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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
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-1649
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NEWPORT CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 094-0849175
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1791 Deere Avenue, Irvine, CA 92606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 863-3144
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Stated Value $0.35 per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $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
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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
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General Description of Business
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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
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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
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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.
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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
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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
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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.
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Components Newport offers a comprehensive line of mechanical components
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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
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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
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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
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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
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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
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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.
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Sales and Marketing
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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.
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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
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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
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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.
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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
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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
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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.
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Employees
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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
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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
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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
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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
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The Company is not a party to any material legal proceedings other than ordinary
routine litigation incidental to its business.
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ITEM 4 Submission of Matters to a Vote of Security Holders
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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
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Matters
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Price Range of Common Stock
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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
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None.
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ITEM 6 Selected Financial Data
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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):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
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
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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
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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
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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
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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
</TABLE>
(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
<PAGE>
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:
<TABLE>
<CAPTION>
Period-to-Period
Percent of Net Sales Increase (Decrease)
------------------------ ------------------
1997 1996 1995 1997 1996
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
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
===== ===== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K
- ------- ----------------------------------------------------------------
(a) 1. Financial Statements and Financial Statement Schedules
---------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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:
<TABLE>
<S> <C>
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).*
</TABLE>
Page 20
<PAGE>
ITEM 14 Exhibits, Financial Statement Schedules and Reports on
- ------- ------------------------------------------------------
Form 10-K (Cont'd)
------------------
<TABLE>
<S> <C>
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)
</TABLE>
_____________
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
NEWPORT CORPORATION
Consolidated Income Statement
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
NEWPORT CORPORATION
Consolidated Balance Sheet
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes.
Page 25
<PAGE>
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
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
======= ======== =======
</TABLE>
See accompanying notes.
Page 26
<PAGE>
NEWPORT CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
See accompanying notes.
Page 27
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(In thousands) December 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Customer receivables $23,857 $23,942
Less allowance for doubtful accounts 485 524
------- -------
$23,372 $23,418
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
(In thousands) December 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
NOTE 5 INCOME TAXES
The provision for taxes based on income consists of the following:
<TABLE>
<CAPTION>
(In thousands) Years ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
Page 30
<PAGE>
The provision for taxes based on income differs from the amount obtained by
applying the statutory tax rate as follows:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
(In thousands) December 31,
------------------
1997 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE>
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, including capitalized lease assets,
consists of the following:
<TABLE>
<CAPTION>
(In thousands) December 31,
-------------------
<S> <C> <C>
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
======= =======
</TABLE>
NOTE 7 INVESTMENTS AND OTHER ASSETS
Investments and other assets consist of the following:
<TABLE>
<CAPTION>
(In thousands) December 31,
---------------
1997 1996
------ ------
<S> <C> <C>
Nonmarketable investments $4,169 $4,114
Other assets 1,661 1,077
------ ------
$5,830 $5,191
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) December 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Capitalized
Lease Borrowings and
For years ending December 31, Obligations Term Notes
----------- --------------
<S> <C> <C>
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
====== =======
</TABLE>
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):
<TABLE>
<S> <C>
1998 $2,418
1999 2,215
2000 2,057
2001 1,967
2002 1,953
Thereafter 7,289
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Under Plan Weighted Average
Available ------------------------------------ Exercise Price
for Option Restricted of Option Shares
or Award Stock Options Total Under Plan
---------- ---------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
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
======== ======= ========= =========
</TABLE>
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):
<TABLE>
<CAPTION>
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
- ------------------ ----------- ---------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$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
========= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
(In thousands) Years ended December 31,
------------------------
1997 1996 1995
----- ---- ------
<S> <C> <C> <C>
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
===== ==== ======
</TABLE>
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
<PAGE>
NOTE 12 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share under SFAS No. 128:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
Page 36
<PAGE>
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:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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
<PAGE>
NOTE 15 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Diluted Net Dividends High Low
Net Gross Net Income Per Per Share Share
Three months ended Sales Profit Income Share (1) Share Price Price
- ------------------------- ------- ------- ------ ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
NEWPORT CORPORATION
Schedule II
Consolidated Valuation Accounts
(In thousands)
<TABLE>
<CAPTION>
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
- ------------------------------------- ---------- ---------------- -------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
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
====== ====== ======= ===== ======
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
================================================================================
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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
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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
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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
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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
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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
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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.
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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,
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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
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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.
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"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.
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"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.
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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
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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
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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
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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
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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.
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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
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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.
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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:
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(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;
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(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
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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
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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
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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;
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(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
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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;
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(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
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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
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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
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(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
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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
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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,
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
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
<PAGE>
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)
-------------------------
<TABLE>
<S> <C>
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 $
===========
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
(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
</TABLE>
2
<PAGE>
E. Net Income (Section 7.10)
-------------------------
<TABLE>
<S> <C>
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
</TABLE>
3
<PAGE>
Exhibit C
Existing Liens
None, other than those liens permitted under Section 7.14.
1
<PAGE>
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
<PAGE>
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
<PAGE>
Schedule 5.2
Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction of Percentage
Name Incorporation Ownership
<S> <C> <C>
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
</TABLE>
*Director's Shares exist for this Subsidiary
(1) Owned directly by Mc Holding S.A.
(2) Owned directly by Newport Ltd.
1
<PAGE>
Exhibit 21
NEWPORT CORPORATION
Subsidiaries of Registrant
<TABLE>
<CAPTION>
State or Country
Name of Subsidiary of Incorporation
- ------------------ ----------------
<S> <C>
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
</TABLE>
Page 41
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,456
<SECURITIES> 0
<RECEIVABLES> 23,857
<ALLOWANCES> 485
<INVENTORY> 28,326
<CURRENT-ASSETS> 65,454
<PP&E> 53,098
<DEPRECIATION> 30,104
<TOTAL-ASSETS> 104,411
<CURRENT-LIABILITIES> 21,139
<BONDS> 21,027
0
0
<COMMON> 3,132
<OTHER-SE> 57,526
<TOTAL-LIABILITY-AND-EQUITY> 104,411
<SALES> 132,594
<TOTAL-REVENUES> 132,594
<CGS> 74,844
<TOTAL-COSTS> 74,844
<OTHER-EXPENSES> 45,181
<LOSS-PROVISION> 134
<INTEREST-EXPENSE> 1,992
<INCOME-PRETAX> 10,094
<INCOME-TAX> 3,030
<INCOME-CONTINUING> 7,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,064
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.77
</TABLE>
