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, 1998
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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 94-0849175
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1791 Deere Avenue, Irvine, CA 92606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 863-3144
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Stated Value $0.35 per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $171,372,000 as of March 12, 1999.
The number of shares outstanding of each of the issuer's classes of common stock
as of March 12, 1999, was 9,154,885.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1999 are incorporated by reference into
Part III.
Page 1 of 47 Pages
Exhibit Index on Sequentially Numbered Page 23
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
optic 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.
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. ("MPI") further increasing its participation in
the semiconductor equipment and computer peripherals markets. In October 1998,
the Company acquired Environmental Optical Sensors, Inc ("EOSI"), further
strengthening its position as a leading provider of high precision assembly and
test equipment for the fast growing fiber optic communications marketplace. 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
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research test and 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 ultra-precise 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 thereby
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 have increased
the demand for high precision automated test and measurement equipment to
facilitate quality control. In addition, the intense competition within the
computer peripherals industry is driving 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 and
increasing the danger of the head bonding to the disk surface, which results in
disk failure. The Company's precision optics, mechanical components and
vibration isolation technology are integrated into hard disk texturing machines
that are used to create "landing zones" on hard disks for disk drive heads to
allow head/disk contact without such failure.
Page 3
Newport's high precision optical and mechanical components and vibration
isolation platforms as well as its precision motion subassemblies 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 system meets the automated inspection needs
and throughput requirements of disk drive head manufacturers. The Company also
has developed the LaserMAP 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 electronic 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, have rendered semiconductors more susceptible to minute manufacturing
defects, thus resulting in increased demand for precision equipment that
improves manufacturing yield 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 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.
The Company's sales to each of these markets have fluctuated and will likely
continue to fluctuate on a period to period basis as a consequence of a number
of factors, including the overall level of demand in each of those markets at
any given time and the level of acceptance of and demand for the Company's
products in each of those markets. These fluctuations may have a significant
impact upon the Company's overall revenues and profitability. In addition,
although the Company maintains an active development program to improve its
product offerings in each of those markets, there can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or enhancing its existing products for sale to such markets on a
timely or cost-effective basis.
Business Segments and Products
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The Company operates in three reportable business segments, two comprising
domestic operations, Components and Subassemblies, and Instruments and Systems.
The third reportable business segment is comprised of the Company's Europe
operations. The Company's Europe segment manufactures and distributes products
from both product groups and accounted for approximately 21% of the Company's
sales. Sales for the two domestic segments are discussed in further detail
below.
Page 4
The Components and Subassemblies segment manufactures and distributes products
consisting of Vibration Isolation Products, Manual Positioning Components, and
Optics. Combined, these products for this segment accounted for approximately
31% of the Company's 1998 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 by greatly reducing vibrations 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.
Manual Positioning Components Newport offers a comprehensive line of
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mechanical components compatible with, and complementary to, its vibration
isolation systems. These mechanical components include products such as
mirror mounts, holders, positioners, and other accessories which are basic
building blocks for experimental or prototype laser and optical systems. The
Company has developed and sells components for fiber optics,
telecommunications and sensors experimentation. Newport's products include a
micro interferometer, laser-to-fiber couplers and fiber optic positioners.
Newport'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.
Subassemblies The Company offers subassemblies that are manufactured by
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providing a value added combination of standard and custom products drawn from
the Company's components, optics, motion control and vibration control product
lines. Items are combined with additional engineering to create a more highly
integrated solution to meet customer needs. These solutions are often
subsystems of the Company's OEM customer's products. This product line offers
a strategic competitive advantage allowing the Company to differentiate itself
from competitors who only offer a limited product selection.
The Instruments and Systems segment manufactures and distributes products
consisting primarily of Motion Control Devices and Systems, Process Automation
Workstations for Photonics Packaging, Video-Based Measurement and Inspection
Systems, and Instruments. These products accounted for approximately 45% of the
Company's 1998 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/TM/ system
adds laser-welded attachment capability and is the
Page 5
industry's only industrial-class laser welding workstation for automated
pigtailing of optoelectronic components, and features Newport's proprietary
LaserHammer/TM/ weld-adjustment technology and fully automated process
sequencing capabilities.
Video-Based Measurement and Inspection Systems Newport offers a line of
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video-based measurement and inspection systems and accessories. These products
include video direct microscopes, Sprint/TM/, 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 heads. The LaserMAP software integrates video and laser technology for
critical dimensional measurement applications in the semiconductor, electronic
packaging, computer peripherals and medical device markets.
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, and light
sources. The Company designs and manufactures a majority of its electronic
products and 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.
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 technical catalogs, 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 English, French
and Japanese and mailed annually to more than 100,000 potential customers.
The Company's site on the World Wide Web (http://www.newport.com) addresses the
large and rapidly growing 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 form, technical/tutorial and
application related material, market surveys, sales information (including its
catalogs), the ability to purchase a majority of the Company's standard products
and comprehensive company and financial overviews.
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 its 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 commenced a sales force automation/customer information
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.
Page 6
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 national 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, 1998, the
Company had 29 company-employed field sales persons in the United States. The
company-employed field sales force is supplemented by 40 independent
representatives and distributors who are primarily dedicated to the Company's
Video-Based Measurement and Inspection Systems product line.
For its international markets, the Company's products are marketed through a
network of 25 company-employed field sales personnel based in France, Germany,
the United Kingdom, Switzerland, Italy, the Netherlands, Canada and Taiwan who
are supplemented by 35 independent representatives and distributors located in
countries where the Company does not have a direct presence. International
sales accounted for approximately 34.8%, 35.3% and 41.8% of total sales in 1998,
1997 and 1996, 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.
The Company has written agreements with its representatives and distributors.
In some cases exclusive authorization has been granted to these representatives
and distributors for sales of certain of the Company's products to a specific
geographic area. Agreements are generally renewable for successive one-year
terms. Either party can terminate the agreement without cause by 90 days
written notice to the other party or immediately by written notice to the other
party, upon the occurrence of certain specified events. Agreements are
generally not assignable without prior approval from the Company. Most
agreements are structured to provide representatives and distributors with sales
discounts off the Company's domestic list price. Distributors are also paid
commissions for sales of the Company's products. No single independent
representative or distributor accounted for more than 4% of the Company's
revenues in 1998 and all independent representatives and distributors combined
accounted for less than 10% of the Company's revenues in 1998.
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 4% of the Company's sales in 1998.
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 in several specialized markets 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 competes on the basis of the performance, quality and
reliability of its products, as well as on the basis of price and timely
manufacturing and delivery. The Company also competes with
Page 7
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 markets 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, Boulder, Colorado and Plymouth, Minnesota. The Company's
international manufacturing facilities are located in France. 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 completed products are produced to the
Company's specifications and carry the Company's logo.
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 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
Page 8
physics research market. In 1997 the Company introduced the DynamYX300 air-
bearing motion system targeted at the 300 millimeter semiconductor wafer
processing test equipment market, the ESP6000, 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. In 1998 the Company
introduced the AutoBar/TM/ Laser Diode Test Station, which adds the ability to
automatically test unmounted laser diode chips and laser bars to the Company's
line of test equipment for the fiber optic communication industry. The Company
also introduced the MAT350/TM/ semiconductor wafer positioning system as a
mid-range companion to the ultra-precision DynamYX300 motion system, the
UNIDRIVE6000/TM/ Universal Motor Driver, an intelligent motor driver that works
with the ESP6000 motion controller to automatically configure itself, and the RV
series of high performance annular rotation stages designed for test,
measurement, inspection and alignment applications where rotary motion is
required. In addition, the Company introduced its models 8016, 5600 and 3150
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 not be
asserted in the future, which claims could materially adversely affect the
Company's business, operating results or financial condition, regardless of the
outcome.
Employees
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As of December 31, 1998, the Company had 810 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 $22.5 million, $22.6
million and $20.7 million at December 31, 1998, 1997 and 1996, respectively.
The Company manufactures 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.
Page 9
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 owned facilities at Beaune and
La Boulonnie, France and in leased facilities at San Luis Obispo, California,
Boulder, Colorado and Plymouth, Minnesota and leases office space in Santa
Clara, California for its Western Region sales, service and application center.
The Company owns a sales and administration office in Evry, France and 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, currently located
at leased facilities in the Netherlands, is scheduled to be relocated to the
Company's facility in Beaune, France during the second quarter of 1999. 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
Garden City, New York manufacturing operations to Irvine, California and leased
the New York property. In 1998, the Company sold this property for
approximately $2.0 million.
ITEM 3 Legal Proceedings
- ------ -----------------
The Company is not a party to any material legal proceedings other than routine
litigation incidental to its business.
ITEM 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
Page 10
PART II
ITEM 5 Market For the Registrant's Common Equity and Related Security Holder
- ------ ---------------------------------------------------------------------
Matters
-------
Price Range of Common Stock
- ---------------------------
The Company's common stock is traded on the NASDAQ National Market under NASDAQ
symbol NEWP. As of December 31, 1998, the Company had 1,557 common stockholders
of record. Refer to Note 15, Supplementary Quarterly Consolidated Financial
Data (Unaudited), of Notes to Consolidated Financial Statements on page 42 for
quarterly share price and dividend payments.
Sales of Unregistered Securities
- --------------------------------
In May 1998 the Company sold and issued 2,000 shares of the Company's common
stock to an individual for cash consideration of $16,380.
Page 11
ITEM 6 Selected Financial Data
- ------ -----------------------
The following table presents selected financial data of the Company and its
subsidiaries as of and for the years ended December 31, 1998, 1997, 1996, 1995,
and 1994, restated to include financial information of ROI and LCI which were
accounted for as poolings of interests
(In thousands, except percent, per share and worldwide employment):
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
FOR THE YEAR:
Net sales $134,359 $132,594 $119,910 $101,961 $94,201
Cost of sales 75,491 74,844 67,103 55,421 51,811
-------- -------- -------- -------- -------
Gross profit 58,868 57,750 52,807 46,540 42,390
Selling, general and administrative 33,017 35,825 36,741 34,441 32,240
Research and development 11,738 9,490 8,204 6,765 5,371
-------- -------- -------- -------- -------
Income from operations 14,113 12,435 7,862 5,334 4,779
Interest expense (1,891) (1,992) (1,931) (1,593) (1,782)
Other income (expense), net 121 (349) 477 1,137 1,839
-------- -------- -------- -------- -------
Income before income taxes 12,343 10,094 6,408 4,878 4,836
Income tax provision 3,365 3,030 1,705 1,003 1,654
-------- -------- -------- -------- -------
Net income $ 8,978 $ 7,064 $ 4,703 $ 3,875 $ 3,182
======== ======== ======== ======== =======
Percent of net sales:
Gross profit 43.8% 43.6% 44.0% 45.6% 45.0%
Selling, general and administrative 24.6 27.0 30.6 33.8 34.2
Research and development 8.7 7.2 6.9 6.6 5.7
Income from operations 10.5 9.4 6.5 5.2 5.1
Net income 6.7 5.3 3.9 3.8 3.4
PER SHARE: (1)
Net income
Basic $ 1.00 $ 0.80 $ 0.54 $ 0.47 $ 0.39
Diluted 0.96 0.77 0.52 0.45 0.38
Dividends paid 0.04 0.04 0.04 0.04 0.04
Equity (diluted) 7.56 6.61 6.39 6.18 5.57
AT YEAR END:
Cash and marketable securities $ 5,335 $ 7,456 $ 3,375 $ 1,524 $ 3,624
Customer receivables, net 25,798 23,372 23,418 19,767 18,755
Inventories 31,260 28,326 28,954 22,744 21,432
Other current assets 6,713 7,850 6,782 4,868 4,512
-------- -------- -------- -------- -------
Current assets 69,106 67,004 62,529 48,903 48,323
Investments and other assets 6,451 5,830 5,191 4,557 4,441
Property, plant and equipment 22,696 22,994 24,045 22,327 23,044
Goodwill, net 12,220 10,133 11,612 8,161 8,846
-------- -------- -------- -------- -------
Total assets $110,473 $105,961 $103,377 $ 83,948 $84,654
======== ======== ======== ======== =======
Current liabilities $ 20,608 $ 22,689 $ 20,787 $ 20,330 $26,604
Long-term debt 17,536 21,027 23,464 9,899 11,117
Other liabilities 1,359 1,587 1,697 1,032 282
Stockholders' equity 70,970 60,658 57,429 52,687 46,651
-------- -------- -------- -------- -------
Total liabilities and equity $110,473 $105,961 $103,377 $ 83,948 $84,654
======== ======== ======== ======== =======
MISCELLANEOUS STATISTICS
Working capital $ 48,498 $ 44,315 $ 41,742 $ 28,573 $21,719
Common shares outstanding 9,119 8,951 8,890 8,699 8,441
Worldwide employment at end of period 810 775 746 662 650
Sales per employee $ 166 $ 171 $ 161 $ 154 $ 145
(1) Net income and equity per share (diluted) for all periods prior to 1997
have been restated as necessary to conform with the requirements of
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Page 12
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
MikroPrecision Instruments, Inc. ("MPI") for all periods and Environmental
Optical Sensors, Inc. ("EOSI") for 1998, which were accounted for using the
purchase method, as described more fully in Note 2 to the consolidated financial
statements on page 33 of this Form 10-K.
RESULTS OF OPERATIONS
- ---------------------
Financial Analysis The following table sets forth, for the periods indicated,
- ------------------
certain income and expense items expressed as a percent of the Company's net
sales and as period-to-period percent increases or decreases:
Period-to-Period
Percent of Net Sales Increase (Decrease)
---------------------- -------------------
1998 1997 1996 1998 1997
------ ------ ------ ------ -------
Net sales 100.0% 100.0% 100.0% 1.3% 10.6%
Cost of sales 56.2 56.4 56.0 0.9 11.5
----- ----- -----
Gross profit 43.8 43.6 44.0 1.9 9.4
Selling, general and
administrative expense 24.6 27.0 30.6 (7.8) (2.5)
Research and
development expense 8.7 7.2 6.9 23.7 15.7
----- ----- -----
Income from operations 10.5 9.4 6.5 13.5 58.2
Interest expense (1.4) (1.5) (1.6) (5.1) 3.2
Other income (expense), net 0.1 (0.3) 0.4 134.7 (173.2)
----- ----- -----
Income before income taxes 9.2 7.6 5.3 22.3 57.5
Income tax provision 2.5 2.3 1.4 11.1 77.7
----- ----- -----
Net income 6.7 5.3 3.9 27.1 50.2
===== ===== =====
Net Sales For 1998, 1997 and 1996, the Company's net sales totaled
- ---------
$134.4 million, $132.6 million and $119.9 million, respectively. Net sales for
1998 increased $1.8 million compared with 1997, with increases of $1.9 million
in domestic markets partially offset by decreases of $0.1 million in
international markets (net of $0.9 million unfavorable exchange rate effect).
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.
Domestic sales totaled $87.6 million, $85.7 million and $69.8 million for 1998,
1997 and 1996, respectively. For 1998, sales increased $1.9 million compared
with 1997. This growth was principally attributable to sales increases of
$5.4 million and $2.1 million to the fiber optic communications and research
markets, respectively, partially offset by sales declines in the semiconductor
and computer peripherals markets of $3.6 million and $2.1 million, respectively.
The domestic semiconductor and
Page 13
computer peripherals markets were negatively impacted by the economic situation
in Asia and overcapacity throughout much of 1998, which resulted in lower demand
for capital equipment the Company supplies to these markets. Domestic sales in
1997 increased $15.9 million versus 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 sales to other general
metrology customers.
International sales totaled $46.8 million, $46.9 million and $50.1 million for
1998, 1997 and 1996, respectively. Sales in 1998 decreased $0.1 million versus
1997. Sales to European markets, reflecting the Company's efforts to expand
commercial market penetration, grew $2.7 million, or 10%, over 1997, with
France, Germany, the Netherlands, the United Kingdom and Switzerland accounting
for most of the increase. Negative foreign exchange rate effects on European
sales totaled $0.7 million. Sales to Asian markets declined $5.5 million, or
37%, with Hong Kong, Korea, Taiwan and the ASEAN countries accounting for most
of the decrease and sales into Japan increasing $0.7 million. Sales into Canada
and Latin America grew $2.7 million, or 82%, over 1997. Canada and Latin
America sales were also negatively impacted by a foreign exchange rate effect,
which totaled $0.2 million. For 1997, international sales 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 in 1997 as compared with 1996. 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.
The order rate was essentially flat year over year as strong growth in the fiber
optic communications market segment was offset by declines in the Company's
other segments. Management expects improvements in sales in 1999 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 1999
will increase over 1998; however, such growth is dependent on many factors and
cannot be assured.
Operating Income Total cost of sales and operating expenses for 1998, 1997
- ----------------
and 1996 were $120.2 million, $120.2 million and $112.0 million, respectively.
Gross margin was 43.8%, 43.6% and 44.0% for 1998, 1997 and 1996, respectively.
The Company's gross margin was essentially flat in 1998 versus 1997. The
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,
which generally have lower margins, but also lower sales and marketing expenses.
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 1999 as a result of increased sales volume and continued manufacturing
productivity improvements Company-wide.
Selling, general and administrative (SG&A) expenses totaled $33.0 million, $35.8
million and $36.7 million for 1998, 1997 and 1996, respectively, representing
24.6%, 27.0% and 30.6% of net sales in the respective years. SG&A decreased in
1998 versus 1997 by $2.8 million primarily due to decreased costs for incentive
compensation programs, lower advertising expenses, reduced sales and marketing
expenses in Europe that resulted from changes made in 1997 to the European sales
organization and favorable exchange rate effect in Europe of $0.3 million. The
$0.9 million decrease in SG&A in 1997 compared with 1996 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
Page 14
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% compared with 1996. Management anticipates that SG&A expenses in total
will increase in 1999 but will decline as a percent of sales as a result of
increased sales volume.
Research and development (R&D) expenses totaled $11.7 million, $9.5 million and
$8.2 million for 1998, 1997 and 1996, respectively. R&D expenses represented
8.7%, 7.2% and 6.9% of net sales in 1998, 1997 and 1996, respectively. The
increases in R&D expenses in 1998 compared with 1997 and in 1997 compared with
1996, were attributable primarily to increased personnel costs related to the
development of a number of new products and product enhancements including
extending the range of the Company's automated packaging and test equipment
product lines 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 for the Company's
Instruments and Systems segment. 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 $14.1 million, $12.4 million and $7.9 million for 1998,
1997 and 1996, respectively. Operating income represented 10.5%, 9.4% and 6.5%
of net sales in 1998, 1997 and 1996, respectively. Management anticipates that
operating income will improve in 1999, 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 $1.9 million, $2.0 million and
- ----------------
$1.9 million for 1998, 1997 and 1996, respectively. Although a majority of the
Company's debt is at fixed interest rates, the Company anticipates interest
expense for 1999 will decrease slightly from 1998 because its long term debt
base will be reduced in each of the second and fourth quarters when principal
payments of $1.5 million are due.
Other Income/(Expense), Net Interest and dividend income totaled
- ---------------------------
$0.5 million, $0.2 million and $0.1 million for the years 1998, 1997 and 1996,
respectively. Exchange losses were $0.3 million and $0.5 million in 1998 and
1997, respectively, versus exchange gains of less than $0.1 million in 1996.
The Company recorded investment gains totaling $0.3 million in 1998 as well as
other expense of $0.4 million. Minimal investment gains were recorded in 1997.
There were no investment gains recorded in 1996.
Taxes Based On Income The effective tax rates for 1998, 1997 and 1996 were
- ---------------------
27.3%, 30.0% and 26.6%, respectively. The decrease in the effective tax rate
for 1998 compared with 1997 was primarily the result of improved profitability
at the Company's European operations resulting in the increased utilization of
foreign tax loss carryforwards. Management anticipates that the Company's
effective tax rate in 1999 will remain at approximately the same level as the
effective tax rate in 1998 as a result of an expected continuation of benefits
from the utilization of foreign tax loss carryforwards.
Employment Worldwide employment of the Company totaled 810, 775 and 746 at
- ----------
December 31, 1998, 1997 and 1996, respectively. The increase in employment at
December 31, 1998, was a result of the acquisition of EOSI and the expansion of
the Company's research and development efforts. Sales per employee approximated
$166,000, $171,000 and $161,000 during 1998, 1997 and 1996, respectively.
Page 15
Stockholders' Equity Stockholders' equity increased from $57.4 million ($6.39
- --------------------
per diluted share) as of December 31, 1996, to $60.7 million ($6.61 per diluted
share) as of December 31, 1997 and to $71.0 million ($7.56 per diluted share) as
of December 31, 1998. The increases in 1998 and 1997 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 repurchase program. The Company
paid dividends totaling $0.4 million during each of the years 1998, 1997 and
1996, respectively. This represents 4 cents per share for each year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities of $7.0 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. Customer receivables increased 10.4% in 1998, while sales grew by
1.3%. Inventories increased 10.4% in 1998 over 1997 levels in part because of
production planning associated with the Company's goal of 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. Accounts payable increased 1.6% in 1998 compared with
1997 as a result of higher inventory levels offset in part by lower operating
expenses.
Net cash used in investing activities of $6.7 million was attributable
principally to the Company's purchases of property, plant and equipment
($5.4 million) and acquisition costs associated with the purchase of EOSI
($3.6 million), partially offset by the net proceeds on the sale of an equity
investment and other property ($3.0 million). The Company's expenditures for
the purchase of property, plant and equipment aggregated $5.0 million and
$5.8 million for 1997 and 1996, respectively.
Net cash used in financing activities of $2.4 million was attributable
principally to the repurchase of stock under the Company's share repurchase
program and by a decrease in long-term borrowings, 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 Company repurchased 172,000 and 290,000 of such
shares in 1998 and 1997, respectively.
At December 31, 1998, the Company had in place a $25.0 million unsecured line of
credit expiring December 31, 2000 with interest at prime, or LIBOR plus 1.0% and
an unused line fee of 20 basis points to support its worldwide operations. At
December 31, 1998, there were no amounts outstanding under the line of credit
with $24.8 million available after considering outstanding letters of credit.
The Company believes its current working capital position together with
estimated cash flows from operations and its existing credit availability are
adequate to fund operations in the ordinary course of business, anticipated
capital expenditures, debt payment requirements, and continuation of its share
repurchase program over at least the next year and for the foreseeable future.
However, this belief is based upon many assumptions and is subject to numerous
risks (see "Additional Factors That May Affect Operating Results," below), and
there can be no assurance that the Company will not require additional funding
in the future.
Although the Company has no present agreements or commitments with respect to
any material acquisitions of other businesses, products, product rights or
technologies, the Company continues to evaluate acquisitions of products,
technologies or companies that complement the Company's business and may make
such acquisitions in the future, and there can be no assurance that the Company
will not need to obtain additional sources of capital to finance any such
acquisitions.
Page 16
Impact of Year 2000
Certain business operations software programs were written using two digits
rather than four to define the applicable year. As a result, those software
programs are time-sensitive and recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including but not limited to, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company initiated a review of its business operations software requirements
in early 1996 as part of the normal course of upgrading its systems to support
current and anticipated growth. Among the criteria for acquiring new or
upgraded software was that it be Year 2000 compliant. In 1997 the Company
acquired new operating software that is Year 2000 compliant. Testing and
implementation occurred throughout 1998 with final conversion at year-end. Cost
of acquiring the upgraded computer hardware and software was approximately $1.2
million and has been capitalized.
Newport sells certain products that include various software applications. The
Company has determined that, since January 1, 1996, its product software has
been Year 2000 compliant. The Company has also requested assurance from its
goods and services providers that they are, or have programs in place to be,
Year 2000 compliant.
The Company established an Information Technology Steering Committee, which
reports directly to the President and Chief Executive Officer. The committee
members include executive management and employees with expertise from various
disciplines including, but not limited to, information technology, engineering,
finance, customer service, communications, facilities, procurement and human
resources. The committee is responsible for addressing Year 2000 issues
associated with the Company's (1) business application systems including, but
not limited to, the Company's customer service, operations and financial systems
and end-user applications; (2) embedded systems, including equipment that
operates such items as the Company's telecommunications and facilities;
(3) software applications embedded in certain of the Company's products;
(4) vendor and supplier relationships; and (5) contingency planning.
While the Company anticipates no major interruption of its business activities,
that will be dependent in part, upon the ability of third parties to be
Year 2000 compliant. The Company's most likely potential risk is the inability
of some customers to order and/or pay on a timely basis and/or the inability of
some suppliers to receive orders and/or deliver on a timely basis. Although the
Company has implemented the actions described above to address third party
issues, it has no direct ability to influence the compliance actions by such
parties. Accordingly, while the Company believes its actions in this regard
should reduce Year 2000 risks, it is unable to eliminate them or to estimate the
ultimate effect Year 2000 risks may have.
While the Company currently believes that neither the software developed by it
as part of its products nor the software licensed by it for its internal use
will be materially affected by Year 2000 problems, there can be no assurance
that the Company's product software, its internal computer systems and networks
or those of its key vendors, developers, distributors and customers will not be
affected by such Year 2000 issues, which could have a material adverse effect on
the Company's business, operating results and financial condition.
European Economic and Monetary Union (EMU) New European Currency
On January 1, 1999, member countries of the European Economic and Monetary Union
established fixed conversion rates between their existing national currencies
and one common currency the euro. The euro trades on currency exchanges and,
during a three-year dual-currency transition period, either the euro or the
national currencies may be used in business transactions. Beginning in January
2002, new euro-denominated bills and coins will be issued, and the national
currencies will be withdrawn from circulation. The Company's operating
subsidiaries affected by the euro conversion have established plans to address
the systems and business issues raised by the euro currency conversion. These
issues include, among
Page 17
others, (1) the need to adapt computer and other business systems and equipment
to accommodate euro-denominated transactions; and (2) the competitive impact of
cross-border price transparency, which may make it more difficult for businesses
to charge different prices for the same products on a country-by-country basis,
particularly once the euro currency is issued in 2002. While, the Company
anticipates that the euro conversion will not have a material adverse impact on
its financial condition or results of operations, there can be no assurance that
the Company's key vendors, customers and distributors will not be affected by
such euro currency issues, which could have an adverse effect on the Company's
business, operating results and financial condition. Further, there can be no
assurance that the currency market volatility will not increase, which could
have an adverse effect on the Company's euro exposures.
Adoption of Statement of Financial Accounting Standards No. 130
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. SFAS No. 130 requires unrealized
gains or losses on foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
Adoption of Statement of Financial Accounting Standards No. 131
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131). 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. While adoption of SFAS No. 131 results
in more reported segments (see Note 13) than previously reported, it does not
have an impact on the Company's results of operations, financial position or
cash flow.
Pending Adoption of Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards
for recording derivatives in interim and annual financial reports requiring that
all derivative instruments be recorded as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999, and therefore the Company will adopt the new requirements effective with
the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31,
2000. Management does not anticipate that the adoption of SFAS No. 133 will
have a significant impact on the Company's results of operations, financial
position or cash flow.
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
Page 18
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 1998, 1997 and 1996, international revenues, which include export sales,
accounted for approximately 34.8%, 35.3% and 41.8%, 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 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.
Page 19
Competition
Intense competition exists among manufacturers of precise motion, measurement
and automation products, and the Company believes that competition 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 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.
Page 20
Integration of Acquisitions
The Company's recent growth has been partly 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.
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed is foreign exchange rates
which may generate translation and transaction gains and losses.
Foreign Currency Risk
Operating in international markets sometimes involves exposure to volatile
movements in currency exchange rates. The economic impact of currency exchange
rate movements on the Company is complex because such changes are often linked
to variability in real growth, inflation, interest rates, governmental actions
and other factors. These changes, if material, may cause the Company to adjust
its financing and operating strategies. Consequently, isolating the effect of
changes in currency does not incorporate these other important economic factors.
International operations constituted less than 1% of the Company's 1998
consolidated operating profit. As currency exchange rates change, translation
of the income statements of international operations into U.S. dollars affects
year-over-year comparability of operating results. The Company does not
generally hedge translation risks because cash flows from international
operations are generally reinvested locally. The Company does not enter into
hedges to minimize volatility of reported earnings because it does not believe
it is justified by the exposure or the cost.
Changes in currency exchange rates that would have the largest impact on
translating future international operating profit include the euro, British
pound, Canadian dollar and Swiss franc. The Company estimates that a 10% change
in foreign exchange rates would not have a material impact on reported operating
profit. The Company believes that this quantitative measure has inherent
limitations because, as discussed in the first paragraph of this section, it
does not take into account any governmental actions or changes in either
customer purchasing patterns or financing and operating strategies.
Transaction gains and losses arise from monetary assets and liabilities
denominated in currencies other than a subsidiary's functional currency. Net
foreign exchange gains and losses were not material to the Company's earnings
for the last three years. The impact of unrealized foreign exchange translation
gains and losses is disclosed in the Consolidated Statement of Comprehensive
Income on page 30.
Interest Rate Risk
The Company has no significant exposure to interest rate risk as its primary
debt instruments carry fixed interest rates.
The sensitivity analyses presented in the interest rate and foreign exchange
discussions above disregard the possibility that rates can move in opposite
directions and that gains from one category may or may not be offset by losses
from another category and vice versa.
Page 21
ITEM 8 Financial Statements and Supplementary Data
- ------ -------------------------------------------
Consolidated financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, the
report of independent auditors thereon and the Company's unaudited quarterly
financial data for 1998 and 1997 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, 1998 in connection
with its May 20, 1999 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, 1998 in connection
with its May 20, 1999 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, 1998 in connection
with its May 20, 1999 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 shall
be accelerated and such options shall be exercisable during the term of the
Consulting Agreement and (2) 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 22
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K
- ------- ----------------------------------------------------------------
(a) 1. Financial Statements and Financial Statement Schedules
----------------------------------------------------------
Report of Independent Auditors 26
FINANCIAL STATEMENTS:
---------------------
Consolidated income statement
for the years ended December 31, 1998, 1997 and 1996 27
Consolidated balance sheet
at December 31, 1998 and 1997 28
Consolidated statement of cash flows
for the years ended December 31, 1998, 1997 and 1996 29
Consolidated statement of stockholders' equity
for the years ended December 31, 1998, 1997 and 1996 30
Consolidated statement of comprehensive income
for the years ended December 31, 1998, 1997 and 1996 30
Notes to consolidated financial statements 31-42
FINANCIAL STATEMENT SCHEDULES:
------------------------------
II - Consolidated valuation accounts 43
All other schedules are omitted as the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
the consolidated financial statements or notes thereto.
2. Exhibits
------------
The exhibits set forth below are filed as part of this Annual Report:
Exhibit 3.1 Restated Articles of Incorporation of Newport
Corporation, a Nevada Corporation, as amended to date
(incorporated by reference to exhibit in the Company's
1987 Proxy Statement).
Exhibit 3.2 Restated Bylaws of Newport Corporation, a Nevada
Corporation, as amended to date (incorporated by
reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the year ended July 31, 1992).
Exhibit 10.1 Lease Agreement dated March 27, 1991, as amended,
pertaining to premises located in Irvine, California
(incorporated by reference to Exhibit 10.1 of the
Company's Annual Report on Form 10-K for the year
ended July 31, 1992).
Exhibit 10.2 1992 Incentive Stock Plan (incorporated by reference
to exhibit in the Company's 1992 Proxy Statement).*
Exhibit 10.3 Employee Stock Purchase Plan, as amended (incorporated
by reference to Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).*
Page 23
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K
- ------- ----------------------------------------------------------------
(Cont'd)
--------
Exhibit 10.4 Form of Severance Compensation Agreement between
Newport Corporation and certain Executive Officers
(incorporated by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1993).*
Exhibit 10.5 Note Agreement dated as of May 2, 1996 between Newport
Corporation and The Prudential Insurance Company of
America (incorporated by reference to Exhibit 10.8 of
the Company's Form 10-Q for the quarter ended
March 31, 1996).
Exhibit 10.6 Severance Compensation Agreement dated as of April 8,
1996, between Newport Corporation, a Nevada
Corporation, and Robert J. Phillippy, Vice President
and General Manager (incorporated by reference to
Exhibit 10.2 of the Company's Form 10-Q for the
quarter ended September 30, 1996).*
Exhibit 10.7 Severance Compensation Agreement dated as of May 1,
1996, between Newport Corporation, a Nevada
Corporation, and Robert G. Deuster, President and
Chief Executive Officer (incorporated by reference to
Exhibit 10.3 of the Company's Form 10-Q for the
quarter ended September 30, 1996).*
Exhibit 10.8 Consulting Agreement dated November 7, 1997 between
Newport Corporation, a Nevada Corporation, and Richard
E. Schmidt, a director of the Company (incorporated by
reference to Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).
Exhibit 10.9 Credit Agreement dated as of February 26, 1998 between
Newport Corporation and ABN AMRO Bank N.V., Los
Angeles International Branch (incorporated by
reference to Exhibit 10.15 of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Auditors
Exhibit 27 Financial Data Schedule (Article 5 of Regulation S-X)
-------------
* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(a) (3) of Form 10-K
(b) Reports on Form 8-K
-------------------
The Company filed no Reports on Form 8-K during the quarter ended
December 31, 1998.
Page 24
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 22, 1999
- ------------------------------------------------------------------------- --------------
Robert G. Deuster, President and Chief Executive Officer Date
(Principal Executive Officer)
/S/ ROBERT C. HEWITT March 22, 1999
- ------------------------------------------------------------------------- --------------
Robert C. Hewitt, Vice President, Chief Financial Officer and Secretary Date
(Chief Financial Officer)
/S/ WILLIAM R. ABBOTT March 22, 1999
- ------------------------------------------------------------------------- --------------
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 22, 1999
- ------------------------------------------------------------------------- --------------
R. Jack Aplin, Member of the Board Date
/S/ ROBERT L. GUYETT March 22, 1999
- ------------------------------------------------------------------------- --------------
Robert L. Guyett, Member of the Board Date
/S/ C. KUMAR N. PATEL March 22, 1999
- ------------------------------------------------------------------------- --------------
C. Kumar N. Patel, Member of the Board Date
/S/ KENNETH F. POTASHNER March 22, 1999
- ------------------------------------------------------------------------- --------------
Kenneth F. Potashner, Member of the Board Date
/S/ RICHARD E. SCHMIDT March 22, 1999
- ------------------------------------------------------------------------- --------------
Richard E. Schmidt, Member of the Board Date
/S/ JOHN T. SUBAK March 22, 1999
- ------------------------------------------------------------------------- --------------
John T. Subak, Member of the Board Date
Page 25
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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Newport
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, 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.
/S/ ERNST & YOUNG LLP
Orange County, California
January 26, 1999
Page 26
NEWPORT CORPORATION
Consolidated Income Statement
(In thousands, except per share amounts) Years Ended December 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
Net sales $134,359 $132,594 $119,910
Cost of sales 75,491 74,844 67,103
-------- -------- --------
Gross profit 58,868 57,750 52,807
Selling, general and administrative expense 33,017 35,825 36,741
Research and development expense 11,738 9,490 8,204
-------- -------- --------
Income from operations 14,113 12,435 7,862
Interest expense (1,891) (1,992) (1,931)
Other income (expense), net 121 (349) 477
-------- -------- --------
Income before income taxes 12,343 10,094 6,408
Income tax provision 3,365 3,030 1,705
-------- -------- --------
Net income $ 8,978 $ 7,064 $ 4,703
======== ======== ========
Net income per share
Basic $ 1.00 $ 0.80 $ 0.54
Diluted $ 0.96 $ 0.77 $ 0.52
Number of shares used to calculate
net income per share
Basic 8,989 8,865 8,700
Diluted 9,384 9,179 8,984
Dividends per share $ 0.04 $ 0.04 $ 0.04
See accompanying notes.
Page 27
NEWPORT CORPORATION
Consolidated Balance Sheet
(In thousands, except share data) December 31,
--------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,335 $ 7,456
Customer receivables, net 25,798 23,372
Other receivables 2,367 2,529
Inventories 31,260 28,326
Deferred tax assets 2,703 3,256
Other current assets 1,643 2,065
-------- --------
Total current assets 69,106 67,004
Investments and other assets 6,451 5,830
Property, plant and equipment, at cost, net 22,696 22,994
Goodwill, net 12,220 10,133
-------- --------
$110,473 $105,961
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,180 $ 6,082
Accrued payroll and related expenses 5,566 5,855
Taxes based on income 95 2,056
Current portion of long-term debt 3,699 2,380
Other current liabilities 5,068 6,316
-------- --------
Total current liabilities 20,608 22,689
Long-term debt 17,536 21,027
Other liabilities 1,359 1,587
Commitments (Note 9)
Stockholders' equity:
Common stock, $0.35 stated value, 20,000,000 shares authorized;
9,119,000 shares issued and outstanding at December 31, 1998;
8,951,000 shares at December 31, 1997 3,192 3,132
Capital in excess of stated value 8,573 8,026
Unamortized deferred compensation (548) (519)
Unrealized translation loss (3,916) (5,036)
Retained earnings 63,669 55,055
-------- --------
Total stockholders' equity 70,970 60,658
-------- --------
$110,473 $105,961
======== ========
See accompanying notes.
Page 28
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(In thousands) Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
Operating activities:
Net income $ 8,978 $ 7,064 $ 4,703
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,075 5,830 6,062
Increase in provision for losses on
receivables, inventories and investments 1,073 1,906 1,226
Deferred income taxes 704 87 (215)
Other non-cash items, net (481) 345 (84)
Changes in operating assets and liabilities:
Receivables (1,532) (1,269) (2,841)
Inventories (3,472) (2,051) (6,596)
Other current assets (196) (1,261) (979)
Other assets 280 (78) -
Accounts payable and other accrued expenses (2,107) 925 2,106
Taxes based on income (2,283) 798 112
Other, net (1) 1 (108)
------- ------- --------
Net cash provided by operating activities 7,038 12,297 3,386
------- ------- --------
Investing activities:
Purchases of property, plant and equipment (5,378) (5,034) (5,844)
Disposition of property, plant and equipment 2,323 396 201
Acquisition of business, net of cash acquired (3,561) (879) (4,442)
Proceeds from sales of investments
and marketable securities 720 - -
Other, net (779) (728) (436)
------- ------- --------
Net cash used in investing activities (6,675) (6,245) (10,521)
Financing activities:
Proceeds from debt placement - - 21,605
Decrease in long-term borrowings (2,360) (790) (13,237)
Cash dividends paid (362) (357) (351)
Repurchase of common stock (2,879) (3,996) -
Issuance of common stock under employee
agreements including associated tax benefit 3,218 2,910 1,013
------- ------- --------
Net cash provided by (used in) financing activities (2,383) (2,233) 9,030
------- ------- --------
Effect of foreign exchange rate changes on cash (101) 262 (44)
------- ------- --------
Increase (decrease) in cash and cash equivalents (2,121) 4,081 1,851
Cash and cash equivalents at beginning of year 7,456 3,375 1,524
------- ------- --------
Cash and cash equivalents at end of year $ 5,335 $ 7,456 $ 3,375
======= ======= ========
See accompanying notes.
Page 29
NEWPORT CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands) Years Ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
Common shares:
Shares outstanding at beginning of year 8,951 8,890 8,699
Issuance of common shares 340 351 191
Repurchase of common shares (172) (290) -
------- ------- -------
Shares outstanding at end of year 9,119 8,951 8,890
======= ======= =======
Common stock:
Balance at beginning of year $3,132 $3,110 $3,045
Issuance of common stock 113 117 49
Grants of restricted stock, net 7 7 16
Repurchase of common stock (60) (102) -
------- ------- -------
Balance at end of year 3,192 3,132 3,110
======= ======= =======
Capital in excess of stated value:
Balance at beginning of year 8,026 8,959 7,609
Issuance of common stock 3,105 2,793 964
Grants of restricted stock, net 261 168 386
Repurchase of common stock (2,819) (3,894) -
------- ------- -------
Balance at end of year 8,573 8,026 8,959
======= ======= =======
Unamortized deferred compensation:
Balance at beginning of year (519) (548) (369)
Grants of restricted stock, net (268) (175) (402)
Amortization of deferred compensation 239 204 223
------- ------- -------
Balance at end of year (548) (519) (548)
======= ======= =======
Unrealized translation loss:
Balance at beginning of year (5,036) (2,442) (1,773)
Unrealized translation gain (loss) 1,120 (2,594) (669)
------- ------- -------
Balance at end of year (3,916) (5,036) (2,442)
======= ======= =======
Retained earnings:
Balance at beginning of year 55,055 48,350 44,175
Dividends (364) (359) (528)
Net income 8,978 7,064 4,703
------- ------- -------
Balance at end of year 63,669 55,055 48,350
======= ======= =======
Total stockholders' equity $70,970 $60,658 $57,429
======= ======= =======
Consolidated Statement of Comprehensive Income
(In thousands) Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Net Income $ 8,978 $ 7,064 $ 4,703
Unrealized translation gain (loss) 1,120 (2,594) (669)
------- -------- -------
Comprehensive income $10,098 $ 4,470 $ 4,034
======= ======== =======
See accompanying notes.
Page 30
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 upon customer acceptance after all significant
obligations have been met, collectability is probable and title has passed to
the customer. Customers have 30 days from the original invoice date (60 days
for international customers) to return a catalog product purchase for exchange
or credit. The catalog product must be returned in its original condition and
meet certain other criteria. Custom configured and certain other products as
defined in the Company's Customer Satisfaction and Product Guarantee Policy
cannot be returned. Unless otherwise stated in its product literature, the
Company provides a one-year warranty from the original invoice date on all
product material and workmanship. Defective products will be either repaired or
replaced, at the Company's option, upon meeting certain criteria.
Income Taxes The Company recognizes the amount of current and deferred taxes
payable or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements and as measured by
the provisions of enacted laws.
Depreciation and Amortization Property, plant and equipment is depreciated on a
straight line basis over estimated useful lives of the assets ranging from three
to thirty one years. In 1997 the Company changed the depreciation method for
certain machinery and equipment from an accelerated method based on a declining
balance formula to a straight line method to conform with the method used to
depreciate its other machinery and equipment. The effect of this change on the
Company's 1997 financial position, results of operations and cash flow was not
material nor does the Company expect this change to have a material impact on
future periods. Leasehold improvements are generally amortized over the term of
the lease.
Advertising The Company expenses the costs of advertising as incurred, except
for direct-response advertising, which is capitalized and amortized over its
expected period of future benefits. Direct-response advertising consists
primarily of product catalogs. The Company uses these product catalogs as its
principal marketing tools for the scientific market. Sales to this market
approximate 35% of the Company's annual revenues. The catalogs provide detailed
product information as well as extensive technical and applications data. The
catalogs are published in English, French and Japanese languages and are mailed
worldwide to more than 100,000 potential customers.
The Company believes that after a period of approximately 12 months, no future
benefit can be realized from these catalogs due to price changes, technological
enhancements to existing products and new product releases. As such, the
Company has established a benefit period of 12 months and amortizes catalog
costs
Page 31
over this timeframe. Advertising materials of $0.2 million and $0.6
million were reported as assets at December 31, 1998 and 1997, respectively.
Advertising expense was $1.4 million, $1.6 million and $1.7 million for 1998,
1997 and 1996, 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
periods prior to 1997 have been restated as necessary to conform with the
requirements of 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.
Fair Values of Financial Instruments Fair values of cash and cash equivalents,
short-term borrowings and the current portion of long-term debt approximate the
carrying value because of the short period of time to maturity. The fair value
of long-term debt approximates its carrying value because their rates of
interest approximate current market rates. The carrying amounts of the foreign
exchange contracts, if any, equal fair value and are adjusted each balance sheet
date for changes in exchange rates.
Investments Nonmarketable investments are stated at cost, adjusted for the
Company's proportionate share of undistributed earnings.
Intangible Assets Goodwill, representing the excess of the purchase price over
the fair value of the net assets of acquired entities, is amortized on a
straight-line basis over its estimated useful life of fifteen to twenty years.
Patents are amortized using the straight-line method over the lives of the
patents. Licenses are amortized on a straight-line basis over the estimated
economic lives of the related assets. Accumulated amortization of intangible
assets, principally goodwill, totaled $4.5 million and $3.5 million at December
31, 1998 and 1997, respectively.
Foreign Currency Balance sheet accounts denominated in foreign currency are
translated at exchange rates as of the date of the balance sheet and income
statement accounts are translated at average exchange rates for the period.
Translation gains and losses are accumulated as a separate component of
Stockholders' Equity. The Company has adopted local currencies as the
functional currencies for its subsidiaries because their principal economic
activities are most closely tied to the respective local currencies.
The Company may enter into foreign exchange contracts as a hedge against foreign
currency denominated receivables. It does not engage in currency speculation.
Market value gains and losses on contracts are recognized currently, offsetting
gains or losses on the associated receivables. Foreign currency transaction
gains and losses are included in current earnings (Note 11). Foreign exchange
contracts totaled $4.2 million and $5.6 million at December 31, 1998 and 1997,
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.
Adoption of Statement of Financial Accounting Standards No. 130 Effective
January 1, 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Page 32
Company's net income or stockholders' equity. SFAS No. 130 requires unrealized
gains or losses on foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
Adoption of Statement of Financial Accounting Standards No. 131 Effective
January 1, 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131). 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. While adoption of SFAS No. 131 has
increased the number of segments reported by the Company, it will not have an
impact on the Company's results of operations, financial position or cash flow.
Pending Adoption of Statement of Financial Accounting Standards No. 133 In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording
derivatives in interim and annual financial reports requiring that all
derivative instruments be recorded as assets or liabilities, measured at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999, and therefore the company will adopt the new requirements effective with
the filing of its quarterly report on form 10-Q for the quarter ended March 31,
2000. Management does not anticipate that the adoption of SFAS No. 133 will
have a significant impact on the company's results of operations, financial
position or cash flow.
NOTE 2 ACQUISITIONS
On January 2, 1996, the Company acquired, for $5.3 million, substantially all
the assets and selected liabilities of MPI, a manufacturer of precision
equipment for high technology industries such as the 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
connection with this acquisition the company recorded goodwill totaling
$4.7 million.
On October 13, 1998, the Company acquired, for $3.5 million in cash plus
additional consideration based upon achievement of future milestones, all the
outstanding capital stock of EOSI, a manufacturer of tunable external cavity
diode laser systems and other components. The Company is located in Boulder,
Colorado. The acquisition was accounted for as a purchase. The excess of the
purchase price, including associated acquisition costs of $0.1 million, over the
net assets acquired resulted in goodwill of $2.6 million.
NOTE 3 CUSTOMER RECEIVABLES
Customer receivables consist of the following:
(In thousands) December 31,
----------------
1998 1997
------- -------
Customer receivables $26,077 $23,857
Less allowance for doubtful accounts 279 485
------- -------
$25,798 $23,372
======= =======
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.
Page 33
NOTE 4 INVENTORIES
Inventories are stated at cost, determined on either a first-in, first-out
(FIFO) or average cost basis and do not exceed net realizable value.
Inventories consist of the following:
(In thousands) December 31,
---------------------
1998 1997
------- -------
Raw materials and purchased parts $12,412 $10,161
Work in process 5,301 5,236
Finished goods 13,547 12,929
------- -------
$31,260 $28,326
======= =======
NOTE 5 INCOME TAXES
The provision for taxes based on income consists of the following:
(In thousands) Years Ended December 31,
------------------------
1998 1997 1996
------- ------ -------
Current:
Federal $1,999 $2,329 $1,541
State 225 321 200
Foreign 437 293 179
Deferred:
Federal 674 48 (214)
State 35 39 5
Foreign (5) - (6)
------ ------ ------
$3,365 $3,030 $1,705
====== ====== ======
The provision for taxes based on income differs from the amount obtained by
applying the statutory tax rate as follows:
(In thousands) Years Ended December 31,
------------------------
1998 1997 1996
------- ------- -------
Income tax provision at statutory rate $4,220 $3,432 $2,179
Increase (decrease) in taxes resulting from:
Non deductible goodwill amortization 142 153 201
Foreign losses not benefited 2 107 167
State income taxes, net of federal income tax benefit 171 238 136
Utilization of foreign losses (21) (57) (151)
Reduction in valuation allowance (237) - (217)
Research and development tax credits (490) - -
Conversion of foreign subsidiaries to u.s. partnerships - - (276)
Foreign sales corporation income (516) (734) (283)
Other, net 94 (109) (51)
------ ------ ------
$3,365 $3,030 $1,705
====== ====== ======
Deferred tax assets and liabilities determined in accordance with statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, reflect the
impact of temporary differences between amounts of assets and liabilities for
tax and financial reporting purposes. Such amounts are measured by tax laws and
the expected future tax consequences of net operating loss carryforwards.
Page 34
In 1998 the Company reduced the valuation allowance applicable to foreign net
operating loss carryforwards by approximately $415,000 because of improvements
in earnings of certain of its European subsidiaries.
Temporary differences and net operating loss carryforwards, which give rise to
deferred tax assets and liabilities recognized in the balance sheet, are as
follows:
(In thousands) December 31,
------------------
1998 1997
------- -------
Deferred tax assets:
Net operating loss carryforwards $ 9,336 $ 9,629
Accruals not currently deductible for tax purposes 1,682 2,658
Other 129 (172)
Valuation allowance (8,444) (8,859)
------- -------
Total deferred tax asset 2,703 3,256
------- -------
Deferred tax liabilities:
Accelerated depreciation methods used for tax purposes 854 796
Other 505 791
------- -------
Total deferred tax liability 1,359 1,587
------- -------
Net deferred tax asset $ 1,344 $ 1,669
======= =======
The Company has foreign net operating loss carryforwards totaling approximately
$25.5 million at December 31, 1998, principally expiring in the years 2007
through 2012. For financial reporting purposes, a valuation allowance has been
recorded primarily to offset the deferred tax asset related to foreign net
operating loss carryforwards. Approximately $2.8 million of the valuation
allowance will be allocated to reduce goodwill when realized. Approximately
$0.2 million and $0.1 million of the valuation allowance realized was allocated
to goodwill for 1998 and 1997, respectively. As the Company's net operating
loss carryforwards and valuation allowance are largely denominated in foreign
currencies, they are subject to foreign currency translation adjustments as
described in Note 1 above and to the risks associated therewith. (See also Item
7A, Quantitative and Qualitative Disclosures About Market Risk, on Page 21 for
further discussion of exchange rate risk.) The exchange gain related to gross
net operating loss carryforwards is largely offset by a corresponding exchange
fluctuation in the valuation allowance. Accordingly, the net effect of currency
fluctuations on the net operating loss carryforwards, net of valuation
allowance, is not material. Net income taxes paid for 1998, 1997 and 1996
totaled $4.3 million, $2.0 million and $1.8 million, respectively.
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, including capitalized lease assets,
consists of the following:
(In thousands) December 31,
---------------------
1998 1997
------- -------
Land $ 1,287 $ 1,954
Buildings 7,218 12,069
Leasehold improvements 8,715 8,381
Machinery and equipment 24,063 20,620
Office equipment 11,715 10,074
------- -------
52,998 53,098
Less accumulated depreciation 30,302 30,104
------- -------
$22,696 $22,994
======= =======
Page 35
NOTE 7 INVESTMENTS AND OTHER ASSETS
Investments and other assets consist of the following:
(In thousands) December 31,
--------------------
1998 1997
------ -------
Nonmarketable investments $3,661 $4,169
Other assets 2,790 1,661
------ -------
$6,451 $5,830
====== ======
Nonmarketable investments consist primarily of investments in private companies,
including a 25% interest in a U.S. supplier and a 23% 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, $4.3 million and $4.5 million from the
U.S. supplier during 1998, 1997 and 1996, respectively.
Other assets consist primarily of capitalized software, patents and license
agreements.
NOTE 8 LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) December 31,
----------------
1998 1997
------- -------
Credit agreements:
PIBOR + 1.00%, maturing December 2000 $ - $ 258
Term notes:
8.25% senior notes, maturing May 2004 18,500 20,000
Capitalized lease obligations, payable
in installments to 2005, in french francs 1,783 1,938
Equipment loans 952 1,211
------- -------
21,235 23,407
Less current portion 3,699 2,380
------- -------
$17,536 $21,027
======= =======
During May 1996, the Company obtained $20.0 million of long-term financing from
an insurance company. These senior notes, sold at par, are unsecured, carry an
8.25% annual coupon and mature in may 2004. interest is payable semiannually
and semiannual principal payments commenced during November 1998.
At December 31, 1998, the Company had in place a $25.0 million unsecured line of
credit expiring December 31, 2000 with interest at prime, or LIBOR (London
Interbank Offered Rate) plus 1.0% and an unused line fee of 20 basis points to
support its worldwide operations. At December 31, 1998, there were no amounts
outstanding under the line of credit with $24.8 million available after
considering outstanding letters of credit.
Page 36
Capitalized lease obligations of 10.0 million French francs (approximately
$1.8 million) relate to real estate and equipment located in France. The
original cost of assets under capital leases at December 31, 1998 and 1997, was
19.1 million French francs (approximately $3.4 million at December 31, 1998).
Accumulated amortization totaled 9.2 million French francs (approximately
$1.6 million) and 8.3 million French francs (approximately $1.4 million) at
December 31, 1998 and 1997, respectively. Required annual payments are as
follows:
(In thousands) Capitalized
Lease Borrowings and
For years ending December 31, Obligations Term Notes
----------- --------------
1999 $ 465 $ 3,365
2000 406 4,423
2001 348 5,164
2002 354 3,500
2003 324 2,000
Thereafter 342 1,000
------ -------
2,239
Less interest 456
------
$1,783 $19,452
====== =======
Interest paid for 1998, 1997 and 1996, totaled $1.9 million, $1.9 million and
$1.6 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):
1999 $2,452
2000 2,305
2001 2,155
2002 2,067
2003 1,874
Thereafter 5,948
The principal lease expires in 2007. Rental expense under all leases totaled
$2.6 million for each of the 1998, 1997 and 1996 years.
NOTE 10 STOCK OPTION PLANS
The Company's stock option plan provides that the number of shares available for
issuance as either stock options or restricted stock increases on the last day
of each fiscal year by an amount equal to 2% of the then outstanding shares.
Options have been granted to directors, officers and key employees at a price
not less than fair market value at the dates of grants for terms of not more
than ten years. Accordingly, no charges have been made to income in accounting
for these options. The tax benefits, if any, resulting from the exercise of
options are credited to capital in excess of stated value. The fair market
value of restricted stock at date of grant is amortized to expense over the
vesting period of five years.
Page 37
The following table summarizes option plan and restricted stock activity for the
years ended December 31, 1998, 1997 and 1996:
Under Plan Weighted Average
Available ------------------------------------ Exercise Price
for Option Restricted of Option Shares
or Award Stock Options Total Under Plan
---------- ---------- ---------- --------- ----------------
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) (224,616) (240,616) 7.35
Forfeited 78,316 - (78,316) (78,316) 7.07
-------- ------- --------- ---------
Balance, December 31, 1997 498,265 101,250 1,062,059 1,163,309 7.69
Authorized 182,388 - - - -
Granted (489,600) 20,000 469,600 489,600 13.50
Exercised - (24,625) (229,400) (254,025) 6.57
Forfeited 31,900 - (31,900) (31,900) 10.50
-------- ------- --------- ---------
Balance, December 31, 1998 222,953 96,625 1,270,359 1,366,984 $ 9.97
======== ======= ========= =========
The weighted average per share fair value of restricted stock granted during
1998 and 1997 was $13.38 and $8.76, respectively.
At December 31, 1997, options on 637,101 shares were exercisable with a weighted
average exercise price of $7.00 per share. The following table summarizes
information concerning options outstanding and exercisable at December 31, 1998
(Contractual life in years):
Options Outstanding Options Exercisable
---------------------------------------- -------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------- ----------- ---------------- -------- ----------- --------
$ 5.00 - 10.13 830,759 5.5 8.05 572,971 7.70
11.63 - 21.00 439,600 9.0 13.61 1,000 12.53
--------- -----------
1,270,359 573,971
========= ===========
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option and employee stock purchase
plans been determined based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
(In thousands) 1998 1997 1996
------ ------ ------
Net income reported $8,978 $7,064 $4,703
Net income - pro forma $7,524 $6,707 $4,405
Diluted earnings per share - reported $ 0.96 $ 0.77 $ 0.52
Diluted earnings per share - pro forma $ 0.80 $ 0.73 $ 0.49
Page 38
The fair value of each option grant in 1998 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
41.01%; risk-free interest rate of 5.44%; expected lives of 5 years; and
expected turnover rate of 12.90%. The fair value of each option grant in 1997
and 1996 was estimated on the date of the grant using 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 1998, 1997 and 1996 was $5.81, $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 82,201 and 87,662
shares issued under the Purchase Plan during 1998 and 1997, respectively. The
amounts included in the pro forma net income disclosures related to the impact
of the Purchase Plan totaled $0.2 million, $0.1 million and $0.1 million for the
years 1998, 1997 and 1996, respectively.
NOTE 11 OTHER INCOME (EXPENSE), NET
Other income (expense), net, consisted of the following:
(In thousands) Years Ended December 31,
------------------------
1998 1997 1996
------- ------ ------
Interest and dividend income $ 458 $ 210 $ 105
Exchange gains (losses), net (261) (497) 27
Gains on sale of investments, net 134 14 -
Other (210) (76) 345
----- ----- -----
$ 121 $(349) $ 477
===== ===== =====
NOTE 12 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share under SFAS No. 128:
(In thousands, except per share amounts) Years Ended December 31,
------------------------
1998 1997 1996
------- ------- ------
Numerator:
Net income $8,978 $7,064 $4,703
Denominator:
Denominator for basic earnings per
share - weighted-average shares 8,989 8,865 8,700
Effect of dilutive securities:
Employee stock options 337 252 225
Restricted stock 58 62 59
----- ----- -----
Dilutive potential common shares 395 314 284
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 9,384 9,179 8,984
===== ===== =====
Basic earnings per share $1.00 $0.80 $0.54
Diluted earnings per share $0.96 $0.77 $0.52
Page 39
NOTE 13 BUSINESS SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131), which superseded Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business Enterprise.
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. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect results of operation or
financial position, but did affect the following disclosure of segment
information.
The Company operates in three reportable segments; two comprising domestic
operations - Components and Subassemblies, and Instruments and Systems. The
third segment comprises the Company's Europe operations. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies except that certain expenses, such as
interest, amortization of certain intangibles and certain corporate expenses are
not allocated to the segments. In addition, certain assets, including cash and
cash equivalents, deferred taxes and certain long-lived and intangible assets
are not allocated to the segments. Intersegment sales are recorded at the
selling Division's cost plus profit.
The Components and Subassemblies segment consists primarily of Vibration
Isolation Products, Mechanical Components, Optics and Subassemblies. The
Instruments and Systems segment consists primarily of Instruments, Motion
Control Devices and Systems, Process Automation Workstations for Photonics
manufacturing and Video-Based Measurement and Inspection Systems. The Europe
segment is comprised of the Company's European-based manufacturing and sales
operations.
Selected financial information for the Company's reportable segments for the
years ended December 31, 1998, 1997 and 1996 follows:
(In thousands) Components Instruments
and and
Subassemblies Systems Europe Total
------------- ----------- ------- --------
Year Ended December 31, 1998:
- ----------------------------
Sales to external customers $42,242 $60,137 $28,322 $130,701
Intersegment sales 5,989 5,831 7,912 19,732
Depreciation and amortizaton 1,061 1,853 1,723 4,637
Segment income (loss) 11,874 1,887 (77) 13,684
Segment assets 16,196 41,835 33,599 91,630
Expenditures for long-lived
assets 512 2,234 1,368 4,114
Year Ended December 31, 1997:
- ----------------------------
Sales to external customers $44,004 $59,063 $26,983 $130,050
Intersegment sales 5,789 5,100 7,015 17,904
Depreciation and amortization 1,068 1,602 1,777 4,447
Segment income (loss) 10,877 3,372 (1,356) 12,893
Segment assets 16,693 32,613 32,884 82,190
Expenditures for long-lived
assets 572 1,536 758 2,866
Year Ended December 31, 1996:
- ----------------------------
Sales to external customers $40,153 $45,995 $31,732 $117,880
Intersegment sales 4,820 3,816 7,928 16,564
Depreciation and amortization 1,064 1,068 2,622 4,754
Segment income (loss) 6,648 1,864 (373) 8,139
Segment assets 16,819 30,658 38,380 85,857
Expenditures for long-lived
assets 289 3,711 1,244 5,244
Page 40
The following reconciles segment income to consolidated income before income
taxes and segment assets and depreciation and amortization to consolidated
assets and consolidated depreciation and amortization.
(in thousands) 1998 1997 1996
--------- --------- ---------
Revenue and income:
Total segment sales $150,433 $147,953 $134,444
Non reportable segment sales 3,658 2,545 2,030
Elimination of intersegment sales (19,732) (17,904) (16,564)
Consolidated sales $134,359 $132,594 $119,910
======== ======== ========
Segment income $ 13,684 $ 12,893 $ 8,139
Income from non reportable segments 174 225 (85)
Unallocated amounts:
Unallocated corporate and other operating income (expense) 255 (683) (192)
Interest expense (1,891) (1,992) (1,931)
Other income (expense) 121 (349) 477
-------- -------- --------
Income before income taxes $ 12,343 $ 10,094 $ 6,408
======== ======== ========
Assets:
Assets for reportable segments $ 91,630 $ 82,190 $ 85,857
Assets for non reportable segments 2,257 1,108 1,020
Assets held at corporate 16,586 22,663 16,500
-------- -------- --------
Total assets $110,473 $105,961 $103,377
======== ======== ========
Expenditures for long-lived assets for reportable segments $ 4,114 $ 2,866 $ 5,244
Expenditures for long-lived assets for non reportable segments 69 22 28
Expenditures for long-lived assets held at corporate 1,195 2,146 572
-------- -------- --------
Total expenditures for long-lived assets $ 5,378 $ 5,034 $ 5,844
======== ======== ========
Depreciation and amortization:
Depreciation and amortization for reportable segments $ 4,637 $ 4,447 $ 4,754
Depreciation and amortization for non reportable segments 37 26 30
Depreciation and amortization for assets held at corporate 1,401 1,357 1,278
-------- -------- --------
Total depreciation and amortization $ 6,075 $ 5,830 $ 6,062
======== ======== ========
Selected financial information for the Company's operations by geographic
segment is as follows:
1998 1997 1996
-------- -------- --------
Geographic area revenue:
United States $ 87,561 $ 85,749 $ 69,780
Europe (1) 30,358 27,659 30,615
Pacific Rim 9,468 14,974 15,441
Other 6,972 4,212 4,074
-------- -------- --------
$134,359 $132,594 $119,910
======== ======== ========
Geographic area long-lived assets:
United States $ 14,094 $ 14,855 $ 14,160
Europe 8,508 8,074 9,831
Other 94 65 54
-------- -------- --------
$ 22,696 $ 22,994 $ 24,045
======== ======== ========
(1) Europe revenues disclosed in the geographic segment include all revenues
from sales to European-based customers whereas Europe segment revenues are
comprised of sales from the Company's Europe operations.
Page 41
NOTE 14 DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan. Generally, all U.S. employees
are eligible to participate in and contribute to this plan. Company
contributions to the plan are determined based on a percentage of contributing
employees' compensation. Expense recognized for the plan totaled $1.3 million,
$1.0 million and $0.9 million for 1998, 1997 and 1996, respectively.
NOTE 15 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)
Diluted Net Dividends High Low
Net Gross Net Income Per Per Share Share
Three months ended Sales Profit Income Share Share Price Price
- ------------------------ ------- ------- ------ ----------- --------- -------- ----------
December 31, 1998 $33,407 $14,708 $2,565 $0.28 $0.02 $17/3/4/ $ 8/7/8/
September 30, 1998 33,456 14,517 2,218 0.24 - 19/3/4/ 10/5/8/
June 30, 1998 33,833 15,163 2,189 0.23 0.02 22/7/8/ 17/3/4/
March 31, 1998 33,663 14,480 2,006 0.21 - 21/3/4/ 12/1/4/
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/
Page 42
NEWPORT CORPORATION
Schedule II
Consolidated Valuation Accounts
(In thousands)
Balance at Additions Balance
Beginning Charged to Costs Other Charges at End
Description of Period and Expenses Write-Offs (1) Add (Deduct) (2) of Period
------------ ---------- ----------------- -------------- ---------------- ---------
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 485 $ (97) $ (120) $ 11 $ 279
Reserve for inventory obsolescence 4,119 1,170 (1,460) 475 4,304
Warranty reserve 426 966 (1,056) - 336
------ ------ ------- ---- ------
Total $5,030 $2,039 $(2,636) $486 $4,919
====== ====== ======= ==== ======
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 524 $ 134 $ (122) $ (51) $ 485
Reserve for inventory obsolescence 4,065 1,772 (1,401) (317) 4,119
Warranty reserve - 982 (556) - 426
------ ------ ------- ----- ------
Total $4,589 $2,888 $(2,079) $(368) $5,030
====== ====== ======= ===== ======
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
Warranty reserve - - - - -
------ ------ ----- ----- ------
Total $3,832 $1,226 $(349) $(120) $4,589
====== ====== ====== =====
(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 43
NEWPORT CORPORATION
FORM 10-K
Exhibit Index
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Auditors
Exhibit 27 Financial Data Schedule (Article 5 of Regulation S-X)