<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER:
000-23461
----------------
SPECTRA-PHYSICS LASERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 77-0264342
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1335 TERRA BELLA AVENUE, MOUNTAIN VIEW, CALIFORNIA, 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
650-961-2550
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par
value $0.01 per share, at October 31, 1998 was 16,168,043 shares.
================================================================================
<PAGE> 2
SPECTRA-PHYSICS LASERS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I Financial information
Item 1. Financial statements and supplementary data:
(a) Consolidated Balance Sheet at September 30, 1998 and December 31, 1997 .................................... 3
(b) Consolidated Statement of Operations for the three and nine months ended September 30, 1998 and 1997 4
(c) Consolidated Statement of Cash Flows for the nine months ended September 30, 1998 and 1997 ................ 5
(d) Notes to Consolidated Financial Statements ................................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 8
Part II Other Information ................................................................................................ 18
Signatures .................................................................................................... 21
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
(UNAUDITED) (SEE NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................ $ 32,916 $ 33,487
Accounts receivable ...................... 35,899 39,511
Inventories .............................. 28,993 25,857
Deferred tax assets ...................... 8,200 8,200
Prepaid expenses and other current assets 5,827 4,409
--------- ---------
Total current assets ............. 111,835 111,464
--------- ---------
Property, plant and equipment, net ......... 31,025 25,480
Intangible assets, net ..................... 1,950 1,637
Other assets ............................... 1,904 1,943
--------- ---------
Total assets ..................... $ 146,714 $ 140,524
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................... $ 7,141 $ 10,453
Borrowings under credit facilities ....... 10,266 7,321
Accrued and other current liabilities .... 21,613 24,749
--------- ---------
Total current liabilities ........ 39,020 42,523
Long-term liabilities ...................... 1,224 1,677
Commitments and contingencies
Stockholders' equity:
Common stock ............................. 162 158
Additional paid-in capital ............... 97,236 93,991
Retained earnings ........................ 9,943 3,629
Cumulative translation adjustments ....... (871) (1,454)
--------- ---------
Total stockholders' equity ....... 106,470 96,324
--------- ---------
Total liabilities and
stockholders' equity ............. $ 146,714 $ 140,524
========= =========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .................................... $ 39,731 $ 39,613 $ 123,564 $ 113,061
Cost of products sold ........................ 24,574 24,893 76,082 71,178
--------- --------- --------- ---------
Gross margin ....................... 15,157 14,720 47,482 41,883
Operating expenses:
Research and development ................... 4,142 4,015 12,887 10,857
Selling, general and administrative ........ 8,282 8,767 25,997 23,555
Other ...................................... -- 4,834 -- 16,157
--------- --------- --------- ---------
Total operating expenses ........... 12,424 17,616 38,884 50,569
--------- --------- --------- ---------
Operating income (loss) ............ 2,733 (2,896) 8,598 (8,686)
Other income (expense):
Interest income (expense) .................. 350 (1,164) 1,022 (3,930)
Foreign currency gain ...................... -- 1,311 -- 2,566
Legal settlement ........................... -- -- -- 17,010
--------- --------- --------- ---------
Total other income ................. 350 147 1,022 15,646
--------- --------- --------- ---------
Income (loss) before income taxes .. 3,083 (2,749) 9,620 6,960
Income tax expense (benefit) ................. 822 (23,474) 3,306 (23,272)
--------- --------- --------- ---------
Net income ......................... $ 2,261 $ 20,725 $ 6,314 $ 30,232
========= ========= ========= =========
Net income per share:
Basic ...................................... $ 0.14 $ 1.59 $ 0.39 $ 2.33
========= ========= ========= =========
Diluted .................................... $ 0.14 $ 1.59 $ 0.38 $ 2.33
========= ========= ========= =========
Shares used in computing net income per share:
Basic ...................................... 16,168 13,000 16,168 13,000
Diluted .................................... 16,168 13,000 16,575 13,000
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................... $ 6,314 $ 30,232
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ............................... 4,213 3,521
Deferred tax assets ......................................... -- (14,519)
Changes in operating assets and liabilities:
Accounts receivable ...................................... 3,612 3,776
Inventories .............................................. (3,136) (5,605)
Prepaid expenses and other current assets ................ (1,418) 261
Accounts payable ......................................... (3,312) 125
Accrued and other current liabilities .................... (3,136) 12,421
-------- --------
Total cash provided by operating activities ......... 3,137 30,212
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment .................... (9,758) (5,722)
Other ......................................................... (144) (53)
-------- --------
Total cash used in investing activities ............. (9,902) (5,775)
-------- --------
FINANCING ACTIVITIES
Net transfers (to) from Spectra-Physics AB .................... -- (27,743)
Net borrowings under credit facilities ........................ 2,945 --
Changes in loans and advances from Spectra-Physics AB ......... -- 2,058
Net proceeds from issuance of common stock .................... 3,249 --
-------- --------
Total cash provided by (used in) financing activities 6,194 (25,685)
-------- --------
Decrease in cash and cash equivalents ............... (571) (1,248)
Cash and cash equivalents at beginning of year ................ 33,487 2,531
-------- --------
Cash and cash equivalents at end of period .................... $ 32,916 $ 1,283
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
SPECTRA-PHYSICS LASERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Spectra-Physics Lasers, Inc. (the "Company") designs, develops,
manufactures and distributes lasers and laser systems for the industrial,
original equipment manufacturer ("OEM"), and research and development markets.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The Company's fiscal year ends on December 31. The Company's fiscal
quarters end on the Friday of the thirteenth week of the quarter. For
presentation purposes, the financial statements reflect the calendar month-end
date.
2. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Raw material ..... $10,503 $10,250
Work in process... 9,191 8,077
Finished goods.... 9,299 7,530
------- -------
$28,993 $25,857
======= =======
</TABLE>
3. STOCKHOLDERS' EQUITY
In January 1998, the Company issued 360,000 shares of common stock at a
price of $10.00 per share in accordance with an overallotment option granted to
the underwriters of the Company's initial public offering. Net proceeds were
$3.2 million.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", and in March 1997, issued SFAS No. 129 "Disclosures of Information About
Capital Structure." These statements specify the computation, presentation and
disclosure requirements for earnings per share and the capital structure of a
company. SFAS No. 128 was adopted by the Company in 1997 and had no impact on
the Company's financial statements. The Company will adopt SFAS No. 129 in the
fourth quarter of 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 and SFAS No. 131 are effective for the
Company in the first quarter and fourth quarter of 1998, respectively. SFAS No.
130 establishes the requirements for disclosure of comprehensive income.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments or contributions from stockholders. SFAS
No. 131 requires publicly held companies to report financial and other
information about key sales-producing segments of the entity for which such
information is available and utilized by the chief operating decision maker.
Specific information to be reported for individual segments includes profit and
loss, certain sales and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided.
6
<PAGE> 7
The Company has adopted SFAS No. 130 in the first quarters of 1998.
Comprehensive income for the nine months ended September 30, 1998 and 1997 were
$6,674,000 and $30,232,000, respectively. The principal difference between
comprehensive income (loss) and net income (loss) is the treatment of cumulative
translation adjustments.
The Company has determined that the impact of adopting SFAS No. 129 and
SFAS No. 131 will not be material to its financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes "special accounting"
for certain types of derivatives.
SFAS No. 133 is effective for years beginning after June 15, 1999, but
earlier adoption is allowed. The Company expects to adopt SFAS No. 133 in the
fourth quarter of 1998 in accounting for certain types of foreign currency
hedges. The impact of the adoption on the Company's financial position or
results of operations has not been determined.
5. EARNINGS PER SHARE
SFAS No. 128 requires the presentation of basic and diluted net income
per share. Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed giving effect to all diluted potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options. Stock options granted by subsidiaries of the Company were not included
in the calculation of net income per share as they were anti-dilutive. At
September 30, 1998, options to purchase 2,109,895 shares of the Company's common
stock were outstanding.
The following table presents the calculation of basic and diluted net
income per share as required under SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income ................................. $ 2,261 $20,725 $ 6,314 $30,232
======= ======= ======= =======
Denominator:
Denominator for basic net income per share:
Weighted average shares ................. 16,168 13,000 16,168 13,000
Effect of dilutive securities:
Employee stock options .................. -- -- 407 --
------- ------- ------- -------
Denominator for diluted net income per share 16,168 13,000 16,575 13,000
======= ======= ======= =======
Net income per share-- Basic ................. $ 0.14 $ 1.59 $ 0.39 $ 2.33
Net income per share-- Diluted ............... $ 0.14 $ 1.59 $ 0.38 $ 2.33
</TABLE>
Pro forma net income per share for 1997 gives effect to the
Reorganization as described in the Company's Annual Report on Form 10-K.
6. ENVIRONMENTAL MATTERS
See Part II., Item 1. Legal Proceedings
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Certain information in this quarterly report on Form 10-Q, including but
not limited to the Management's Discussion and Analysis of Financial Condition
and Results of Operations, may constitute forward-looking statements as such
term is defined in Section 27A of the Securities Act of 1933 (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934. Certain
forward-looking statements can be identified by the use of forward-looking
terminology such as, "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," "anticipates," or "hopeful,"
or the negative thereof or other comparable terminology, or by discussions of
strategy, plans or intentions. Forward-looking statements involve risks and
uncertainties, including sales initiatives and those described in the Risk
Factors section of Item 1 of Spectra-Physics Lasers, Inc's (the "Company's")
Annual Report on Form 10-K, which could cause actual results to be materially
different than those in the forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company assumes no obligation to update such
information.
OVERVIEW
The Company is a leader in the design, development, manufacture and
distribution of lasers and laser systems for a broad range of markets.
Spectra-Physics AB, a multinational corporation based in Sweden which is listed
for trading on the Stockholm Stock Exchange, indirectly owns 80.4% of the
Company's outstanding Common Stock. Prior to the Reorganization described below,
the Company, Opto Power Corporation and Spectra-Physics Laser Data Systems,
Inc., together with various foreign subsidiaries of Spectra-Physics AB that
conducted sales and technical support operations on their behalf, were operated
as a functional group called the Lasers and Optics Group. In preparation for the
Company's initial public offering, the Lasers and Optics Group was reorganized
(the "Reorganization") in October 1997 so that the assets and liabilities
(including contractual rights and obligations) of the Lasers and Optics Group
are now held directly or indirectly by the Company.
In December 1997, the Company completed an initial public offering of
2,400,000 shares of Common Stock, at an offering price of $10.00 per share. An
additional 360,000 shares of common stock were sold in January 1998 in
accordance with an overallotment option granted to the underwriters. The net
proceeds from the sale of these shares was approximately $23.9 million.
The consolidated financial statements as of and for the three and nine
month periods ended September 30, 1997 reflect the financial position, results
of operations and cash flows of the Company as if it were a separate entity. The
Company's historical results have varied significantly from period to period due
to the inclusion of charges related to legal expenses associated with a lawsuit
and compensation expenses associated with certain stock options. The Company
also incurred interest expense on loans and advances from Spectra-Physics AB and
foreign currency gains and losses resulting from the Company's participation in
Spectra-Physics AB's foreign currency hedging program. None of these charges and
credits are expected to be incurred in the future. However, there can be no
assurance that similar items might not occur.
Net sales for products are recognized upon shipment. The Company derives
its revenue primarily from the sale of high power semiconductor-based and
conventional lasers and laser systems. High power semiconductor-based lasers and
laser systems are sold into the OEM/industrial market and research and
development market. The OEM/industrial market is characterized by unit sales,
with varying prices, in volumes of as much as several thousand units.
Conventional lasers are primarily sold into the research and development market.
This market is typically characterized by the sale of single units and systems
with prices that range from approximately $3,000 to $500,000. Sales in this
market have historically varied from quarter to quarter due to seasonal
fluctuations and governmental spending patterns. Over the last three years, a
growing proportion of the Company's total net sales and most of its sales growth
have been from high power semiconductor-based lasers.
The Company's sales have shown a pattern in the last several years
whereby the fiscal fourth quarter net sales represent a large share of the
Company's annual net sales and whereby the Company's first quarter net sales
decline significantly compared to the fourth quarter of the prior fiscal year.
The Company believes these sales patterns result in part because of
Spectra-Physics AB's emphasis on annual (as opposed to quarterly) results and in
part from the Company's incentive compensation plan which compensates employees
based on annual results. The Company recognizes that the non-linear pattern of
its shipments leads to inefficiencies in asset and employee utilization. The
Company is taking steps to mitigate this sales trend, but this pattern is likely
to continue in the near term.
8
<PAGE> 9
The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of components, the proportion of third party
products incorporated into the Company's systems, foreign currency exchange
rates and manufacturing costs. For example, since high power semiconductor-based
lasers and laser systems generally have higher gross margins than conventional
lasers, absent other factors, a shift in sales toward high power
semiconductor-based lasers and laser systems would lead to a gross margin
improvement for the Company. On the other hand, if market conditions in the
highly competitive conventional laser market forced the Company to lower unit
prices, the Company would suffer a decline in gross margin unless the Company
were able to timely offset the price reduction by a reduction in production
costs or by sales of other products with higher gross margins. Either of these
events could have a material effect on the Company's business, operating results
and financial condition.
The Company spends a significant amount of resources on research and
development. In recent years, the Company has focused much of these resources on
high power semiconductor-based lasers and laser systems. The Company expects to
continue to spend substantial resources in developing high power
semiconductor-based lasers and laser systems while making focused research and
development expenditures to maintain its leadership position in conventional
lasers.
A significant proportion of the Company's sales are to international
customers and are denominated in currencies other than the U.S. dollar. The
Company also has sales and support operations located in certain European
countries and in Japan which operate in local currencies. As a result, while the
Company attempts to hedge its economic risk of foreign currency fluctuations,
the Company is exposed to fluctuations in foreign currency exchange rates. These
fluctuations have had in the past, and may have in the future, a significant
impact on the Company's results of operations.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the Company's
results of operations in dollar terms and as a percentage of net sales and the
percent change from 1997 to 1998:
<TABLE>
<CAPTION>
PERCENT OF NET
SALES
THREE MONTHS THREE MONTHS
ENDED ENDED PERCENT
SEPTEMBER 30, SEPTEMBER 30, CHANGE
---------------------- ------------------- 1997 TO
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 39,731 $ 39,613 100.0% 100.0% 0.3%
Cost of products sold .................. 24,574 24,893 61.9 62.8 (1.3%)
-------- -------- ----- -----
Gross margin ......................... 15,157 14,720 38.1 37.2 3.0%
Operating expenses:
Research and development ............. 4,142 4,015 10.4 10.1 3.2%
Selling, general and administrative .. 8,282 8,767 20.8 22.1 (5.5%)
Other ................................ -- 4,834 0.0 12.2 (100.0%)
-------- -------- ----- -----
Total operating expenses .......... 12,424 17,616 31.2 44.4 (29.5%)
-------- -------- ----- -----
Operating income (loss) ........... 2,733 (2,896) 6.9 (7.2) NM
Other income (expense):
Interest income (expense) ............ 350 (1,164) 0.9 (2.9) NM
Foreign currency gain ................ -- 1,311 0.0 3.3 (100.0%)
-------- -------- ----- -----
Total other income ................ 350 147 0.9 0.4 138.1%
-------- -------- ----- -----
Income (loss) before income taxes . 3,083 (2,749) 7.8 (6.9) NM
Income tax expense (benefit) ........... 822 (23,474) 2.1 (59.3) NM
-------- -------- ----- -----
Net income ........................... $ 2,261 $ 20,725 5.7% 52.4% (89.1%)
======== ======== ===== =====
Operating income before infrequent or
unusual items(a) ...................... $ 2,733 $ 1,938 6.9% 4.9% 41.0%
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF NET
SALES
NINE MONTHS NINE MONTHS
ENDED ENDED PERCENT
SEPTEMBER 30, SEPTEMBER 30, CHANGE
----------------------- -------------------- 1997 TO
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 123,564 $ 113,061 100.0% 100.0% 9.3%
Cost of products sold .................. 76,082 71,178 61.6 63.0 6.9%
--------- --------- ----- -----
Gross margin ......................... 47,482 41,883 38.4 37.0 13.4%
Operating expenses:
Research and development ............. 12,887 10,857 10.4 9.6 18.7%
Selling, general and administrative .. 25,997 23,555 21.0 20.8 10.4%
Other ................................ -- 16,157 0.0 14.3 (100.0%)
--------- --------- ----- -----
Total operating expenses .......... 38,884 50,569 31.4 44.7 (23.1%)
--------- --------- ----- -----
Operating income (loss) ........... 8,598 (8,686) 7.0 (7.7) NM
Other income (expense):
Interest income (expense) ............ 1,022 (3,930) 0.8 (3.5) NM
Foreign currency gain ................ -- 2,566 0.0 2.3 (100.0%)
Legal settlement ..................... -- 17,010 0.0 15.0 (100.0%)
--------- --------- ----- -----
Total other income ................ 1,022 15,646 0.8 13.8 (93.5%)
--------- --------- ----- -----
Income before income taxes ........ 9,620 6,960 7.8 6.1 38.2%
Income tax expense (benefit) ........... 3,306 (23,272) 2.7 (20.6) NM
--------- --------- ----- -----
Net income ........................... $ 6,314 $ 30,232 5.1% 26.7% (79.1%)
========= ========= ===== =====
Operating income before infrequent or
unusual items(a) ...................... $ 8,598 $ 7,471 7.0% 6.6% 15.1%
</TABLE>
10
<PAGE> 11
(a) Operating income before infrequent or unusual items is presented as
supplemental information and should not be construed as a substitute
for, or better, indicator of, results of operations than operating
income (loss) or net income determined in accordance with generally
accepted accounting principles. This information represents actual 1997
operating loss adjusted for compensation expense associated with stock
options of $4.8 million for the three months ended September 30, 1997,
and legal expense associated with a lawsuit of $1.7 million and
compensation expense associated with stock options of $14.5 million for
the nine months ended September 30, 1997. No such amounts were incurred
in 1998. While such items are not expected to be incurred in the future,
there can be no assurances that similar items might not occur.
NM -- not meaningful
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales
Net sales were $39.7 million and $39.6 million in the three months ended
September 30, 1998 and 1997, respectively, representing an increase of 0.3%. Net
sales for the three months ended September 30, 1998, calculated using foreign
currency exchange rates for the same period in 1997, increased 2.9%.
Net sales in the following geographic markets were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
North America .... $22,298 $22,597
Japan ............ 6,704 6,790
Europe ........... 8,365 7,150
Other Asia ....... 1,412 1,590
Rest of the World 952 1,486
------- -------
$39,731 $39,613
======= =======
</TABLE>
Net sales for the three months ended September 30, 1998 at actual
currency exchange rates increased 17.0% for Europe, and decreased 1.3% for North
America, 1.3% for Japan, 11.2% for Other Asia, and 35.9% for Rest of the World.
Net sales for the three months ended September 30, 1998, calculated using
foreign currency exchange rates for the same period in 1997, increased 11.3% for
Japan and 21.2% for Europe. Since substantially all sales in North America,
Other Asia and Rest of the World are denominated in U.S. dollars, year to year
constant currency changes in these markets are as presented in the table. Europe
in the above table includes sales from the Company's European sales
subsidiaries. Export sales to countries not located in Asia are included in Rest
of the World.
Net sales were $123.6 million and $113.1 million for the nine months
ended September 30, 1998 and 1997, respectively, representing an increase of
9.3%. Net sales for the nine months ended September 30, 1998, calculated using
foreign currency exchange rates for the same period in 1997, increased 12.6%.
Net sales in the following geographic markets were:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
North America .... $ 68,053 $ 63,025
Japan ............ 23,557 23,208
Europe ........... 24,041 20,488
Other Asia ....... 4,485 2,975
Rest of the World 3,428 3,365
-------- --------
$123,564 $113,061
======== ========
</TABLE>
Net sales for the nine months ended September 30, 1998 at actual
currency exchange rates increased 8.0% for North America, 1.5% for Japan, 17.3%
for Europe, 50.8% for Other Asia, and 1.9% for Rest of the World. Net sales for
the nine months ended
11
<PAGE> 12
September 30, 1998, calculated using foreign currency exchange rates for the
same period in 1997, increased 12.8% for Japan and 23.5% for Europe.
The majority of the Company's sales in Japan are denominated in Japanese
Yen. In response to the devaluation of the Yen against the U.S. dollar through
the third quarter of 1998 the Company has been raising the Yen denominated
prices of its products in Japan. However, the devaluation of the Yen has
negatively impacted the Company's results of operations through the third
quarter of 1998 and there can be no assurance that further devaluation of the
Yen will not have a material adverse effect on the Company's results of
operations.
The Company is hopeful that the supplemental government budget in Japan
will result in increased unit sales in the next several quarters.
Reduced orders and sales in the commercial printing and graphics market
due to an announced production slowdown by a major customer have negatively
impacted the Company's sales growth for the first three quarters of 1998.
The Company also sells products to the semiconductor and disk media
manufacturing OEM markets. The widely reported weaknesses in these markets have
resulted in the Company experiencing a flat sales profile in these markets
through the third quarter of 1998 compared to the same period in 1997. Widely
published reports foresee no upturn in these markets until late 1999 thereby
limiting the growth of the Company's sales into these markets.
The Company's strategy continues to be to seek sales and profit growth
in OEM/industrial opportunities and the Company is pursuing OEM/industrial
opportunities in other markets.
As previously mentioned, over the last three years a growing proportion
of the Company's total sales and most of its sales growth have been from sales
of high power semiconductor-based lasers. However, in the third quarter of 1998,
the percentage of total sales in the research and development market grew as
compared to the second quarter of 1998 and the third quarter of 1997. This was
due to weaknesses in certain key OEM markets as described above. The Company
believes that the third quarter of 1998 revenue comparisons are indicative of
current market conditions only and that the evolution from conventional to
semiconductor-based lasers will continue.
Cost of products sold and gross margin
Cost of products sold includes all manufacturing materials and labor and
a proportionate share of overhead costs, as well as costs of shipping, tooling,
royalties, third party products incorporated in the Company's products and
provisions for excess and obsolete inventories and warranty. Cost of products
sold varies by product mix, product pricing, cost of components, the proportion
of third party products incorporated in systems manufactured by the Company, and
manufacturing costs.
Gross margin was $15.2 million and $14.7 million for the three months
ended September 30, 1998 and 1997, respectively, representing an increase of
3.0%. As a percentage of net sales, gross margin was 38.1% and 37.2% in the
three months ended September 30, 1998 and 1997, respectively. The principal
reason for the improvement in gross margin as a percentage of net sales was the
higher proportion of sales of high power semiconductor-based lasers and laser
systems which generally have higher gross margins than conventional products.
Gross margin as a percentage of net sales also increased in 1998 compared to
1997 due to improved manufacturing yields for high power semiconductor-based
lasers and laser systems.
Gross margin was $47.5 million and $41.9 million for the nine months
ended September 30, 1998 and 1997, respectively, representing an increase of
13.4 %. As a percentage of net sales, gross margin was 38.4% and 37.0% in the
nine months ended September 30, 1998 and 1997, respectively. The principal
reasons for the improvement in gross margin as a percentage of net sales were
the higher proportion of sales of high power semiconductor-based lasers and
laser systems which generally have higher gross margins than conventional
products, the increase in sales that allowed the absorption of fixed
manufacturing overhead expenses over a larger unit base and improved
manufacturing yields for high power semiconductor-based lasers and laser
systems. Mitigating these favorable factors was the negative effect on gross
margins from the strengthening of the U.S. dollar compared to non-U.S. dollar
currencies, particularly the Yen.
12
<PAGE> 13
Operating expenses
Operating expenses totaled $12.4 million and $17.6 million in the three
months ended September 30, 1998 and 1997, respectively, representing a decrease
of 29.5%. As a percentage of net sales, operating expenses were 31.2% and 44.4%
in the three months ended September 30, 1998 and 1997, respectively. Included in
other operating expenses in the three months ended September 30, 1997 was
compensation expense associated with certain stock options of a subsidiary of
$4.8 million. The stock options were cancelled in the fourth quarter of 1997 for
a combination of cash and common stock of the Company. Accordingly, the Company
does not expect to incur additional compensation expense relating to these stock
options in the future. Excluding such compensation expense, operating expenses
decreased 2.8% from the three months ended September 30,1997 to the same period
in 1998 and were 32.2% of net sales for the three months ended September 30,
1997.
Operating expenses totaled $38.9 million and $50.6 million for the nine
months ended September 30, 1998 and 1997, respectively, representing a decrease
of 23.1%. As a percentage of net sales, operating expenses were 31.4% and 44.7%
in the nine months ended September 30, 1998 and 1997, respectively. Included in
other operating expenses in 1997 were legal expense of $1.7 million associated
with a lawsuit which was settled in the second quarter of 1997 and compensation
expense associated with certain stock options of a subsidiary of $14.5 million.
The stock options were cancelled in the fourth quarter of 1997 for a combination
of cash and common stock of the Company. Accordingly, the Company does not
expect to incur additional compensation expense relating to these stock options
in the future. Excluding such legal and compensation expenses, operating
expenses increased 13.0% from the nine months ended September 30, 1997 to the
same period in 1998 and were 30.4% of net sales for the nine months ended
September 30, 1997.
Research and development expenses represent expenses associated with
Company funded research and new product development, and efforts designed to
improve the performance of existing products and manufacturing processes.
Customer funded product development engineering for certain OEM customers and
the U.S. government, which to date has been minimal, is recorded as a reduction
of research and development expenses. Research and development expenses are
charged to operations as incurred.
Research and development expenses totaled $4.1 million and $4.0 million
for the three months ended September 30, 1998 and 1997, respectively,
representing an increase of 3.2%. As a percentage of net sales, research and
development expenses were 10.4% and 10.1% in the three months ended September
30, 1998 and 1997, respectively.
Research and development expenses totaled $12.9 million and $10.9
million for the nine months ended September 30, 1998 and 1997, respectively,
representing an increase of 18.7%. As a percentage of net sales, research and
development expenses were 10.4% and 9.6% in the nine months ended September 30,
1998 and 1997, respectively. The increase in research and development spending
for the three and nine month periods was principally focused on high power
semiconductor-based lasers and laser systems.
Selling, general and administrative expenses include the expenses of the
Company's sales and support subsidiaries in the United Kingdom, France, Germany,
the Netherlands and Japan as well as the Company's North American sales and
support organization, and other administrative expenses such as legal and
accounting.
Selling, general and administrative expenses totaled $8.3 million and
$8.8 million for the three months ended September 30, 1998 and 1997,
respectively, representing a decrease of 5.5%. As a percentage of net sales,
selling, general and administrative expenses were 20.8% and 22.1% in the three
months ended September 30, 1998 and 1997, respectively.
Selling, general and administrative expenses totaled $26.0 million and
$23.6 million for the nine months ended September 30, 1998 and 1997,
respectively, representing an increase of 10.4%. As a percentage of net sales,
selling, general and administrative expenses were 21.0% and 20.8% in the nine
months ended September 30, 1998 and 1997, respectively. The principal reasons
for the increase in selling, general and administrative expenses in dollar terms
for the three and nine month periods were increased expenses associated with
penetrating the industrial/OEM markets and costs of being a public company.
Interest income (expense)
Interest income totaled $0.3 million in the three months ended September
30, 1998 compared to interest expense of $1.2 million in the three months ended
September 30, 1997. Interest income totaled $1.0 million in the nine months
ended September 30, 1998 compared to interest expense of $3.9 million in the
nine months ended September 30, 1997. Interest income for 1998 was earned on the
Company's invested cash and cash equivalents. Interest expense for 1997 was
incurred on loans and advances from Spectra-
13
<PAGE> 14
Physics AB and affiliates. Interest expense was also imputed on the certain
non-interest bearing advances from Spectra-Physics AB and affiliates. In
connection with the Reorganization, Spectra-Physics AB and affiliates converted
all loans and advances to the Company to equity.
Foreign currency gain (loss)
All of the Company's manufacturing is performed in the United States.
However, the Company has significant sales outside the United States denominated
in currencies other than the U.S. dollar. Also, the Company's sales and support
subsidiaries pay local operating expenses in local currencies. As a result, the
Company's operations are exposed to fluctuations in foreign currency exchange
rates and these fluctuations have been, and may continue to be, material.
From late 1995 to September 1997, the Company had a hedging program with
Spectra-Physics AB whereby it hedged a portion of its anticipated non-U.S.
dollar denominated cash flows on a twelve-month rolling basis. Accordingly, at
the end of each period, there was approximately twelve months of foreign
exchange contracts open to deliver a specified amount of foreign currency at a
specified rate. As allowed under generally accepted accounting principles
("GAAP") in Sweden, the Company had deferred the unrealized gain or loss
resulting from the impact of currency exchange rate movements on open contracts
until the underlying transaction was completed. However, since these contracts
were not, as required under U.S. GAAP, designated as hedges of firm,
identifiable foreign currency commitments, the proper U.S. accounting treatment
for these contracts was to recognize unrealized gain or loss resulting from the
impact of currency exchange rate movements on open contracts in each period
reported. Accordingly in the accompanying financial statements such gains and
losses were recorded as other income or expense. Also included in other income
and expense were realized gains and losses on the settlement of foreign exchange
contracts and realized and unrealized gains and losses on transactions
denominated in currencies other than the U.S. dollar for U.S. based operations.
In October 1997, the Company changed the way it hedges its foreign
currency exposures. The Company now enters into transactions with independent
financial institutions. The Company's policy is to not hold or issue financial
instruments for trading purposes nor will it hold or issue leveraged derivative
financial instruments. The objective of the Company's foreign exchange risk
management policy is to preserve the U.S. dollar value of its non-U.S. dollar
cash flows. These cash flows arise primarily from the sale of the Company's
products in currencies other than U.S. dollar, most of which are made through
the Company's subsidiaries in Japan and Europe. The Company uses forward
exchange contracts and simple purchased foreign currency option contracts to
hedge, respectively, firm commitments and probable anticipated transactions that
expose the Company to enterprise risk. Gains and losses on forward exchange
contracts that are designated as hedges of a firm order from a customer outside
the United States will be deferred and included in the measurement of the
underlying transaction. Gains on purchased foreign currency options with little
or no intrinsic value designated as hedges of probable anticipated foreign sales
transactions expected to occur within the next three to six months whose
significant characteristics and terms are known will also be deferred and
recognized at the time of the closing of the anticipated transactions.
In all time periods, the Company had no foreign currency options. There
were no foreign currency gains or losses in either the three or nine month
periods ended September 30, 1998. Foreign currency gain of $1.3 million and $2.6
were recognized in the three and nine months ended September 30, 1998 and 1997,
respectively.
Legal settlement
The Company recognized other income of $17.0 million in the second
quarter of 1997 relating to the settlement of a lawsuit.
Income tax expense
Income taxes have been provided in the financial statements as if the
Company were a separate taxable entity. For periods prior to the three months
ended September 30, 1997, income tax expense reflected foreign taxes only due to
the expectation by the Company at that time of continuing losses in the U.S.
Deferred tax assets were established relating to differences between the
financial statements and tax basis of assets and liabilities based on enacted
tax laws and rates applicable to the period in which the differences are
expected to affect taxable income. These deferred tax assets were offset in
total by a valuation allowance due to the expectation of continued losses in the
U.S. During the three months ended September 30, 1997, the Company decreased the
tax valuation allowance based on management's expectations regarding future
taxable income for the Company. Management's expectations included the
consideration of the conversion of loans and advances from Spectra-Physics AB
and affiliates to equity in October 1997 which eliminated related interest
charges in the future.
14
<PAGE> 15
For income tax return purposes, the Company and affiliates of
Spectra-Physics AB have entered into a tax sharing arrangement that generally
requires the Company to determine its U.S. tax liability as a separate
consolidated group.
The Company's effective tax rate is 38% of pre tax income. During the
three months ended September 30, 1998, the Company recorded an income tax
adjustment of $350,000 to reverse excess income tax reserves. As a result,
income tax expense for the three months ended September 30, 1998 was $0.8
million. The Company recorded an income tax benefit of $23.5 million in the
three months ended September 30, 1997 as a result of decreasing the tax
valuation allowance discussed above. Income tax expense was $3.3 million in the
nine months ended September 1998 and income tax benefit was $23.3 million in the
nine months ended September 1997.
LIQUIDITY AND CAPITAL RESOURCES
Through the third quarter of 1997, the Company had satisfied its
liquidity requirements through cash provided by Spectra-Physics AB and
affiliates in the form of loans and advances. As of October 1, 1997, all
outstanding loans and advances from Spectra-Physics AB and affiliates were
converted to equity. At September 30, 1998, the Company had working capital of
$72.8 million, including cash and cash equivalents of $32.9 million, compared to
working capital at December 31, 1997 of $68.9 million, including cash and cash
equivalents of $33.5 million.
Cash provided by operating activities was $3.1 million and $30.2 million
in the nine months ended September 30, 1998 and 1997, respectively. Included in
cash provided by operating activities in the nine months ended September 30,
1997 was the receipt of $17.0 million relating to the settlement of a lawsuit
and the increase in accrued liabilities related to stock compensation of $14.5
million. Cash used in investing activities, mostly purchases of property, plant
and equipment, was $9.9 million and $5.8 million in the nine months ended
September 30, 1998 and 1997, respectively. Cash provided by financing activities
was $6.2 million in the nine months ended September 30, 1998. Cash used in
financing activities was $25.7 million in the nine months ended September 30,
1997. During the nine months ended September 30, 1998, financing activities
included the sale of 360,000 shares of common stock in accordance with an
overallotment option granted to the underwriters of the Company's initial public
offering of $3.2 million and increases in net borrowings under the Company's
credit facilities in Japan of $2.9 million. All of the cash used in financing
activities in the nine months ended September 30, 1997 represented payments on
loans and advances or transfers to Spectra-Physics AB and affiliates.
The above activities resulted in a decrease in cash and cash equivalents
of $0.6 million and $1.2 million in the nine months ended September 30, 1998 and
1997, respectively.
The Company has unsecured short-term credit facilities in Japan with
several banks. The facilities allow aggregate borrowings of 2.1 billion Yen
($15.2 million) and bear interest at 1.625% per annum. At September 30, 1998 and
December 31, 1997 there were $10.3 million and $7.3 million, respectively, of
borrowings outstanding under these facilities. The Company also has available a
$10.0 million committed, unsecured credit facility and a $10.0 million
uncommitted, unsecured credit facility with a bank. The committed facility is
through June 2000. At September 30, 1998 and December 31, 1997, there were no
borrowings under either facility.
The Company has reviewed its short- and long-term liquidity needs. The
Company's liquidity needs for at least the next eighteen months will be met by
cash flows from operations, existing cash balances and borrowings available
under its credit facilities.
YEAR 2000 COMPLIANCE
An issue exists for all companies that rely on computers as the year
2000 approaches. Known as the "Millennium Bug" or the "Year 2000 (Y2K) Problem"
the problem stems from the way that some computer systems and other chip
containing equipment were programmed to process date information. To conserve
memory, dates were stored as two digit, rather than as four digit, numbers with
all the dates assumed to be between 1900 and 1999. Thus the year 2000 would be
stored as "00" and be assumed to be 1900, and year 2001 as "01", and be assumed
to be 1901, etc. This practice will result in incorrect results when computers
so programmed perform arithmetic operations, comparisons or data field sorting
with dates later than 1999.
The Board of Directors of Spectra-Physics, and all levels of management,
are well aware of the Y2K problem, and plans have been made to address the
issue. Spectra-Physics' Y2K compliance plans are supervised by the Vice
President of Finance, and progress is under ongoing review by the Board. The
Company's Year 2000 Project Team has completed an initial review of
Spectra-Physics' (a)
15
<PAGE> 16
Information Technology (IT) and non-IT systems, (b) products, (c) vendors and
(d) customers and is acting to correct identified problems.
Information Technology (IT) and non-IT systems
Spectra-Physics has completed a review of its Information Technology
(IT) and non-IT systems at all of its sites. The Company has identified a few
items that are not Y2K compliant and has created a plan to bring them into
compliance by the end of the second quarter of 1999. The Company feels that it
will be able to accomplish this goal by (a) using its internal programming
staff, (b) using outside computer consultants in a few limited cases, and (c)
buying replacements for some specific systems. Costs in connection with these
solutions are not expected to be material. However, if such modifications or
replacements are not completed in a timely manner, the Y2K problem may have a
material adverse effect on the operations of the Company.
Products
The Company has completed a thorough review of its products. This review
has uncovered no material Y2K issues with Spectra-Physics products. The cost of
this review was not material.
Vendors and Suppliers
The Company has performed a careful review of its suppliers and vendors
and has identified a subset of them as being "critical" vendors. Spectra-Physics
has sent letters to each of these critical vendors asking them about their Y2K
readiness. The Company expects to get responses to such requests by the end of
1998. The Company will then assess their responses and, for those who are not
Y2K compliant, will either work with them to bring them into compliance or
identify alternative vendors. The cost of this process was not and is not
expected to be material. If a critical vendor is not Y2K compliant, and such
vendor cannot remedy its noncompliance and Spectra-Physics cannot identify an
alternative vendor, there may be a material adverse effect on the operations of
the Company.
Customers
The Company has drafted a Y2K compliance letter to be sent to its
customers in the fourth quarter of 1998. Since no one customer of the Company
makes up more than 5% of the Company's total sales, the Company is not subject
to as much risk as companies with more concentrated sales. The Company expects
to complete the survey of its customers during the first quarter of 1999. The
Company will assess their Y2K readiness in the first half of 1999 and will work
with those who are not compliant to identify alternative methods for them to
order from Spectra-Physics. The cost of this process has not been, and is not
expected to be, material.
The business communities' understanding of the Y2K Problem is
continually evolving, and all plans may need to be reviewed as the year 2000
approaches. Further third party Y2K problems (suppliers to Spectra-Physics'
vendors, for example) which are outside the control of Spectra-Physics may have
an effect on Spectra-Physics' ability to serve its customers. This, in turn, may
have a material adverse effect on the Company's operations. The Company is
working to be ready for the year 2000 and will continue to modify plans and
efforts as necessary.
EUROPEAN MONETARY UNION (EMU)
The euro is a new currency being introduced by certain European
countries collectively known as the European Monetary Union (EMU). The euro is
scheduled to be introduced on January 1, 1999 at which time the eleven
participating EMU members will establish fixed conversion rates between their
existing currencies (legacy currencies) and the euro. As of that date, the
legacy currencies will have no value of their own but will be subsets of the
euro. The legacy currencies and the euro will both be used through June 30, 2002
when the legacy currencies will be withdrawn (euro only environment).
The introduction of the euro could have an adverse impact on a company's
information systems, its markets and the economies in which it operates.
With regards to information systems, the Company has completed a
thorough review of its information systems and believes the introduction of the
euro in 1999 will have no material impact on its systems. Furthermore, the
Company's review indicates that
16
<PAGE> 17
the Company's information systems can operate in the "euro only" environment in
2002. As that date gets closer the Company expects to conduct another survey
concerning the euro's impact on information systems.
With regards to the Company's markets, the Company has reviewed its
customer list and current selling practices and expects no material impact from
the introduction of the euro on January 1, 1999.
The Company is currently unable to determine the ultimate long term
financial impact of the exclusive use of the euro on the Company's markets and
on the economies of the countries in which the Company operates. This impact
will be dependent upon the evolving competitive situations and macro-economic
impact of the introduction of the euro.
17
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's facilities and operations are subject to a wide variety of
Environmental Laws and Employee Safety Laws. Further, compliance with
Environmental Laws also may require the acquisition of permits or other
authorizations for certain activities and compliance with various standards or
procedural requirements. Although the Company believes that its operations are
in compliance in all material respects with current requirements under
Environmental Laws and Employee Safety Laws, the nature of the Company's
operations exposes it to the risk of liabilities or claims with respect to such
matters.
Certain of these Environmental Laws, including Superfund Laws, hold
owners or operators of land or businesses liable for their own and for previous
owners' or operators' releases of Hazardous Substances. Such Superfund Laws also
provide for responses to and liability for releases of certain Hazardous
Substances into the environment. The nature of the Company's operations and the
long history of industrial uses at some of its current or former facilities
expose the Company to risk of liabilities or claims under Superfund Laws. The
Company has received two notifications from state or federal environmental
regulatory agencies stating that the Company may be potentially responsible
under Superfund Laws for the release of Hazardous Substances generated by its
former operations at these two locations. The Company responded to the inquiries
by asserting that it was not responsible for response activities at these sites.
Since the Company provided its responses, the environmental regulatory agencies
have not pursued the Company as a potentially responsible party.
Since 1984, the Company's facilities in Mountain View, California
("Mountain View Site") have been undergoing investigation and remediation in
response to past releases of industrial solvents to the soil and groundwater. In
addition, the impacted groundwater has migrated to what is referred to as the
North Bayshore Area. As a result of these past releases, the Mountain View Site
and other neighboring sites are listed on the NPL or the Superfund List under
CERCLA. The Company is subject to Orders that require the Company to perform
remediation on- and off-site and investigate other potentially responsible
parties. Pursuant to the Orders and other orders issued to other responsible
parties, the Company and other responsible parties are jointly performing and
funding remediation which includes soil treatment and on-site and off-site
groundwater extraction, treatment and monitoring. All of the required soil and
groundwater remediation and monitoring systems currently required by the Order
are in place, and consequently the initial capital expenses for such systems
have been incurred. As of November 1998, the Company has received permission
from the Regional Water Quality Control Board (RWQCB) to shut down one of its
extraction well. The Company is seeking permission to shut down a second well.
In October 1997, the Company was served with a complaint that had been filed in
the Superior Court of the State of California seeking an unspecified amount of
damages for personal injuries and property damage incurred by residents of a
single location alleged to have resulted from the Company's and others'
negligent and/or intentional handling of toxic chemicals (Rosario Balcita et al.
v. Teledyne Semiconductor, Spectra-Physics Lasers, et al.). While the Company
believes it has meritorious defenses to the claims asserted in this lawsuit and
intends to vigorously defend itself in this case, the amount of loss, if any,
that may result upon resolution of this complaint is not currently estimable nor
have any amounts been accrued in the financial statements. There can be no
assurance that the complaint will be resolved without adverse impact to the
Company's financial position or results of operations. There can be no
assurances that other parties will not come forward and claim personal injury or
property damage.
Based on the Company's experience to date, the Company believes that the
future cost of compliance with existing Environmental Laws (or liability for
known environmental liabilities or claims) and Employee Safety Laws should not
have a material adverse effect on the Company's business, operating results and
financial condition. However, future events, such as changes in existing laws
and regulations or their interpretation, or the discovery of heretofore unknown
contamination, may give rise to additional compliance costs or liabilities that
could have a material adverse effect on the Company's business, operating
results and financial condition. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies or stricter or different interpretations of existing laws, may require
additional expenditures by the Company that may be material.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
18
<PAGE> 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Plan of Reorganization of the Company (Incorporated by reference
to exhibit 2.1 of the Company's Registration Statement on Form
S-1 (No. 333-38329))
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to exhibit 3.1 of the Company's
Registration Statement on Form S-1 (No. 333-38329))
3.2 Bylaws of the Company (Incorporated by reference to exhibit 3.2
of the Company's Registration Statement on Form S-1 (No.
333-38329))
4.1 Specimen of Common Stock Certificate (Incorporated by reference
to exhibit 4.1 of Amendment No. 1 of the Company's Registration
Statement on Form S-1 (No. 333-38329))
10.1 Agreement by and between Spectra-Physics USA and the Company,
dated as of August 29, 1997 (Incorporated by reference to
exhibit 10.1 of the Company's Registration Statement on Form S-1
(No. 333-38329))
10.2 Registration Rights Agreement between Spectra-Physics USA and
the Company (Incorporated by reference to exhibit 10.2 of
Amendment No. 2 of the Company's Registration Statement on Form
S-1 (No. 333-38329))
10.3 Form of Executive Employment Agreement with certain officers of
the Company (Incorporated by reference to exhibit 10.3 of
Amendment No. 2 of the Company's Registration Statement on Form
S-1 (No. 333-38329))
10.4 Employment Agreement dated May 19, 1995 between the Company and
Mark S. Sobey (Incorporated by reference to exhibit 10.4 of
Amendment No. 1 of the Company's Registration Statement on Form
S-1 (No. 333-38329))
10.5 Form of Executive Incentive Plan (Incorporated by reference to
exhibit 10.5 of Amendment No. 1 of the Company's Registration
Statement on Form S-1 (No. 333-38329))
10.6 1997 Spectra-Physics Lasers, Inc. Stock Option Plan
(Incorporated by reference to exhibit 10.6 of Amendment No. 1 of
the Company's Registration Statement on Form S-1 (No.
333-38329))
10.7 Patent License Agreement dated as of October 4, 1997 by and
between the Company, as licensor, and Spectra Precision, Inc.,
as licensee (Incorporated by reference to exhibit 10.7 of
Amendment No. 1 of the Company's Registration Statement on Form
S-1 (No. 333-38329))
10.8 Patent License Agreement dated as of October 4, 1997 by and
between Spectra Precision, Inc., as licensor, and the Company,
as licensee (Incorporated by reference to exhibit 10.8 of
Amendment No. 1 of the Company's Registration Statement on Form
S-1 (No. 333-38329))
10.9 Tradename and Trademark License Agreement dated as of August 29,
1997 by and between the Company, Spectra-Physics AB and certain
Spectra-Physics AB subsidiaries (Incorporated by reference to
exhibit 10.9 of Amendment No. 1 of the Company's Registration
Statement on Form S-1 (No. 333-38329))
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.10 Form of Restricted Stock Plan Agreement among the Company, Opto
Power and certain Opto Power employees (Incorporated by
reference to exhibit 10.10 of Amendment No. 1 of the Company's
Registration Statement on Form S-1 (No. 333-38329))
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Spectra-Physics Lasers, Inc.
Date: November 13, 1998 /s/ PATRICK L. EDSELL
------------------------------------
Patrick L. Edsell
Chairman, President and Chief
Executive Officer
Date: November 13, 1998 /s/ THOMAS J. SCANNELL
------------------------------------
Thomas J. Scannell
Vice President, Finance, Secretary,
and Treasurer
(Principal Financial Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,916
<SECURITIES> 0
<RECEIVABLES> 35,899
<ALLOWANCES> 0
<INVENTORY> 28,993
<CURRENT-ASSETS> 111,835
<PP&E> 79,350
<DEPRECIATION> 48,325
<TOTAL-ASSETS> 146,714
<CURRENT-LIABILITIES> 39,020
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 106,308
<TOTAL-LIABILITY-AND-EQUITY> 146,714
<SALES> 123,564
<TOTAL-REVENUES> 123,564
<CGS> 76,082
<TOTAL-COSTS> 76,082
<OTHER-EXPENSES> 38,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,022
<INCOME-PRETAX> 9,620
<INCOME-TAX> 3,306
<INCOME-CONTINUING> 6,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,314
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>
