... 35 Section 9. Miscellaneous..................................................................... 35 Section 9.1. Non-Business Day.................................................................. 35 Section 9.2. No Waiver, Cumulative Remedies.................................................... 36 Section 9.3. Amendments, Etc................................................................... 36 Section 9.4. Costs and Expenses................................................................ 36 Section 9.5. Documentary Taxes................................................................. 36 Section 9.6. Survival of Representations....................................................... 37 Section 9.7. Survival of Indemnities........................................................... 37 Section 9.8. Notices........................................................................... 37 Section 9.9. Currency.......................................................................... 38 Section 9.10. Currency Equivalence.............................................................. 38 Section 9.11. Headings.......................................................................... 38 Section 9.12. Severability of Provisions........................................................ 38 Section 9.13. Counterparts...................................................................... 39 Section 9.14. Binding Nature, Governing Law, Etc................................................ 39 Section 9.15. Submission to Jurisdiction; Appointment of Agent for Process; Waiver of Jury Trial........................................................... 39 Section 9.16. Outstanding Letters of Credit..................................................... 39
Exhibit A - Revolving Credit Note Exhibit B - Compliance Certificate Exhibit C - Existing Liens Exhibit D - Certain Investment Descriptions Schedule 5.2 - Subsidiaries -iii- Exhibit 10.10 Credit Agreement ABN AMRO Bank N.V. Los Angeles, California Ladies and Gentlemen: The undersigned, Newport Corporation, a Nevada corporation (the "Company"), applies to you (the "Bank") for your commitment, subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, to extend credit to the Company, all as more fully hereinafter set forth. Section 1. The Credits. Section 1.1. Revolving Credit. Subject to the terms and conditions hereof, the Bank agrees to extend a revolving credit (the "Revolving Credit") to the Company which may be availed of by the Company from time to time during the period from and including the date hereof to but not including the Termination Date, at which time the commitment of the Bank to extend credit under the Revolving Credit shall expire. The Revolving Credit may be utilized by the Company in the form of Loans and Letters of Credit, all as more fully hereinafter set forth, provided that the aggregate principal amount of Loans and Letters of Credit outstanding at any one time shall not exceed $15,000,000 (which, in the case of Letters of Credit issued in an Alternative Currency, means the U.S. Dollar Equivalent thereof computed as set forth in Section 1.3(a) hereof) (the "Commitment", as such amount may be reduced pursuant to Section 3.3 hereof). During the period from and including the date hereof to but not including the Termination Date, the Company may use the Commitment by borrowing, repaying and reborrowing Loans in whole or in part and/or by having the Bank issue Letters of Credit, having such Letters of Credit expire or otherwise terminate without having been drawn upon or, if drawn upon, reimbursing the Bank for each such drawing, and having the Bank issue new Letters of Credit, all in accordance with the terms and conditions of this Agreement. Section 1.2. Revolving Credit Loans. Subject to the terms and conditions hereof, the Revolving Credit may be availed of by the Company in the form of loans (individually a "Loan" and collectively the "Loans"). Each Loan shall be in a minimum amount of $100,000. Each Loan shall be made against and evidenced by a single promissory note of the Company in the form (with appropriate insertions) attached hereto as Exhibit A (the "Note") payable to the order of the Bank in the principal amount of $15,000,000. The Note shall be dated the date of issuance thereof, be expressed to bear interest as set forth in Section 2 hereof, and be expressed to mature on the Termination Date. Without regard to the principal amount of the Note stated on its face, the actual principal amount at any time outstanding and owing by the Company on account of the Note shall be the sum of all Loans made hereunder less all payments of principal actually received by the Bank. Section 1.3. Letters of Credit. (a) General Terms. Subject to the terms and conditions hereof, the Revolving Credit may be availed of by the Company in the form of standby and commercial letters of credit issued by the Bank for the account of the Company (together with the Outstanding Letters of Credit being hereinafter referred to individually as a "Letter of Credit" and collectively the "Letters of Credit"), provided that the aggregate amount of Letters of Credit issued and outstanding hereunder shall not at any one time exceed $10,000,000. For purposes of this Agreement, a Letter of Credit shall be deemed outstanding as of any time in an amount equal to the maximum amount which could be drawn thereunder under any circumstances and over any period of time plus any unreimbursed drawings then outstanding with respect thereto (which, in the case of Letters of Credit issued in an Alternative Currency shall mean the U.S. Dollar Equivalent thereof). If and to the extent any Letter of Credit expires or otherwise terminates without having been drawn upon, the availability under the Commitment shall to such extent be reinstated. (b) Term. Each Letter of Credit issued hereunder shall expire not later than the earlier of (i) twelve (12) months from the date of issuance (or be cancelable not later than twelve (12) months from the date of issuance and each renewal) or (ii) the Termination Date. (c) General Characteristics. Each Letter of Credit issued hereunder shall be payable in U.S. Dollars or in an Alternative Currency, conform to the general requirements of the Bank for the issuance of a standby or commercial letter of credit, as the case may be, as to form and substance, and be a letter of credit which the Bank may lawfully issue. (d) Applications. At the time the Company requests each Letter of Credit to be issued (or prior to the first issuance of a Letter of Credit in the case of a continuing application), the Company shall execute and deliver to the Bank an application for such Letter of Credit substantially in the form attached hereto as Exhibit E (individually an "Application" and collectively the "Applications"). Subject to the other provisions of this subsection, the obligation of the Company to reimburse the Bank for drawings under a Letter of Credit shall be governed by the Application for such Letter of Credit. If the Bank shall receive any draft presented under any Letter of Credit, the Bank shall, promptly following its receipt thereof, examine all documents purporting to represent such demand for payment to ascertain that the same appear on their face to be in substantial conformity with the terms and conditions of such Letter of Credit. The Bank shall, as soon as reasonably practicable, give notification (which may be oral or written) to the Company of such demand for payment and the determination by the Bank as to whether such demand for payment was in accordance with the terms and conditions of such Letter of Credit and whether the Bank has made or will make a disbursement thereunder, provided that the failure to give such notice shall not relieve the Company of its obligation to reimburse the Bank for the amount of such draft paid. In the event the Bank is not reimbursed by the Company for the amount the Bank pays on any draft drawn under a Letter of Credit issued hereunder by 11:00 a.m. (Los Angeles time or in the case of a Letter of Credit issued in an Alternative Currency, local time at the place of issuance) on the date when such drawing is paid, the obligation of the Company to reimburse the Bank for the amount of such draft paid shall bear interest (which the Company hereby promises to pay on demand) from and after the date the draft is paid until payment in full thereof at the fluctuating rate per annum determined by adding -2- 2% to the Domestic Rate as from time to time in effect (provided, however, that if and so long as Bank shall have not given the Company notice of its payment of such draft, such rate per annum shall equal the Domestic Rate as from time to time in effect). Notwithstanding the foregoing but subject to Section 6 hereof, the Company may, but shall not be obligated to, satisfy its reimbursement obligation to the Bank by requesting the Bank to make a Loan in the amount of such reimbursement obligation. Anything contained in the Applications to the contrary notwithstanding, (i) the Company shall pay fees in connection with each Letter of Credit as set forth in Section 3 hereof, (ii) prior to the occurrence of a Default or an Event of Default the Bank will not call for additional collateral security for the obligations of the Company under the Applications other than collateral security consisting of rights in goods (or documents of title evidencing the same) financed under such Applications, and (iii) prior to the occurrence of a Default or an Event of Default the Bank will not call for the funding of a Letter of Credit by the Company prior to being presented with a draft drawn thereunder (or, in the event the draft is a time draft, prior to its due date). In the event any drafts are drawn under a Letter of Credit and are not repaid by the Company within the period set forth above, the Company hereby irrevocably authorizes the Bank, upon prior notice to the Company, to charge any of the Company's deposit accounts maintained with the Bank for the amount necessary to reimburse the Bank for any drafts drawn under Letters of Credit issued hereunder. All payments on account of any reimbursement obligations in respect of a Letter of Credit issued in an Alternative Currency shall be made in such Alternative Currency. Section 1.4. Manner and Disbursement of Loans. The Company shall give written or telephonic notice to the Bank (which notice shall be irrevocable once given and, if given by telephone, shall be promptly confirmed in writing) by no later than 11:00 a.m. (Los Angeles time) on the date the Company requests the Bank to make a Loan hereunder. Each such notice shall specify the date of the Loan requested (which must be a Business Day) and the amount of such Loan. Each Loan shall initially constitute part of the Domestic Rate Portion except to the extent the Company has otherwise timely elected as provided in Section 2 hereof. The Company agrees that the Bank may rely upon any written or telephonic notice given by any person the Bank in good faith believes is an Authorized Representative without the necessity of independent investigation and, in the event any telephonic notice conflicts with the written confirmation, such telephonic notice shall govern if the Bank has acted in reliance thereon. Subject to the provisions of Section 6 hereof, the proceeds of each Loan shall be made available to the Company at the principal office of the Bank in New York, New York, in immediately available funds. Section 2. Interest and Change in Circumstances. Section 2.1. Interest Rate Options. (a) Subject to all of the terms and conditions of this Section 2, portions of the principal indebtedness evidenced by the Note (all of the indebtedness evidenced by the Note bearing interest at the same rate for the same period of time being hereinafter referred to as a "Portion") may, at the option of the Company, bear interest with reference to the Domestic Rate (the "Domestic Rate Portion") or with reference to an Adjusted LIBOR ("LIBOR Portions"), and Portions may be converted from time to time from one basis to the other. All of the indebtedness evidenced by the Note which is not part of a Fixed Rate Portion shall constitute a single Domestic Rate Portion. All of the indebtedness evidenced by the Note which bears interest with reference to a particular Adjusted LIBOR for a particular Interest -3- Period shall constitute a single LIBOR Portion. Anything contained herein to the contrary notwithstanding, the obligation of the Bank to create, continue or effect by conversion any Fixed Rate Portion shall be conditioned upon the fact that at the time no Default or Event of Default shall have occurred and be continuing. The Company hereby promises to pay interest on each Portion at the rates and times specified in this Section 2. (b) Domestic Rate Portion. The Domestic Rate Portion shall bear interest at the rate per annum equal to the Domestic Rate as in effect from time to time, provided that if the Domestic Rate Portion or any part thereof is not paid when due (whether by lapse of time, acceleration or otherwise) such Portion shall bear interest, whether before or after judgment, until payment in full thereof at the rate per annum determined by adding 2% to the interest rate which would otherwise be applicable thereto from time to time. Interest on the Domestic Rate Portion shall be payable monthly on the last day of each month in each year (commencing October 31, 1999) and at maturity of the Note, and interest after maturity (whether by lapse of time, acceleration or otherwise) shall be due and payable upon demand. Any change in the interest rate on the Domestic Rate Portion resulting from a change in the Domestic Rate shall be effective on the date of the relevant change in the Domestic Rate. (c) Libor Portions. Each LIBOR Portion shall bear interest for each Interest Period selected therefor at a rate per annum determined by adding 1% to the Adjusted LIBOR for such Interest Period, provided that if any LIBOR Portion is not paid when due (whether by lapse of time, acceleration or otherwise) such Portion shall bear interest, whether before or after judgment, until payment in full thereof through the end of the Interest Period then applicable thereto at the rate per annum determined by adding 2% to the interest rate which would otherwise be applicable thereto, and effective at the end of such Interest Period such LIBOR Portion shall automatically be converted into and added to the Domestic Rate Portion and shall thereafter bear interest at the interest rate applicable to the Domestic Rate Portion after default. Interest on each LIBOR Portion shall be due and payable on the last day of each Interest Period applicable thereto and, with respect to any Interest Period applicable to a LIBOR Portion in excess of three (3) months, on the date occurring every three (3) months after the date such Interest Period began and at the end of such Interest Period, and interest after maturity (whether by lapse of time, acceleration or otherwise) shall be due and payable upon demand. The Company shall notify the Bank on or before 11:00 a.m. (Los Angeles time) on the third Business Day preceding the end of an Interest Period applicable to a LIBOR Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which event the Company shall notify the Bank of the new Interest Period selected therefor, and in the event the Company shall fail to so notify the Bank, such LIBOR Portion shall automatically be converted into and added to the Domestic Rate Portion as of and on the last day of such Interest Period. Section 2.2. Minimum Amounts. Each Fixed Rate Portion shall be in an amount equal to $1,000,000 or such greater amount which is an integral multiple of $100,000. Section 2.3. Computation of Interest. All interest on the Note shall be computed on the basis of a year of 360 days for the actual number of days elapsed. -4- Section 2.4. Manner of Rate Selection. The Company shall notify the Bank by 11:00 a.m. (Los Angeles time) at least three (3) Business Days prior to the date upon which the Company requests that any LIBOR Portion be created or that any part of the Domestic Rate Portion be converted into a LIBOR Portion (each such notice to specify in each instance the amount thereof and the Interest Period selected therefor). If any request is made to convert a Fixed Rate Portion into another type of Portion available hereunder, such conversion shall only be made so as to become effective as of the last day of the Interest Period applicable thereto. All requests for the creation, continuance and conversion of Portions under this Agreement shall be irrevocable. Such requests may be written or oral and the Bank is hereby authorized to honor telephonic requests for creations, continuances and conversions received by it from any person the Bank in good faith believes to be an Authorized Representative without the necessity of independent investigation, the Company hereby indemnifying the Bank from any liability or loss ensuing from so acting, Section 2.5. Change of Law. Notwithstanding any other provisions of this Agreement or the Note, if at any time the Bank shall determine that any change in applicable laws, treaties or regulations or in the interpretation thereof makes it unlawful for the Bank to create or continue to maintain any Fixed Rate Portion, it shall promptly so notify the Company and the obligation of the Bank to create, continue or maintain any such Fixed Rate Portion under this Agreement shall terminate until it is no longer unlawful for the Bank to create, continue or maintain such Fixed Rate Portion. The Company, on demand, shall, if the continued maintenance of any such Fixed Rate Portion is unlawful, thereupon prepay the outstanding principal amount of the affected Fixed Rate Portion, together with all interest accrued thereon and all other amounts payable to the Bank with respect thereto under this Agreement; provided, however, that the Company may elect to convert the principal amount of the affected Portion into another type of Portion available hereunder, subject to the terms and conditions of this Agreement. Section 2.6. Unavailability of Deposits or Inability to Ascertain Adjusted LIBOR. Notwithstanding any other provision of this Agreement or the Note, if prior to the commencement of any Interest Period, the Bank shall determine that deposits in the amount of any LIBOR Portion scheduled to be outstanding during such Interest Period are not readily available to the Bank in the relevant market or, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining Adjusted LIBOR, then the Bank shall promptly give notice thereof to the Company and the obligations of the Bank to create or effect by conversion any such Fixed Rate Portion in such amount and for such Interest Period shall terminate until deposits in such amount and for the Interest Period selected by the Company shall again be readily available in the relevant market and adequate and reasonable means exist for ascertaining Adjusted LIBOR. Section 2.7. Taxes and Increased Costs. With respect to any Fixed Rate Portion, if the Bank shall determine that any change in any applicable law, treaty, regulation or guideline (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or any new law, treaty, regulation or guideline, or any interpretation of any of the foregoing by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending -5- branch or the Fixed Rate Portions contemplated by this Agreement (whether or not having the force of law), shall: (i) impose, increase, or deem applicable any reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, or any other acquisition of funds or disbursements by, the Bank which is not in any instance already accounted for in computing the interest rate applicable to such Fixed Rate Portion; (ii) subject the Bank, any Fixed Rate Portion or the Note to the extent it evidences such a Portion to any tax (including, without limitation, any United States interest equalization tax or similar tax however named applicable to the acquisition or holding of debt obligations and any interest or penalties with respect thereto), duty, charge, stamp tax, fee, deduction or withholding in respect of this Agreement, any Fixed Rate Portion or the Note to the extent it evidences such a Portion, except such taxes as may be measured by the overall net income or gross receipts of the Bank or its lending branches and imposed by the jurisdiction, or any political subdivision or taxing authority thereof, in which the Bank's principal executive office or its lending branch is located; (iii) change the basis of taxation of payments of principal and interest due from the Company to the Bank hereunder or under the Note to the extent it evidences any Fixed Rate Portion (other than by a change in taxation of the overall net income or gross receipts of the Bank); or (iv) impose on the Bank any penalty with respect to the foregoing or any other condition regarding this Agreement, any Fixed Rate Portion, or its disbursement, or the Note to the extent it evidences any Fixed Rate Portion; and the Bank shall determine that the result of any of the foregoing is to increase the cost (whether by incurring a cost or adding to a cost) to the Bank of creating or maintaining any Fixed Rate Portion hereunder or to reduce the amount of principal or interest received or receivable by the Bank (without benefit of, or credit for, any prorations, exemption, credits or other offsets available under any such laws, treaties, regulations, guidelines or interpretations thereof), then the Company shall pay on demand to the Bank from time to time as specified by the Bank such additional amounts as the Bank shall reasonably determine are sufficient to compensate and indemnify it for such increased cost or reduced amount. If the Bank makes such a claim for compensation, it shall provide to the Company a certificate setting forth the computation of the increased cost or reduced amount as a result of any event mentioned herein in reasonable detail and such certificate shall be conclusive if reasonably determined. Section 2.8. Change in Capital Adequacy Requirements. If the Bank shall determine that the adoption after the date hereof of any applicable law, rule or regulation regarding capital adequacy, or any change in any existing law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or any of its branches) with any request or directive regarding capital adequacy -6- (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations hereunder or for the credit which is the subject matter hereof to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to liquidity and capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within fifteen (15) days after demand by the Bank, the Company shall pay to the Bank such additional amount or amounts reasonably determined by the Bank as will compensate the Bank for such reduction. Section 2.9. Funding Indemnity. In the event the Bank shall incur any loss, cost or expense (including, without limitation, any loss (including loss of profit), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired or contracted to be acquired by the Bank to fund or maintain any Fixed Rate Portion or the relending or reinvesting of such deposits or other funds or amounts paid or prepaid to the Bank) as a result of: (i) any payment of a Fixed Rate Portion on a date other than the last day of the then applicable Interest Period for any reason, whether before or after default, and whether or not such payment is required by any provision of this Agreement; or (ii) or any failure by the Company to create, borrow, continue or effect by conversion a Fixed Rate Portion on the date specified in a notice given pursuant to this Agreement; then upon the demand of the Bank, the Company shall pay to the Bank such amount as will reimburse the Bank for such loss, cost or expense. If the Bank requests such a reimbursement, it shall provide to the Company a certificate setting forth the computation of the loss, cost or expense giving rise to the request for reimbursement in reasonable detail and such certificate shall be conclusive if reasonably determined. Section 2.10. Lending Branch. The Bank may, at its option, elect to make, fund or maintain Portions of the Loans or issue Letters of Credit hereunder at or through such of its branches or offices as the Bank may from time to time elect. Section 2.11. Discretion of Bank as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, the Bank shall be entitled to fund and maintain its funding of all or any part of the Note in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, without limitation, determinations under Sections 2.6, 2.7 and 2.9 hereof) shall be made as if the Bank had actually funded and maintained each Fixed Rate Portion during each Interest Period applicable thereto through the purchase of deposits in the relevant market in the amount of such Fixed Rate Portion, having a maturity corresponding to such Interest Period, and bearing an interest rate equal to the LIBOR for such Interest Period. -7- Section 3. Fees, Prepayments, Terminations and Applications. Section 3.1. Fees. (a) Commitment Fee. For the period from and including the date hereof to but not including the Termination Date, the Company shall pay to the Bank a commitment fee at the rate of 0.20% per annum (computed on the basis of a year of 360 days for the actual number of days elapsed) on the average daily unused portion of the Commitment. Such commitment fee shall be payable quarter- annually in arrears on the last day of each March, June, September and December in each year (commencing October 31, 1999) and on the Termination Date. (b) Letter of Credit Fees. On the date of issuance of each standby Letter of Credit, and as a condition thereto, and annually thereafter, the Company shall pay to the Bank a letter of credit fee computed at the rate of 1.00% per annum (computed on the basis of a year of 360 days for the actual number of days elapsed) on the maximum amount of the related Letter of Credit which is scheduled to be outstanding during the immediately succeeding twelve (12) months. In connection with the issuance of each commercial Letter of Credit, the Company further agrees to pay to the Bank such fees as the Bank from time to time customarily imposes in connection with the issuance of commercial letters of credit. In addition to the letter of credit fees called for above, the Company further agrees to pay to the Bank such processing and transaction fees and charges as the Bank from time to time customarily imposes in connection with any amendment, cancellation, negotiation and/or payment of letters of credit and drafts drawn thereunder. Section 3.2. Voluntary Prepayments. (a) Domestic Rate Portion. The Company may prepay without premium or penalty and in whole or in part (but if in part, then in an amount not less than $100,000 or the total amount then outstanding, whichever is less) the Domestic Rate Portion of the Note at any time upon notice to the Bank prior to 11:00 a.m. (Los Angeles time) on the date fixed for prepayment, each such prepayment to be made by the payment of the principal amount to be prepaid. (b) Fixed Rate Portions. The Company may prepay any Fixed Rate Portion of the Note only on the last date of the then applicable Interest Period, in whole or in part (but if in part, then in an amount not less than $100,000 or such greater amount which is an integral multiple of $100,000), upon three (3) Business Days' prior notice to the Bank (which notice shall be irrevocable once given, must be received by the Bank no later than 11:00 a.m. (Los Angeles time) on the third Business Day preceding the date of such prepayment, and shall specify the principal amount to be repaid); provided, however, that the outstanding principal amount of any Fixed Rate Portion of the Note prepaid in part shall not be less than $1,000,000 or such greater amount which is an integral multiple of $100,000 after giving effect to such prepayment. Any such prepayment shall be effected by payment of the principal amount to be prepaid and accrued interest thereon to the end of the applicable Interest Period. Section 3.3. Terminations. The Company shall have the right at any time and from time to time, upon three (3) Business Days' prior notice to the Bank, to terminate without premium or penalty and in whole or in part (but if in part, then in an amount not less than $1,000,000) the -8- Commitment, provided that the Commitment may not be reduced to an amount less than the aggregate principal amount of the Loans and Letters of Credit then outstanding. Any termination of the Commitment pursuant to this Section may not be reinstated. Section 3.4. Place and Application of Payments. All payments of principal, interest, fees and all other Obligations payable hereunder and under the other Loan Documents shall be made to the Bank at (a) its principal office in Los Angeles, California (or at such other place as the Bank may specify) or (b) if such payment is to be made in an Alternative Currency, no later than 11:00 a.m. local time at the place of payment to such office as the Bank has previously notified the Company. Payments received by the Bank after 11:00 a.m. shall be deemed received as of the opening of business on the next Business Day. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without set-off or counterclaim and without reduction for, and free from, any and all present or future taxes, levies, imposts, duties, fees, charges, deductions, withholdings, restrictions and conditions of any nature imposed by any government or any political subdivision or taxing authority thereof (but excluding any taxes imposed on or measured by the net income of the Bank). Unless the Company otherwise directs, principal payments shall be applied first to the Domestic Rate Portion until payment in full thereof, with any balance applied to the Fixed Rate Portions in the order in which their Interest Periods expire. Section 3.5. Notations. All Loans made against the Note, the status of all amounts evidenced by the Note as constituting part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the rates of interest and Interest Periods applicable to such Portions shall be recorded by the Bank on its books and records or, at its option in any instance, endorsed on a schedule to the Note and the unpaid principal balance and status, rates and Interest Periods so recorded or endorsed by the Bank shall be prima facie evidence in any court or other proceeding brought to enforce the Note of the principal amount remaining unpaid thereon, the status of the Loans evidenced thereby and the interest rates and Interest Periods applicable thereto; provided that the failure of the Bank to record any of the foregoing shall not limit or otherwise affect the obligation of the Company to repay the principal amount of the Note together with accrued interest thereon. Prior to any negotiation of the Note, the Bank shall record on a schedule thereto the status of all amounts evidenced thereby as constituting part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the rates of interest and the Interest Periods applicable thereto. Section 4. Definitions; Interpretation. Section 4.1. Definitions. The following terms when used herein shall have the following meanings: "Acquisition" shall mean any transaction, or any series of related transactions, consummated after the date of this Agreement, by which the Company or any of its Subsidiaries (i) acquires any ongoing business or all or substantially all of the assets of any Person or division thereof, whether through purchase of assets, merger or otherwise, or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the voting stock of a corporation or other firm. -9- "Adjusted LIBOR" means a rate per annum determined by the Bank in accordance with the following formula: Adjusted LIBOR = LIBOR ------------------------------------ 100%-Reserve Percentage "Reserve Percentage" means, for the purpose of computing Adjusted LIBOR, the daily average for the applicable Interest Period of the maximum rate at which reserves (including, without limitation, any marginal, emergency, supplemental or other special reserves) are imposed during such Interest Period by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on "eurocurrency liabilities" (as such term is defined in Regulation D) (or in respect of any other category of liabilities that includes deposits by reference to which the interest rate on LIBOR Portions is determined or any category of extensions of credit or other assets that include loans by non-United States offices of the Bank to United States residents), but subject to any amendments to such reserve requirement by such Board or its successor, and taking into account any transitional adjustments thereto becoming effective during such Interest Period. For purposes of this definition, LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in Regulation D without benefit of or credit for prorations, exemptions or offsets under Regulation D. "LIBOR" means, for each Interest Period, the arithmetic average of the rates of interest per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which deposits in U. S. Dollars in immediately available funds are offered to the Bank at 11:00 a.m. (London, England time) two (2) Business Days before the beginning of such Interest Period by three (3) or more major banks in the interbank eurodollar market selected by the Bank for a period equal to such Interest Period and in an amount equal or comparable to the applicable LIBOR Portion scheduled to be outstanding from the Bank during such Interest Period. Each determination of LIBOR made by the Bank shall be conclusive and binding absent manifest error. "Affiliate" means any Person directly or indirectly controlling or controlled by, or under direct or indirect Common control with, another Person. A Person shall be deemed to control another Person for the purposes of this definition if such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the other Person, whether through the ownership of voting, securities, common directors, trustees or officers, by contract or otherwise; provided that, in any event for purposes of this definition, any Person that owns, directly or indirectly, 5% or more of the securities having the ordinary voting power for the election of directors or governing body of a corporation or 5% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. "Agreement" means this Credit Agreement, as the same may be amended, modified or restated from time to time in accordance with the terms hereof. "Alternative Currency" means a currency other than U.S. Dollars acceptable to the Bank in its reasonable discretion. "Application" is defined in Section 1.3 hereof. -10- "Authorized Representative" means those persons shown on the lists of officers provided the Company pursuant to Section 6.2(a) hereof or on any update of any such list provided by the Company to the Bank, or any further or different officer of the Company so named by any Authorized Representative of the Company in a written notice to the Bank. "Bank" is defined in the introductory paragraph hereof. "Business Day" means any day other than a Saturday or Sunday on which the Bank is not authorized or required to close in Los Angeles, California and New York, New York and, when used with respect to LIBOR Portions, a day on which the Bank is also dealing in United States Dollar deposits in the interbank market in London, England and when used with respect to any Letter of credit issued in an Alternative Currency, on which banks and foreign exchange markets are open for business in the city where issuance, or payments in respect of such Letter of Credit are being made. "Capital Lease" means any lease of Property which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee. "Capitalized Lease Obligation" means the amount of the liability shown on the balance sheet of any Person in respect of a Capital Lease determined in accordance with GAAP. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto. "Commitment" is defined in Section 1.1 hereof. "Company" is defined in the introductory paragraph hereof. "Consolidated Subsidiary" means any Subsidiary whose accounts are required to be consolidated with those of the Company in accordance with GAAP. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Corning Acquisition" means the Acquisition of the assets of a division of Corning, Incorporated relating to the letter of intent issued by the Company to Corning, International with a total purchase price not to exceed $12,000,000. "Default" means any event or condition the occurrence of which would, with the passage of time or the giving of notice, or both, constitute an Event of Default. "Domestic Rate" means, for any day, the greater of (i) the rate of interest announced by the Bank from time to time as its prime rate for U.S. dollar loans, as in effect on such day; and (ii) the sum of (x) the Federal Funds Rate plus (y) 1/2 of 1% (.500%). -11- "Domestic Rate Portion" is defined in Section 2. 1 (a) hereof. "Domestic Restricted Subsidiary" means a Restricted Subsidiary which is organized under the laws of the United States or any State thereof and which conducts substantially all of its business and has substantially all of its assets within the United States. "EBITDA" means, with reference to any period, Net Income for such period plus all amounts deducted in arriving at such Net Income amount in respect of (i) Interest Expense for such period, plus (ii) federal, state and local income taxes for such period, plus (iii) all amounts properly charged for depreciation of fixed assets and amortization of intangible assets during such period on the books of the Company and its Subsidiaries. "EMU" shall mean economic and monetary union as contemplated in the Treaty on European Union. "EMU Commencement" shall mean the date of commencement of the third stage of EMU, namely January 1, 1999. "EMU Legislation" shall mean legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency (whether known as the "euro" or otherwise), being in part the implementation of the third stage of EMU. "Equity Offering" means any issuance of equity securities (whether common or preferred stock or otherwise), other than common stock issued in connection with the exercise of employee stock options. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto. "Euro" shall mean the single currency of Euro Members of the European Union. "Eurocurrency Loans" shall have the meaning set forth in Section 3.1 hereof. "Euro Member" shall mean each state described as a "participating member state" in any EMU Legislation. "Euro Unit" shall mean the currency unit of the Euro. "Event of Default" means any event or condition identified as such in Section 8.1 hereof. "Facilities" means the loans made under the 364-Day Agreement and the Loans made hereunder. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal -12- funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day (as provided in clause (i)), the Federal Funds Rate for such day shall be the average rate quoted to ABN AMRO Bank N.V., Los Angeles Branch on such day on such transactions as determined by the Bank. "Fixed Rate Portions" means and includes the LIBOR Portions. "GAAP" means generally accepted accounting principles as in effect from time to time, applied by the Company and its Subsidiaries on a basis consistent with the preparation of the Company's most recent financial statements furnished to the Bank pursuant to Section 5.5 hereof. "Indebtedness for Borrowed Money" means for any Person (without duplication) all of the obligations of such Person which, in accordance with GAAP, would be included on the liability side of the balance sheet of such Person prepared at such time, and shall include (i) all indebtedness created, assumed or incurred in any manner by such Person representing money borrowed (including, by the issuance of debt securities), (ii) all indebtedness for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business which are not more than 90 days past due), (iii) all indebtedness secured by any Lien upon Property of such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness, (iv) all Capitalized Lease Obligations of such Person and (v) all obligations of such Person on or with respect to letters of credit, bankers' acceptances and other extensions of credit whether or not representing obligations for borrowed money. "Interest Expense" means, with reference to any period, the sum of all interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of the Company and its Subsidiaries for such period determined in accordance with GAAP. "Interest Period" means, with respect to any LIBOR Portion, the period commencing on, commencing as the case may be, the creation, continuation or conversion date with respect to such LIBOR Portion and ending one (1), two (2), three (3) or six (6) months thereafter as selected by the Company in its notice as provided herein; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day which is not a Business Day, that interest Period shall be extended to the next succeeding Business Day, unless in the case of an Interest Period for a LIBOR Portion the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) no Interest Period may extend beyond the final maturity date of the Note; -13- (iii) the interest rate to be applicable to each Portion for each Interest Period shall apply from and including the first day of such Interest Period to but excluding the last day thereof; and (iv) no Interest Period may be selected if after giving effect thereto the Company will be unable to make a principal payment scheduled to be made during such Interest Period without paying part of a Fixed Rate Portion on a date other than the last day of the Interest Period applicable thereto. For purposes of determining an Interest Period, a month means a period starting on one day in a calendar month and ending on a numerically corresponding day in the next calendar month, provided, however, if an Interest Period begins on the last day of a month or if there is no numerically corresponding day in the month in which an Interest Period is to end, then such Interest Period shall end on the last Business Day of such month. "Letter of Credit" is defined in Section 1.3 hereof. "LIBOR Portions" is defined in Section 2.1 (a) hereof. "Lien" means any mortgage, lien, security interest, pledge, charge or encumbrance of any kind in respect of any Property, including the interests of a vendor or lessor under any conditional sale, Capital Lease or other title retention arrangement. "Loan" is defined in Section 1.2 hereof. "Loan Documents" means this Agreement, the Note and the Applications. "Materially Adverse Effect" means, in relation to any event or occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), (a) a materially adverse effect on the business, Property, operations, prospects or condition, financial or otherwise, of the Company and its Subsidiaries, taken as a whole; (b) an adverse effect on the ability of the Company to perform any of its payment or other material Obligations under any Loan Document; or (c) an impairment of the validity or enforceability of any Loan Document or any material impairment of the rights, remedies or benefits available to the Bank under any Loan Document. "Net Income" means, with reference to any period, the net income (or net loss) of the Company and its Subsidiaries for such period as computed on a consolidated basis in accordance with GAAP, and, without limiting the foregoing, after deduction from gross income of all expenses and reserves, including reserves for all taxes on or measured by income, but excluding extraordinary profits and also excluding any taxes on such profits. -14- "Note" is defined in Section 1.2 hereof. "Obligations" means all obligations of the Company to pay principal and interest on the Loans, all reimbursement obligations owing under the Applications, all fees and charges payable hereunder, and all other payment obligations of the Company and the Guarantors arising under or in relation to any Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. "Original Dollar Amount" means in relation to any Letter of Credit issued in an Alternative Currency, the U.S. Dollar Equivalent of the amount (computed as set forth in Section 1.3(a) hereof) of such Letter of Credit on the date it is issued. "Outstanding Letters of Credit" means all outstanding letters of credit heretofore issued by the Bank (whether directly or through one of its branches or affiliates) for the account of the Company, including but not limited to, letters of credit issued under the Prior Credit Agreement. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof. "Plan" means any employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code that either (i) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Portion" is defined in Section 2. 1 (a) hereof. "Prior Credit Agreement" means that certain Credit Agreement dated as of February 26, 1998 between the Company and the Bank, as amended. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Quick Ratio" means, as of any time the same is to be determined, the ratio of current assets minus inventory of the Company and its Subsidiaries to current liabilities of the Company and its Subsidiaries, all as determined on a consolidated basis in accordance with GAAP, but subject nevertheless to the express limitations and restrictions hereinafter set forth. There shall he excluded from current assets all deferred assets, prepaid expenses, the surrender value of insurance and investments in and loans and advances to any Person, other than investments -15- permitted by Section 7.15(a)-(c), both inclusive, of this Agreement and further provided that there shall be excluded from current liabilities all obligations of the Company with respect to the Facilities. "Restricted Subsidiary" means any Subsidiary the total assets of which constitutes 10% or more of total assets of the Company and its Subsidiaries computed on a consolidated basis in accordance with GAAP, and of which 100% (by number of votes) of the voting stock is at all times owned by the Company and/or one or more Restricted Subsidiaries. "Revolving Credit" is defined in Section 1.1 hereof. "Subsidiary" means any corporation or other Person more than 50% of the outstanding ordinary voting shares or other equity interests of which is at the time directly or indirectly owned by the Company, by one or more of its Subsidiaries, or by the Company and one or more of its Subsidiaries. "Tangible Net Worth" means, as of any time the same is to be determined, the total shareholders' equity (including capital stock, additional paid-in- capital and retained earnings after deducting treasury stock, but excluding minority interests in Subsidiaries) which would appear on the balance sheet of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP, less the sum of (i) all notes receivable from officers and employees of the Company and its Subsidiaries, (ii) the aggregate book value of all assets which would be classified as intangible assets under GAAP, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and deferred research and development expense) and similar assets and (iii) the write-up of assets above cost. "Termination Date" means September 30, 2002, or such earlier date on which the Commitment is terminated in whole pursuant to Section 3.3, 8.2 or 8.3 hereof. "364-Day Agreement" means that certain 364-Day $10,000,000 Revolving Credit Agreement dated as of October 29, 1999 between the Company and the Bank. "Treaty on European Union" shall mean the Treaty of Rome of March 25, 1957, as amended by the Single European Act of 1986 and the Maastricht Treaty (which was signed at Maastricht on February 7, 1992, and came into force on November 1, 1993, as amended from time to time). "Total Liabilities" means, as of any time the same is to be determined, the aggregate of all indebtedness, obligations, liabilities, reserves and any other items which would be listed as a liability on a balance sheet of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP, and in any event including all indebtedness and liabilities of any other Person which the Company or any Subsidiary may guarantee or otherwise be responsible or liable for (other than any liability arising out of the endorsement of commercial paper for deposit or collection received in the ordinary course of business), all indebtedness and liabilities secured by any Lien on any Property of the Company or any Subsidiary, whether or not -16- the same would be classified as a liability on a balance sheet, the liability of the Company or any Subsidiary in respect of banker's acceptances and letters of credit, and the aggregate amount of rentals or other consideration payable by the Company or any Subsidiary in accordance with GAAP over the remaining unexpired term of all Capital Leases, but excluding all general contingency reserves and reserves for deferred income taxes and investment credit. "Unfunded Vested Liabilities" means, for any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds, the fair the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "U.S. Dollars" means the lawful currency of the United States of America. "U.S. Dollar Equivalent" means the amount of U.S. Dollars which would be realized by converting an Alternative Currency into U.S. Dollars in the spot market at the exchange rate quoted by the Bank at approximately 11:00 a.m. (London, England time) two Business Days prior to the date on which a computation thereof is required to be made, to major banks in the interbank market for the purchase of U.S. Dollars for such Alternative Currency. "Welfare Plan" means a "welfare plan" as defined in Section 3(1) of ERISA. "Wholly-Owned Subsidiary" means a Subsidiary of which all of the issued and outstanding shares of capital stock (other than directors' qualifying shares as required by law) or other equity interests are owned by the Company and/or one or more Wholly-Owned Subsidiaries within the meaning of this definition. Section 4.2. Interpretation. The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words "hereof", "herein", and "hereunder" and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All references to time of day herein are references to Los Angeles, California time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. Section 5. Representations and Warranties. The Company represents and warrants to the Bank as follows: Section 5.1. Organization and Qualification. The Company is duly organized, validly existing and in good standing as a corporation under the laws of the State of Nevada, has full and adequate corporate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the -17- business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying except where the failure to so qualify or be licensed would not result in a Materially Adverse Effect. Section 5.2. Subsidiaries. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized, as may be, has full and adequate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying except where the failure to so qualify or be licensed would not result in a Materially Adverse Effect. Schedule 5.2 hereto identifies each Subsidiary, the jurisdiction of its incorporation or organization, as the case may be, the percentage of issued and outstanding shares of each class of its capital stock or other equity interests owned by the Company and the Subsidiaries and, if such percentage is not 100% (excluding directors' qualifying shares as required by law), a description of each class of its authorized capital stock and other equity interests and the number of shares of each class issued and outstanding. All of the outstanding shares of capital stock and other equity interests of each Subsidiary are validly issued and outstanding shares, and fully paid and nonassessable and all such shares and other equity interests indicated on Schedule 5.2 as owned by the Company or a Subsidiary are owned, beneficially and of record, by the Company or such Subsidiary free and clear of all Liens. There are no outstanding commitments or other obligations of any Subsidiary to issue, and no options, warrants or other rights of any Person to acquire, any shares of any class of capital stock or other equity interests of any Subsidiary. Section 5.3. Corporate Authority and Validity of Obligations. The Company has full right and authority to enter into this Agreement and the other Loan Documents and to perform all of its obligations hereunder and under the other Loan Documents. The Loan Documents delivered by the Company have been duly authorized, executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law); and this Agreement and the other Loan Documents do not, nor does the performance or observance by the Company of any of the matters and things herein or therein provided for, contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Company or any provision of the charter, articles of incorporation or by-laws of the Company or any covenant, indenture or agreement of or affecting the Company or any of its Properties, except where such default would not constitute a Materially Adverse Effect or result in the creation or imposition of any Lien on any Property of the Company. Section 5.4. Use of Proceeds; Margin Stock. The Company shall use the proceeds of the Loans and other extensions of credit made available hereunder solely for the refinancing of the indebtedness (other than the Outstanding Letters of Credit) owing to the Bank under the Prior Credit Agreement and for its general working capital purposes and shall use standby Letters of Credit issued hereunder solely in connection with performance bonding requirements or guarantee requirements in connection with Permitted Indebtedness of the Company or its -18- Subsidiaries hereunder in the ordinary course of its business. The initial Loans hereunder shall be in an amount necessary to so refinance and concurrently therewith the Prior Credit Agreement shall terminate. Neither the Company nor any Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan or any other extension of credit made hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Section 5.5. Financial Reports. The consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1998 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the fiscal year then ended, and accompanying notes thereto, which financial statements are accompanied by the audit report of Ernst & Young, independent public accountants, and the unaudited interim consolidated balance sheet of the Company and its Subsidiaries as at June 30, 1999 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the six (6) months then ended, heretofore furnished to the Bank, fairly present the consolidated financial condition of the Company and its Subsidiaries as at said dates and the consolidated results of their operations and cash flows for the periods then ended in conformity with generally accepted accounting principles applied on a consistent basis subject in the case of interim balance sheet to normal year-end adjustment and in the absence of footnotes. Neither the Company nor any Subsidiary has contingent liabilities which are material to it other than as indicated on such financial statements or, with respect to future periods, on the financial statements furnished pursuant to Section 7.5 hereof. Section 5.6. No Material Adverse Change. Since June 30, 1999, there has been no change in the condition (financial or otherwise) or business prospects of the Company or any Subsidiary except those occurring in the ordinary course of business, none of which individually or in the aggregate constitute a Materially Adverse Effect. Section 5.7. Full Disclosure. The statements and information furnished to the Bank, in connection with the negotiation of this Agreement and the other Loan Documents and the commitment by the Bank to provide all or part of the financing contemplated hereby do not contain any untrue statements of a material fact or omit a material fact necessary to make the material statements contained herein or therein not misleading, the Bank acknowledging that as to any projections furnished to the Bank, the Company only represents that the same were prepared on the basis of information and estimates the Company believed to be reasonable at the time made. Section 5.8. Good Title. The Company and its Subsidiaries each have good and valid title to their assets as reflected on the most recent consolidated balance sheet of the Company and its Subsidiaries furnished to the Bank (except for sales of assets by the Company and its Subsidiaries in the ordinary course of business), subject to no Liens other than such thereof as are permitted by Section 7.14 hereof. -19- Section 5.9. Litigation and Other Controversies. There is no litigation or governmental proceeding or labor controversy pending, nor to the knowledge of the Company threatened, against the Company or any Subsidiary which if adversely determined would result in a Materially Adverse Effect. Section 5.10. Taxes. All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary or upon any of their respective Properties, income or franchises, which are shown to be due and payable in such returns, have been paid. The Company does not know of any proposed additional tax assessment against it or its Subsidiaries for which adequate provision in accordance with GAAP has not been made on its accounts. Adequate provisions in accordance with GAAP for taxes on the books of the Company and each Subsidiary have been made for all open years, and for its current fiscal period. Section 5.11. Approvals. No authorization, consent, license, or exemption from, or filing or registration with, any court or governmental department, agency or instrumentality, nor any approval or consent of the stockholders of the Company or any other Person, is or will be necessary to the valid execution, delivery or performance by the Company of this Agreement or any other Loan Document except as have been made or obtained prior to the date hereof. Section 5.12. Affiliate Transactions. Neither the Company nor any Subsidiary is a party to any contracts or agreements with any of its Affiliates (other than with Wholly-Owned Subsidiaries) on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts or agreements between Persons not affiliated with each other. Section 5.13. Investment Company; Public Utility Holding Company. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "public utility holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 5.14. ERISA. The Company and each other member of its Controlled Group has fulfilled its obligations under the minimum funding standards of and is in compliance in all material respects with ERISA and the Code to the extent applicable to it and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. Neither the Company nor any Subsidiary has any contingent liabilities with respect to any post-retirement benefits under a Welfare Plan, other than liability for continuation coverage described in article 6 of Title I of ERISA. Section 5.15. Compliance with Laws. The Company and each of its Subsidiaries are in compliance with the requirements of all federal, state and local laws, rules and regulations applicable to or pertaining to their Properties or business operations (including, without limitation, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, and laws and regulations establishing quality criteria and standards for air, water, land and toxic or hazardous wastes and substances), non- compliance with which could result in a -20- Materially Adverse Effect. Neither the Company nor any Subsidiary has received notice to the effect that its operations are not in compliance with any of the requirements of applicable federal, state or local environmental, health and safety statutes and regulations or are the subject of any governmental investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could result in a Materially Adverse Effect. Section 5.16. Other Agreements. Neither the Company nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting the Company, any Subsidiary or any of their Properties, which default if uncured would have a material adverse effect on the financial condition, Properties, business or operations of the Company or any Subsidiary. Section 5.17. No Default. No Default or Event of Default has occurred and is continuing. Section 6. Conditions Precedent. The obligation of the Bank to make any Loan or to issue any Letter of Credit under this Agreement is subject to the following conditions precedent: Section 6.1. All Advances. As of the time of the making of each extension of credit (including the initial extension of credit) hereunder: (a) each of the representations and warranties set forth in Section 5 hereof and in the other Loan Documents shall be true and correct as of such time, except to the extent the same expressly relate to an earlier date; (b) the Company shall be in full compliance with all of the terms and conditions of this Agreement and of the other Loan Documents, and no Default or Event of Default shall have occurred and be continuing or would occur as a result of making such extension of credit; (c) after giving effect to such extension of credit the aggregate principal amount of all Loans and Letters of Credit outstanding under this Agreement shall not exceed the Commitment; (d) such extension of credit shall not violate any order, judgment or decree of any court or other authority or any provision of law or regulation applicable to the Bank (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) as then in effect; and (e) in the case of the issuance of any Letter of Credit, the Bank shall have received a properly completed Application therefor together with the fees called for hereby. -21- The Company's request for any Loan or Letter of Credit shall constitute its warranty as to the facts specified in subsections (a) through (d), both inclusive, above. Section 6.2. Initial Advance. At or prior to the making of the initial extension of credit hereunder, the following conditions precedent shall also have been satisfied: (a) the Bank shall have received the following (each to be properly executed and completed) and the same shall have been approved as to form and substance by the Bank: (i) the Note; (ii) copies of resolutions of the Board of Directors or other appropriate body of the Company authorizing the execution and delivery of the Loan Documents to which it is a party, certified by the Secretary or Assistant Secretary of the Company and of all other legal documents or proceedings taken in connection with the execution and delivery of this Agreement and the other Loan Documents to the extent the Bank or its counsel may reasonably request; (iii) an incumbency certificate containing the name, title and genuine signatures of each of the Company's Authorized Representatives; and (iv) certified copies of the articles of incorporation or charter and bylaws of the Company; (b) the Bank shall have received the initial fees called for hereby; (c) the Bank shall have received such valuations and certifications as it may reasonably require in order to satisfy itself as to, the financial condition of the Company and its Subsidiaries, and the lack of material contingent liabilities of the Company and its Subsidiaries; (d) legal matters incident to the execution and delivery of this Agreement and the other Loan Documents and to the transactions contemplated hereby shall be reasonably satisfactory to the Bank and its counsel; and the Bank shall have received the favorable written opinion of counsel for the Company in form and substance reasonably satisfactory to the Bank and its counsel; (e) the Bank shall have received a good standing certificate for the Company (dated as of the date no earlier than thirty (30) days prior to the date hereof) from the office of the secretary of state of the state of its incorporation and each state in which it is qualified to do business as a foreign corporation; and (g) the Bank shall have received such other agreements, instruments, documents, certificates and opinions as the Bank may reasonably request. -22- Section 7. Covenants. The Company agrees that, so long as any credit is available to or in use by the Company hereunder, except to the extent compliance in any case or cases is waived in writing by the Bank: Section 7.1. Maintenance of Business. The Company shall, and shall cause each Subsidiary to, preserve and maintain its existence. The Company shall, and shall cause each Subsidiary to, preserve and keep in force and effect all licenses, permits and franchises necessary to the proper conduct of its business. Section 7.2. Maintenance of Properties. The Company shall maintain, preserve and keep its property, plant and equipment in good repair, working order and condition (ordinary wear and tear excepted) and shall from time to time make all needful and proper repairs, renewals, replacements, additions and betterments thereto so that at all times the efficiency thereof shall be fully preserved and maintained, and shall cause each Subsidiary to do so in respect of Property owned or used by it. Section 7.3. Taxes and Assessments. The Company shall duly pay and discharge, and shall cause each Subsidiary to duly pay and discharge, all taxes, rates, assessments, fees and governmental charges upon or against it or its Properties, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves are provided therefor. Section 7.4. Insurance. The Company shall insure and keep insured, and shall cause each Subsidiary to insure and keep insured, with good and responsible insurance companies, all insurable Property owned by it which is of a character usually insured by Persons similarly situated and operating like Properties against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like Properties; and the Company shall insure, and shall cause each Subsidiary to insure, such other hazards and risks (including employers' and public liability risks) with good and responsible insurance companies as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Company shall upon request furnish to the Bank a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section. Section 7.5. Financial Reports. The Company shall, and shall cause each Subsidiary to, maintain a standard system of accounting in accordance with GAAP and shall furnish to the Bank and its duly authorized representatives such information respecting the business and financial condition of the Company and its Subsidiaries as the Bank may reasonably request; and without any request, shall furnish to the Bank: (a) as soon as available, and in any event within forty-five (45) days after the close of each quarterly accounting period of the Company, a copy of the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the last day of such period and the consolidated and consolidating statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the quarter and the fiscal year to -23- date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Company in accordance with GAAP and certified to by the President or chief financial officer of the Company; (b) as soon as available, and in any event within one hundred twenty (120) days after the close of each annual accounting period of the Company, a copy of the consolidated balance sheet of the Company and its Subsidiaries as of the close of such period and the consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such period, and accompanying notes thereto, each in reasonable detail showing in comparative form the figures for the previous fiscal year, accompanied by an unqualified opinion thereon of Ernst & Young or another firm of independent public accountants of recognized national standing, selected by the Company and satisfactory to the Bank, to the effect that the financial statements have been prepared in accordance with GAAP and present fairly in all material respects in accordance with GAAP the consolidated financial condition of the Company and its Subsidiaries as of the close of such fiscal year and the results of their operations and cash flows for the fiscal year then ended; (c) within the period provided in subsection (b) above, the written statement of the accountants who certified the audit report thereby required that in the course of their audit they have obtained no knowledge of any Default or Event of Default, or, if such accountants have obtained knowledge of any such Default or Event of Default, they shall disclose in such statement the nature and period of the existence thereof; (d) promptly upon the filing or making thereof, copies of each filing and report made by the Company or any Subsidiary with or to any securities exchange or the Securities and Exchange Commission, and of each communication from the Company or any Subsidiary to shareholders generally; (e) promptly after receipt thereof, any additional written reports, management letters or other detailed information contained in writing concerning significant aspects of the Company's or any Subsidiary's operations and financial affairs given to it by its independent public accountants; (f) as soon as available, and in any event within thirty (30) days following the end of each fiscal year of the Company, a copy of the Company's consolidated and consolidating business plan for the following fiscal year, such business plan to show the Company's projected consolidated and consolidating revenues, expenses, and balance sheet on month-by-month basis, such business plan to be in reasonable detail prepared by the Company and in form reasonably satisfactory to the Bank; and (g) promptly after knowledge thereof shall have come to the attention of any responsible officer of the Company, written notice of any threatened or pending litigation or governmental proceeding or labor controversy against the Company or any Subsidiary -24- which, if adversely determined, would constitute a Materially Adverse Effect or of the occurrence of any Default or Event of Default hereunder. Each of the financial statements furnished to the Bank pursuant to subsections (a) and (b) of this Section shall be accompanied by a written certificate in the form attached hereto as Exhibit B signed by the President or chief financial officer of the Company to the effect that to the best of such officer's knowledge and belief no Default or Event of Default has occurred during the period covered by such statements or, if any such Default or Event of Default has occurred during such period, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Company to remedy the same. Such certificate shall also set forth the calculations supporting such statements in respect of Sections 7.7, 7.8, 7.9, 7.10, 7.11 and 7.12 of this Agreement. Section 7.6. Inspection. The Company shall, and shall cause each Subsidiary to, permit the Bank and its duly authorized representatives and agents to visit and inspect any of the Properties, corporate books and financial records of the Company and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Company and each Subsidiary, and to discuss the affairs, finances and accounts of the Company and each Subsidiary with, and to be advised as to the same by, its officers, employees and independent public accountants (and by this provision the Company hereby authorizes such accountants to discuss with the Bank the finances and affairs of the Company and of each Subsidiary) at such reasonable times and reasonable intervals as the Bank may designate. Section 7.7. Quick Ratio. The Company will at all times maintain a Quick Ratio of not less than 1.0 to 1.0. Section 7.8. Leverage Ratio. The Company will at all times maintain a ratio of Total Liabilities to Tangible Net Worth (the "Leverage Ratio") of not more than 1.35 to 1.00. Section 7.9. Tangible Net Worth. The Company will at all times maintain Tangible Net Worth at not less than the sum of $50,465,000 plus, on a cumulative basis, 75% of positive Net Income for each fiscal year subsequent to the fiscal year ended December 31, 1998 plus, at the time of offering, 75% of Equity Offerings issued after the date of this Agreement. Section 7.10. Net Income. The Company will not permit Net Income to be less than $0 for any two consecutive fiscal quarters nor will it permit any negative Net Income for any single fiscal quarter to exceed the negative equivalent of 10% of Tangible Net Worth. Section 7.11. Interest Coverage Ratio. The Company will, as of the last day of each fiscal quarter of the Company, maintain the ratio of EBITDA for the four fiscal quarters of the Company then ended to Interest Expense for the same four fiscal quarters then ended (the "Interest Coverage Ratio") of not less than 3.5 to 1.0. Section 7.12. Capital Expenditures. The Company will not, nor will it permit any Subsidiary to, expend or become obligated for capital expenditures (as determined in accordance -25- with GAAP) in an aggregate amount in excess of $10,000,000 during any fiscal year of the Company. Section 7.13. Indebtedness for Borrowed Money. The Company shall not, nor shall it permit any Subsidiary to, issue, incur, assume, create or have outstanding any Indebtedness for Borrowed Money; provided, however, that the foregoing shall not restrict nor operate to prevent any of the following ("Permitted Indebtedness"): (a) the Obligations of the Company owing to the Bank and other indebtedness and obligations of the Company or any Subsidiary from time to time owing to the Bank; (b) purchase money indebtedness and Capitalized Lease Obligations secured by Liens permitted by Section 7.14(e) hereof in an aggregate amount not to exceed $7,000,000 at any one time outstanding; (c) Indebtedness secured by Liens of carriers, warehousemen, mechanics, landlords or materialmen that constitute Permitted Liens under Section 7.14(a) below; (d) Indebtedness in respect of liabilities permitted under Section 7.14(c) below; and (e) unsecured term debt owed by Micro-Controle, S.A. to financial institutions as of the date of this Agreement; and (f) Indebtedness in an aggregate amount not to exceed $15,000,000 solely in connection with the Corning Acquisition. Section 7.14. Liens. The Company shall not, nor shall it permit any Subsidiary to, create, incur or permit to exist any Lien of any kind on any Property owned by the Company or any Subsidiary; provided, however, that the foregoing shall not apply to nor operate to prevent: (a) Liens arising by statute in connection with worker's compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges, good faith cash deposits in connection with tenders, contracts or leases to which the Company or any Subsidiary is a party or other cash deposits required to be made in the ordinary course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor; (b) mechanics', workmen's, materialmen's, landlords', carriers', or other similar Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest; -26- (c) the pledge of assets for the purpose of securing an appeal, stay or discharge in the course of any legal proceeding, provided that the aggregate amount of liabilities of the Company and its Subsidiaries secured by a pledge of assets permitted under this subsection, including interest and penalties thereon, if any, shall not be in excess of $1,000,000 at any one time outstanding; (d) the Liens existing as of the date hereof and disclosed on Exhibit C hereto; (e) Liens on property of the Company or any of its Subsidiaries created solely for the purpose of securing indebtedness permitted by Section 7.13(b) hereof, representing or incurred to finance, refinance or refund the purchase price of Property, provided that no such Lien shall extend to or cover other Property of the Company or such Subsidiary other than the respective Property so acquired, and the principal amount of indebtedness secured by any such Lien shall at no time exceed the original purchase price of such Property; and (f) easements, right-of-way, zoning and similar restrictions and other similar encumbrances or title defects which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company; and (g) Liens arising solely in connection with the Corning Acquisition. Section 7.15. Investments, Acquisitions, Loans, Advances and Guaranties. The Company shall not, nor shall it permit any Subsidiary to, directly or indirectly, make, retain or have outstanding any investments (whether through purchase of stock or obligations or otherwise) in, or loans or advances (other than for travel advances and other similar cash advances made to employees in the ordinary course of business) to, any other Person, or acquire all or any substantial part of the assets or business of any other Person or division thereof, or be or become liable as endorser, guarantor, surety or otherwise for any debt, obligation or undertaking of any other Person, or otherwise agree to provide funds for payment of the obligations of another, or supply funds thereto or invest therein or otherwise assure a creditor of another against loss, or apply for or become liable to the issuer of a letter of credit which supports an obligation of another, or subordinate any claim or demand it may have to the claim or demand of any other Person; provided, however, that the foregoing shall not apply to nor operate to prevent: (a) investments in direct obligations of the United States of America or of any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, provided that any such obligations shall mature within one year of the date of issuance thereof; (b) investments in commercial paper rated at least P-1 by Moody's Investors Services, Inc. and at least A-1 by Standard & Poor's Corporation maturing within 270 days of the date of issuance thereof; -27- (c) investments in certificates of deposit issued by any United States commercial bank having capital and surplus of not less than $100,000,000 which have a maturity of one year or less; (d) endorsement of items for deposit or collection of commercial paper received in the ordinary course of business; (e) the present investments, loans and advances by the Company in its Subsidiaries as disclosed on Schedule 5.2 hereof and additional investments, loans and advances by the Company of up to $12,000,000 in and to Subsidiaries; (f) the Company's guarantee of the indebtedness permitted under Section 7.13(c) hereof; (g) Acquisitions by the Company of substantially all of the assets of corporations or Acquisitions of Wholly-Owned Domestic Restricted Subsidiaries from and after the date hereof so long as (i) the aggregate amount of cash consideration payable in connection with such Acquisitions does not exceed $3,000,000, (ii) the aggregate amount of stock consideration payable in connection with such Acquisitions does not exceed $5,000,000, (iii) the Acquisition of a Domestic Restricted Subsidiary shall have been approved by the board of directors of such Person prior to such Acquisition and (iv) such acquired Domestic Restricted Subsidiary shall have complied with the provisions of Section 7.23 hereof; (h) investments in the form of accounts receivable arising from sales of goods or services in the ordinary course of business; (i) investments in the form of advances or prepayments to suppliers in the ordinary course of business; and (j) investments in addition to those otherwise permitted under this Section 7.15 of a type described on Exhibit D hereto which bear the equivalent of at least A-1 or AA by Standard & Poor's Corporation and mature within one year; (k) existing minority investments in Siskiyou, ILX and Optra, and, after the date hereof, the Company may make additional minority investments of up to $2,000,000 per fiscal year; and (l) the Corning Acquisition. In determining the amount of investments, acquisitions, loans, advances and guarantees permitted under this Section 7.15, investments and acquisitions shall always be taken at the original cost thereof (regardless of any subsequent appreciation or depreciation therein), loans and advances shall be taken at the principal amount thereof then remaining unpaid, and guarantees shall be taken at the amount of obligations guaranteed thereby. -28- Section 7.16. Mergers, Consolidations and Sales. The Company shall not, nor shall it permit any Subsidiary to, be a party to any merger or consolidation, or sell, transfer, lease or otherwise dispose of all or any substantial part of its Property, including any disposition of a substantial part of, its Property as part of a sale and leaseback transaction, or in any event sell or discount (with or without recourse) any of its notes or accounts receivable; provided, however, that this Section shall not apply to nor operate to prevent the Company or any Subsidiary from (a) selling its inventory in the ordinary course of its business, (b) selling its equipment or other tangible Property that is obsolete or no longer useful or necessary to its business in the ordinary course of its business, or (c) selling its cash equivalents or marketable securities in the ordinary course of its business and in a manner consistent with its customary and usual cash management practices. As used in this Section 7.16, a sale, lease, transfer or disposition of assets shall be deemed to be of a "substantial part" of the Company's or any Subsidiary's Property if the book value of such assets, when added to the book value of all other assets sold, leased, transferred or disposed of by the Company or such Subsidiary exceeds 10% of the Company's tangible assets and, further provided, that any Subsidiary of the Company may merge or consolidate with or into or sell, lease or otherwise convey all or a substantial part of its assets to the Company or any Wholly-Owned Domestic Restricted Subsidiary; provided that, in any such merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation. Section 7.17. Maintenance of Subsidiaries. The Company shall not assign, sell or transfer, or permit any Subsidiary to issue, assign, sell or transfer, any shares of capital stock of a Subsidiary except to another Subsidiary or to the Company; provided that the foregoing shall not operate to prevent the issuance, sale and transfer to any person of any shares of capital stock of a Subsidiary solely for the purpose of qualifying, and to the extent legally necessary to qualify, such person as a director of such Subsidiary. Section 7.18. Dividends and Certain Other Restricted Payments. The Company shall not during any fiscal year (a) declare or pay any dividends on or make any other distributions in respect of any class or series of its capital stock (other than dividends payable on its common stock of up to $.04 per share per annum and dividends payable solely in its capital stock and repurchases of up to 50,000 shares of its capital stock per year) or (b) directly or indirectly purchase, redeem or otherwise acquire or retire any of its capital stock, provided, however, that the foregoing shall not apply to nor operate to prevent the common stock share repurchase program approved by the Company's Board of Directors to repurchase and retire shares issued solely for the Company's equity compensation plans and employee stock purchase plan or to repurchase shares at cost pursuant to rights under stock option or restricted stock purchase agreements. Section 7.19. ERISA. The Company shall, and shall cause each Subsidiary to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its Properties. The Company shall, and shall cause each Subsidiary to, promptly notify the Bank of (i) the occurrence of any reportable event (as defined in ERISA) with respect to a Plan, (ii) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor, (iii) its intention to terminate or withdraw from any Plan, and (iv) the occurrence -29- of any event with respect to any Plan which would result in the incurrence by the Company or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement Welfare Plan benefit. Section 7.20. Compliance with Laws. The Company shall, and shall cause each Subsidiary to, comply in all respects with the requirements of all federal, state and local laws, rules, regulations, ordinances and orders applicable to or pertaining to their Properties or business operations, non-compliance with which could result in a Materially Adverse Effect. Section 7.21. Burdensome Contracts With Affiliates. The Company shall not, nor shall it permit any Subsidiary to, enter into any contract, agreement or business arrangement with any of its Affiliates (other than with Wholly-Owned Subsidiaries) on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts, agreements or business arrangements between Persons not affiliated with each other. Section 7.22. No Changes in Fiscal Year. Neither the Company nor any Subsidiary shall change its fiscal year from its present basis without the prior written consent of the Bank. Section 7.23. Formation of Subsidiaries. Except for existing Subsidiaries designated on Schedule 5.2 hereto, the Company shall not, nor shall it permit any Subsidiary to, acquire any Subsidiary without the prior written consent of the Bank, such consent not to be unreasonably withheld. Section 7.24. Change in the Nature of Business. The Company shall not, and shall not permit any Subsidiary to, engage in any business or activity if as a result the general nature of the business of the Company or any Subsidiary would be changed in any material respect from the general nature of the business engaged in by the Company or such Subsidiary on the date of this Agreement. Section 7.25. Limitation on Certain Restrictions on Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise permit to exist or become effective any Lien or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in profits owned by the Company or any Subsidiary or pay any indebtedness owed to the Company or (b) make loans or advances to the Company or any of its Subsidiaries, except for such Liens or restrictions existing under or by reason of (i) applicable law or (ii) this Agreement and the other Loan Documents. Section 7.26. European Monetary Union. (a) If, as a result of the EMU Commencement, (i) any Alternative Currency ceases to be lawful currency of the state issuing the same and is replaced by the Euro or (ii) any Alternative Currency and the Euro are at the same time both recognized by the central bank or comparable governmental authority of the state issuing such currency as lawful currency of such state, then any amount payable hereunder by any party hereto in such Alternative Currency (including, without limitation, any Loan to be made under this Agreement) shall instead be payable in the Euro and the amount so payable shall be -30- determined by redenominating or converting such amount into the Euro at the exchange rate officially fixed by the European Central Bank for the purpose of implementing the EMU, provided, that to the extent any EMU Legislation provides that an amount denominated either in the Euro or in the applicable Alternative Currency can be paid either in Euros or in the applicable Alternative Currency, each party to this Agreement shall be entitled to pay or repay such amount in Euros or in the applicable Alternative Currency. Prior to the occurrence of the event or events described in clause (i) or (ii) of the preceding sentence, each amount payable hereunder in any such Alternative Currency will, except as otherwise provided herein, continue to be payable only in that Alternative Currency. (b) The Company shall from time to time, at the request of the Bank, pay to the Bank the amount of any cost or increased cost incurred by, or of any reduction in any amount payable to or in the effective return on its capital to, or of interest or other return foregone by, the Bank or any holding company of the Bank as a result of the introduction of, changeover to or operation of the Euro in any applicable state to the extent attributable to the Bank's obligations hereunder or for the credit which is the subject matter hereof. (c) With respect to the payment of any amount denominated in the Euro or in any Alternative Currency, the Bank shall not be liable to the Company in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Bank if the Bank shall have taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds (in the Euro Unit or, as the case may be, in any Alternative Currency) to the account with the bank in the principal financial center in the Euro Member which the Company or, as the case may be, the Bank shall have specified for such purpose. In this paragraph (c), "all relevant steps" means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Bank may from time to time determine for the purpose of clearing or settling payments of the Euro. (d) If the basis of accrual of interest or fees expressed in this Agreement with respect to the currency of any state that becomes a Euro Member shall be inconsistent with any convention or practice in the London interbank market for the basis of accrual of interest or fees in respect of the Euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such state becomes a Euro Member; provided, that if any Loan in the currency of such state is outstanding immediately prior to such date, such replacement shall take effect, with respect to such Loan, at the end of the then current Interest Period. (e) In addition, this Agreement (including, without limitation, the definition of Eurocurrency Loans) will be amended to the extent determined by the Bank (acting reasonably and in consultation with the Company) to be necessary to reflect such EMU Commencement and change in currency and to put the Bank and the Company in the same position, so far as possible, that they would have been in if such implementation and change in currency had not occurred. Except as provided in the foregoing provisions of this Section 7.26, no such implementation or change in currency nor any economic consequences resulting therefrom shall (i) give rise to any right to terminate prematurely, contest, cancel, rescind, alter, modify or renegotiate the -31- provisions of this Agreement or (ii) discharge, excuse or otherwise affect the performance of any obligations of Company or the Bank under this Agreement, any Note or any other Loan Documents. Section 8. Events of Default and Remedies. Section 8.1. Events of Default. Any one or more of the following (unless waived in writing by the Bank) shall constitute an "Event of Default" hereunder: (a) default in the payment of any principal of any Obligation or any principal of any other indebtedness or obligation (whether direct, contingent or otherwise) of the Company owing to the Bank when due, whether at the stated maturity thereof or at any time provided for in this Agreement or default for a period of ten (10) days in the payment when due of any interest or other Obligation payable by the Company hereunder or under any other Loan Documents (whether at the stated maturity thereof or at any other time provided for in this Agreement) or default for a period of ten (10) days in the payment when due of any interest or other amount payable in respect or any other indebtedness or obligation (whether direct, contingent or otherwise) of the Company owing to the Bank; or (b) default in the observance or performance of any covenant set forth in Sections 7.7 through 7.12 or 7.16, 7.18, 7.19, 7.24 or 7.25 hereof; or (c) default in the observance or performance of any other provision hereof or of any other Loan Document which is not remedied within thirty (30) days after the earlier of (i) the date on which such failure shall first become known to any officer of the Company or (ii) written notice thereof is given to the Company by the Bank; or (d) any representation or warranty made by the Company herein or in any other Loan Document, or in any statement or certificate furnished by it pursuant hereto or thereto, or in connection with any extension of credit made hereunder, proves untrue in any material respect as of the date of the issuance or making thereof; or (e) any event occurs or condition exists (other than those described in subsections (a) through (d) above) which is specified as an event of default under any of the other Loan Documents, or any of the Loan Documents shall for any reason not be or shall cease to be in full force and effect, or any of the Loan Documents is declared to be null and void, or the Company or any Person acting on its behalf or any shall challenge the validity of any Loan Document or the obligations of the Company thereunder; or (f) default shall occur under any Indebtedness for Borrowed Money in an aggregate principal amount of $500,000 or more issued, assumed or guaranteed by the Company or any Subsidiary, or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated), or any such -32- Indebtedness for Borrowed Money shall not be paid when due (whether by lapse of time, acceleration or otherwise); or (g) any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $500,000 shall be entered or filed against the Company or any Subsidiary or against any of their Property and which remains unvacated, unbonded, unstayed or unsatisfied for a period of thirty (30) days; or (h) the Company or any member of its Controlled Group shall fail to pay when due an amount or amounts aggregating in excess $250,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $250,000 (collectively, a "Material Plan") shall be filed under Title IV of ERISA by the Company or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against the Company or any member of its Controlled Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within thirty (30) days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (i) dissolution or termination of the existence of the Company or any Restricted Subsidiary (other than due to merger of such Restricted Subsidiary with and into the Company); or (j) the Company or any Restricted Subsidiary shall (i) have entered involuntarily against it in an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (vi) take any corporate action in furtherance of any matter described in parts (i) through (v) above, or (vii) fail to contest in good faith any appointment or proceeding described in Section 8.1(k) hereof; or (k) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Company or any Restricted Subsidiary or any substantial part of any of their Property, or a proceeding described in Section 8.1(j)(v) shall be instituted against -33- the Company or any Restricted Subsidiary, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of sixty (60) days. Section 8.2. Non-Bankruptcy Defaults. When any Event of Default described in subsection (a) through (i), both inclusive, of Section 8.1 has occurred and is continuing, the Bank may, by notice to the Company, take one or more of the following actions: (a) terminate the obligation of the Bank to extend any further credit hereunder on the date (which may be the date thereof) stated in such notice; (b) declare the principal of and the accrued interest on the Note to be forthwith due and payable and thereupon the Note, including both principal and interest and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall be and become immediately due and payable without further demand, presentment, protest or notice of any kind; and (c) enforce any and all rights and remedies available to it under the Loan Documents or applicable law. Section 8.3. Bankruptcy Defaults. When any Event of Default described in subsection (j) or (k) of Section 8.1 has occurred and is continuing, then the Note, including both principal and interest, and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind, and the obligation of the Bank to extend further credit pursuant to any of the terms hereof shall immediately terminate. In addition, the Bank may exercise any and all remedies available to it under the Loan Documents or applicable law. Section 8.4. Collateral for Undrawn Letters of Credit. When any Event of Default, other than an Event of Default described in subsection (j) or (k) of Section 8.1, has occurred and is continuing, the Company shall, upon demand of the Bank, and when any Event of Default described in subsection (j) or (k) of Section 8.1 has occurred the Company shall, without notice or demand from the Bank, immediately pay to the Bank the full amount of each Letter of Credit then outstanding, the Company agreeing to immediately make such payment and acknowledging and agreeing that the Bank would not have an adequate remedy at law for failure of the Company to honor any such demand and that the Bank shall have the right to require the Company to specifically perform such undertaking whether or not any draws have been made under any such Letters of Credit. Section 9. Miscellaneous. Section 9.1. Non-Business Day. If any payment hereunder becomes due and payable on a day which is not a Business Day, the due date of such payment shall be extended to the next succeeding Business Day on which date such payment shall be due and payable. In the case of any payment of principal falling due on a day which is not a Business Day, interest on such principal amount shall continue to accrue during such extension at the rate per annum then in -34- effect, which accrued amount shall be due and payable on the next scheduled date for the payment of interest. Section 9.2. No Waiver, Cumulative Remedies. No delay or failure on the part of the Bank or on the part of the holder of the Obligations in the exercise of any power or right shall operate as a waiver thereof or as an acquiescence in any default, nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies hereunder of the Bank and of the holder of the Obligations are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. Section 9.3. Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement or of any other Loan Document, nor consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and the Company. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. Section 9.4. Costs and Expenses. The Company agrees to pay on demand the reasonable costs and expenses of the Bank in connection with the negotiation, preparation, execution and delivery of any consents hereunder or waivers or amendments to this Agreement or the other Loan Documents, including the fees and expenses of Messrs. Chapman and Cutler counsel for the Bank, with respect to all of the foregoing (whether or not the transactions contemplated hereby are consummated). The Company further agrees to pay to the Bank or any other holder of the Obligations all costs and expenses (including court costs and attorneys' fees), if any, incurred or paid by the Bank or any other holder of the Obligations in connection with any Default or Event of Default or in connection with the enforcement of this Agreement or any of the other Loan Documents or any other instrument or document delivered hereunder or thereunder. The Company further agrees to indemnify the Bank, and any security trustee, and their respective directors, officers and employees, against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor, whether or not the indemnified Person is a party thereto) which any of them may pay or incur arising out of or relating to any Loan Document or any of the transactions contemplated thereby or the direct or indirect application or proposed application of the proceeds of any extension of credit made available hereunder, other than those which arise from the gross negligence or willful misconduct of the party claiming indemnification. The Company, upon demand by the Bank at any time, shall reimburse the Bank for any legal or other expenses incurred in connection with investigating or defending against any of the foregoing except if the same is directly due to the gross negligence or willful misconduct of the party to be indemnified. The obligations of the Company under this Section 9.4 shall survive the termination of this Agreement. Section 9.5. Documentary Taxes. The Company agrees to pay on demand any documentary, stamp or similar taxes payable in respect of this Agreement or any other Loan Document, including interest and penalties, in the event any such taxes are assessed, irrespective of when such assessment is made and whether or not any credit is then in use or available hereunder. -35- Section 9.6. Survival of Representations. All representations and warranties made herein or in any of the other Loan Documents or in certificates given pursuant hereto or thereto shall survive the execution and delivery of this Agreement and the other Loan Documents, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. Section 9.7. Survival of Indemnities. All indemnities and other provisions relative to reimbursement to the Bank of amounts sufficient to protect the yield of the Bank with respect to the Loans and Letters of Credit, including, but not limited to, Sections 2.7 and 2.9 hereof, shall survive the termination of this Agreement and the payment of the Note and the reimbursement obligations with respect to the Letters of Credit. Section 9.8. Notices. Except as otherwise specified herein, all notices hereunder shall be in writing (including cable or telecopy) and shall be given to the relevant party at its address or telecopier number set forth below, or such other address or telecopier number as such party may hereafter specify by notice to the other given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed: to the Company at: Newport Corporation 1791 Deere Avenue Irvine, California 92606 Attention: Robert C. Hewitt Telephone: (949) 253-1405 Telecopy: (949) 253-1671 to the Bank at: ABN AMRO Bank N.V. 300 South Grand Avenue Suite 1115 Los Angeles, California 90071-7519 Attention: Mr. John A. Miller Telephone: (213) 687-2072 Telecopy: (213) 687-2061 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section 9.8 and a confirmation of such telecopy has been received by the sender, (ii) if given by telex, when such telex is transmitted to the telex number specified in this Section 9.8 and the answer back is received by sender, (iii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iv) if given by any other means, when delivered at the addresses specified in this Section 9.8; provided -36- that any notice given pursuant to Section 1 or Section 2 hereof shall be effective only upon receipt. Section 9.9. Currency. Each reference in this Agreement to U.S. Dollars or to an Alternative Currency (the "relevant currency") is of the essence. To the fullest extent permitted by law, the obligation of the Company in respect of any amount due in the relevant currency under this Agreement shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in the relevant currency that the Bank entitled to receive such payment may, in accordance with normal banking procedures, purchase with the sum paid in such other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which such party receives such payment. If the amount in the relevant currency that may be so purchased for any reason falls short of the amount originally due, the Company shall pay such additional amounts, in the relevant currency, as may be necessary to compensate for the shortfall. Any obligations of the Company not discharged by such payment shall, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided herein, shall continue in full force and effect. Section 9.10. Currency Equivalence. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due from the Company hereunder or under the Note or applications in the currency expressed to be payable herein or under the Note or Applications (the "specified currency") into another currency, the parties agree that the rate of exchange used shall be that at which in accordance with normal banking procedures the Bank could purchase the specified currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Company in respect of any such sum due to the Bank hereunder or under the Note or any Application shall, notwithstanding any judgment in a currency other than the specified currency, be discharged only to the extent that on the Business Day following receipt by the Bank of any sum adjudged to be so due in such other currency, may in accordance with normal banking procedures purchase the specified currency with such other currency. If the amount of the specified currency so purchased is less than the sum originally due to the Bank in the specified currency, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Bank against such loss, and if the amount of the specified currency so purchased exceeds the amount originally due to the Bank in the specified currency. Section 9.11. Headings. Section headings used in this Agreement are for convenience of reference only and are not a part of this Agreement for any other purpose. Section 9.12. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 9.13. Counterparts. This Agreement may be executed in any number of counterparts, and by different parties hereto no separate counterpart signature pages, and all such counterparts taken together shall be deemed to constitute one and the same instrument. -37- Section 9.14. Binding Nature, Governing Law, Etc. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Bank and the benefit of its successors and assigns, including any subsequent holder of the Obligations. The Company may not assign its rights hereunder without the written consent of the Bank. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. This Agreement and the rights and duties of the parties hereto shall be governed by, and construed in accordance with, the internal laws of the State of California without regard to principles of conflicts of laws. Section 9.15. Submission to Jurisdiction; Appointment of Agent for Process; Waiver of Jury Trial. The Company hereby submits to the nonexclusive jurisdiction of the Federal or State courts sitting in Orange County, California for purposes of all legal proceedings arising out of or relating to this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company and the Bank each hereby irrevocably waive any and all right to trial by jury in any legal proceeding arising out of or relating to any Loan Document or the transactions contemplated thereby. Section 9.16. Outstanding Letters of Credit. The Company and the Bank agree that the Outstanding Letters of Credit shall, for all purposes of this Agreement, constitute Letters of Credit outstanding hereunder and all risk allocation or guaranty agreements executed and delivered in connection therewith shall remain in full force and effect. [The Remainder of Page Intentionally Left Blank] -38- Upon your acceptance hereof in the manner hereinafter set forth, this Agreement shall constitute a contract between us for the uses and purposes hereinabove set forth. Dated as of this 29th day of October, 1999. Newport Corporation By:_______________________________ Its____________________________ Accepted and agreed to as of the day and year last above written. ABN AMRO Bank N.V. By:_______________________________ Its:__________________________ By:_______________________________ Its:__________________________ -39- Exhibit A Newport Corporation Revolving Credit Note $15,000,000 October 29, 1999 On the Termination Date, for value received, the undersigned, Newport Corporation, a Nevada corporation (the "Company"), hereby promises to pay to the order of ABN AMRO Bank N.V. (the "Bank") at its office at 300 South Grand Avenue, Los Angeles, California, the principal sum of (i) Fifteen Million and no/100 Dollars ($15,000,000), or (ii) such lesser amount as may at the time of the maturity hereof, whether by acceleration or otherwise, be the aggregate unpaid principal amount of all Loans owing from the Company to the Bank under the Revolving Credit provided for in the Credit Agreement hereinafter mentioned. This Note evidences Loans made and to be made to the Company by the Bank under the Revolving Credit provided for under that certain 3-Year $15,000,000 Revolving Credit Agreement dated as of October 29, 1999 between the Company and the Bank (said Credit Agreement, as the same may be amended, modified or restated from time to time, being referred to herein as the "Credit Agreement"), and the Company hereby promises to pay interest at the office described above on such Loans evidenced hereby at the rates and at the times and in the manner specified therefor in the Credit Agreement. Each Loan made under the Revolving Credit against this Note, any repayment of principal hereon, the status of each such Loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the interest rate and Interest Period applicable thereto shall be endorsed by the holder hereof on a schedule to this Note or recorded on the books and records of the holder hereof (provided that such entries shall be endorsed on a schedule to this Note prior to any negotiation hereof). The Company agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the entries endorsed on a schedule to this Note or recorded on the books and records of the holder hereof shall be prima facie evidence of the unpaid principal balance of this Note, the status of each Loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any Fixed Rate Portion, the interest rate and Interest Period applicable thereto. This Note is issued by the Company under the terms and provisions of the Credit Agreement and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms are defined in the Credit Agreement. -40- The Company hereby promises to pay all costs and expenses (including attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Company hereby waives presentment for payment and demand. This Note shall be construed in accordance with, and governed by, the internal laws of the State of California without regard to principles of conflicts of laws. Newport Corporation By:______________________________ Name:____________________________ Its:_____________________________ -41- Exhibit B Compliance Certificate This Compliance Certificate is furnished to ABN AMRO Bank N.V. (the "Bank") pursuant to that certain 3-Year $15,000,000 Revolving Credit Agreement dated as of October 29, 1999, by and between Newport Corporation (the "Company") and the Bank (the "Credit Agreement"). Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. The Undersigned hereby certifies that: 1. I am the duly elected _____________________________________ of the Company; 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Company and its Subsidiaries during the accounting period covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or the occurrence of any event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. The financial statements required by Section 7.5 of the Credit Agreement and being furnished to you concurrently with this certificate are, to the best of my knowledge, true, correct and complete as of the dates and for the periods covered thereby; and 5. The Attachment hereto sets forth financial data and computations evidencing the Company's compliance with certain covenants of the Credit Agreement, all of which data and computations are, to the best of my knowledge, true, complete and correct and have been made in accordance with the relevant Sections of the Credit Agreement. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existing and the action which the Company has taken, is taking, or proposes to take with respect to each such condition or event: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ The foregoing certifications, together with the computations set forth in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this _____ day of ____________, 19__. Newport Corporation By Its:______________________________ -2- Attachment to Compliance Certificate Newport Corporation Compliance Calculations for Credit Agreement Dated as of October 29, 1999 Calculations as of ____________, 19__ ================================================================================ A. Quick Ratio (Section 7.7) ------------------------- 1. Current assets $___________ A1 2. Inventory $___________ A2 3. Line A1 minus Line A2 $___________ A3 4. Current liabilities (excluding Loans) $___________ A4 5. Ratio of Line A3 to Line A4 ______: 1.0 6. Line A5 ratio must not be less than 1.0: 1.0 Company in compliance? yes/no B. Tangible Net Worth (Section 7.9) -------------------------------- 1. Total shareholder's equity $___________ B1 2. Sum of: (i) intangibles $__________ (ii) write-up of assets $__________ $___________ B2 3. Line B1 minus Line B2 $======== (Tangible Net Worth) B3 4. Line B3 must be greater than or equal to $___________ Company in compliance? yes/no C. Leverage Ratio (Section 7.8) ---------------------------- 1. Total liabilities $___________ C1 2. Tangible Net Worth (line B3 above) $___________ C2 3. Ratio of Line C1 to Line C2 ______: 1.0 4. Line C3 ratio must not be greater than 1.35: 1.0 Company in compliance? yes/no D. Interest Coverage Ratio (Section 7.11) -------------------------------------- 1. Net Income for past 4 quarters $___________ D1 2. Interest Expense for past 4 quarters $___________ D2 3. Federal, state and local income $___________ taxes for past 4 quarters D3 4. Depreciation and amortization for $___________ past 4 quarters D4 5. Add lines D1, D2, D3 and D4 $======== (EBITDA) D5 6. Ratio of Line D5 to Line D2 ______: 1.0 7. Line D6 ratio must not be less than 3.5: 1.0 Company in compliance? yes/no E. Net Income (Section 7.10) ------------------------- 1. Net Income for past quarter $___________ E1 2. Net Income for fiscal quarter preceding $___________ Line E1 quarter E2 3. 10% of Tangible Net Worth (Line B3 above) $___________ E3 4. Line E1 amount must not exceed Line E3 -2- 5. Line E2 amount must exceed $0 Company in compliance yes/no F. Capital Expenditures (Section 7.12) ----------------------------------- 1. Capital expenditures fiscal year to date $___________ F1 2. Line F1 amount must not exceed $10,000,000 Company in compliance? yes/no -3- Exhibit C Existing Liens None, other than those liens permitted under Section 7.14. Exhibit D "U.S. Treasury Securities" - Obligations of the U.S. government. Bills have a maturity of one year or less and are sold on a discount basis. Notes have maturities of one to seven years and bonds have longer maturities; both are interest-bearing. "U.S. Government Agency Securities" - Obligations of the U.S. government agencies or departments - some owned by the federal government, some sponsored by it but privately held. "Domestic" or "Eurodollar Certificates" or "Deposits" - U.S. dollar deposits or certificates of deposit, held domestically or overseas from one day to five years. "Bankers Acceptances" - Time drafts sold on a discount basis with a maturity of six months or less, with a bank accepting primary responsibility for paying the draft whether or not the customer has repaid the bank. "Money Market Funds" - Daily funds invested in a portfolio of short-term instruments, with special funds developed for corporate use. Smith Barney's Money Fund Cash Portfolio Class A and Temporary Investment Fund, Inc. are included in this approved group. "Commercial Paper" - Company short-term unsecured promissory notes with a fixed maturity, sold on a discount basis from one to 270 days. "Municipal Government Notes and Bonds" - Securities issued by a state or local government, usually tax exempt. "Floating Rate Municipal Notes and Bonds" - Variable rate long term municipal bonds which may be "put back" to the issuer at par plus accrued interest at frequent intervals. "Municipal Auction Rate Preferred Stock" - Mutual funds based on a diversified portfolio of municipal bonds, by law backed by assets equal to at least 200% of face value, and bearing interest at auction set rates in frequent intervals. "Taxable Municipal Auction Rate Notes" - Notes issued by non-profit corporations which bear interest at auction set rates on a taxable basis. "Corporate Notes" - Corporate unsecured promissory notes with a fixed maturity from nine months to 15 years. "Corporate Auction Rate Preferred Stock" - Corporate perpetual preferred stock with a floating rate dividend eligible for the 70% intercorporate dividend received deduction. The dividend pricing mechanism ensures that the stock will trade at par on auction dates. Schedule 5.2 Subsidiaries
Jurisdiction of Percentage Name Incorporation Ownership Micro-Controle Benelux S.A. (inactive) Belgium 100* Newport Domestic International Sales Corp. California 100 (inactive) Newport European Distribution Company California 100 Newport Government Systems, Inc. California 100 (inactive) Newport Instruments Canada Corporation Canada 100 MC Holding S.A. France 100* Micro-Controle S.A. (1) France 100* Newport GmbH Germany 100 Micro-Controle Italia SRL Italy 100 Newport BV Netherlands 100 Newport Instruments AG Switzerland 100 Micro-Controle Holdings Ltd. (inactive) (2) United Kingdom 100 Micro-Controle Ltd. (inactive) (2) United Kingdom 100 Micro-Controle UK Ltd. (inactive) (2) United Kingdom 100 Newport Ltd. United Kingdom 100 Newport Foreign Sales Corporation Barbados 100 Environmental Optical Sensors, Inc. Colorado 100
*Director's Shares exist for this Subsidiary (1) Owned directly by MC Holding S.A. (2) Owned directly by Newport Ltd. EX-10.11 4 1999 STOCK INCENTIVE PLAN Exhibit 10.11 NEWPORT CORPORATION 1999 STOCK INCENTIVE PLAN This 1999 STOCK INCENTIVE PLAN (the "Plan") is hereby established and adopted this 18th day of November, 1999 (the "Effective Date") by Newport Corporation, a Nevada corporation (the "Company"). ARTICLE 1 PURPOSES OF THE PLAN 1.1 Purposes. The purposes of the Plan are (a) to enhance the Company's ability to attract, motivate and retain the services of qualified employees, officers, directors, consultants and other service providers (to the extent qualifying under Article 3 hereof) upon whose judgment, initiative and efforts the successful conduct and development of the Company's business largely depends, and (b) to provide additional incentives to such persons or entities to devote their utmost effort and skill to the advancement and betterment of the Company, by providing them an opportunity to participate in the ownership of the Company and thereby have an interest in the success and increased value of the Company. ARTICLE 2 DEFINITIONS For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 Administrator. "Administrator" means the Board or, if the Board delegates responsibility for any matter to the Committee, the term Administrator shall mean the Committee. 2.2 Affiliated Company. "Affiliated Company" means any "parent corporation" or "subsidiary corporation" of the Company, whether now existing or hereafter created or acquired, as those terms are defined in Sections 424(e) and 424(f) of the Code, respectively. 2.3 Board. "Board" means the Board of Directors of the Company. 2.4 Cause. "Cause" means, with respect to the termination of a Participant's employment, termination of such employment by the Company for any of the following reasons: (a) The continued refusal or omission by the Participant to perform any material duties required of him by the Company if such duties are consistent with duties customary for the position held with the Company; (b) Any material act or omission by the Participant involving malfeasance or gross negligence in the performance of Participant's duties to, or material deviation from any of the policies or directives of, the Company; 1 (c) Conduct on the part of Participant which constitutes the breach of any statutory or common law duty of loyalty to the Company; or (d) Any illegal act by Participant which materially and adversely affects the business of the Company or any felony committed by Participant, as evidenced by conviction thereof, provided that the Company may suspend Participant with pay while any allegation of such illegal or felonious act is investigated. 2.5 Change in Control. "Change in Control" shall mean (i) the acquisition, directly or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the beneficial ownership of more than fifty percent (50%) of the outstanding securities of the Company; (ii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (iii) the sale, transfer or other disposition of all or substantially all of the assets of the Company; (iv) a complete liquidation or dissolution of the Company; or (v) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger. 2.6 Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.7 Committee. "Committee" means a committee of two or more members of the Board appointed to administer the Plan, as set forth in Section 7.1 hereof. 2.8 Common Stock. "Common Stock" means the Common Stock, $0.35 par value, of the Company, subject to adjustment pursuant to Section 4.2 hereof. 2.9 Disability. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Code. The Administrator's determination of a Disability or the absence thereof shall be conclusive and binding on all interested parties. 2.10 Effective Date. "Effective Date" means November 18, 1999, which was the date on which the Plan was originally adopted by the Board. 2.11 Exercise Price. "Exercise Price" means the purchase price per share of Common Stock payable upon exercise of an Option. 2.12 Fair Market Value. "Fair Market Value" on any given date means the value of one share of Common Stock, determined as follows: (a) If the Common Stock is then listed or admitted to trading on a Nasdaq market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on such Nasdaq market system or principal stock exchange on which the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted on such day, then the Fair Market Value shall be the closing sale price of the Common Stock on such Nasdaq market system or such exchange on the next preceding day on which a closing sale price is quoted. 2 (b) If the Common Stock is not then listed or admitted to trading on a Nasdaq market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of valuation. (c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Administrator in good faith using any reasonable method of evaluation, which determination shall be conclusive and binding on all interested parties. 2.13 NASD Dealer. "NASD Dealer" means a broker-dealer that is a member of the National Association of Securities Dealers, Inc. 2.14 Offeree. "Offeree" means a Participant to whom a Right to Purchase has been offered or who has acquired Restricted Stock under the Plan. 2.15 Option. "Option" means any option to purchase Common Stock granted pursuant to the Plan. 2.16 Option Agreement. "Option Agreement" means the written agreement entered into between the Company and the Optionee with respect to an Option granted under the Plan. 2.17 Optionee. "Optionee" means a Participant who holds an Option. 2.18 Participant. "Participant" means an individual or entity who holds an Option, a Right to Purchase or Restricted Stock under the Plan. 2.19 Purchase Price. "Purchase Price" means the purchase price per share of Restricted Stock payable upon acceptance of a Right to Purchase. 2.20 Restricted Stock. "Restricted Stock" means shares of Common Stock issued pursuant to Article 6 hereof, subject to any restrictions and conditions as are established pursuant to such Article 6. 2.21 Right to Purchase. "Right to Purchase" means a right to purchase Restricted Stock granted to an Offeree pursuant to Article 6 hereof. 2.22 Service Provider. "Service Provider" means a consultant or other person or entity who provides services to the Company or an Affiliated Company and who the Administrator authorizes to become a Participant in the Plan. 2.23 Stock Purchase Agreement. "Stock Purchase Agreement" means the written agreement entered into between the Company and the Offeree with respect to a Right to Purchase offered under the Plan. ARTICLE 3 ELIGIBILITY 3.1 Options and Rights to Purchase. Subject to Section 3.3, officers and other key employees of the Company or of an Affiliated Company, members of the Board (whether or not 3 employed by the Company or an Affiliated Company), and Service Providers are eligible to receive Options or Rights to Purchase under the Plan. 3.2 Limitation on Shares. In no event shall any Participant be granted Rights to Purchase or Options in any one calendar year pursuant to which the aggregate number of shares of Common Stock that may be acquired thereunder exceeds 200,000 shares. 3.3 Restrictions. Notwithstanding anything contained in this Plan to the contrary, including, without limitation, Section 3.1 above, no director or officer of the Company or any Affiliated Company shall be eligible to receive any Option or Right to Purchase, or any right to receive the same, pursuant to this Plan unless and until this Plan has been approved by the affirmative vote of holders of a majority of the outstanding shares of the Company's Common Stock. ARTICLE 4 PLAN SHARES 4.1 Shares Subject to the Plan. The number of shares of Common Stock that may be issued under the Plan shall be 300,000 shares, subject to adjustment as to the number and kind of shares pursuant to Section 4.2 hereof. For purposes of this limitation, in the event that (a) all or any portion of any Option or Right to Purchase granted or offered under the Plan can no longer under any circumstances be exercised, or (b) any shares of Common Stock are reacquired by the Company pursuant to a Option Agreement or Stock Purchase Agreement, the shares of Common Stock allocable to the unexercised portion of such Option or such Right to Purchase, or the shares so reacquired, shall again be available for grant or issuance under the Plan. 4.2 Changes in Capital Structure. In the event that the outstanding shares of Common Stock are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend, or other change in the capital structure of the Company, then appropriate adjustments shall be made by the Administrator to the aggregate number and kind of shares subject to this Plan, and the number and kind of shares and the price per share subject to outstanding Option Agreements, Rights to Purchase and Stock Purchase Agreements in order to preserve, as nearly as practical, but not to increase, the benefits to Participants. 4 ARTICLE 5 OPTIONS 5.1 Option Agreement. Each Option granted pursuant to this Plan shall be evidenced by an Option Agreement which shall specify the number of shares subject thereto, vesting provisions relating to such Option and the Exercise Price per share. As soon as is practical following the grant of an Option, an Option Agreement shall be duly executed and delivered by or on behalf of the Company to the Optionee to whom such Option was granted. Each Option Agreement shall be in such form and contain such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable, including, without limitation, the imposition of any rights of first refusal and resale obligations upon any shares of Common Stock acquired pursuant to an Option Agreement. Each Option Agreement may be different from each other Option Agreement. 5.2 Exercise Price. The Exercise Price per share of Common Stock covered by each Option shall be determined by the Administrator, except that the Exercise Price of a Option shall not be less than 85% of Fair Market Value on the date the Option is granted. 5.3 Payment of Exercise Price. Payment of the Exercise Price shall be made upon exercise of an Option and may be made, in the discretion of the Administrator, subject to any legal restrictions, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Optionee that have been held by the Optionee for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Optionee's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Optionee; (f) the waiver of compensation due or accrued to the Optionee for services rendered; (g) provided that a public market for the Common Stock exists, a "same day sale" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; (h) provided that a public market for the Common Stock exists, a "margin" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; or (i) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 5.4 Term and Termination of Options. The term and termination of each Option shall be as fixed by the Administrator, but no Option may be exercisable more than ten (10) years after the date it is granted. 5.5 Vesting and Exercise of Options. Each Option shall vest and become exercisable in one or more installments at such time or times and subject to such conditions, including without limitation the achievement of specified performance goals or objectives, as shall be determined by the Administrator. 5.6 Nontransferability of Options. No Option shall be assignable or transferable except by will or the laws of descent and distribution, and during the life of the Optionee shall be 5 exercisable only by such Optionee; provided, however, that, in the discretion of the Administrator, any Option may be assigned or transferred in any manner which such Option is permitted to be assigned or transferred under the Code. 5.7 Rights as Stockholder. An Optionee or permitted transferee of an Option shall have no rights or privileges as a Stockholder with respect to any shares covered by an Option until such Option has been duly exercised and certificates representing shares purchased upon such exercise have been issued to such person. ARTICLE 6 RIGHTS TO PURCHASE 6.1 Nature of Right to Purchase. A Right to Purchase granted to an Offeree entitles the Offeree to purchase, for a Purchase Price determined by the Administrator, shares of Common Stock subject to such terms, restrictions and conditions as the Administrator may determine at the time of grant ("Restricted Stock"). Such conditions may include, but are not limited to, continued employment or the achievement of specified performance goals or objectives. 6.2 Acceptance of Right to Purchase. An Offeree shall have no rights with respect to the Restricted Stock subject to a Right to Purchase unless the Offeree shall have accepted the Right to Purchase within ten (10) days (or such longer or shorter period as the Administrator may specify) following the grant of the Right to Purchase by making payment of the full Purchase Price to the Company in the manner set forth in Section 6.3 hereof and by executing and delivering to the Company a Stock Purchase Agreement. Each Stock Purchase Agreement shall be in such form, and shall set forth the Purchase Price and such other terms, conditions and restrictions of the Restricted Stock, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable. Each Stock Purchase Agreement may be different from each other Stock Purchase Agreement. 6.3 Payment of Purchase Price. Subject to any legal restrictions, payment of the Purchase Price upon acceptance of a Right to Purchase Restricted Stock may be made, in the discretion of the Administrator, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Offeree that have been held by the Offeree for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Offeree's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Offeree; (f) the waiver of compensation due or accrued to the Offeree for services rendered; or (g) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 6.4 Rights as a Stockholder. Upon complying with the provisions of Section 6.2 hereof, an Offeree shall have the rights of a Stockholder with respect to the Restricted Stock purchased pursuant to the Right to Purchase, including voting and dividend rights, subject to the terms, restrictions and conditions as are set forth in the Stock Purchase Agreement. Unless the Administrator shall determine otherwise, certificates evidencing shares of Restricted Stock shall remain in the possession of the Company in accordance with the terms of the Stock Purchase Agreement. 6 6.5 Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided in the Stock Purchase Agreement or by the Administrator. In the event of termination of a Participant's employment, service as a director of the Company or Service Provider status for any reason whatsoever (including death or disability), the Stock Purchase Agreement may provide, in the discretion of the Administrator, that the Company shall have the right, exercisable at the discretion of the Administrator, to repurchase (i) at the original Purchase Price, any shares of Restricted Stock which have not vested as of the date of termination, and (ii) at Fair Market Value, any shares of Restricted Stock which have vested as of such date, on such terms as may be provided in the Stock Purchase Agreement. 6.6 Vesting of Restricted Stock. The Stock Purchase Agreement shall specify the date or dates, the performance goals or objectives which must be achieved, and any other conditions on which the Restricted Stock may vest. 6.7 Dividends. If payment for shares of Restricted Stock is made by promissory note, any cash dividends paid with respect to the Restricted Stock may be applied, in the discretion of the Administrator, to repayment of such note. 6.8 Nonassignability of Rights. No Right to Purchase shall be assignable or transferable except by will or the laws of descent and distribution or as otherwise provided by the Administrator. ARTICLE 7 ADMINISTRATION OF THE PLAN 7.1 Administrator. Authority to control and manage the operation and administration of the Plan shall be vested in the Board, which may delegate such responsibilities in whole or in part to a committee consisting of two (2) or more members of the Board (the "Committee"). Members of the Committee may be appointed from time to time by, and shall serve at the pleasure of, the Board. As used herein, the term "Administrator" means the Board or, with respect to any matter as to which responsibility has been delegated to the Committee, the term Administrator shall mean the Committee. 7.2 Powers of the Administrator. In addition to any other powers or authority conferred upon the Administrator elsewhere in the Plan or by law, the Administrator shall have full power and authority: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and Rights to Purchase shall be offered, the number of shares to be represented by each Option and Right to Purchase and the consideration to be received by the Company upon the exercise thereof; (b) to interpret the Plan; (c) to create, amend or rescind rules and regulations relating to the Plan; (d) to determine the terms, conditions and restrictions contained in, and the form of, Option Agreements and Stock Purchase Agreements; (e) to determine the identity or capacity of any persons who may be entitled to exercise a Participant's rights under any Option or Right to Purchase under the Plan; (f) to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option Agreement or Stock Purchase Agreement; (g) to accelerate the vesting of any Option or release or waive any repurchase rights of the Company with respect to Restricted Stock; (h) to extend the exercise date of any Option or acceptance date of any Right to Purchase; (i) to provide for rights of first refusal and/or repurchase rights; (j) to amend outstanding 7 Option Agreements and Stock Purchase Agreements to provide for, among other things, any change or modification which the Administrator could have provided for upon the grant of an Option or Right to Purchase or in furtherance of the powers provided for herein; and (k) to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Any action, decision, interpretation or determination made in good faith by the Administrator in the exercise of its authority conferred upon it under the Plan shall be final and binding on the Company and all Participants. 7.3 Limitation on Liability. No employee of the Company or member of the Board or Committee shall be subject to any liability with respect to duties under the Plan unless the person acts fraudulently or in bad faith. To the extent permitted by law, the Company shall indemnify each member of the Board or Committee, and any employee of the Company with duties under the Plan, who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding, whether civil, criminal, administrative or investigative, by reason of such person's conduct in the performance of duties under the Plan. ARTICLE 8 CHANGE IN CONTROL 8.1 Change in Control. In order to preserve a Participant's rights in the event of a Change in Control of the Company with respect to Options and Rights to Purchase, the Administrator in its discretion may, at any time an Option or Right to Purchase is granted, or at any time thereafter, take one or more of the following actions: (A) provide for the purchase of each Option or Right to Purchase for an amount of cash or other property that could have been received upon the exercise of the Option or Right to Purchase had the Option been currently exercisable, (B) adjust the terms of the Options and Rights to Purchase in a manner determined by the Administrator to reflect the Change in Control, (C) cause the Options and Rights to Purchase to be assumed, or new rights substituted therefor, by another entity, through the continuance of the Plan and the assumption of outstanding Options and Rights to Purchase, or the substitution for such Options and Rights to Purchase of new options and new rights to purchase of comparable value covering shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and Exercise Prices, in which event the Plan and such Options and Rights to Purchase, or the new options and rights to purchase substituted therefor, shall continue in the manner and under the terms so provided or (D) make such other provision as the Committee may consider equitable. If the Administrator does not take any of the forgoing actions, all Options and Rights to Purchase shall terminate upon the consummation of the Change in Control and the Administrator shall cause written notice of the proposed transaction to be given to all Participants not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction. 8 ARTICLE 9 AMENDMENT AND TERMINATION OF THE PLAN 9.1 Amendments. The Board may from time to time alter, amend, suspend or terminate the Plan in such respects as the Board may deem advisable. No such alteration, amendment, suspension or termination shall be made which shall substantially affect or impair the rights of any Participant under an outstanding Option Agreement or Stock Purchase Agreement without such Participant's consent. The Board may alter or amend the Plan to comply with requirements under the Code relating to Incentive Options or other types of options which give Optionee more favorable tax treatment than that applicable to Options granted under this Plan as of the date of its adoption. Upon any such alteration or amendment, any outstanding Option granted hereunder may, if the Administrator so determines and if permitted by applicable law, be subject to the more favorable tax treatment afforded to an Optionee pursuant to such terms and conditions. 9.2 Plan Termination. Unless the Plan shall theretofore have been terminated, the Plan shall terminate on the tenth (10th) anniversary of the Effective Date and no Options or Rights to Purchase may be granted under the Plan thereafter, but Option Agreements, Stock Purchase Agreements and Rights to Purchase then outstanding shall continue in effect in accordance with their respective terms. ARTICLE 10 CANCELLATION & RECISSION 10.1 Non-Competition. Unless an Option Agreement specifies otherwise, the Administrator may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid, or deferred Options at any time if the Participant is not in compliance with all applicable provisions of the Option Agreement and the Plan, or if the Participant engages in any "Adverse Activity." For purposes of this Section 10, "Adverse Activity" shall include: (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company; (ii) the disclosure to anyone outside the Company, or the use in other than the Company's business, without prior written authorization from the Company, of any confidential information or material relating to the business of the Company, acquired by the Participant either during or after employment with the Company; (iii) the failure or refusal to disclose promptly and to assign to the Company all right, title and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company; (iv) activity that results in termination of the Participant's employment for Cause; (v) a violation of any rules, policies, procedures or guidelines of the Company; or (vi) any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company. 10.2 Agreement Upon Exercise. Upon exercise, payment or delivery pursuant to an Option Agreement, the Participant shall certify in a manner acceptable to the Company that he or she 9 is in compliance with the terms and conditions of the Plan. In the event a Participant fails to comply with the provisions of paragraphs (i)-(vi) of Section 10.1 prior to, or during the six (6) months after, any exercise, payment or delivery pursuant to an Option Agreement, such exercise, payment or delivery may be rescinded within two years thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the exercise, payment or delivery, in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company. ARTICLE 11 MISCELLANEOUS 11.1 Benefits Not Alienable. Other than as provided above, benefits under the Plan may not be assigned or alienated, whether voluntarily or involuntarily. Any unauthorized attempt at assignment, transfer, pledge or other disposition shall be without effect. 11.2 No Enlargement of Employee Rights. This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Participant to be consideration for, or an inducement to, or a condition of, the employment of any Participant. Nothing contained in the Plan shall be deemed to give the right to any Participant to be retained as an employee of the Company or any Affiliated Company or to interfere with the right of the Company or any Affiliated Company to discharge any Participant at any time. 11.3 Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to Option Agreements and Stock Purchase Agreements, except as otherwise provided herein, will be used for general corporate purposes. 11.4 Annual Reports. During the term of this Plan, the Company will furnish to each Participant copies of annual financial reports that the Company distributes generally to its stockholders. 10 EX-21 5 SUBSIDIARIES OF REGISTRANT Exhibit 21 NEWPORT CORPORATION Subsidiaries of Registrant State or Country of Name of Subsidiary Incorporation - ------------------ ------------- Newport Domestic International Sales Corporation (Inactive) California Newport European Distribution Company California Newport Government Systems, Inc. (Inactive) California Environmental Optical Sensors, Inc. Colorado Newport Precision Optics Corporation New York Newport Photonics Packaging Services Corporation Delaware Micro-Controle Benelux S.A. (Inactive) Belgium Newport Instruments Canada Corporation Canada MC Holding S.A. France Micro-Controle S.A. France Newport GmbH Germany Micro-Controle Italia S.r.l. Italy Newport BV Netherlands Newport Instruments AG Switzerland Newport Ltd. United Kingdom Micro-Controle Holdings Ltd. (Inactive) United Kingdom Micro-Controle Ltd. (Inactive) United Kingdom Micro-Controle UK Ltd. (Inactive) United Kingdom Newport Foreign Sales Corporation Barbados EX-23 6 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements pertaining to the 1992 Incentive Stock Plan (Form S-8 No. 33-58564) and the Employee Stock Purchase Plan (Form S-8 No. 33-87062) of Newport Corporation of our report dated January 25, 2000, with respect to the consolidated financial statements and schedule of Newport Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /S/ ERNST & YOUNG LLP Orange County, California March 23, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated income statements, consolidated balance sheets and consolidated statements of cash flows and is qualified in its entirety by reference to such financial statements contained within the Company's Form 10-K for the year ended December 31, 1999. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,721 0 32,650 411 36,386 77,140 58,611 32,873 122,253 30,968 12,715 0 0 3,231 73,932 122,253 141,945 141,945 80,194 80,194 48,449 278 1,785 11,239 2,956 8,283 0 0 0 8,283 0.91 0.88
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