-----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, VNxJrawiPeaYafZtzeB4UuS26AQUMC2aEUJ+/TJNn3Ik4aX7GDDZgGItCb715SR8 0/Rr22YUbtOKFaK+aW1XkQ== 0001017062-99-000908.txt : 19990518 0001017062-99-000908.hdr.sgml : 19990518 ACCESSION NUMBER: 0001017062-99-000908 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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-Q SEC ACT: SEC FILE NUMBER: 000-01649 FILM NUMBER: 99624873 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-Q 1 FOR THE QUARTERLY PERIOD MARCH 31, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 *** FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________ Commission File Number 0-1649 ------ NEWPORT CORPORATION -------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 94-0849175 - -------------------------------------- ------------------- (State or other Jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1791 Deere Avenue, Irvine, CA 92606 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (949) 863-3144 -------------- N/A ------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of each of the issuer's classes of common stock as of March 31, 1999, was 9,183,773 Page 1 of 15 Exhibity Index on Sequentially Numbered Page 14 NEWPORT CORPORATION INDEX PART I. FINANCIAL INFORMATION Page Number Item 1: Financial Statements: Consolidated Income Statement and Condensed Consolidated Statement of Stockholders' Equity for the Three Months ended March 31, 1999 and 1998. 3 Consolidated Balance Sheet at March 31, 1999 and December 31, 1998. 4 Consolidated Statement of Cash Flows for the Three Months ended March 31, 1999 and 1998. 5 Notes to Condensed Consolidated Financial Statements. 6-8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. 9-13 Item 3: Quantitative and Qualitative Disclosures About Market Risk 13-14 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K. 14 SIGNATURE 14 Page 2 NEWPORT CORPORATION Consolidated Income Statement and Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In thousands, except per share amounts) Three Months Ended March 31, -------------------- 1999 1998 --------- -------- Net sales $29,448 $33,663 Cost of sales 16,639 19,183 ------- ------- Gross profit 12,809 14,480 Selling, general and administrative expense 7,895 8,312 Research and development expense 3,006 2,772 ------- ------- Income from operations 1,908 3,396 Interest expense (448) (508) Other income (expense), net (190) 63 ------- ------- Income before income taxes 1,270 2,951 Income tax provision 356 945 ------- ------- Net income $ 914 $ 2,006 ======= ======= Net income per share: Basic $0.10 $0.22 Diluted $0.10 $0.21 Number of shares used to calculate net income per share: Basic 9,069 8,919 Diluted 9,407 9,377 Stockholders' equity, beginning of period $70,970 $60,658 Net income 914 2,006 Unrealized translation loss (1,456) (455) Unamortized deferred compensation 54 (207) Repurchase of common stock (143) - Issuance of common stock 1,083 1,734 ------- ------- Stockholders' equity, end of period $71,422 $63,736 ======= =======
See accompanying notes Page 3 NEWPORT CORPORATION Consolidated Balance Sheet
(In thousands, except share data) March 31, December 31, 1999 1998 ----------- ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 3,627 $ 5,335 Customer receivables, net 24,263 25,798 Other receivables 2,494 2,367 Inventories 32,874 31,260 Deferred tax assets 2,679 2,703 Other current assets 1,748 1,643 -------- -------- Total current assets 67,685 69,106 Investments and other assets 6,881 6,451 Property, plant and equipment, at cost, net 21,941 22,696 Goodwill, net 11,609 12,220 -------- -------- $108,116 $110,473 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,400 $ 6,180 Accrued payroll and related expenses 4,818 5,566 Current portion of long-term debt 3,695 3,699 Other current liabilities 4,124 5,163 -------- -------- Total current liabilities 18,037 20,608 Long-term debt 17,250 17,536 Other liabilities 1,407 1,359 Commitments and contingencies Stockholders' equity: Common stock, $.35 stated value, 20,000,000 shares authorized; 9,184,000 shares issued and outstanding at March 31, 1999; 9,119,000 shares at December 31, 1998 3,214 3,192 Capital in excess of stated value 9,491 8,573 Unamortized deferred compensation (494) (548) Unrealized translation loss (5,372) (3,916) Retained earnings 64,583 63,669 -------- -------- Total stockholders' equity 71,422 70,970 -------- -------- $108,116 $110,473 ======== ========
See accompanying notes Page 4 NEWPORT CORPORATION Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended, March 31 ------------------- (In thousands) 1999 1998 -------- -------- Operating activities: Net income $ 914 $ 2,006 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,466 1,608 Increase (decrease) in provision for losses on receivables and inventories (86) 396 Other non-cash items, net (3) 59 Changes in operating assets and liabilities: Receivables 846 (556) Inventories (1,962) (1,736) Other current assets (244) (318) Other assets 95 360 Accounts payable and other accrued expenses (1,884) (644) Taxes based on income (105) (515) ------- ------- Net cash provided by (used in) operating activities (963) 660 ------- ------- Investing activities: Purchases of property, plant and equipment (1,092) (1,396) Disposition of property, plant and equipment 79 1,857 Other, net (390) 12 ------- ------- Net cash provided by (used in) investing activities (1,403) 473 ------- ------- Financing activities: Increase in short-term borrowings - 651 Decrease in long-term borrowings (141) (157) Cash dividends paid (182) (180) Repurchase of common stock (143) - Issuance of common stock under employee agreements, including associated tax benefit 1,083 1,467 ------- ------- Net cash provided by financing activities 617 1,781 ------- ------- Effect of foreign exchange rate changes on cash 41 (1) ------- ------- Net increase (decrease) in cash and cash equivalents (1,708) 2,913 Cash and cash equivalents at beginning of period 5,335 7,456 ------- ------- Cash and cash equivalents at end of period $ 3,627 $10,369 ======= ======= Cash paid in the period for: Interest $ 85 $ 51 Taxes 494 1,103
See accompanying notes Page 5 NEWPORT CORPORATION Notes to condensed Consolidated Financial Statements March 31, 1999 (Unaudited) 1. Interim Reporting General The accompanying unaudited financial statements consolidate the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information. The accounts of the Company's subsidiaries in Europe have been consolidated using a one-month lag. In the opinion of management, all adjustments necessary for a fair presentation of the information in the unaudited condensed consolidated financial statements have been made and consist of only normal recurring accruals. Operating results for the three-month period ended March 31, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission, and consequently, these statements should be read in conjunction with the Company's consolidated financial statements and notes thereto, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Net Income per Share Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period, excluding restricted stock, while diluted net income per share is based on the weighted average number of shares of common stock outstanding during the period and the dilutive effects of common stock equivalents (mainly stock options), determined using the treasury stock method, outstanding during the period. Foreign Currency Balance sheet accounts denominated in foreign currencies 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. Foreign exchange contracts totaled $4.5 million and $4.2 million at March 31, 1999, and December 31, 1998, respectively. 2. Customer Receivables The Company maintains adequate reserves for potential credit losses. Such losses have been minimal and within management's estimates. Receivables from customers are generally unsecured. Customer receivables consist of the following:
March 31, December 31, (In thousands) 1999 1998 --------- ------------ Customer receivables $24,532 $26,077 Less allowance for doubtful accounts 269 279 ------- ------- $24,263 $25,798 ======= =======
Page 6 NEWPORT CORPORATION Notes to condensed Consolidated Financial Statements March 31, 1999 (Unaudited) 3. 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:
March 31, December 31, (In thousands) 1999 1998 ---------- ------------- Raw materials and purchased parts $11,303 $12,412 Work in process 6,705 5,301 Finished goods 14,866 13,547 ------- ------- $32,874 $31,260 ======= =======
4. Property, Plant and Equipment Property plant and equipment consist of the following:
March 31, December 31, (In thousands) 1999 1998 --------- ------------ Land $ 1,183 $ 1,287 Buildings 6,634 7,218 Leasehold improvements 8,552 8,715 Machinery and equipment 23,915 24,063 Office equipment 11,808 11,715 ------- ------- 52,092 52,998 Less accumulated depreciation 30,151 30,302 ------- ------- $21,941 $22,696 ======= =======
5. Other Income (Expense), Net Other income (expense), net, consists of the following:
Three Months Ended March 31, ----------------------- (In thousands) 1999 1998 ------- ------- Interest and dividend income $ 49 $ 86 Exchange losses, net (212) (44) Other (27) 21 ------- ------- $ (190) $ 63 ======= =======
Page 7 NEWPORT CORPORATION Notes to condensed Consolidated Financial Statements March 31, 1999 (Unaudited) 6. Comprehensive Income (Loss) The components of comprehensive income (loss), net of related tax, are as follows:
Three Months Ended March 31, --------- (In thousands) 1999 1998 -------- ---------- Net income $ 914 $2,006 Unrealized translation loss (1,456) (455) ------- ------ $ (542) $1,551 ======= ======
7. Segment Reporting Selected financial information for the Company's reportable segments for the three months ended March 31, 1999 and 1998 follows:
(In thousands) Components Instruments and and Subassemblies Systems Europe Total ------------- ------------ ------- ------- Three Months Ended March 31, 1999: - ---------------------------------- Sales to external customers $ 9,540 $12,366 $6,132 $28,038 Intersegment sales 1,330 1,928 1,716 4,974 Segment income (loss) 2,543 (656) (49) 1,838 Three Months Ended March 31, 1998: - ---------------------------------- Sales to external customers $11,209 $14,904 $6,936 $33,049 Intersegment sales 1,559 1,438 1,681 4,678 Segment income (loss) 3,282 475 (227) 3,530
The following reconciles segment income to consolidated income before income taxes.
Three Months Ended March 31, --------- (In thousands) 1999 1998 ------- ---------- Segment income (loss) $1,838 $3,530 Income from non reportable segments 152 16 Unallocated corporate and other operating expense (82) (150) Interest expense (448) (508) Other income (expense) (190) 63 ------ ------ Income before income taxes $1,270 $2,951 ====== ======
Page 8 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 1999 and 1998 INTRODUCTORY NOTE This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q 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 forward-looking statements include (i) the existence and development of the Company's technical and manufacturing capabilities and product offerings, (ii) anticipated competition, (iii) potential future growth in revenues and income, (iv) potential future decreases in costs, and (v) the need for, and availability of, additional financing. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that the Company will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that the Company's markets will continue to grow, that the Company's products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within the Company's markets will not change materially or adversely, that the Company will retain key technical and management personnel, that the Company's forecasts will accurately anticipate market demand, that there will be no material adverse change in the Company's operations or business, that fluctuations in foreign currency exchange rates do not have a material adverse impact on the Company's competitive position in international markets and that the Company will not experience significant supply shortages with respect to purchased components, sub-systems or raw materials. Additional factors that may affect future operating results are discussed in more detail in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, including those in Europe and Asia and those related to its strategic markets, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although, the Company believes that the assumptions underlying the forward-looking statements will be realized. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward- looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company undertakes no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following is management's discussion and analysis of certain significant factors that have affected the earnings and financial position of the Company during the period included in the accompanying financial statements. This discussion compares the three-month period ended March 31, 1999, with the three- month period ended March 31, 1998. This discussion should be read in conjunction with the financial statements and associated notes. Page 9 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three Months Ended March 31, 1999 and 1998 RESULTS OF OPERATIONS
Period-to-Period FINANCIAL ANALYSIS Percentage of Net Sales Increase (decrease) ---------------------------- ---------------------------- Three Months Ended March 31, Three Months Ended March 31, 1999 1998 1998 ----- ----- ------ Net sales 100.0% 100.0% (12.5)% Cost of sales 56.5 57.0 (13.3) ----- ----- Gross margin 43.5 43.0 (11.5) Selling, general and administrative expense 26.8 24.7 (5.0) Research and development expense 10.2 8.2 8.4 ----- ----- Income from operations 6.5 10.1 (43.8) Interest expense (1.5) (1.5) (11.8) Other income (expense), net (0.7) 0.2 NM Income taxes (1.2) (2.8) (62.3) ----- ----- Net income 3.1 6.0 (54.4) ===== =====
NM = not meaningful NET SALES Net sales for the three-month period ended March 31, 1999 were $29.4 million compared with $33.7 million for the three-month period ended March 31, 1998, a decrease of 12.5% versus the prior year period. The sales decrease versus the prior year quarter was primarily attributable to declines in sales to the semiconductor equipment, computer peripherals, research and general metrology markets of 40.9%, 19.0%, 17.5% and 13.8%, respectively. Partially offsetting this decline was growth in sales to the fiber optic communications market of 38.3% compared with 1998's first quarter. The Company's domestic sales totaled $17.9 million for the three-month period ended March 31, 1999, compared with $21.9 million for the corresponding period in 1998, a decrease of 18.3%. The decrease in domestic sales for the quarter was evident in all of the Company's market segments, with the exception of the fiber optic communications market. Lower sales in the semiconductor equipment market was primarily caused by continued overcapacity and the resultant reduction in demand for capital equipment, while a delay in the introduction of the Company's new vision products constrained sales to the general metrology market. The Company's international sales totaled $11.5 million for the three-month period ended March 31, 1999, compared with $11.8 million for the corresponding prior year period, a decrease of 1.7%. European sales were down $1.2 million for the quarter, a 16.0% decrease versus the respective prior year period. Sales in France, Germany and the United Kingdom combined dropped $1.5 million versus 1998's first quarter, while sales to Netherlands based customers grew $0.4 million over the prior year quarter. Foreign exchange rate effects on European sales were not significant for the quarter. Canadian sales for the three-month period, reflecting the strength of the fiber optic communications market, totaled $1.5 million, an increase of $1.0 million or 173.2% versus the prior year quarter. Sales to the Asian markets increased 3.7% to $3.1 million for the quarter, which is notable as this reverses a downward trend of the last four quarters. Providing the quarterly growth versus prior year were Korea and Australia with increases of $0.5 million and $0.2 million, respectively, partially offset by sales declines in the ASEAN countries and Japan of $0.4 million and $0.2 million, respectively. Order rates for the first quarter were 18.9% below the prior year period as increases of 17.7% in the fiber optic communications market and 6.0% in the general metrology market were offset by declines of 71.4%, 48.7% and 11.2% in the semiconductor, computer peripherals and research markets, respectively. Semiconductor equipment market orders in the first quarter 1998 included an individual $4.0 million order. Excluding that order, the quarterly decline for the semiconductor equipment market is approximately 18.1%. Page 10 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three Months Ended March 31, 1999 and 1998 Overall, management anticipates that net sales in 1999 will increase over 1998; however, such growth may be affected by many factors, and cannot be assured. GROSS PROFIT Gross margin (gross profit as a percentage of sales) increased to 43.5% of sales for the three-month period ended March 31, 1999, compared with 43.0% in the comparable 1998 period. This increase in gross margin percentage reflects a greater proportion of higher margin photonics product sales during the quarter. Management anticipates that the Company's overall gross margin will improve in 1999 as a result of this product mix effect and continued productivity improvements Company-wide. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses for the three-month period ended March 31, 1999, decreased 5.0% compared with the three-month period ended March 31, 1998. The decrease in SG&A expenses is primarily a result of lower costs for certain compensation and incentive plans that are tied to sales and profit performance. SG&A expenses when stated as a percentage of sales were 26.8% compared with 24.7% for the prior year period. RESEARCH AND DEVELOPMENT EXPENSES Research and development (R&D) expenses for the three-month period ended March 31, 1999, increased $0.2 million or 8.4% compared with the three-month period ended March 31, 1998. As a percentage of sales, R&D expenses were 10.2% versus 8.2% for the prior year period. The increase in expenses is in line with management's commitment to continued product development and enhancement of existing products. INTEREST EXPENSE AND OTHER INCOME (EXPENSE), NET Interest expense totaled $0.4 million for the three-month period ended March 31, 1999 versus $0.5 million for the three-month period ended March 31, 1998. Other income (expense), net was ($0.2 million) for the three-month period ended March 31, 1999 versus $0.1 million for the 1998 first quarter. The decline versus the prior year quarter is primarily attributable to higher foreign exchange losses related to the recent strengthening of the U.S. dollar against the euro. PROVISION FOR TAXES The effective annual tax rates for the three-month periods ended March 31, 1999 and March 31, 1998 were 28.0% and 32.0%, respectively. The lower 1999 first quarter tax rate, compared with the 1998 first quarter tax rate, is primarily the result of increased utilization of foreign tax loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities of $1.0 million for the three-month period ended March 31, 1999 was principally attributable to payments on accounts payable and other accrued expenses ($1.9 million) and increases in certain other operating assets, principally inventories ($1.7 million). Partially offsetting these amounts were the Company's net income ($0.9 million) and depreciation and amortization ($1.5 million). Current assets totaled $67.7 million at March 31, 1999 and exceeded current liabilities ($18.0 million) at that date. Net cash used in investing activities of $1.4 million for the three-month period ended March 31, 1999, was principally attributable to the Company's purchases of property, plant and equipment and the capitalization of certain software development costs. Net cash provided by financing activities of $0.6 million for the three-month period ended March 31, 1999, was primarily due to the issuance of common stock under employee agreements, partially offset by the repurchase of common stock under the Company's share repurchase program, cash dividend payments and payments on borrowings. Page 11 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three Months Ended March 31, 1999 and 1998 Although the Company has no present agreements or commitments with respect to any material 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. The Company believes its current working capital position together with estimated cash flows from operations and its existing credit availability are adequate to fund operations in the ordinary course of business, anticipated capital expenditures and debt repayment requirements over at least the next year and for the foreseeable future. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Impact of Year 2000 Certain 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. Testing and implementation occurred throughout 1998 with final conversion at year-end. Cost of acquiring the upgraded computer hardware and software was approximately $1.2 million and has been capitalized. Newport sells certain products that include various software applications. The Company has determined that, since January 1, 1996, its product software has been 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. The Company established an Information Technology Steering Committee, which reports directly to the President and Chief Executive Officer. The committee members include executive management and employees with expertise from various disciplines including, but not limited to, information technology, engineering, finance, customer service, communications, facilities, procurement and human resources. The committee is responsible for addressing Year 2000 issues associated with the Company's (1) business application systems including, but not limited to, the Company's customer service, operations and financial systems and end-user applications; (2) embedded systems, including equipment that operates such items as the Company's telecommunications and facilities; (3) software applications embedded in certain of the Company's products; (4) vendor and supplier relationships; and (5) contingency planning. While the Company anticipates no major interruption of its business activities, that will be dependent in part, upon the ability of third parties to be Year 2000 compliant. The Company's most likely potential risk is the inability of some customers to order and/or pay on a timely basis and/or the inability of some suppliers to receive orders and/or deliver on a timely basis. Although the Company has implemented the actions described above to address third party issues, it has no direct ability to influence the compliance actions by such parties. Accordingly, while the Company believes its actions in this regard should reduce Year 2000 risks, it is unable to eliminate them or to estimate the ultimate effect Year 2000 risks may have. Page 12 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three Months Ended March 31, 1999 and 1998 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, distributors and customers 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. European Economic and Monetary Union (EMU) New European Currency On January 1, 1999, eleven of the fifteen member countries of the European Economic and Monetary Union established fixed conversion rates between their existing national currencies and one common currency-the euro. The euro trades on currency exchanges and, during a three-year dual-currency transition period, either the euro or the national currencies may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins will be issued, and the national currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the systems and business issues raised by the euro currency conversion. These issues include, among others, (1) the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis, particularly once the euro currency is issued in 2002. While, the Company anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations, there can be no assurance that the Company's key vendors, customers and distributors will not be affected by such euro currency issues, which could have an adverse effect on the Company's business, operating results and financial condition. Further, there can be no assurance that the currency market volatility will not increase, which could have an adverse effect on the Company's euro exposures. Pending Adoption of Statement of Financial Accounting Standards No. 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording derivatives in interim and annual financial reports requiring that all derivative instruments be recorded as assets or liabilities, measured at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and therefore the Company will adopt the new requirements effective with the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. Management does not anticipate that the adoption of SFAS No. 133 will have a significant impact on the Company's results of operations, financial position or cash flow. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rates which may generate translation and transaction gains and losses. Foreign Currency Risk Operating in international markets sometimes involves exposure to volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on the Company is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause the Company to adjust its financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors. International operations constituted approximately 5.4% of the Company's consolidated operating profit for the three-months ended March 31, 1999. As currency exchange rates change, translation of the income statements of international operations into U.S. dollars affects year-over-year comparability of operating results. The Company does not generally hedge translation risks because cash flows from international operations are generally reinvested locally. The Company does not enter into hedges to minimize volatility of reported earnings because it does not believe it is justified by the exposure or the cost. Page 13 NEWPORT CORPORATION Quantitative and Qualitative Disclosures About Market Risk (Cont'd) Three Months Ended March 31, 1999 and 1998 Changes in currency exchange rates that would have the largest impact on translating future international operating profit include the euro, British pound, Canadian dollar and Swiss franc. The Company estimates that a 10% change in foreign exchange rates would not have a material impact on reported operating profit. The Company believes that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or financing and operating strategies. Transaction gains and losses arise from monetary assets and liabilities denominated in currencies other than a subsidiary's functional currency. Net foreign exchange gains and losses were not material to the Company's earnings for the last three years. The impact of unrealized foreign exchange translation gains and losses is disclosed in Note 6 - Comprehensive Income (Loss) on page 8. Interest Rate Risk The Company has no significant exposure to interest rate risk as its primary debt instruments carry fixed interest rates. The sensitivity analyses presented in the interest rate and foreign exchange discussions above disregard the possibility that rates can move in opposite directions and that gains from one category may or may not be offset by losses from another category and vice versa. NEWPORT CORPORATION PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K. (a) Exhibits Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWPORT CORPORATION (Registrant) Dated: May 13, 1999 By: /S/ ROBERT C. HEWITT ------------------------------------------------ Robert C. Hewitt, Principal Financial Officer, duly authorized to sign on behalf of the Registrant Page 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED WITHIN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999. 1,000 3-MOS DEC-31-1999 MAR-31-1999 3,627 0 24,532 269 32,874 67,685 52,092 30,151 108,116 18,037 17,250 0 0 3,214 68,208 108,116 29,448 29,448 16,639 16,639 11,077 14 448 1,270 356 914 0 0 0 914 0.10 0.10
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