-----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, GkjkNfiauxFmwYJfC1Fn9xQdfKRCIbCc331pGn2CJBy39lW18mQhRvIGG7UzGHr0 Gr6/Q93KZk6njvescAJ/rg== 0001017062-98-000644.txt : 19980331 0001017062-98-000644.hdr.sgml : 19980331 ACCESSION NUMBER: 0001017062-98-000644 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD 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: 98577345 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 ANNUAL REPORT FOR THE FISCAL YEAR END 12/31/1997 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, 1997 ------------------------- 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 094-0849175 - -------------------------------------------------------------------------------- (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 (714) 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 $182,475,000 as of March 20, 1998. The number of shares outstanding of each of the issuer's classes of common stock as of March 20, 1998, was 9,073,887. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1998, are incorporated by reference into Part III. Page 1 of 43 Pages Exhibit Index on Sequentially Numbered Page 20 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 the Company intends 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 the Company's control, and actual results may differ depending on a variety of important factors, including those described below in "Additional Factors That May Affect Operating Results." PART I ITEM 1 Business - ------ -------- General Description of Business - ------------------------------- Newport Corporation, together with its consolidated subsidiaries (the "Company" or "Newport"), is a leading global supplier of high precision components, instruments, micropositioning and measurement products and systems to the fiber optics communications, computer peripherals, semiconductor equipment and scientific research markets. The Company designs, manufactures and markets components and systems that enhance productivity and capabilities of automated assembly and test and measurement for high precision manufacturing and engineering applications. With nearly thirty years experience in research laboratory products and systems, the Company also provides sophisticated equipment to commercial, academic and governmental research institutions worldwide. Certain of the Company's products and systems incorporate proprietary software developed by the Company or by third parties for the Company's use. The trend towards miniaturization in computer, telecommunications and other industries has placed greater demands on the manufacturing operations within these industries. As component sizes decrease, such components are required to be manufactured on a more precise level. In addition, customers are demanding increasingly sophisticated product offerings. As a result, suppliers of precision components, such as hard disk drives, semiconductor wafers and fiber optic communications equipment, are being driven to manufacture products within extremely narrow tolerances. This requires ultraprecise motion and vibration control and precision measurement components and systems. The Company's products enable manufacturers to manufacture and test sophisticated components to satisfy the demands for reduced size and increased functionality. For nearly three decades Newport has serviced the needs of research laboratories for precision equipment. In 1991, the Company acquired the micro-positioning business of Micro-Controle S.A. and commenced its 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 the Company with a significant manufacturing and distribution base in Europe. In February 1995, the Company acquired RAM Optical Instrumentation, Inc. ("ROI") in order to increase its participation in the computer peripherals and semiconductor test and measurement markets. The acquisition of ROI also increased the Company's expertise in developing software and manufacturing integrated systems. In March 1995, the Company acquired Light Control Instruments, Inc. ("LCI"), a participant in the fiber optic test and measurement market. The acquisition of LCI expanded the Company's fiber optic product offering by adding laser diode test equipment to the Company's internally developed product line. In January 1996, the Company acquired MikroPrecision Instruments, Inc. ("MikroPrecision") further increasing its participation in the semiconductor equipment and computer peripherals market. As a result of its internal growth and strategic acquisitions, Newport is 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, the Company continues to focus its core strengths in research test and Page 2 measurement equipment to provide ultra-precision motion and measurement technologies for research applications. The Company seeks to leverage its expertise in research laboratory equipment to continue to expand its product offerings for commercial applications. Markets - ------- Fiber Optic Communications Equipment Traditional wireline telecommunications networks are increasingly being replaced or supplemented by fiber optic transmission lines in order to increase network capacity. Fiber optic technology is also being increasingly utilized in local and wide area networks and for data communication within mainframe computers. High volume production of optoelectronic components used in fiber optic networks, however, has been limited by the method in which manufacturers of these devices manipulate strands of optical fiber. Optical fibers must be aligned within extremely narrow tolerances to allow pulses of light to be transmitted from a laser diode source through the communications line. In order for the light pulses to be transmitted efficiently, optical fibers must be aligned within nanometer (40 billionths of an inch) scale tolerances. Current manual techniques result in low production yields and inconsistent quality. The Company believes that as network suppliers are required to increase production and focus on technological innovations in fiber optics, they will increasingly seek out "turn-key" assembly automation and test and measurement systems from third party suppliers such as the Company. Newport's AutoAlign(TM), ORION(TM) and LaserWeld(TM) systems integrate the Company's ultraprecise motion and vibration control components with optical instrumentation to provide software controlled turn-key systems that permit the automated alignment and connection of optical fibers within extremely narrow tolerances and thus substantially increase productivity. The Company also manufactures laser diode burn-in and characterization equipment that allows diode manufacturers to age and test laser diodes more efficiently. These devices are the sources of light in fiber optic networks. Introduced in 1996, the Company's laser diode test equipment can burn-in and test hundreds of laser diodes at one time. Computer Peripherals Manufacturers of computer hard disk drives and other peripheral equipment such as printers and scanners are required to manufacture their products within extremely narrow tolerances. In the hard disk drive market, the demand for test and measurement products is being driven primarily by two factors. First, increased requirements of data density are driving manufacturers to produce smaller disk drives with increased storage capacity, thus heightening the need for ultra-precise test equipment. Second, the growth in demand for data storage devices and the increased usage of offshore production facilities has increased the demand for high precision automated test and measurement equipment to facilitate quality control. In addition, competitive factors within the computer peripherals industry are causing manufacturers to provide products with greater functionality and minimal product failure rates, thus requiring more capable inspection equipment. Manufacturers also seek highly precise solutions in an effort to maximize the life cycles of their products. As a result, the Company believes that data storage manufacturers are increasing their investment in ultraprecise automated inspection systems to test all components used in the design and manufacture of sophisticated disk drive equipment. The disk drive market is also being driven by the increased need for ultra precise surfaces on the disk and disk slider in hard drives. High storage densities in disk drives require narrower spacing between the disk drive heads and the disk surface, thus requiring smoother surfaces on the head and disk to prevent inadvertent contact and resultant disk failure. The Company's precision optics, mechanical components and vibration isolation technology are integrated into hard disk texturing machines that are used to create "landing zones" on hard disks for disk drive heads to allow head/disk contact without such failure. Page 3 Newport's high precision optical and mechanical components and vibration isolation platforms as well as its precision motion sub-assemblies and integrated systems are used by manufacturers of disk drives and other computer peripheral devices for test, measurement, inspection and calibration applications. The Company's Polaris(TM) system meets the automated inspection needs and throughput requirements of disk drive head manufacturers. The Company also has developed the LaserMAP(TM) system that combines laser and video technology to allow for automated dimensional measurement of the suspension system that holds the heads in the disk drive assembly. The LaserMAP system has also been applied to critical dimensional measurement applications in the semiconductor and medical device markets. Semiconductor Equipment The market for semiconductors, or computer chips, continues to grow as personal computers, personal digital assistants and other computer equipment increasingly penetrate the worldwide landscape. Also adding significantly to this market is the increased demand for highly functional electronics devices that require semiconductor technology. Increased demand for greater performance and smaller size has driven the requirement for reduced chip size and increased sophistication in chip design. Reduced size and increased sophistication, in turn, has rendered semiconductors more susceptible to minute manufacturing defects, thus resulting in increased demand for precision equipment that improves manufacturing and quality control. Newport provides high precision vibration isolation systems and mechanical components to Original Equipment Manufacturers ("OEMs") and chip manufacturers for integration into equipment that can detect and measure sub-micron defects in semiconductors as well as perform semiconductor and thin film head profiling. The Company's products enable manufacturers to detect and classify the defects more accurately and thereby increase manufacturing efficiency. Research Laboratory Equipment The Company has been a leader in servicing the needs of the research laboratory equipment market for nearly three decades and continues to provide precise test and measurement equipment to commercial, academic and governmental research institutions worldwide. The Company seeks to provide a broad portfolio of components, instruments and systems, including vibration isolation products and systems, mechanical components and accessories, laser-quality optics and optomechanical components and optoelectronic instruments, that fulfill a wide variety of research functions. The research laboratory equipment market continues to provide the Company with a significant base of assets, technology and employees enabling the Company to expand its presence in other markets. Products - -------- The Company manufactures and distributes two major product groups, broadly defined by the Company as Laser Electro-Optical equipment and peripherals and Precision Systems. Laser Electro-Optical equipment and peripherals consist of Vibration Isolation Products, Components, Optics and Instruments and accounted for approximately 55% of the Company's 1997 sales. Vibration Isolation Products Laser and certain other high technology ---------------------------- experiments and applications require a relatively vibration-free environment. The Newport isolation systems provide a working surface for experiments and applications with greatly reduced vibration environments due to noise, ground motion and excitations caused by external forces or active components mounted to the table itself. The Company's isolation systems provide dynamically rigid surfaces using internally damped honeycomb tops mounted on pneumatic supports. The Company's product line includes over 350 standard vibration isolation systems. In addition, Newport has the capability to manufacture custom systems. While these products are built to rigid quality standards, they are comprised of standard materials and consequently, there are no unusual supply requirements. Page 4 Components Newport offers a comprehensive line of mechanical components ---------- compatible with, and complementary to, its vibration isolation systems. These mechanical components include products such as mirror mounts, holders, positioners, and other accessories which are basic building blocks for experimental or prototype laser and optical systems. The Company has developed and sells components for fiber optics, telecommunications and sensors experimentation. Newport's products include a micro interferometer, laser-to- fiber couplers and fiber optic positioners. The Company's line of fiber optic components includes selected products manufactured by third parties. Optics The Company manufactures and markets a line of laser-quality optics ------ and optomechanical components. This product line includes lenses, mirrors, prisms, laser beam expanders, collimators, attenuators, variable beamsplitters and spatial filters. The Company has the capability to provide custom optical designs and coatings for specific applications. Instruments Newport offers several lines of electronic instruments to ----------- complement its other products serving optical laboratories. These products are concentrated in the areas of light measurement and control, light sources and holography. The Company not only designs and manufactures a majority of its electronic products but also distributes the products of others. Examples of the electronics instruments manufactured or distributed by the Company include power meters, laser diode instruments, spectrum analyzers, electronic shutters and modulators, lasers, lamps and accessories. Precision Systems consist primarily of Motion Control Devices and Systems, Process Automation Workstations for Photonics Packaging and Video-Based Measurement and Inspection Systems. These products accounted for approximately 45% of the Company's 1997 sales. Motion Control Devices and Systems Newport offers an extensive line of ---------------------------------- manually operated and motorized positioning devices for both research and industrial 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. The Company also manufactures a line of positioning sub-systems, for both laboratory and industrial applications. Newport's system integration capability allows it to serve application-specific research, test and measurement, and inspection markets and to satisfy a wide variety of industrial process application needs. Process Automation Workstations for Photonics Manufacturing Newport has ----------------------------------------------------------- developed several advanced process automation workstations for packaging and testing of photonics devices used in communications and sensing applications. Integrating core vibration control, motion control, and light measurement instrumentation technologies, the Company's AutoAlign system utilizes sophisticated control software to completely automate fiber optic alignment and device characterization for any photonic device. The LaserWeld system adds laser-welded attachment capability and is the industry's only industrial-class laser welding workstation for automated pigtailing of opto-electronic components, and features Newport's proprietary LaserHammer(TM) weld-adjustment technology and fully automated process sequencing capabilities. Video-Based Measurement and Inspection Systems Through the Company's wholly ---------------------------------------------- owned subsidiary, ROI, Newport offers a line of video-based measurement and inspection systems and accessories. These products include video direct microscopes, Sprint, OMIS II(TM) and OMIS III(TM) optical measurement inspection systems, Polaris magnetic head pole geometry system and LaserMAP software. The Polaris magnetic head pole geometry system is specifically designed to measure pole geometry features on thin film disk drive sliders. 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 5 Sales and Marketing - ------------------- The Company's products are sold to thousands of companies and institutions throughout the world and are marketed by means of a technical catalog, a technically trained marketing staff and a worldwide network of subsidiary sales offices and sales representatives. Newport's principal marketing tool for the scientific market is its 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. New product brochures and customer newsletters further augment these catalogs. These catalogs are published in the English, French and Japanese languages and are mailed worldwide to more than 100,000 potential customers annually. The Company also publishes brochures that target specific market segments including fiber optic communications, computer peripherals and semiconductor equipment. Newport advertises in journals serving many technical disciplines within the above mentioned market segments. Further product exposure and contact with existing and potential clients are developed and maintained at trade shows and technical conferences. The Company has an interactive site on the World Wide Web (http://www.newport.com) that addresses the large Internet-savvy portion of the Company's customer base. As the World Wide Web continues to gain acceptance within the Company's core markets, this tool will provide even greater advantages to the Company and its customers. Available on the Company's World Wide Web site are the latest products, a literature and information request format, technical/tutorial and application related material, market surveys, sales information (including its catalogs), and comprehensive company and financial overviews. The Company has commenced a telemarketing initiative. This new program targets new product brochures to potential customers, coordinates new order leads with salesmen and utilizes focused mailing lists for selected niche markets. In addition, the Company is focusing its advertising into market niches related to high growth, high technology industries such as fiber optic communications for which the Company has developed the AutoAlign and LaserWeld fiber alignment and packaging systems. For the Company's U.S. markets, components and systems are marketed through an internal sales and marketing staff, a Company-employed field sales organization and a nation-wide network of distributors and sales representatives. The Company selects sales representatives based on their knowledge of the Company's markets and their contacts with potential customers. As of December 31, 1997, the Company had 20 company-employed field sales persons deployed in the United States. The company-employed field sales force is supplemented by 48 independent representatives and distributors who are primarily dedicated to the Company's RAM Optical Instrumentation product line. For its international markets, the Company's products are marketed through a network of 26 company-employed field sales personnel based in France, Germany, the United Kingdom, Switzerland, Italy, the Netherlands, Canada and Taiwan who are supplemented by 36 independent representatives and distributors located in countries where the Company does not have a direct presence. International sales accounted for approximately 35.3%, 41.8% and 45.6% of total sales in 1997, 1996 and 1995, respectively. As a result of conducting business internationally, the Company is subject to various risks, which include: a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements such as export requirements, tariffs and other barriers; difficulties in staffing and managing foreign operations; longer accounts receivable cycles; currency fluctuations; export control restrictions; overlapping or differing tax structures; political and economic instability and general trade restrictions. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's business, results of operations or financial condition. Page 6 The Company's sales and marketing efforts for its larger systems are focused on establishing and developing long-term relationships with potential customers. A significant portion of the markets targeted by the Company for growth have been served to date by the internal manufacturing operations of components and systems manufacturers. The Company believes that as end-users continue to require reduced size and increased functionality in fiber optic, computer peripherals and semiconductor assembly and test equipment, those manufacturers will increasingly seek outside solutions for highly precise manufacturing and inspection applications. Sales cycles for such system products can be lengthy, and can range up to twelve months. Sales are typically made through standard purchase orders that can be subject to cancellation, postponement or other types of delays. No single unaffiliated customer accounted for more than 3% of the Company's sales in 1997. Sales and orders for the Company's products historically have generally not been affected by significant seasonal demand. Competition - ----------- The Company competes principally in several specialized market segments against a limited number of companies, some of which are more established, enjoy higher name recognition and possess far greater financial, technological and marketing resources than the Company while others are relatively small and highly specialized firms. In general, the Company currently competes on the basis of the performance and quality of its products, including reliability, as well as on price and timely manufacture and delivery. The Company also competes with the internal equipment manufacturing operations of many of its potential customers. While the Company attempts to convince such potential customers that it would be more efficient to outsource their equipment needs, there can be no assurance that the Company will be successful in penetrating this portion of these markets. Further, there can be no assurance that any of such potential customers will not market its internally manufactured equipment to third parties and thereby compete directly with the Company. In the research laboratory equipment market, increasing budgetary constraints are expected to give low-cost providers a competitive advantage, notwithstanding reduced quality and performance. In addition, because of the fragmented nature of this market, general equipment manufacturers may gain a market presence without specifically targeting the market. There can be no assurance that the Company will be able to compete successfully in the future against existing or new competitors, or that new competitors, some of which may have substantially greater financial, technical and marketing resources than the Company, will not seek to enter the market served by the Company's products. Manufacturing - ------------- The Company assembles, tests and packages its components and systems at its domestic manufacturing facilities located in Irvine and San Luis Obispo, California, and Plymouth, Minnesota. The Company's international manufacturing facilities are located in France. For information regarding the Company's operations by geographic area, refer to Note 13 of Notes to Consolidated Financial Statements. A portion of the Company's research and development facilities, its 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. The Company's 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 its larger products, assembling the subassemblies and components into integrated systems. The Company seeks to design and manufacture components internally for its integrated systems, although on a limited basis the Company purchases completed products from certain suppliers and resells those products through its distribution system. Most of these purchase-pass-through products are produced to the Company's specifications and carry the Company's logo. Page 7 The Company currently procures 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 the Company, the Company would be required to purchase comparable components from other sources. If for any reason the Company could not obtain comparable replacement components from other sources in a timely manner, the Company's business, results of operations or financial condition could be adversely affected. Research and Product Development - -------------------------------- The Company continually seeks to improve its technological position through internal research and product development and licensing and acquisitions of complementary technologies. Technological advances, evolving industry standards and new product introductions and enhancements characterize the computer peripherals, semiconductor equipment and fiber optic communications equipment markets, as well as the other markets for the Company's products. The Company attempts to enhance its existing products and develop and introduce innovative new products to satisfy customer needs. As the Company's business continues to evolve towards systems integration, the Company regularly investigates new ways to combine components manufactured at its various operations to produce innovative technological solutions for the markets it serves. The Company is investing in a number of programs to develop new products and product enhancements to complement its AutoAlign fiber alignment system for the fiber optic communications market. During 1995 the Company developed a prototype LaserWeld packaging system for manufacturing optoelectronic devices for the high growth fiber optic communication industry. Products introduced by the Company in 1995 included the Polaris magnetic head pole geometry measurement system for the disk drive industry and LaserMAP software which integrates laser metrology into its video inspection systems for applications in the electronics packaging industry. During 1996 it introduced the ORION packaging system, a semiautomated single-mode fiber alignment system as well as a series of X-ray goniometers for sale to the high energy physics research market. In 1997 the Company introduced the DynamYX300(TM) air-bearing motion system targeted at the 300 millimeter semiconductor wafer processing test equipment market, the ESP6000(TM), a digital signal processor (DSP) based motion controller specifically designed for test, measurement, inspection, and alignment applications, and the TS series of linear motion stages designed for semiconductor and computer peripheral test and measurement applications. In addition, the Company introduced its models 8008 and 6000 benchtop laser diode controllers as well as a number of new products for the photonics research market and the traditional Laser Electro-Optical market. Management is committed to continued product development and intends to maintain R&D expenditures at a level between 7% and 9% of net sales for the development of new products and product improvements. There can be no assurance that the Company's research and development efforts will be successful, that its new products will be developed on a timely basis and will achieve customer acceptance or that its customers' products will 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 the Company's business, operating results or financial condition. Intellectual Property and Proprietary Rights - -------------------------------------------- The Company has a number of patents, trademarks, exclusive marketing rights and licenses. The Company believes that its business relies primarily on its product performance, experience and marketing skill, and is not dependent upon patent rights. Although the Company continues to implement protective measures, including requiring all employees and certain key suppliers and consultants to the Company to sign nondisclosure agreements, and intends to defend its proprietary rights, policing unauthorized use of the Company's technology or products is difficult and there can be no assurance that these measures will be successful. In addition, there can be no assurance that infringement, invalidity, right to use or ownership claims by third parties will be asserted in the future, which claims could materially adversely affect the Company's business, operating results or financial condition, regardless of the outcome. Page 8 Employees - --------- As of December 31, 1997, the Company had 775 employees worldwide. None of the Company's employees are represented by a union. The Company believes that its relationship with its employees is good. Backlog - ------- The consolidated backlog of all the Company's products was $22.6 million, $20.7 million and $19.3 million at December 31, 1997, 1996 and 1995, respectively. The Company manufacturers a significant portion of its products for inventory to provide the capability to make shipments upon receipt of an order. The remainder of the Company's 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, the Company does not believe that its backlog of orders at any particular date is a meaningful indicator of the Company's sales for any succeeding period. As a result of manufacturing products in advance of receiving orders, the Company may at any given time have excess levels of inventory. Such excess levels of inventories increase the Company's expenses and the amount of the Company's resources invested in working capital. In addition, as the Company's 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, Newport has minority ownership interests in several domestic companies involved in manufacturing laser-related and other high technology products. ITEM 2 Properties - ------ ---------- The Company's headquarters and principal California manufacturing operations are located at 1791 Deere Avenue, Irvine, California. The Company leases the Deere Avenue property under a fifteen-year lease expiring in March 2007. In addition, the Company has manufacturing operations in leased facilities at San Luis Obispo, California and Plymouth, Minnesota and leases office space in Mountain View, California for its Western Region sales, service and application center. The Company leases sales and service offices in Germany, England, Switzerland, Italy, the Netherlands, Canada and Taiwan, with leases expiring at various dates through 2011. The Company's centralized European distribution center is located at leased facilities in the Netherlands. The Company believes that its facilities are adequate for its current needs and that suitable additional or substitute space will be available in the future to accommodate expansion of the Company's operations. The Company acquired in 1991, 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 the Company relocated its New York manufacturing operations to Irvine, California and leased the Garden City, New York property. Subsequent to the end of the year the Company sold this property for approximately $2.0 million. ITEM 3 Legal Proceedings - ------ ----------------- The Company is not a party to any material legal proceedings other than ordinary routine litigation incidental to its business. Page 9 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, 1997. PART II ITEM 5 Market For the Registrant's Common Equity and Related Security Holder - ------ --------------------------------------------------------------------- Matters - ------- Price Range of Common Stock - --------------------------- The Company's common stock is traded on the NASDAQ National Market under NASDAQ symbol NEWP. As of December 31, 1997, the Company had 1,513 common stockholders of record. Refer to Note 15, Supplementary Quarterly Consolidated Financial Data (Unaudited), of Notes to Consolidated Financial Statements on page 38 for quarterly share price and dividend payments. Sales of Unregistered Securities - -------------------------------- None. Page 10 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, 1997, 1996, 1995, 1994, and 1993, restated to include financial information of ROI and LCI which were accounted for as poolings of interests (In thousands, except percent, per share and employment information):
1997 1996 1995 1994 1993 -------- --------- -------- -------- --------- FOR THE YEAR: Net sales $132,594 $119,910 $101,961 $94,201 $93,573 Cost of sales 74,844 67,103 55,421 51,811 51,747 -------- -------- -------- ------- ------- Gross profit 57,750 52,807 46,540 42,390 41,826 Selling, general and administrative 35,825 36,741 34,441 32,240 31,735 Research and development 9,490 8,204 6,765 5,371 5,219 Restructuring expense and other special charges - - - - 6,263 -------- -------- -------- ------- ------- Income (loss) from operations 12,435 7,862 5,334 4,779 (1,391) Interest expense (1,992) (1,931) (1,593) (1,782) (2,321) Other income (expense), net (349) 477 1,137 1,839 1,463 -------- -------- -------- ------- ------- Income (loss) before income taxes 10,094 6,408 4,878 4,836 (2,249) Income tax provision 3,030 1,705 1,003 1,654 951 -------- -------- -------- ------- ------- Net income (loss) $ 7,064 $ 4,703 $ 3,875 $ 3,182 $(3,200) ======== ======== ======== ======= ======= Percent of net sales: Gross profit 43.6% 44.0% 45.6% 45.0% 44.7% Selling, general and administrative 27.0 30.6 33.8 34.2 33.9 Research and development 7.2 6.9 6.6 5.7 5.6 Income (loss) from operations 9.4 6.5 5.2 5.1 (1.5) Net income (loss) 5.3 3.9 3.8 3.4 (3.4) PER SHARE: Net income (loss) per share (1) Basic $ 0.80 $ 0.54 $ 0.47 $ 0.39 $ (0.39) Diluted 0.77 0.52 0.45 0.38 (0.39) Dividends paid per share 0.04 0.04 0.04 0.04 0.04 Equity per share (diluted) 6.61 6.39 6.18 5.57 5.31 AT YEAR END: Cash and marketable securities $ 7,456 $ 3,375 $ 1,524 $ 3,624 $ 4,311 Customer receivables, net 23,372 23,418 20,547 18,755 16,946 Inventories 28,326 28,954 22,744 21,432 21,655 Other current assets 6,300 6,782 4,088 4,512 4,941 -------- -------- ------- ------- ------- Current assets 65,454 62,529 48,903 48,323 47,853 Investments and other assets 5,830 5,191 4,557 4,441 5,185 Property, plant and equipment 22,994 24,045 22,327 23,044 24,145 Goodwill, net 10,133 11,612 8,161 8,846 8,852 -------- -------- ------- ------- ------- Total assets $104,411 $103,377 $83,948 $84,654 $86,035 ======== ======== ======= ======= ======= Current liabilities $ 21,139 $ 20,787 $20,330 $26,604 $24,085 Long-term debt 21,027 23,464 9,899 11,117 16,005 Other liabilities 1,587 1,697 1,032 282 2,302 Stockholders' equity 60,658 57,429 52,687 46,651 43,643 -------- -------- ------- ------- ------- Total liabilities and equity $104,411 $103,377 $83,948 $84,654 $86,035 ======== ======== ======= ======= ======= MISCELLANEOUS STATISTICS Working capital $ 44,315 $ 41,742 $28,573 $21,719 $23,768 Common shares outstanding 8,951 8,890 8,699 8,441 8,400 Worldwide employment at end of period 775 746 662 650 676 Sales per employee (annualized) $ 171 $ 161 $ 155 $ 142 $ 132
(1) Earnings per share 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 11 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 the Company's actual results could differ materially from those anticipated in such statements, as a result of various factors including those described below in "Additional Factors That May Affect Future Operating Results." OVERVIEW - -------- The following is management's discussion and analysis of certain significant factors that have affected the results of operations and financial condition of the Company during the period included in the accompanying financial statements. This discussion should be read in conjunction with the financial statements and associated notes. This discussion includes the impact of the acquisition of RAM Optical Instrumentation, Inc. ("ROI") and Light Control Instruments, Inc. ("LCI") which were accounted for using the pooling of interests method and MikroPrecision Instruments, Inc. ("MikroPrecision") which was accounted for using the purchase method, as described more fully in Note 2 to the financial statements on page 29 of this Form 10-K. RESULTS OF OPERATIONS - --------------------- Financial Analysis The following table sets forth, for the periods - ------------------ indicated, certain income and expense items expressed as a percent of the Company's net sales and as period-to-period percent increases or decreases:
Period-to-Period Percent of Net Sales Increase (Decrease) ------------------------ ------------------ 1997 1996 1995 1997 1996 ------ ------ ------ -------- -------- Net sales 100.0% 100.0% 100.0% 10.6% 17.6% Cost of sales 56.4 56.0 54.4 11.5 21.1 ----- ----- ----- Gross profit 43.6 44.0 45.6 9.4 13.5 Selling, general and administrative expense 27.0 30.6 33.8 (2.5) 6.7 Research and development expense 7.2 6.9 6.6 15.7 21.2 ----- ----- ----- Income from operations 9.4 6.5 5.2 58.2 47.4 Interest expense (1.5) (1.6) (1.5) 3.2 21.2 Other income (expense), net (0.3) 0.4 1.1 (173.2) (58.0) ----- ----- ----- Income before income taxes 7.6 5.3 4.8 57.5 31.4 Income tax provision 2.3 1.4 1.0 77.7 70.0 ----- ----- ----- Net income 5.3 3.9 3.8 50.2 21.4 ===== ===== =====
Net Sales For 1997, 1996 and 1995, the Company's net sales totaled $132.6 - --------- million, $119.9 million and $102.0 million, respectively. Net sales for 1997 increased $12.7 million compared with 1996, with increases of $15.9 million in domestic markets partially offset by a $3.2 million decrease in international markets. Net sales for 1996 increased $17.9 million compared with 1995, represented by increases of $14.3 million in domestic markets and $3.6 million (net of $0.8 million unfavorable exchange rate effect) in international markets. Domestic sales totaled $85.7 million, $69.8 million and $55.5 million for 1997, 1996 and 1995, respectively. For 1997, sales increased $15.9 million compared with 1996. The growth is primarily attributable to a $6.6 million increase in sales to the semiconductor equipment, fiber optic communications and computer peripherals markets, sales growth totaling $2.1 million to research customers and increases in Page 12 sales to other general metrology customers. Sales for 1996 increased $14.3 million versus 1995. The increase was attributable principally to sales revenue at MikroPrecision ($7.7 million) for which there were no comparable amounts in 1995 and increases in sales of vibration isolation and precision motion systems to the semiconductor equipment, fiber optic communications and computer peripherals markets. International sales totaled $46.9 million, $50.1 million and $46.5 million for 1997, 1996 and 1995, respectively. Sales in 1997 decreased $3.2 million versus 1996 primarily due to the effect of the stronger U.S. dollar, which negatively impacted the translation of 1997 European sales by $3.0 million when compared with 1996, and continued softness throughout most of the year in European research markets, particularly France and Germany. Excluding the negative foreign exchange rate effects, European sales were approximately flat year to year. Pacific Rim sales declined $0.5 million in 1997 versus 1996. Results in this region were mixed with sales to the Hong Kong and Taiwan markets growing $1.4 million while sales to Japan and the ASEAN countries declined $2.1 million. For 1996, sales increased $3.6 million versus 1995 and was attributable principally to increased sales into the fiber optic communication and computer peripherals markets in Pacific Rim countries ($6.0 million), offset partially by declines in Europe ($2.5 million), primarily France where funding for research equipment was reduced, including the previously mentioned $0.8 million unfavorable exchange rate effect. The order rate in the U.S. continues to show strength in response to the increasing sales and marketing emphasis on higher growth market niches in the fiber optic communications, semiconductor equipment and computer peripherals industries and on new products introduced in 1997. Management expects improvements in sales in 1998 particularly in the United States and Europe as the Company continues to leverage its expertise in the design, manufacture and marketing of high precision components, instruments and integrated systems to the fiber optic communications, semiconductor equipment, computer peripherals and scientific research markets. However, the continued strength of the U.S. dollar against European currencies and the economic uncertainty in Asia may offset in part the anticipated sales growth in those markets. Overall, management anticipates that net sales in 1998 will increase over 1997; however, such growth is dependent on many factors and cannot be assured. Operating Income Total costs and expenses for 1997, 1996 and 1995 were $120.2 - ---------------- million, $112.0 million and $96.7 million, respectively. Gross margin was 43.6%, 44.0% and 45.6% for 1997, 1996 and 1995, respectively. The slight decrease in gross margin in 1997 from 1996 was attributable primarily to the higher growth rates in sales to OEM customers in the Company's target markets that generally have lower margins, but also lower sales and marketing expenses. The decrease in gross margin in 1996 from 1995 was attributable primarily to the addition of sales of products manufactured by MikroPrecision, which typically have lower margins than the Company's other products. Management anticipates that, despite the expectation that sales to OEM customers in the Company's target markets will comprise an increasing proportion of the Company's net sales, the Company's overall gross margin will increase slightly in 1998 as a result of increased sales volume and continued manufacturing productivity improvements Company-wide. Selling, general and administrative (SG&A) expenses totaled $35.8 million, $36.7 million and $34.4 million for 1997, 1996 and 1995, respectively, representing 27.0%, 30.6% and 33.8% of net sales in the respective years. The $0.9 million decrease in SG&A in 1997 resulted primarily from favorable exchange rate effects in Europe, decreases in advertising and other controllable expenses, delayed personnel replacement and the favorable effect on sales and marketing expenses from the mix shift toward OEM customers. Excluding the $1.1 million benefit of exchange rates, real SG&A expenses increased $0.2 million or less than 1% over 1996. The 1996 increase ($2.3 million) was attributable primarily to expenses incurred at MikroPrecision for which there were no comparable expenses in 1995 ($1.4 million) and to adverse determination of an appeal of litigation in France dating prior to the acquisition of Micro Controle S.A. ($0.6 million) offset in part by a favorable exchange rate effect in Europe of $0.2 million. Management anticipates SG&A expenses in total will increase in 1998 but will continue to decline as a percent of sales as a result of anticipated increased sales volume. Page 13 Research and development (R&D) expenses totaled $9.5 million, $8.2 million and $6.8 million for 1997, 1996 and 1995, respectively. R&D expenses represented 7.2%, 6.9% and 6.6% of net sales in 1997, 1996 and 1995, respectively. The increases in R&D expenses in 1997 compared with 1996 and 1996 compared with 1995, were attributable primarily to increased personnel costs related to the development of a number of new products and product enhancements some of which were to complement the AutoAlign fiber alignment system, including the ORION semiautomated single-mode fiber alignment system for the fiber optic communications market, improvements to the LaserWeld packaging workstation, development of laser diode burn-in and characterization systems and new products and software by the Company's ROI and MikroPrecision subsidiaries. Management is committed to continued product development and intends to maintain R&D expenditures at a level between 7% and 9% of net sales for the development of new products and product improvements. The Company is dependent to a significant extent upon its ability to enhance its existing products and to introduce innovative new products that gain market acceptance. There can be no assurance, however, that the Company will be successful in selecting, developing or manufacturing new products, or in enhancing its existing products so as to achieve such market acceptance. Operating income totaled $12.4 million, $7.9 million and $5.3 million for 1997, 1996 and 1995, respectively. Operating income represented 9.4%, 6.5% and 5.2% of net sales in 1997, 1996 and 1995, respectively. Management anticipates that operating income will improve in 1998, both in total and as a percentage of net sales, primarily as a result of anticipated net sales growth exceeding expense growth. Interest Expense Interest expense totaled $2.0 million, $1.9 million and $1.6 - ---------------- million for 1997, 1996 and 1995, respectively. The increase in interest expense for 1996 over 1995 was primarily the result of additional debt incurred to finance the acquisition of MikroPrecision. The Company anticipates interest expense for 1998 will remain approximately the same as 1997 because its long term debt base will remain relatively constant until the 4th quarter when a $1.5 million principal payment is due, and because the majority of the Company's debt is at fixed interest rates. Other Income/(Expense), Net Interest and dividend income totaled $0.2 - --------------------------- million, $0.1 million and $0.1 million for the years 1997, 1996 and 1995 respectively. Exchange losses were $0.5 million in 1997 versus exchange gains of less than $0.1 million in both 1996 and 1995. The Company recorded investment gains totaling $0.8 million in 1995. Minimal investment gains were recorded in 1997 and no investment gains were recorded in 1996. Taxes Based On Income The effective tax rates for 1997, 1996 and 1995 were - --------------------- 30.0%, 26.6% and 20.6%, respectively. The increase in the effective tax rate for 1997 compared with 1996 was primarily the result of higher state income taxes, a lower utilization of foreign operating losses and no reduction in valuation allowance which were partially offset by a benefit from higher foreign sales corporation income. The increase in the effective tax rate for 1996 compared with 1995 was primarily the result of lower utilization of state net operating losses ("NOLs") and foreign operating losses and a lower valuation allowance reduction which were partially offset by a benefit from the conversion of foreign subsidiaries to U.S. partnerships. Management anticipates that the Company's effective tax rate in 1998 will be slightly higher than in 1997. Employment Worldwide employment of the Company totaled 775, 746 and 662 at - ---------- December 31, 1997, 1996 and 1995, respectively. The increase in employment at December 31, 1996, was a result of the acquisition of MikroPrecision and increased production to meet sales requirements. Sales per employee approximated $171,000, $161,000 and $155,000 during 1997, 1996 and 1995, respectively. Stockholders' Equity Stockholders' equity increased from $52.7 million ($6.18 - -------------------- per share) as of December 31, 1995, to $57.4 million ($6.39 per share) as of December 31, 1996 and to $60.7 million ($6.61 per share) as of December 31, 1997. The increases in 1997 and 1996 were attributable to the respective year earnings and issuance of stock under stock option and purchase plans, offset in part by dividend payments, unrealized translation losses and repurchase of stock under the Company's share Page 14 repurchase program in 1997. The Company paid dividends totaling $0.4 million, $0.4 million, $0.3 million during each of the years 1997, 1996 and 1995, respectively. This represents 4 cents per share for each year. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Net cash provided by operating activities of $12.3 million was primarily attributable to the Company's operating income plus non-cash items, principally depreciation and amortization, offset in part by changes in operating assets and liabilities. Inventories decreased 2.2% in 1997 over 1996 levels as a result of programs introduced in 1997 to minimize inventory levels while maintaining competitive manufacturing lead times. The Company believes that it must maintain certain levels of inventory in order to ensure that the lead times to its customers remain competitive, however high levels of inventory increases the risk that the Company will have to write down inventory in the future due to obsolescence if the Company does not correctly anticipate market demand for certain of its products. Customer receivables remained at approximately the same level as in 1996, while sales grew by 10.6%. Accounts payable decreased 25.2% in 1997 compared with 1996 in part as a result of reducing inventory levels and changes in the timing of material purchases. Net cash used in investing activities of $6.2 million was attributable principally to the Company's purchases of property, plant and equipment ($5.0 million) and the final payment due on the acquisition of MikroPrecision Instruments ($0.9 million). Capital expenditures for property, plant and equipment aggregated $5.8 million and $2.5 million for 1996 and 1995, respectively. Net cash used in financing activities of $2.2 million was attributable principally to the repurchase of stock under the Company's share repurchase program, partially offset by the issuance of common stock in connection with stock option and purchase plans. In February 1998, Newport's board of directors authorized the repurchase of an additional 350,000 shares under the Company's share repurchase program which commenced in April 1997. This brings the total number of shares authorized for repurchase to 640,000. The originally authorized 290,000 shares were repurchased in 1997. At December 31, 1997, the Company had in place a $20.0 million unsecured line of credit with interest at prime, or LIBOR plus 1.0% and an unused line fee of 25 basis points to support its domestic operation. In addition, a 10.0 million French franc ($1.7 million) unsecured line of credit with interest at PIBOR plus 1.0% was in place to support the Company's European requirements. Both lines of credit were scheduled to mature on December 31, 1999. At December 31, 1997, there was no amount outstanding under the domestic unsecured line of credit with $18.2 million available after considering outstanding letters of credit. The amount outstanding under the Company's 10.0 million French franc ($1.7 million) European unsecured line of credit was 1.6 million French francs ($0.3 million). In February 1998 the Company modified its bank credit agreement increasing its overall unsecured line of credit to $25.0 million to support the Company's worldwide operations replacing the previous $20.0 million domestic unsecured line of credit and 10.0 million French franc unsecured line of credit. This modified credit agreement retains the same interest rate (prime or LIBOR plus 1.0%) while reducing the unused line fee from 25 basis points to 20 basis points and extends the maturity of the line to December 31, 2000. The Company believes its current working capital position together with estimated cash flows from operations and its existing financing availability are adequate to fund operations in the ordinary course of business at least through 1998, including anticipated capital expenditures, debt payment requirements, and continuation of its share repurchase program. Although the Company has no present agreements or commitments with respect to any material Page 15 acquisitions of other businesses, products, product rights or technologies, the Company continues to evaluate acquisitions of products, technologies or companies that complement the Company's business and may make such acquisitions in the future, and there can be no assurance that the Company will not need to obtain additional sources of capital to finance any such acquisitions. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS - ----------------------------------------------------------- The Company's future operating results, and stock price, may be affected by a number of factors that could cause actual results to differ from those stated herein. These factors include the following: Rapid Technological Change; New Product Development The computer peripherals, semiconductor equipment and fiber optic communications equipment markets, as well as the other markets for the Company's products, are characterized by rapid technological advances, evolving industry standards and new product introductions and enhancements. Demand for certain of the Company's products is dependent upon the market acceptance of the products manufactured by the Company's customers, and there can be no assurance that such market acceptance will be achieved. The Company is also dependent to a significant extent upon its ability to enhance its existing products, to predict the needs of its customers and to develop and introduce innovative new products on a timely basis that gain market acceptance. Failure to develop, or introduce on a timely basis, new products or product enhancements that meet its customers' needs and achieve market acceptance could materially adversely affect the Company's business, operating results and financial condition. Although the Company maintains an active development program to improve its product offerings, there can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products on a timely or cost-effective basis. Risks of Doing Business in International Markets In 1997, 1996 and 1995, international revenues accounted for approximately 35.3%, 41.8% and 45.6%, respectively, of the Company's net sales. The Company expects that international revenues will continue to account for a significant percentage of the Company's net sales for the foreseeable future. As a result of conducting business internationally, the Company is subject to various risks, which include: a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements such as export requirements, tariffs and other barriers; difficulties in staffing and managing foreign operations; longer accounts receivable cycles; currency fluctuations; export control restrictions; overlapping or differing tax structures; political and economic instability and general trade restrictions. In addition, due to various factors, including the difficulty of assessing the various political and economic factors that may affect the strength of foreign economies, it is often difficult to project demand for the Company's products in foreign countries. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's business, results of operations or financial condition. As a result of the Company's international sales and operations, fluctuations in foreign exchange rates could affect the sales price in local currencies of the Company's products in foreign markets, the U.S. dollar value of sales denominated in foreign currencies as well as local costs and expenses of the Company's foreign operations. The Company uses forward exchange contracts, and other risk management techniques, to hedge its exposure to currency fluctuations relating to its intercompany transactions; however, its international subsidiaries remain exposed to the economic risks of foreign currency fluctuations. There can be no assurance that such factors will not adversely impact the Company's operations in the future or require the Company to modify its current business practices. Dependence on Research Budgets of Customers A substantial amount of the Company's net sales has historically been derived from sales of its products to Page 16 academic and governmental research institutions in the United States and various foreign countries, and the Company anticipates that sales to such institutions will continue to account for a significant portion of the Company's net sales for the foreseeable future. As such, the Company's future performance is directly dependent in part upon the capital expenditure budgets of its research institution customers and the continued demand of such customers for the Company's products. Many domestic and foreign research institutions, including certain of the Company's customers, have experienced constraints on their capital expenditure budgets due to factors such as reduced governmental funding of research activities and reduced defense spending. The Company's operating results may in the future be subject to period-to-period fluctuations as a consequence of such funding constraints, and there can be no assurance that such constraints will not continue over time, or that they will not have a material adverse effect on the Company's business, operating results or financial condition. Competition Intense competition exists among manufacturers of precise motion, measurement and automation products, and the Company believes that competition in the Company's markets from both new and existing competitors will increase in the future. The Company competes principally in several specialized market segments against a limited number of companies, some of which are more established, enjoy higher name recognition and possess far greater financial, technological and marketing resources than the Company, while others are relatively small and highly specialized firms. The Company currently competes principally on the basis of the performance and quality of its products, including reliability, as well as on price and timely manufacture and delivery. There can be no assurance that the Company will be able to compete successfully in the future against existing or new competitors, or that new competitors, some of which may have substantially greater financial, technical and marketing resources than the Company, will not seek to enter the markets served by the Company's products. In addition, there can be no assurance that competitive pressures will not cause the Company to reduce prices, which would negatively affect its gross margins. Dependence on Component Availability and Key Suppliers The Company's ability to meet customer demand depends in part upon its ability to obtain adequate supplies of components from its vendors on a timely basis. The Company currently procures various components from single-sources due to unique component designs as well as certain quality and performance requirements. If such single-sourced components were to become unavailable or were to become unavailable on terms satisfactory to the Company, the Company would be required to purchase comparable components from other sources. If for any reason the Company could not obtain comparable replacement components from other sources in a timely manner, the Company's business, results of operations or financial condition could be adversely affected. In addition, certain of the Company's suppliers require long lead-times to deliver requested quantities of components. If the Company were unable to obtain sufficient quantities of components used in the manufacture of its products, resulting delays or reductions in product shipments could occur and could have a material adverse effect on the Company's business, results of operations or financial condition. Fluctuations in Operating Results The Company's past operating results have been, and its future operating results will be, subject to fluctuations resulting from a number of factors, including the availability of government research funding; the demand for the products sold by the Company's customers; the timing of new product introductions by the Company or its competitors; variations in the mix of products sold by the Company; changes in pricing policies by the Company, its competitors or suppliers, including possible decreases in average selling prices of the Company's products in response to competitive pressures; market acceptance of any new or enhanced versions of the Company's products; the availability and cost of key components; the availability of manufacturing capacity; and fluctuations in general economic conditions. The Company's overall gross margins may vary significantly on a period-to-period basis due to a number of factors including variations Page 17 in product mix. In addition, competitive pressures may adversely affect gross margins. Accordingly, there can be no assurance that the Company will be able to sustain satisfactory gross margins. The Company also may choose to reduce prices or to increase spending in response to competition or to pursue new market opportunities, all of which may adversely affect the Company's business, operating results and financial condition. As a result, the Company believes that period-to-period comparisons of its results of operations are not meaningful and cannot be relied upon as indications of future performance. Due to all of the foregoing factors, the Company's operating results may be below the expectations of public market analysts and investors in some future quarters, which would likely result in a decline in the trading price of the Common Stock. Integration of Acquisitions The Company's recent growth primarily has been the result of strategic acquisitions of complementary businesses. Accordingly, the Company's future operating results will be dependent on its ability to integrate various business operations in an effective manner. The Company intends to further broaden its product offering by designing and marketing complete systems comprised of components manufactured within its various operations. There can be no assurance that the Company will be successful in managing and integrating such business operations. In addition, the Company's acquisition-related growth will continue to place additional demands on the Company's management and resources. Impact of Year 2000 Certain of the Company's business operations software programs were written using two digits rather than four to define the applicable year. As a result, those software programs are time-sensitive and recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including but not limited to, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company initiated a review of its business operations software requirements in early 1996 as part of the normal course of upgrading its systems to support current and anticipated growth. Among the criteria for acquiring new or upgraded software was that it be Year 2000 compliant. In 1997 the Company acquired new operating software that is Year 2000 compliant and is currently in the test and conversion phase, with implementation expected to be substantially complete by December 31, 1998. Based upon the results of the work done to date, the Company believes that the remaining work will be completed in a timely manner and that the overall cost of such work will not be material. Newport sells certain products that include various software applications. Currently the Company is in the process of upgrading or otherwise ensuring that its product software is Year 2000 compliant. The Company has also requested assurance from its goods and services providers that they are, or have programs in place to be, Year 2000 compliant. While the Company currently believes that neither the software developed by it as part of its products nor the software licensed by it for its internal use will be materially affected by Year 2000 problems, there can be no assurance that the Company's product software, its internal computer systems and networks or those of its key vendors, developers and distributors will not be affected by such Year 2000 issues, which could have a material adverse effect on the Company's business, operating results and financial condition. PENDING ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131 - ----------------------------------------------------------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), which is effective for years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in Page 18 interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements effective with the filing of its Annual Report on form 10-K for the year ended December 31, 1998. Management has not completed its review of SFAS No. 131, but does expect that, while adoption of SFAS No. 131 may result in more reported segments than are currently reported, it will not have an impact on the Company's results of operations, financial position or cash flow. ITEM 8 Financial Statements and Supplementary Data - ------ ------------------------------------------- Consolidated financial statements of the Company as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, the report of independent auditors thereon and the Company's unaudited quarterly financial data for 1997 and 1996 are referenced in Item 14 herein. ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial - ------ ------------------------------------------------------------------------- Disclosure - ---------- Not applicable. PART III ITEM 10 Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- The information required hereunder is incorporated by reference to the Company's Proxy Statement to be filed within 120 days of December 31, 1997 in connection with its May 27, 1998, 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, 1997 in connection with its May 27, 1998, 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, 1997 in connection with its May 27, 1998, 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 is 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 be accelerated and be exercisable during the term of the Consulting Agreement and (2) that the restricted stock shall continue to vest in accordance with the original time schedule. The Company has entered into Severance Compensation Agreements with certain of its officers. See response to Item 11 above. Page 19 PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K - ------- ---------------------------------------------------------------- (a) 1. Financial Statements and Financial Statement Schedules ---------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors 23 FINANCIAL STATEMENTS: --------------------- Consolidated income statement for the years ended December 31, 1997, 1996 and 1995 24 Consolidated balance sheet at December 31, 1997 and 1996 25 Consolidated statement of cash flows for the years ended December 31, 1997, 1996 and 1995 26 Consolidated statement of stockholders' equity for the years ended December 31, 1997, 1996 and 1995 27 Notes to consolidated financial statements 28-38 FINANCIAL STATEMENT SCHEDULES: ------------------------------ II - Consolidated valuation accounts 39
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 10.3 1992 Incentive Stock Plan (incorporated by reference to exhibit in the Company's 1992 Proxy Statement).* Exhibit 10.4 Employee Stock Purchase Plan, as amended.* Exhibit 10.7 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).*
Page 20 ITEM 14 Exhibits, Financial Statement Schedules and Reports on - ------- ------------------------------------------------------ Form 10-K (Cont'd) ------------------ Exhibit 10.8 Stock Purchase Agreement dated as of February 14, 1995, among Newport Corporation as Purchaser, RAM Optical Instrumentation, Inc. and Mark G. Arenal, Harry J. Brown, The Harry & Patricia Brown Living Trust 1994, John G. Hartwell, and The John G. Hartwell Family Trust Established 1/3/90 as Sellers (incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed March 15, 1995).* Exhibit 10.10 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 10.12 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 10.13 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 10.14 Consulting Agreement dated November 7, 1997 between Newport Corporation, a Nevada Corporation, and Richard E. Schmidt, a director of the Company. Exhibit 10.15 Credit Agreement dated as of February 26, 1998 between Newport Corporation and ABN AMRO Bank N.V., Los Angeles International Branch. Exhibit 21 Subsidiaries of Registrant Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors Exhibit 27 Financial Data Schedule (Article 5 of Regulation S-X)
_____________ * 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, 1997. Page 21 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 25, 1998 - -------------------------------------------------------------------------------- Robert G. Deuster, President and Chief Executive Officer Date (Principal Executive Officer) /S/ROBERT C. HEWITT March 25, 1998 - -------------------------------------------------------------------------------- Robert C. Hewitt, Vice President, Chief Financial Officer Date and Secretary (Chief Financial Officer) /S/WILLIAM R. ABBOTT March 25, 1998 - -------------------------------------------------------------------------------- William R. Abbott, 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 25, 1998 - -------------------------------------------------------------------------------- R. Jack Aplin, Member of the Board Date /S/ROBERT L. GUYETT March 25, 1998 - -------------------------------------------------------------------------------- Robert L. Guyett, Member of the Board Date /S/LOUIS B. HORWITZ March 25, 1998 - -------------------------------------------------------------------------------- Louis B. Horwitz, Member of the Board Date /S/DAN L. MCGURK March 25, 1998 - -------------------------------------------------------------------------------- Dan L. McGurk, Member of the Board Date /S/C. KUMAR N. PATEL March 25, 1998 - -------------------------------------------------------------------------------- C. Kumar N. Patel, Member of the Board Date /S/RICHARD E. SCHMIDT March 25, 1998 - -------------------------------------------------------------------------------- Richard E. Schmidt, Member of the Board Date /S/JOHN T. SUBAK March 25, 1998 - -------------------------------------------------------------------------------- John T. Subak, Member of the Board Date Page 22 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Newport Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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. ERNST & YOUNG LLP Orange County, California January 30, 1998, except for Note 8, as to which the date is February 26, 1998 Page 23 NEWPORT CORPORATION Consolidated Income Statement (In thousands, except per share amounts)
Years Ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Net sales $132,594 $119,910 $101,961 Cost of sales 74,844 67,103 55,421 -------- -------- -------- Gross profit 57,750 52,807 46,540 Selling, general and administrative expense 35,825 36,741 34,441 Research and development expense 9,490 8,204 6,765 -------- -------- -------- Income from operations 12,435 7,862 5,334 Interest expense (1,992) (1,931) (1,593) Other income (expense), net (349) 477 1,137 -------- -------- -------- Income before income taxes 10,094 6,408 4,878 Income tax provision 3,030 1,705 1,003 -------- -------- -------- Net income $ 7,064 $ 4,703 $ 3,875 ======== ======== ======== Net income per share (1) Basic $ 0.80 $ 0.54 $ 0.47 Diluted $ 0.77 $ 0.52 $ 0.45 Number of shares used to calculate net income per share Basic 8,865 8,700 8,270 Diluted 9,179 8,984 8,521 Dividends per share $ 0.04 $ 0.04 $ 0.04
(1) Earnings per share for all periods prior to 1997 have been restated as necessary to conform with the requirements of SFAS No. 128, Earnings Per Share. See accompanying notes. Page 24 NEWPORT CORPORATION Consolidated Balance Sheet (In thousands, except share data)
December 31, --------------------- 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 7,456 $ 3,375 Customer receivables, net 23,372 23,418 Other receivables 979 2,075 Inventories 28,326 28,954 Deferred tax assets 3,256 3,004 Other current assets 2,065 1,703 -------- -------- Total current assets 65,454 62,529 Investments and other assets 5,830 5,191 Property, plant and equipment, at cost, net 22,994 24,045 Goodwill, net 10,133 11,612 -------- -------- $104,411 $103,377 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,082 $ 8,128 Accrued payroll and related expenses 5,855 4,879 Taxes based on income 2,056 1,373 Current portion of long-term debt 2,380 1,236 Other current liabilities 4,766 5,171 -------- -------- Total current liabilities 21,139 20,787 Long-term debt 21,027 23,464 Other liabilities 1,587 1,697 Commitments (Note 9) Stockholders' equity: Common stock, $0.35 stated value, 20,000,000 shares authorized; 8,951,000 shares issued and outstanding at December 31, 1997; 8,890,000 shares at December 31, 1996 3,132 3,110 Capital in excess of stated value 8,026 8,959 Unamortized deferred compensation (519) (548) Unrealized translation loss (5,036) (2,442) Retained earnings 55,055 48,350 -------- -------- Total stockholders' equity 60,658 57,429 -------- -------- $104,411 $103,377 ======== ========
See accompanying notes. Page 25 NEWPORT CORPORATION Consolidated Statement of Cash Flows (In thousands)
Years Ended December 31, ------------------------------ 1997 1996 1995 ------- -------- ------- Operating activities: Net income $ 7,064 $ 4,703 $ 3,875 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,830 6,062 4,940 Net gains from sales of investments -- -- (832) Increase in provision for losses on receivables, inventories and investments 1,906 1,226 1,940 Deferred income taxes 194 (215) (889) Other non-cash items, net 345 (84) (94) Changes in operating assets and liabilities: Receivables (1,269) (2,841) 561 Inventories (2,051) (6,596) (2,492) Other current assets (1,261) (979) 232 Other assets (78) -- -- Accounts payable and other accrued expenses 925 2,106 (2,488) Taxes based on income 691 112 (50) Other, net 1 (108) 995 ------- -------- ------- Net cash provided by operating activities 12,297 3,386 5,698 ------- -------- ------- Investing activities: Purchases of property, plant and equipment (5,034) (5,844) (2,513) Disposition of property, plant and equipment 396 201 50 Acquisition of business, net of cash acquired (879) (4,442) -- Proceeds from sales of investments and marketable securities -- -- 1,319 Other, net (728) (436) 97 ------- -------- ------- Net cash used in investing activities (6,245) (10,521) (1,047) ------- -------- ------- Financing activities: Proceeds from debt placement -- 21,605 -- Decrease in long-term borrowings (790) (13,237) (7,371) Cash dividends paid (357) (351) (312) Repurchase of common stock (3,996) -- -- Issuance of common stock under employee agreements including associated tax benefit 2,910 1,013 1,675 ------- -------- ------- Net cash provided by (used in) financing activities (2,233) 9,030 (6,008) ------- -------- ------- Effect of foreign exchange rate changes on cash 262 (44) (133) ------- -------- ------- Increase in cash and cash equivalents 4,081 1,851 1,490 Cash and cash equivalents at beginning of year 3,375 1,524 3,014 ------- -------- ------- Cash and cash equivalents at end of year $ 7,456 $ 3,375 $ 1,524 ======= ======== =======
See accompanying notes. Page 26 NEWPORT CORPORATION Consolidated Statement of Stockholders' Equity (In thousands)
Years Ended December 31, ------------------------ 1997 1996 1995 ------- ------- ------- Common shares: Shares outstanding at beginning of year 8,890 8,699 8,441 Issuance of common shares 351 191 258 Repurchase of common shares (290) -- -- ------- ------- ------- Shares outstanding at end of year 8,951 8,890 8,699 ======= ======= ======= Common stock: Balance at beginning of year $ 3,110 $ 3,045 $ 2,954 Issuance of common stock 117 49 80 Grants of restricted stock, net 7 16 11 Repurchase of common stock (102) -- -- ------- ------- ------- Balance at end of year 3,132 3,110 3,045 ======= ======= ======= Capital in excess of stated value: Balance at beginning of year 8,959 7,609 5,771 Issuance of common stock 2,793 964 1,595 Grants of restricted stock, net 168 386 243 Repurchase of common stock (3,894) -- -- ------- ------- ------- Balance at end of year 8,026 8,959 7,609 ======= ======= ======= Unamortized deferred compensation: Balance at beginning of year (548) (369) (251) Grants of restricted stock, net (175) (402) (254) Amortization of deferred compensation 204 223 136 ------- ------- ------- Balance at end of year (519) (548) (369) ======= ======= ======= Unrealized gain on marketable securities: Balance at beginning of year -- -- 343 Change in unrealized gain -- -- (343) ------- ------- ------- Balance at end of year -- -- -- ======= ======= ======= Unrealized translation loss: Balance at beginning of year (2,442) (1,773) (2,778) Unrealized translation gain (loss) (2,594) (669) 1,005 ------- ------- ------- Balance at end of year (5,036) (2,442) (1,773) ======= ======= ======= Retained earnings: Balance at beginning of year 48,350 44,175 40,612 Dividends (359) (528) (312) Net income 7,064 4,703 3,875 ------- ------- ------- Balance at end of year 55,055 48,350 44,175 ======= ======= ======= Total stockholders' equity $60,658 $57,429 $52,687 ======= ======= =======
See accompanying notes. Page 27 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Newport Corporation is a global leader in the design, manufacture and marketing of 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. The accounts of the Company's subsidiaries in Europe have been consolidated using a one-month lag. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior year amounts to conform to current year presentation. 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 allowance, investment reserves, litigation settlement costs and future undiscounted cash flows used in the analysis of the impairment of long-lived assets. Sales A sale is recorded when title passes to customers. 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 sales brochures and catalogs. The capitalized costs are amortized over estimated future benefit periods ranging from three months to two years. Advertising materials of $0.6 million and $0.5 million were reported as assets at December 31, 1997 and 1996, respectively. Advertising expense was $1.6 million, $1.7 million and $1.6 million for 1997, 1996 and 1995, respectively. Net Income per Share The Company has adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which replaces the presentation of primary and fully diluted net income per share with basic and diluted net income per share. Basic net income per share is based on the weighted average number of shares of common stock outstanding during the periods, excluding restricted stock, while diluted net income per share is based on the weighted average number of shares of common stock outstanding during the periods and the dilutive effects of common stock equivalents (stock options), determined using the treasury stock method, outstanding during the periods. All prior periods' earnings per share calculations have been restated in accordance with SFAS No. 128 (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 less than three months. Page 28 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 forward 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. At December 31, 1997, accumulated amortization of intangible assets, principally goodwill, aggregated $3.5 million. 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 $5.6 million and $1.2 million at December 31, 1997 and December 31, 1996, respectively. Stock Option Plans Effective January 1, 1996, the Company adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and accordingly is continuing to account for its plans under previous accounting standards. Consequently, SFAS No. 123 did not have an impact on the Company's consolidated results of operations or financial position. Pending Adoption of Statement of Financial Accounting Standards No. 131 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), which is effective for years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements effective with the filing of its Annual Report on Form 10-K for the year ended December 31, 1998. Management has not completed its review of SFAS No. 131, but does expect that, while adoption of SFAS No. 131 may result in more reported segments than are currently reported, it will not have an impact on the Company's results of operations, financial position or cash flow NOTE 2 ACQUISITIONS In February 1995, the Company acquired all the outstanding capital stock of RAM Optical Instrumentation, Inc. ("ROI"), a manufacturer of video inspection systems, in exchange for 1,251,000 shares of its common stock. Additionally, an option to purchase ROI common shares was exchanged for an option to purchase 72,975 shares of the Company's common stock. In March 1995, the Company acquired all the outstanding stock of Light Control Instruments, Inc. ("LCI"), a manufacturer of laser-diode instruments, in exchange Page 29 for 128,000 shares of the Company's common stock. These transactions have been accounted for as poolings of interests. Costs associated with these acquisitions totaling $0.1 million were charged to operations in the first quarter of 1995. On January 2, 1996, the Company acquired, for cash plus additional consideration based upon future operating profit, substantially all the assets and selected liabilities of MikroPrecision Instruments, Inc. ("MikroPrecision"), a manufacturer of precision equipment for high technology industries such as semiconductor and disk drive markets. The company is located in Plymouth, Minnesota, a suburb of Minneapolis, Minnesota. The acquisition was accounted for as a purchase. In 1997, the Company paid the seller $879,000 for total amounts due as additional consideration which has been recorded as additional goodwill. In connection with this acquisition the Company recorded goodwill totaling $4.7 million. NOTE 3 CUSTOMER RECEIVABLES Customer receivables consist of the following:
(In thousands) December 31, ----------------- 1997 1996 ------- ------- Customer receivables $23,857 $23,942 Less allowance for doubtful accounts 485 524 ------- ------- $23,372 $23,418 ======= =======
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. 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, ---------------------- 1997 1996 ------- ------- Raw materials and purchased parts $10,161 $10,705 Work in process 5,236 4,998 Finished goods 12,929 13,251 ------- ------- $28,326 $28,954 ======= =======
NOTE 5 INCOME TAXES The provision for taxes based on income consists of the following:
(In thousands) Years ended December 31, ------------------------- 1997 1996 1995 ------ ------ ------ Current: Federal $2,329 $1,541 $ 935 State 321 200 85 Foreign 293 179 303 Deferred: Federal 48 (214) 74 State 39 5 14 Foreign -- (6) (408) ------ ------ ------ $3,030 $1,705 $1,003 ====== ====== ======
Page 30 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, -------------------------- 1997 1996 1995 ------ ------ ------ Income tax provision at statutory rate $3,432 $2,179 $1,658 Increase (decrease) in taxes resulting from: Non deductible goodwill amortization 153 201 191 Foreign losses not benefited 107 167 90 State income taxes, net of federal income tax benefit 238 136 135 Utilization of foreign losses (57) (151) (290) Reduction in valuation allowance -- (217) (408) Conversion of foreign subsidiaries to U.S. Partnerships -- (276) -- Foreign Sales Corporation income (734) (283) (156) Utilization of state NOL, net of federal income tax benefit -- -- (105) Other, net (109) (51) (112) ------ ------ ------ $3,030 $1,705 $1,003 ====== ====== ======
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. In 1996 and 1995, the Company reduced the valuation allowance applicable to foreign net operating loss carryforwards by approximately $217,000 and $408,000, respectively, 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, ------------------ 1997 1996 ------- ------- Deferred tax assets: Net operating loss carryforwards $ 9,629 $ 9,440 Accruals not currently deductible for tax purposes 2,658 2,080 Other (172) 154 Valuation allowance (8,859) (8,670) ------- ------- Total deferred tax asset 3,256 3,004 ------- ------- Deferred tax liabilities: Accelerated depreciation methods used for tax purposes 796 851 Other 791 196 ------- ------- Total deferred tax liability 1,587 1,047 ------- ------- Net deferred tax asset $ 1,669 $ 1,957 ======= =======
The Company has foreign net operating loss carryforwards totaling approximately $26.1 million at December 31, 1997, principally expiring in the years 2007 through 2011. 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 $2.4 million of the valuation allowance will be allocated to reduce goodwill when realized. Approximately $0.1 million and $0.3 million of the valuation allowance realized was allocated to goodwill for 1996 and 1995, respectively. Net income taxes paid for 1997, 1996 and 1995 totaled $2.0 million, $1.8 million and $1.0 million, respectively. Page 31 NOTE 6 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, including capitalized lease assets, consists of the following:
(In thousands) December 31, ------------------- 1997 1996 ------- ------- Land $ 1,954 $ 2,155 Buildings 12,069 12,896 Leasehold improvements 8,381 8,462 Machinery and equipment 20,620 22,643 Office equipment 10,074 9,734 ------- ------- 53,098 55,890 Less accumulated depreciation 30,104 31,845 ------- ------- $22,994 $24,045 ======= =======
NOTE 7 INVESTMENTS AND OTHER ASSETS Investments and other assets consist of the following:
(In thousands) December 31, --------------- 1997 1996 ------ ------ Nonmarketable investments $4,169 $4,114 Other assets 1,661 1,077 ------ ------ $5,830 $5,191 ====== ======
Nonmarketable investments consist primarily of investments in private companies, including a 25% interest in a U.S. supplier and a 29% interest in a company active in laser and electro-optical technology, stated at cost, adjusted for the Company's proportionate share of undistributed earnings. The Company made purchases of approximately $4.3 million, $4.5 million and $3.8 million from the U.S. supplier during 1997, 1996 and 1995, respectively. Other assets consist primarily of capitalized software, patents and license agreements. NOTE 8 LONG-TERM DEBT Long-term debt consists of the following:
(Dollar amounts in thousands) December 31, ----------------- 1997 1996 ------- ------- Credit agreements: Prime, maturing December 1999 $ -- $ 400 PIBOR + 1.00%, maturing December 1999 258 213 Term notes: 8.25% senior notes, maturing May 2004 20,000 20,000 Capitalized lease obligations, payable in installments to 2005, in French francs 1,938 2,552 Equipment loans 1,211 1,535 ------- ------- 23,407 24,700 Less current portion 2,380 1,236 ------- ------- $21,027 $23,464 ======= =======
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 principal payments commence during November 1998. Page 32 At December 31, 1997, the Company had in place a $20.0 million unsecured line of credit with interest at prime, or LIBOR (London Interbank Offered Rate) plus 1.0% and an unused line fee of 25 basis points to support its domestic operation. In addition, a 10.0 million French franc ($1.7 million) unsecured line of credit with interest at PIBOR (Paris Interbank Offered Rate) plus 1.0% was in place to support the Company's European requirements. Both lines of credit were scheduled to mature on December 31, 1999. At December 31, 1997, there was no amount outstanding under the domestic unsecured line of credit with $18.2 million available after considering outstanding letters of credit. The amount outstanding under the Company's 10.0 million French franc ($1.7 million) European unsecured line of credit was 1.6 million French francs ($0.3 million). In February 1998 the Company modified its bank credit agreement increasing its overall unsecured line of credit to $25.0 million to support the Company's worldwide operations replacing the previous $20.0 million domestic unsecured line of credit and 10.0 million French franc unsecured line of credit. This modified credit agreement retains the same interest rate (prime or LIBOR plus 1.0%) while reducing the unused line fee from 25 basis points to 20 basis points and extends the maturity of the line to December 31, 2000. Capitalized lease obligations of 11.7 million French francs (approximately $1.9 million) relate to real estate and equipment located in France. The original cost of assets under capital leases at December 31, 1997 and 1996, was 19.1 million French francs (approximately $3.2 million at December 31, 1997). Accumulated amortization totaled 8.3 million French francs (approximately $1.4 million) and 7.5 million French francs (approximately $1.4 million) at December 31, 1997 and 1996, respectively. Required annual payments are as follows (In thousands):
Capitalized Lease Borrowings and For years ending December 31, Obligations Term Notes ----------- -------------- 1998 $ 430 $ 2,102 1999 433 3,340 2000 378 4,368 2001 324 5,162 2002 329 3,500 Thereafter 614 2,997 ------ ------- 2,508 Less interest 570 ------ $1,938 $21,469 ====== =======
Interest paid for 1997, 1996 and 1995, totaled $1.9 million, $1.6 million and $1.4 million, respectively. NOTE 9 COMMITMENTS The Company leases certain of its manufacturing and office facilities and equipment under non-cancelable operating leases. Minimum rental commitments under terms of these leases are as follows for years ending December 31 (In thousands): 1998 $2,418 1999 2,215 2000 2,057 2001 1,967 2002 1,953 Thereafter 7,289
The principal lease expires in 2007. Rental expense under all leases totaled $2.6 million for each of the 1997, 1996 and 1995 years. Page 33 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. The following table summarizes option plan and restricted stock activity for the years ended December 31, 1997, 1996 and 1995:
Under Plan Weighted Average Available ------------------------------------ Exercise Price for Option Restricted of Option Shares or Award Stock Options Total Under Plan ---------- ---------- --------- --------- ---------------- Balance, December 31, 1994 568,973 50,750 1,002,756 1,053,506 $7.13 Authorized 175,246 -- -- -- -- Granted (361,475) 41,000 320,475 361,475 6.52 Exercised -- (10,000) (155,520) (165,520) 6.93 Forfeited 157,446 (8,250) (149,196) (157,446) 7.73 -------- ------- --------- --------- Balance, December 31, 1995 540,190 73,500 1,018,515 1,092,015 $6.93 Authorized 177,793 -- -- -- -- Granted (376,000) 55,500 320,500 376,000 8.71 Exercised -- (22,250) (64,585) (86,835) 5.35 Forfeited 120,939 (10,000) (110,939) (120,939) 8.24 -------- ------- --------- --------- 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) (243,536) (259,536) 7.35 Forfeited 78,316 -- (78,316) (78,316) 7.07 -------- ------- --------- --------- Balance, December 31, 1997 498,265 101,250 1,061,959 1,163,209 $7.69 ======== ======= ========= =========
The weighted average per share fair value of restricted stock granted during 1997 and 1996 was $8.76 and $8.59, respectively. At December 31, 1996, options on 681,311 shares were exercisable with a weighted average exercise price of $6.86 per share. The following table summarizes information concerning options outstanding and exercisable at December 31, 1997 (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 - ------------------ ----------- ---------------- --------- ----------- -------- $2.40 - 5.75 206,725 4.0 4.65 198,975 4.61 6.06 - 15.25 855,234 6.7 8.43 438,126 8.09 --------- ------- 1,061,959 637,101 ========= =======
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 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 Page 34 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:
1997 1996 ------ ------ Net income - reported $7,064 $4,703 Net income - pro forma $6,707 $4,332 Diluted earnings per share - reported $ 0.77 $ 0.52 Diluted earnings per share - pro forma $ 0.73 $ 0.49
The fair value of each option grant in 1996 and 1997 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.33%; expected annual volatility of 34.00%; risk-free interest rate of 6.36%; expected lives of 5 years; and expected turnover rate of 12.90%. The weighted average per share fair value of options granted in 1997 and 1996 was $3.56 and $4.26, 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 87,662 and 79,869 shares issued under the Purchase Plan during 1997 and 1996, respectively. NOTE 11 OTHER INCOME (EXPENSE), NET Other income (expense), net, consisted of the following:
(In thousands) Years ended December 31, ------------------------ 1997 1996 1995 ----- ---- ------ Interest and dividend income $ 210 $105 $ 95 Exchange gains/(losses), net (497) 27 8 Gains on sale of investments, net 14 -- 832 Other (76) 345 202 ----- ---- ------ $(349) $477 $1,137 ===== ==== ======
Marketable securities, which consisted of a publicly traded company's stock, were sold in 1995. Gross sale proceeds were $0.9 million in 1995. Realized gains and losses on sale of these securities are based on the difference between the selling price and historical cost. Realized gains of $0.8 million for 1995 are reflected in gains on sale of investments. Page 35 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, ------------------------ 1997 1996 1995 ---- ---- ---- Numerator: Net income $7,064 $4,703 $3,875 Denominator: Denominator for basic earnings per share - weighted-average shares 8,865 8,700 8,270 Effect of dilutive securities: Employee stock options 252 225 198 Restricted stock 62 59 53 ------ ------ ------ Dilutive potential common shares 314 284 251 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 9,179 8,984 8,521 ====== ====== ====== Basic earnings per share $ 0.80 $ 0.54 $ 0.47 Diluted earnings per share $ 0.77 $ 0.52 $ 0.45
Page 36 NOTE 13 BUSINESS SEGMENT INFORMATION The Company operates in one business segment. It designs, manufactures and markets on a worldwide basis high precision components, instruments and integrated systems which enhance customer productivity and capabilities of test and measurement and automated assembly for precision manufacturing, engineering and research activities. The Company's high precision products are sold to the fiber optic communications, semiconductor equipment, computer peripherals and scientific research markets. Information concerning the Company's operations by geographic segment is as follows:
(In thousands) Years Ended December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Sales to unaffiliated customers: United States $103,066 $ 86,217 $ 64,769 Europe 26,983 31,700 35,087 Other areas 2,545 1,993 2,105 -------- -------- -------- $132,594 $119,910 $101,961 ======== ======== ======== Sales between geographic areas (based on invoiced prices): United States $ 10,890 $ 8,428 $ 7,233 Europe 7,014 7,960 11,489 Intercompany eliminations (17,904) (16,388) (18,722) -------- -------- -------- $ -- $ -- $ -- ======== ======== ======== Income (loss) before taxes: United States $ 11,814 $ 6,960 $ 4,215 Europe (1,643) (540) 735 Other areas 267 (52) (46) Intercompany eliminations (344) 40 (26) -------- -------- -------- $ 10,094 $ 6,408 $ 4,878 ======== ======== ======== Assets: United States $129,183 $116,428 $ 94,376 Europe 33,260 37,958 40,160 Other areas 1,108 978 770 Intercompany eliminations (59,140) (51,987) (51,358) -------- -------- -------- $104,411 $103,377 $ 83,948 ======== ======== ========
The Company's manufacturing facilities are located in the United States and France. United States revenues include exports to unaffiliated customers totaling $17.1 million, $16.4 million and $9.3 million for 1997, 1996 and 1995, respectively. NOTE 14 DEFINED CONTRIBUTION PLAN The Company sponsors a defined contribution plan. Generally, all U.S. employees are eligible to participate and contribute in this plan. Contributions to the plan are determined based on a percentage of contributing employees' compensation. Expense recognized for the plan totaled $1.0 million, $0.9 million and $0.8 million for 1997, 1996 and 1995, respectively. Page 37 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 (1) Share Price Price - ------------------------- ------- ------- ------ ----------- --------- ------- --------- December 31, 1997 $36,983 $16,325 $2,570 $0.28 $0.02 $17 1/2 $13 13/16 September 30, 1997 32,699 13,965 1,769 0.19 -- 16 11 1/8 June 30, 1997 31,861 13,941 1,465 0.16 0.02 12 1/4 8 1/4 March 31, 1997 31,051 13,519 1,260 0.14 -- 9 1/2 8 1/2 December 31, 1996 $32,580 $14,794 $1,669 $0.19 $0.02 $ 9 3/8 $ 8 September 30, 1996 29,235 12,708 1,116 0.12 -- 9 7/8 7 3/8 June 30, 1996 30,116 13,017 976 0.11 0.02 10 1/2 8 3/4 March 31, 1996 27,979 12,288 942 0.11 -- 9 1/4 7 1/2
(1) Diluted net income per share is computed independently for each of the quarters presented and the summation of quarterly amounts may not equal the total net income per share reported for the year. Earnings per share for all periods prior to 1997 have been restated as necessary to conform with the requirements of SFAS No. 128, Earnings Per Share. Page 38 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, 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 Reserve on investments 380 -- -- -- 380 ------ ------ ------- ----- ------ Total $4,969 $1,906 $(1,523) $(368) $4,984 ====== ====== ======= ===== ====== Year ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $ 537 $ 62 $ (59) $ (16) $ 524 Reserve for inventory obsolescence 3,295 1,164 (290) (104) 4,065 Reserve on investments 457 -- (77) -- 380 ------ ------ ------- ----- ------ Total $4,289 $1,226 $ (426) $(120) $4,969 ====== ====== ======= ===== ====== Year ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts $ 460 $ 190 $ (138) $ 25 $ 537 Reserve for inventory obsolescence 3,380 1,750 (1,984) 149 3,295 Reserve on investments 457 -- -- -- 457 ------ ------ ------- ----- ------ Total $4,297 $1,940 $(2,122) $ 174 $4,289 ====== ====== ======= ===== ======
(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 39 NEWPORT CORPORATION FORM 10-K Exhibit Index Exhibit 10.4 Employee Stock Purchase Plan As Amended Exhibit 10.14 Consulting Agreement with Richard E. Schmidt Exhibit 10.15 Credit Agreement dated February 26, 1998 Exhibit 21 Subsidiaries of Registrant Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors Exhibit 27 Financial Data Schedule (Article 5 of Regulation S-X) Page 40 EX-10.4 2 EMPLOYEE STOCK PURCHASE PLAN AS AMENDED 3/20/1998 EXHIBIT 10.4 THE NEWPORT CORPORATION EMPLOYEE STOCK PURCHASE PLAN (As Amended on March 20, 1998) This EMPLOYEE STOCK PURCHASE PLAN (the "Plan") is hereby established by NEWPORT CORPORATION (the "Company") effective January 1, 1995 (the "Effective Date"), as amended on May 28, 1997, amended again on March 20, 1998. ARTICLE I PURPOSE OF THE PLAN ------------------- 1.1 Purpose. The Company has determined that it is in its best interests ------- to provide an incentive to attract and retain employees and to increase employee morale by providing a program through which employees may acquire a proprietary interest in the Company through the purchase of shares of the common stock of the Company ("Company Stock"). The Plan is hereby established by the Company to permit employees to subscribe for and purchase directly from the Company shares of the Company Stock at a discount from the market price, and to pay the purchase price in installments by payroll deductions. The Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). The provisions of the Plan are to be construed in a manner consistent with the requirements of Section 423 of the Code. The Plan is not intended to be an employee benefit plan under the Employee Retirement Income Security Act of 1974, and therefore is not required to comply with that Act. ARTICLE II DEFINITIONS ----------- 2.1 Compensation. "Compensation" means the amount indicated on the Form ------------ W-2, including any elective deferrals with respect to a plan of the Company qualified under either Section 125 or Section 401(a) of the Internal Revenue Code of 1986, issued to an employee by the Company. 2.2 Employee. "Employee" means each person currently employed by the -------- Company or any of its operating subsidiaries on a full time basis (persons who average at least thirty hours per week), any portion of whose income is subject to withholding of income tax or for whom Social Security retirement contributions are made by the Company and any person qualifying as a common law employee of the Company. 2.3 Effective Date. "Effective Date" means January 1, 1995. -------------- 2.4 5% Owner. "5% Owner" means an Employee who, immediately after the -------- grant of any rights under the Plan, would own Company Stock or hold outstanding options to purchase Company Stock possessing 5% or more of the total combined voting power of all classes of stock of the Company. For purposes of this Section, the ownership attribution rules of Code Section 425(d) shall apply. 2.5 Grant Date. "Grant Date" means the first day of each Offering Period ---------- (January 1, April 1, July 1 and October 1) under the Plan. 2.6 Participant. "Participant" means an Employee who has satisfied the ----------- eligibility requirements of Section 3.1 and has become a participant in the Plan in accordance with Section 3.2. 2.7 Plan Year. "Plan Year" means the twelve consecutive month period --------- ended on December 31. 2.8 Offering Period. "Offering Period" means the three consecutive month --------------- periods coinciding with the calendar quarter (January 1 through March 31, April 1 through June 30, July 1 through September 30 and October 1 through December 31) each Plan Year. 2.9 Purchase Date. "Purchase Date" means the last day of each Offering ------------- Period (March 31, June 30, September 30 or December 31). ARTICLE III ELIGIBILITY AND PARTICIPATION ----------------------------- 3.1 Eligibility. Each Employee of the Company who has completed a year of ----------- employment with the Company on the Effective Date may become a Participant in the Plan on the Effective Date. All other Employees of the Company may become a participant in the Plan on the Grant Date coincident with or next following his completion of one year of employment with the Company. 3.2 Participation. An Employee who has satisfied the eligibility ------------- requirements of Section 3.1 may become a Participant in the Plan upon his completion and delivery to the Human Resources Department of the Company of a subscription agreement provided by the Company (the "Subscription Agreement") authorizing payroll deductions. Payroll deductions for a Participant shall commence on the Grant Date coincident with or next following the filing of the Participant's Subscription Agreement and shall remain in effect until revoked by the Participant by the filing of a notice of withdrawal from the Plan under Article VIII or by the filing of a new Subscription Agreement providing for a change in the Participant's payroll deduction rate under Section 5.2. 3.3 Special Rules. Under no circumstances shall: ------------- (a) A 5% Owner be granted a right to purchase Company Stock under the Plan; or (b) A Participant be entitled to purchase Company Stock under the Plan which, when aggregated with all other employee stock purchase plans of the Company, exceeds an amount equal to the Aggregate Maximum. "Aggregate Maximum" means an amount equal to $25,000 worth of Company Stock (determined using the fair market value of such Company Stock at each applicable 2 Grant Date) during each Plan Year. ARTICLE IV OFFERING PERIODS ---------------- 4.1 Offering Periods. The initial grant of the right to purchase Company ---------------- Stock under the Plan shall commence on the Effective Date and terminate on the next Purchase Date. Thereafter, the Plan shall provide for Offering Periods commencing on each Grant Date and terminating on the next following Purchase Date. ARTICLE V PAYROLL DEDUCTIONS ------------------ 5.1 Participant Election. Upon the Subscription Agreement, each -------------------- Participant shall designate the amount of payroll deductions to be made from his or her paycheck to purchase Company Stock under the Plan. The amount of payroll deductions shall be designated in whole dollar amounts of Compensation, not to exceed 15% of Compensation for any Plan Year. The amount so designated upon the Subscription Agreement shall be effective as of the next Grant Date and shall continue until terminated or altered in accordance with Section 5.2 below. 5.2 Changes in Election. A Participant may terminate participation in the ------------------- Plan at any time prior to the close of an Offering Period as provided in Article VIII. A Participant may decrease the rate of payroll deductions at any time during any Offering Period by completing and delivering to the Human Resources Department of the Company a new Subscription Agreement setting forth the desired change. A Participant may also terminate payroll deductions and have accumulated deductions for the Offering Period applied to the purchase of Company Stock as of the next Purchase Date by completing and delivering to the Human Resources Department a new Subscription Agreement setting forth the desired change. Any change under this Section shall become effective on the next payroll period (to the extent practical under the Company's payroll practices) following the delivery of the new Subscription Agreement. 5.3 Participant Accounts. The Company shall establish and maintain a -------------------- separate account ("Account") for each Participant. The amount of each Participant's payroll deductions shall be credited to his Account. No interest will be paid or allowed on amounts credited to a Participant's Account. All payroll deductions received by the Company under the Plan are general corporate assets of the Company and may be used by the Company for any corporate purpose. The Company is not obligated to segregate such payroll deductions. ARTICLE VI GRANT OF PURCHASE RIGHTS ------------------------ 6.1 Right to Purchase Shares. On each Grant Date, each Participant shall ------------------------ be granted a right to purchase at the price determined under Section 6.2 that number of whole shares of Company Stock that can be purchased or issued by the Company based upon that price with the amounts held in his Account. In the event that there are amounts held in a Participant's Account 3 that are not used to purchase Company Stock, such amounts shall remain in the Participant's Account and shall be eligible to purchase Company Stock in any subsequent Offering Period. 6.2 Purchase Price. The purchase price for any Offering Period shall be -------------- the lesser of: (a) 85% of the Fair Market Value of Company Stock on the Grant Date; or (b) 85% of the Fair Market Value of Company Stock on the Purchase Date. 6.3 Fair Market Value. "Fair Market Value" on any given date means the ----------------- value of one share of Company Stock, determined as follows: (a) If the Company Stock is then listed or admitted to trading on the Nasdaq National 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 the Nasdaq National Market System or principal stock exchange on which the Company Stock is then listed or admitted to trading, or, if no closing sale price is quoted or no sale takes place on such day, then the Fair Market Value shall be the closing sale price of the Company Stock on the Nasdaq National Market System or such exchange on the next preceding day on which a sale occurred. (b) If the Company Stock is not then listed or admitted to trading on the Nasdaq National 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 Company 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. ARTICLE VII PURCHASE OF STOCK ----------------- 7.1 Purchase of Company Stock. Absent an election by the Participant to ------------------------- terminate and have his or her Account returned, on each Purchase Date, the Plan shall purchase on behalf of each Participant the maximum number of whole shares of Company Stock at the purchase price determined under Section 6.2 above as can be purchased with the amounts held in each Participant's Account. The Plan shall not be required to purchase any fractional shares of Company Stock. In the event that there are amounts held in a Participant's Account that are not used to purchase Company Stock, all such amounts shall be held in the Participant's Account and carried forward to the next Offering Period. 7.2 Delivery of Company Stock. ------------------------- (a) Company Stock acquired under the Plan may either be issued directly to Participants or may be issued to a contract administrator ("Administrator") engaged by the Company to administer the Plan under Article IX. If the Company Stock is issued in the name of the Administrator, all Company Stock so issued ("Plan Held Stock") shall be held in the name of 4 the Administrator for the benefit of the Plan. The Administrator shall maintain accounts for the benefit of the Participants which shall reflect each Participant's interest in the Plan Held Stock. Such accounts shall reflect the number of shares of Company Stock that are being held by the Administrator for the benefit of each Participant. (b) Any Participant may elect to have the Company Stock purchased under the Plan from his or her Account be issued directly to the Participant. Any election under this paragraph shall be on the forms provided by the Company and shall be issued in accordance with paragraph (c) below. (c) In the event that Company Stock under the Plan is issued directly to a Participant, the Company will deliver to each Participant a stock certificate or certificates issued in his name for the number of shares of Company Stock purchased as soon as practicable after the Purchase Date. The time of issuance and delivery of shares may be postponed for such period as may be necessary to comply with the registration requirements under the Securities Act of 1933, as amended, the listing requirements of any securities exchange on which the Company Stock may then be listed, or the requirements under other laws or regulations applicable to the issuance or sale of such shares. ARTICLE VIII WITHDRAWAL ---------- 8.1 In Service Withdrawals. At any time prior to the Purchase Date of an ---------------------- Offering Period, any Participant may withdraw the amounts held in his Account by executing and delivering to the Human Resources Department for the Company written notice of withdrawal on the form provided by the Company. In such a case, the entire balance of the Participant's Account shall be paid to the Participant, without interest, as soon as is practicable. Upon such notification, that Participant shall cease to participate in the Plan for the remainder of the Offering Period in which the notice is given. Any Employee who has withdrawn under this Section shall be excluded from participation in the Plan for the remainder of the Offering Period and the next succeeding Offering Period, but may then be reinstated as a Participant for a subsequent Offering Period by executing and delivering a new Subscription Agreement to the Committee. 8.2 Termination of Employment. ------------------------- (a) In the event that a Participant's employment with the Company terminates for any reason, the Participant shall cease to participate in the Plan on the date of termination. As soon as is practical following the date of termination, the entire balance of the Participant's Account shall be paid to the Participant or his beneficiary, without interest. (b) A Participant may file a written designation of a beneficiary who is to receive any shares of Company Stock purchased under the Plan or any cash from the Participant's Account in the event of his or her death subsequent to a Purchase Date, but prior to delivery of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's Account under the Plan in the event of his death prior to a Purchase Date under paragraph (a) above. 5 (c) Any beneficiary designation under paragraph (b) above may be changed by the Participant at any time by written notice. In the event of the death of a Participant, the Committee may rely upon the most recent beneficiary designation it has on file as being the appropriate beneficiary. In the event of the death of a Participant and no valid beneficiary designation exists or the beneficiary has predeceased the Participant, the Committee shall deliver any cash or shares of Company Stock to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed to the knowledge of the Committee, the Committee, in its sole discretion, may deliver such shares of Company Stock or cash to the spouse or any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Committee, then to such other person as the Committee may designate. ARTICLE IX PLAN ADMINISTRATION ------------------- 9.1 Plan Administration. ------------------- (a) Authority to control and manage the operation and administration of the Plan shall be vested in the Board of Directors (the "Board") for the Company, or a committee ("Committee") thereof. The Board or Committee shall have all powers necessary to supervise the administration of the Plan and control its operations. (b) In addition to any powers and authority conferred on the Board or Committee elsewhere in the Plan or by law, the Board or Committee shall have the following powers and authority: (i) To designate agents to carry out responsibilities relating to the Plan; (ii) To administer, interpret, construe and apply this Plan and to answer all questions which may arise or which may be raised under this Plan by a Participant, his beneficiary or any other person whatsoever; (iii) To establish rules and procedures from time to time for the conduct of its business and for the administration and effectuation of its responsibilities under the Plan; and (iv) To perform or cause to be performed such further acts as it may deem to be necessary, appropriate, or convenient for the operation of the Plan. (c) Any action taken in good faith by the Board or Committee in the exercise of authority conferred upon it by this Plan shall be conclusive and binding upon a Participant and his beneficiaries. All discretionary powers conferred upon the Board shall be absolute. 9.2 Limitation on Liability. No Employee of the Company nor member of the ----------------------- Board or Committee shall be subject to any liability with respect to his 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 other Employee of the Company with 6 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 the person's conduct in the performance of his duties under the Plan. ARTICLE X COMPANY STOCK ------------- 10.1 Limitations on Purchase of Shares. The maximum number of shares of --------------------------------- Company Stock that shall be made available for sale under the Plan shall be 650,000 shares, subject to adjustment under Section 10.4 below. The shares of Company Stock to be sold to Participants under the Plan will be either purchased in broker's transactions in accordance with the requirements of federal securities laws or issued by the Company. If the total number of shares of Company Stock that would otherwise be issuable or purchasable pursuant to rights granted pursuant to Section 6.1 of the Plan at the Purchase Date exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available in as uniform and equitable a manner as is practicable. In such event, the Company shall give written notice of such reduction of the number of shares to each participant affected thereby and any unused payroll deductions shall be returned to such participant if necessary. 10.2 Voting Company Stock. The Participant will have no interest or -------------------- voting right in shares to be purchased under Section 6.1 of the Plan until such shares have been purchased. 10.3 Registration of Company Stock. Shares to be delivered to a ----------------------------- Participant under the Plan will be registered in the name of the Participant unless designated otherwise by the Participant. 10.4 Changes in Capitalization of the Company. Subject to any required ---------------------------------------- action by the shareholders of the Company, the number of shares of Company Stock covered by each right under the Plan which has not yet been exercised and the number of shares of Company Stock which have been authorized for issuance under the Plan but have not yet been placed under rights or which have been returned to the Plan upon the cancellation of a right, as well as the Purchase Price per share of Company Stock covered by each right under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Company Stock resulting from a stock split, stock dividend, spin-off, reorganization, recapitalization, merger, consolidation, exchange of shares or the like. Such adjustment shall be made by the Board of Directors for the Company, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Company Stock subject to any right granted hereunder. 10.5 Merger of Company. In the event that the Company at any time ----------------- proposes to merge into, consolidate with or to enter into any other reorganization pursuant to which the Company is not the surviving entity (including the sale of substantially all of its assets or a "reverse" merger in which the Company is the surviving entity), the Plan shall terminate, unless provision is made in writing in connection with such transaction for the continuance of the Plan and for the assumption of rights theretofore granted, or the substitution for such rights of new rights covering the shares of a successor corporation, with appropriate adjustments as to number and kind of shares and 7 prices, in which event the Plan and the rights theretofore granted or the new rights substituted therefor, shall continue in the manner and under the terms so provided. If such provision is not made in such transaction for the continuance of the Plan and the assumption of rights theretofore granted or the substitution for such rights of new rights covering the shares of a successor corporation, then the Board of Directors or its committee shall cause written notice of the proposed transaction to be given to the persons holding rights not less than 10 days prior to the anticipated effective date of the proposed transaction, and, concurrent with the effective date of the proposed transaction, such rights shall be exercised automatically in accordance with Section 7.1 as if such effective date were a Purchase Date of the applicable Offering Period unless a Participant withdraws from the Plan as provided in Section 8.1. ARTICLE XI MISCELLANEOUS MATTERS --------------------- 11.1 Amendment and Termination. The Plan shall terminate on December 31, ------------------------- 2004. Since future conditions affecting the Company cannot be anticipated or foreseen, the Company reserves the right to amend, modify, or terminate the Plan at any time. Upon termination of the Plan, all benefits shall become payable immediately. Notwithstanding the foregoing, no such amendment or termination shall affect rights previously granted, nor may an amendment make any change in any right previously granted which adversely affects the rights of any Participant. In addition, no amendment may be made without prior approval of the shareholders of the Company if such amendment would: (a) Increase the number of shares of Company Stock that may be issued under the Plan; (b) Materially modify the requirements as to eligibility for participation in the Plan; or (c) Materially increase the benefits which accrue to Participants under the Plan. 11.2 Shareholder Approval. Continuance of the Plan and the effectiveness -------------------- of any right granted hereunder shall be subject to approval by the shareholders of the Company, within twelve months before or after the date the Plan is adopted by the Board. 11.3 Benefits Not Alienable. Benefits under the Plan may not be assigned ---------------------- or alienated, whether voluntarily or involuntarily. Any attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Article VIII. 11.4 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 Employee or to be consideration for, or an inducement to, or a condition of, the employment of any Employee. Nothing contained in the Plan shall be deemed to give the right to any Employee to be retained in the employ of the Company or to interfere with the right of the Company to discharge any Employee at any time. 11.5 Governing Law. To the extent not preempted by Federal law, all legal ------------- questions pertaining to the Plan shall be determined in accordance with the laws of the State of California. 8 11.6 Non-business Days. When any act under the Plan is required to be ----------------- performed on a day that falls on a Saturday, Sunday or legal holiday, that act shall be performed on the next succeeding day which is not a Saturday, Sunday or legal holiday. Notwithstanding the above, Fair Market Value shall be determined in accordance with Section 6.3. 11.7 Compliance With Securities Laws. Notwithstanding any provision of ------------------------------- the Plan, the Committee shall administer the Plan in such a way to insure that the Plan at all times complies with any requirements of Federal Securities Laws. For example, affiliates may be required to make irrevocable elections in accordance with the rules set forth under Section 16b-3 of the Securities Exchange Act of 1934. IN WITNESS WHEREOF, NEWPORT CORPORATION has caused this instrument to become effective as of January 1, 1995, as amended on May 28, 1997, amended again on March 20, 1998. NEWPORT CORPORATION By: /s/ Robert C. Hewitt ------------------------------------------- Robert C. Hewitt Vice President, Chief Financial Officer and Secretary 9 EX-10.14 3 CONSULTING AGRMT. WITH RICHARD E. SCHMIDT EXHIBIT 10.14 November 7, 1996 Mr. Richard E. Schmidt Re: Retirement Compensation Package Dear Dick: I am pleased to report that, in recognition of your outstanding service to the Company, the Company's Compensation Committee has approved a retirement compensation package for you. Accordingly, the Company agrees as follows: 1. Nonqualified Stock Options. The Company agrees that the vesting of -------------------------- the nonqualified stock options currently held by you shall be accelerated, effective as of the date of your retirement as an employee of the Company, so as to be exercisable for all of the shares subject thereto (immediately prior to such acceleration, options for 33,750 shares remained unvested). In addition, the Company acknowledges and agrees that the option agreements governing such options permit you to exercise such options for so long as you serve as a member of the Company's Board of Directors, and for three (3) months thereafter. 2. Restricted Stock. The Company agrees to amend the Restricted Stock ---------------- Award Agreements governing the shares of restricted stock currently held by you so as to provide that service as a member of the Company's Board of Directors shall be deemed to constitute "employment with the Company" for purposes of Section 2.1 thereof, so that the Termination Date (as defined in such Agreements) shall not be deemed to occur until termination of your service as a member of the Board. 3. Consulting Agreement. The Company shall enter into a Consulting -------------------- Agreement with you pursuant to which you will provide consulting services to the Company for a period of one (1) year, which Agreement shall be renewable, in the sole discretion of the Company's Board of Directors, for up to four (4) additional one (1) year terms. Your compensation for such consulting services shall be $100,000 per year. 4. Health Insurance. The Company shall provide you with supplemental ---------------- health care insurance, without charge, for life. If the foregoing is acceptable, please so indicate by executing a copy of this letter at the place indicated below and returning it to me at the Company. If you have any questions, please do not hesitate to call me. Sincerely, /s/ ROBERT G. DEUSTER Robert G. Deuster ACCEPTED AND AGREED: /s/ RICHARD E. SCHMIDT - ---------------------- Richard E. Schmidt CONSULTING AGREEMENT -------------------- This Consulting Agreement ("Agreement") is made this 7th day of November, 1996, between Richard E. Schmidt ("Schmidt") and Newport Corporation, a Nevada corporation ("Newport"). R E C I T A L S --------------- A. Schmidt has been an employee, Chairman and Chief Executive Officer of Newport for several years and is scheduled to retire on December 31, 1996; and B. Newport and Schmidt now desire to provide for a consulting relationship between the parties following Schmidt's retirement. NOW THEREFORE, the parties agree as follows: 1. Consulting. Newport shall engage Schmidt as a business consultant and ---------- Schmidt shall serve Newport in such capacity, upon the terms hereinafter set forth. 2. Consulting Term. The period of Schmidt's engagement as a consultant --------------- shall begin on January 1, 1997 and extend for a period of twelve (12) months thereafter. Newport may, at its sole option, extend this Agreement for successive additional twelve (12) month periods or any fraction thereof, subject to the willingness of Schmidt to continue to serve in the capacity as consultant. Each such additional period shall be deemed to be a new Consulting Term hereunder. Should this Agreement be in force at the time of change in control (defined in Section 5), this Agreement shall automatically renew and extend from the date of Schmidt's retirement to a date five (5) years later, with all terms and conditions as set forth herein. 3. Duties. During the Consulting Term, so long as Schmidt is being ------ compensated hereunder, Schmidt shall, from time to time, at mutually agreed upon times, render such advice and consultation in such manner as Newport shall make known, including without limitation, advice and consultation regarding strategic planning, management, financial analysis, product planning or other corporate matters. Subject to Section 7 regarding confidentiality, Schmidt may engage in other activities during the Consulting Term, provided he is able to make himself reasonably available to Newport from time to time for consultation assignments. 4. Compensation - Consulting Term. As compensation for Schmidt's ------------------------------ services as a consultant for each twelve-month Consulting Term, Newport shall pay Schmidt a fee in the sum of $100,000 plus travel expenses, if any, incurred by Schmidt in rendering such services. Payment of such amount shall be made on a quarterly basis during each Consulting Term. 5. Change in Control. ----------------- "Change in control" of Newport shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of Newport representing 30% of more of the combined voting power of Newport's then outstanding securities ordinarily (apart from rights accruing under special circumstances) having the right to vote at elections of directors, (b) the persons who were directors of Newport immediately prior to any merger, consolidation, sale of assets or securities, contested election, or any combination of the foregoing, shall as a result thereof cease to constitute a majority of the Board of Directors of Newport or its successor, or (c) the persons who were directors of Newport immediately prior to a tender offer or exchange offer for the voting stock of Newport (other than by Newport or a subsidiary) shall, within two (2) years after the making of such tender or exchange offer, cease to constitute a majority of the Board of Directors of Newport or its successor. 6. Death or Disability. ------------------- (a) In the event of Schmidt's death or disability prior to a change in control as set forth in Section 5 above: (i) If, during the course of the Consulting Term, Schmidt dies, the consulting provisions of this Agreement, as applicable, shall terminate, and Schmidt's estate shall be paid, within fifteen (15) days, a termination settlement of twelve (12) months of fee as set forth in Section 4(a). (ii) If, during the course of the Consulting Term, Schmidt suffers a physical or mental disability due to illness or incapacity such that, based on competent medical evidence, Schmidt is unable to carry out the duties to be performed by him hereunder, the consulting provisions of this Agreement shall terminate, and Schmidt's estate shall be paid, within fifteen (15) days, a termination settlement of twelve (12) months of fee as set forth in Section 4(a). (b) In the event of the death or disability of Schmidt following a change in control, Schmidt or his estate shall continue to receive payments as set forth in Section 4 for the remainder of the term of the Agreement, as defined in Section 2. 7. Confidentiality. During the Consulting Term, Schmidt shall refrain --------------- from directly or indirectly, for his own account or as agent, servant, employee or member of any firm (a) disclosing to any other person or entity any confidential information or trade secrets of Newport, without Newport's written consent, and (b) engaging, hiring, employing or soliciting the employment of any of Newport's then employees or of the then employees of any of Newport's affiliates or subsidiaries. The violation of any of these provisions shall provide just cause for the full and unconditional release, without liability to Newport, of all of Newport's obligations hereunder. 8. Miscellaneous. ------------- (a) Assignment. The performance of Schmidt contemplated hereunder is ---------- personal in nature and, accordingly, neither this Agreement nor any part thereof may be assigned by either party hereto. (b) Successors and Affiliates. Except as otherwise provided herein, ------------------------- this Agreement is binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives and, in the case of Newport, any successor by operation of law or otherwise. Newport shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Newport, by agreement in form satisfactory to Schmidt, to expressly assume and perform this Agreement in the same manner and to the same extent that Newport would be required to perform and if no such succession had taken place. (c) Waiver and Amendment. A party's failure to enforce any of its -------------------- rights hereunder shall not be deemed to be a waiver of such rights, unless such waiver is in writing and signed by the waiving party. Waiver of any one breach shall not be deemed to be a waiver of any other breach of the same or any other provisions hereof. This Agreement may be amended only by a written agreement executed by either party hereto. (d) Governing Law. The validity of this Agreement, the construction ------------- of its terms and the determination of the rights and duties of the parties hereto shall all be governed by the laws of the State of California. (e) Entire Agreement. This Agreement contains the sole and entire ---------------- agreement and understanding of the parties with respect to the subject matter hereof, and any and all prior discussions, negotiations, commitments, letters of intent, memoranda, writings and understandings related hereto, are hereby superseded. No representations oral or otherwise, express or implied, other than those contained herein, have been made by any party hereto. (f) Severability. This Agreement is severable to the extent that if ------------ any of its provisions should be declared invalid by court of competent jurisdiction, the validity and enforceability of the remaining provisions shall not thereby be adversely affected. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date and year first above written. NEWPORT CORPORATION, a Nevada corporation By: /s/ ROBERT G. DEUSTER --------------------- Robert G. Deuster, Chief Executive Officer /s/ RICHARD E. SCHMIDT ---------------------- Richard E. Schmidt EX-10.15 4 CREDIT AGREEMENT DATED FEBRUARY 26, 1998 EXHIBIT 10.15 ================================================================================ $25,000,000 CREDIT AGREEMENT DATED AS OF FEBRUARY 26, 1998 BETWEEN NEWPORT CORPORATION AND ABN AMRO BANK N.V., LOS ANGELES INTERNATIONAL BRANCH ================================================================================ 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........................ 4 Section 2.1. Interest Rate Options........................ 4 Section 2.2. Minimum Amounts.............................. 5 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................... 6 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............................... 8 Section 2.11. Discretion of Bank as to Manner of Funding... 8 SECTION 3. FEES, PREPAYMENTS, TERMINATIONS AND APPLICATIONS............ 8 Section 3.1. Fees......................................... 8 Section 3.2. Voluntary Prepayments........................ 9 Section 3.3. Terminations................................. 9 Section 3.4. Place and Application of Payments............ 9 Section 3.5. Notations.................................... 10 SECTION 4. DEFINITIONS; INTERPRETATION................................. 10 Section 4.1. Definitions.................................. 10 Section 4.2. Interpretation............................... 18 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.............................. 19 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 Section 5.9. Litigation and Other Controversies........... 20 Section 5.10. Taxes........................................ 20 Section 5.11. Approvals.................................... 20 Section 5.12. Affiliate Transactions....................... 21 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......................... 30 Section 7.21. Burdensome Contracts With Affiliates......... 30 Section 7.22. No Changes in Fiscal Year.................... 30 Section 7.23. Formation of Subsidiaries.................... 30 Section 7.24. Change in the Nature of Business............. 31 Section 7.25. Limitation on Certain Restrictions on Subsidiaries.............................. 31 SECTION 8. EVENTS OF DEFAULT AND REMEDIES............................... 31 Section 8.1. Events of Default............................. 31 Section 8.2. Non-Bankruptcy Defaults....................... 33 Section 8.3. Bankruptcy Defaults........................... 33 Section 8.4. Collateral for Undrawn Letters of Credit...... 33 SECTION 9. MISCELLANEOUS................................................ 34 Section 9.1. Non-Business Day.............................. 34 Section 9.2. No Waiver, Cumulative Remedies................ 34 Section 9.3. Amendments, Etc............................... 34 Section 9.4. Costs and Expenses............................ 34 Section 9.5. Documentary Taxes............................. 35 Section 9.6. Survival of Representations................... 35 Section 9.7. Survival of Indemnities....................... 35 Section 9.8. Notices....................................... 35 Section 9.9. Currency...................................... 36 Section 9.10. Currency Equivalence.......................... 37 Section 9.11. Headings...................................... 37 Section 9.12. Severability of Provisions.................... 37 Section 9.13. Counterparts.................................. 37 Section 9.14. Binding Nature, Governing Law, Etc............ 37 Section 9.15. Submission to Jurisdiction; Appointment of Agent for Process; Waiver of Jury Trial..... 37 Section 9.16. Outstanding Letters of Credit................. 38 CREDIT AGREEMENT ABN AMRO Bank N.V. Los Angeles International Branch 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 $25,000,000 (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 $25,000,000. 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 2 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% 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 3 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 February 28, 1998) 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 4 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. 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 5 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 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 6 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 (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 7 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) 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. 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 8 of .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 March 31, 1998) 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 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. 9 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, 10 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 11 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. "Authorized Representative" means those persons shown on the lists of officers provided by 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. 12 "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. "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. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto. "Event of Default" means any event or condition identified as such in Section 8.1 hereof. "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. 13 "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, 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; (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. 14 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 any 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 reimbursement obligations owing under the Applications, all fees and charges payable 15 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 December 20, 1995 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 be 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 16 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 Loans hereunder. "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 December 31, 2000, or such earlier date on which the Commitment is terminated in whole pursuant to Section 3.3, 8.2 or 8.3 hereof. "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 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 17 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 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 exchange 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 18 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 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 the case 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 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. 19 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 is 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, 1996 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 September 30, 1997 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for the nine (9) 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. 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 September 30, 1997, 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 20 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, 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. 21 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, 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: 22 (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 principalamount 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. 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; 23 (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: 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 24 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; (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 25 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 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 26 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 $38,400,000 plus, on a cumulative basis, 75% of positive Net Income for each fiscal year subsequent to the fiscal year ended December 31, 1996. 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 $7,000,000 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; 27 (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. 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; (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 28 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. 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; (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; 29 (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 $1,000,000, (ii) the aggregate amount of stock consideration payable in connection with such Acquisitions does not exceed $3,000,000, (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, it being agreed that the acquisition of substantially all of the assets of MikroPrecision Instruments, Inc. by the Company shall not be subject to such limits; (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. 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 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 30 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 Section. 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; 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. 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, 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 31 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 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 32 (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 of 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 (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 33 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; or (j) the Company or any Restricted Subsidiary shall (i) have entered involuntarily against it 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 all 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. 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 34 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 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, 35 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 this Agreement, the other Loan Documents and the other instruments and documents to be delivered hereunder or thereunder, and in connection with the transactions contemplated hereby or thereby, and in connection with any consents hereunder or waivers or amendments hereto or thereto, including the fees and expenses of Messrs. Katten Muchin & Zavis 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 36 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 Section. Except as otherwise specified herein, all notices hereunder shall be in writing (including cable, telecopy or telex) and shall be given to the relevant party at its address, telecopier number or telex number set forth below, or such other address, telecopier number or telex 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 92714 Attention:Robert C. Hewitt Telephone:(714) 253-1405 Telecopy:(714) 253-1671 Telex:n/a to the Bank at: ABN AMRO Bank N.V. Los Angeles International Branch 300 South Grand Avenue Suite 1115 Los Angeles, California 90071-7519 Attention:Mr. John A. Miller Telephone:(213) 687-2072 Telecopy:(213) 687-2061 Telex:n/a 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 37 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, 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 judgement 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. 38 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 on 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 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. 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. 39 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 26th day of February, 1998. NEWPORT CORPORATION By: ---------------------------- Its: ---------------------------- Accepted and agreed to as of the day and year last above written. ABN AMRO BANK N.V., Los Angeles International Branch By: ---------------------------- Its: ---------------------------- 40 Exhibit A Newport Corporation Revolving Credit Note $25,000,000 February 26, 1998 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) Twenty-Five Million and no/100 Dollars ($25,000,000), 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 Credit Agreement dated as of February 26, 1998 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 1 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. 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:___________________________________ Its:__________________________________ 2 Exhibit B Compliance Certificate This Compliance Certificate is furnished to ABN AMRO Bank N.V. (the "Bank") pursuant to that certain Credit Agreement dated as of February 26, 1998, 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 existed 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 February 26, 1998 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 $ ===========
1 (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
2 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 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 $7,000,000 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 for 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 have 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. 2 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. 3 Schedule 5.2 Subsidiaries
Jurisdiction of Percentage Name Incorporation Ownership Micro-Controle Benelux S.A. Belgium 100* Newport Domestic International Sales Corp. California 100 (inactive) Newport European Distribution Company California 100 Newport Government Systems, Inc. (inactive) California 100 RAM Optical Instrumentation, Inc. California 100 Newport Instruments Canada Corporation Canada 100 MC Holding S.A. France 100* Micro-Controle S.A. (1) France 100* Micro-Controle GmbH Germany 100 Newport GmbH Germany 100 Micro-Controle Italia Italy 100 Newport BV Netherlands 100 Klinger Scientific Corporation New York 100 Newport Instruments AG Switzerland 100 Newport Taiwan Taiwan 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 U.S. Virgin Islands 100 MikroPrecision Instruments, Inc. Nevada 100
*Director's Shares exist for this Subsidiary (1) Owned directly by Mc Holding S.A. (2) Owned directly by Newport Ltd. 1 EX-21 5 SUBSIDIARIES OF REGISTRANT Exhibit 21 NEWPORT CORPORATION Subsidiaries of Registrant
State or Country Name of Subsidiary of Incorporation - ------------------ ---------------- Newport Domestic International Sales Corporation (Inactive) California Newport European Distribution Company California Newport Government Systems, Inc. (Inactive) California RAM Optical Instrumentation, Inc. California MikroPrecision Instruments, Inc. Nevada Klinger Scientific Corporation New York 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 U.S. Virgin Islands
Page 41 EX-23 6 CONSENT OF ERNST & YOUNG 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 30, 1998, except for Note 8 as to which the date is February 26, 1998, 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, 1997. ERNST & YOUNG LLP Orange County, California March 25, 1998 Page 42 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS, BALANCE SHEETS AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS CONTAINED WITHIN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. YEAR DEC-31-1997 DEC-31-1997 7,456 0 23,857 485 28,326 65,454 53,098 30,104 104,411 21,139 21,027 0 0 3,132 57,526 104,411 132,594 132,594 74,844 74,844 45,181 134 1,992 10,094 3,030 7,064 0 0 0 7,064 0.80 0.77
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