<PAGE> 1
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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 MARCH 31, 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)
------------------------
<TABLE>
<S> <C>
DELAWARE 77-0264342
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 February 28, 1998 was 16,168,043 shares.
================================================================================
<PAGE> 2
SPECTRA-PHYSICS LASERS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial information ...................................... 1
Item 1. Financial statements and supplementary data
(a) Consolidated Balance Sheet at March 31, 1998 and 1
December 31, 1997.......................................
(b) Consolidated Statement of Operations for the three 2
months ended March 31, 1998 and 1997........................
(c) Consolidated Statement of Cash Flows for the three 3
months ended March 31, 1998 and 1997........................
(d) Notes to Consolidated Financial Statements.............. 4
Item 2. Management's discussion and analysis of financial condition 6
and results of operations...................................
Part II Other Information........................................... 12
Signatures.................................................. 15
</TABLE>
i
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (SEE NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,957 $ 33,487
Accounts receivable....................................... 37,137 39,511
Inventories............................................... 26,590 25,857
Deferred tax assets....................................... 8,200 8,200
Prepaid expenses and other current assets................. 5,345 4,409
-------- --------
Total current assets.............................. 108,229 111,464
-------- --------
Property, plant and equipment, net.......................... 26,849 25,480
Intangible assets, net...................................... 1,825 1,637
Other assets................................................ 1,840 1,943
-------- --------
Total assets...................................... $138,743 $140,524
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,003 $ 10,453
Borrowings under credit facilities........................ 7,676 7,321
Accrued and other current liabilities..................... 20,563 24,749
-------- --------
Total current liabilities......................... 36,242 42,523
Long-term liabilities....................................... 1,259 1,677
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 162 158
Additional paid-in capital................................ 97,236 93,991
Retained earnings......................................... 5,745 3,629
Cumulative translation adjustments........................ (1,901) (1,454)
-------- --------
Total stockholders' equity........................ 101,242 96,324
-------- --------
Total liabilities and stockholders' equity........ $138,743 $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.
1
<PAGE> 4
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $43,606 $35,080
Cost of products sold....................................... 27,020 22,535
------- -------
Gross margin...................................... 16,586 12,545
Operating expenses:
Research and development.................................. 4,748 3,318
Selling, general and administrative....................... 8,802 7,274
Other..................................................... -- 6,490
------- -------
Total operating expenses.......................... 13,550 17,082
------- -------
Operating income (loss)........................... 3,036 (4,537)
Other income (expense):
Interest income (expense)................................. 377 (1,423)
Foreign currency gain (loss).............................. -- 2,123
------- -------
Total other income (expense)...................... 377 700
------- -------
Income (loss) before income taxes................. 3,413 (3,837)
Income tax expense.......................................... 1,297 126
------- -------
Net income (loss)................................. $ 2,116 $(3,963)
======= =======
Net income (loss) per share:
Basic..................................................... $ 0.13 $ (0.30)
======= =======
Diluted................................................... $ 0.13 $ (0.30)
======= =======
Shares used in computing net income (loss) per share:
Basic..................................................... 16,168 13,000
Diluted................................................... 16,897 13,000
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 2,116 $(3,963)
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization............................. 1,405 1,150
Changes in operating assets and liabilities:
Accounts receivable.................................... 2,374 5,264
Inventories............................................ (733) (1,820)
Prepaid expenses and other current assets.............. (936) (813)
Accounts payable....................................... (2,450) (808)
Accrued and other current liabilities.................. (4,604) (692)
------- -------
Total cash provided by (used in) operating
activities....................................... (2,828) (1,682)
------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (2,712) (1,157)
Other....................................................... (594) (330)
------- -------
Total cash provided by (used in) investing
activities....................................... (3,306) (1,487)
------- -------
FINANCING ACTIVITIES
Net transfers (to) from Spectra-Physics AB.................. -- 1,542
Net borrowings under credit facilities...................... 355 --
Changes in loans and advances from Spectra-Physics AB....... -- 300
Net proceeds from issuance of common stock.................. 3,249 --
------- -------
Total cash provided by (used in) financing
activities....................................... 3,604 1,842
------- -------
Increase (decrease) in cash and cash
equivalents...................................... (2,530) (1,327)
Cash and cash equivalents at beginning of year.............. 33,487 2,531
------- -------
Cash and cash equivalents at end of period.................. $30,957 $ 1,204
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
3
<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 three months ended March 31, 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>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw material......................................... $ 9,349 $10,250
Work in process...................................... 8,686 8,077
Finished goods....................................... 8,555 7,530
------- -------
$26,590 $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
4
<PAGE> 7
SPECTRA-PHYSICS LASERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
The Company has adopted SFAS No. 130 in the three months ended March 31,
1998. Comprehensive net income (loss) for the three months ended March 31, 1998
and 1997 were $1,839,000 and $(3,963,000), respectively. The principal
difference between comprehensive net 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.
5. EARNINGS PER SHARE
SFAS No. 128 requires the presentation of basic and diluted net income
(loss) per share. Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) 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
(loss) per share as they were anti-dilutive.
The following table presents the calculation of basic and diluted net
income (loss) per share as required under SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
Numerator:
Net income (loss)..................................... $ 2,116 $ (3,963)
======= ========
Denominator:
Denominator for basic net income (loss) per share:
Weighted average shares............................ 16,168 13,000
Effect of dilutive securities:
Employee stock options............................. 729
------- --------
Denominator for diluted net income (loss) per share... 16,897 13,000
======= ========
Net income (loss) per share -- Basic.................... $ 0.13 $ (0.30)
Net income (loss) per share -- Diluted.................. $ 0.13 $ (0.30)
</TABLE>
Pro forma net loss 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
5
<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," or "anticipates" or the
negative thereof or other comparable terminology, or by discussions of strategy,
plans or intentions. Forward-looking statements involve risks and uncertainties,
including those described in the Risk Factors section of Item 1 of 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 period ended March
31, 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. These charges and credits are not 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 semiconductor-based and conventional
lasers and laser systems. 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.
Semiconductor-based lasers and laser systems are sold into the research and
development market and the OEM/industrial market. The OEM/industrial market is
characterized by unit sales, with varying prices, in volumes of as much as
several thousand units. Over the last three years, a growing proportion of the
Company's total net sales and most of its sales growth have been from
semiconductor-based lasers.
The Company has experienced a trend in its sales whereby its fiscal fourth
quarter net sales represent a disproportionate share of the Company's annual net
sales and whereby the Company's first quarter net sales
6
<PAGE> 9
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.
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 semiconductor-based lasers and
laser systems generally have higher gross margins than conventional lasers,
absent other factors, a shift in sales toward semiconductor-based lasers and
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
semiconductor-based lasers and laser systems. The Company expects to continue to
spend substantial resources in developing products for 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 that
have had in the past, and may have in the future, a significant impact on the
Company's results of operations.
The recent sharp devaluation of East Asian currencies against the U.S.
dollar has not had a material adverse affect on the Company's results of
operations. Excluding Japan, less than 3% of the Company's sales are to East
Asian countries, and the majority of these sales are denominated in U.S.
dollars. While sales to East Asian countries (excluding Japan) during the three
months ended March 31, 1998 are down as compared to the three months ended March
31, 1997, the Company does not expect this trend to have a material adverse
affect on the results of its operations.
The majority of the Company's sales in Japan are denominated in Japanese
Yen. The Company has responded to the devaluation of the Yen against the U.S.
dollar by raising the Yen denominated prices of its products in Japan. Further,
the Company is hopeful that the recently passed supplemental government budget
in Japan will result in increased unit sales there. However, there can be no
assurance that the continued devaluation of the Yen will not have a material
adverse affect on the Company's results of operations.
7
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets 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
MARCH 31, MARCH 31, CHANGE
----------------- -------------- 1997 TO
1998 1997 1998 1997 1998
------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $43,606 $35,080 100.0% 100.0% 24.3%
Cost of products sold............................ 27,020 22,535 62.0 64.2 19.9%
------- ------- ----- ------
Gross margin................................... 16,586 12,545 38.0 35.8 32.2%
Operating expenses:
Research and development....................... 4,748 3,318 10.9 9.5 43.1%
Selling, general and administrative............ 8,802 7,274 20.2 20.7 21.0%
Other.......................................... -- 6,490 0.0 18.5 -100.0%
------- ------- ----- ------
Total operating expenses.................... 13,550 17,082 31.1 48.7 -20.7%
------- ------- ----- ------
Operating income (loss)..................... 3,036 (4,537) 7.0 -12.9 NM
Other income (expense):
Interest income (expense)...................... 377 (1,423) 0.9 -4.1 NM
Foreign currency gain (loss)................... -- 2,123 0.0 6.1 -100.0%
------- ------- ----- ------
Total other income (expense)................ 377 700 0.9 2.0 -46.1%
------- ------- ----- ------
Income (loss) before income taxes........... 3,413 (3,837) 7.8 -10.9 NM
Income tax expense............................... 1,297 126 3.0 0.4 929.4%
------- ------- ----- ------
Net income (loss).............................. $ 2,116 $(3,963) 4.9% -11.3% NM
======= ======= ===== ======
Operating income before infrequent or unusual
items(a)....................................... $ 3,036 $ 1,953 7.0% 5.6% 55%
</TABLE>
- ---------------
(a) Operating income before infrequent or unusual items is presented as
supplemental information and should not be construed as a substitute, or
better, indicator of, results of operations than operating income (loss) or
net income (loss) determined in accordance with generally accepted
accounting principles. This information represents actual 1997 operating
income (loss) adjusted for legal expenses associated with a lawsuit of $1.7
million and compensation expense associated with stock options of $4.8
million. 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 MONTHS ENDED MARCH 31, 1998 AND 1997
Net sales
Net sales were $43.6 million in 1998 and $35.1 million in 1997,
representing an increase of 24.3%. Net sales for 1998, calculated using foreign
currency exchange rates for 1997, increased 28.4%. The growth in sales was
principally due to increased volumes of high-power semiconductor-based lasers
and laser systems as the market for these products expanded due to customers'
acceptance of these products.
8
<PAGE> 11
Net sales were in the following geographic markets (based on the location
of the Company's sales subsidiary):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Europe................................................... $ 7,365 $ 6,100
Japan.................................................... 9,116 9,366
United States and export................................. 27,125 19,614
------- -------
$43,606 $35,080
======= =======
</TABLE>
Net sales at actual currency exchange rates increased 20.7% for Europe and
38.3% for the U.S. Net sales at actual currency exchange rates decreased 2.7%
for Japan. Net sales for 1998, calculated using foreign currency exchange rates
for 1997, increased: 30.4% for Europe; 4.9% for Japan; and 38.3% for the U.S.
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 $16.6 million in 1998 and $12.5 million in 1997,
representing an increase of 32.2%. As a percentage of net sales, gross margin
was 38.0% and 35.8% in the three months ended March 31, 1998 and 1997,
respectively. The principal reasons for the improvement in gross margin as a
percentage of net sales were the higher proportion of high powered
semi-conductor lasers and laser systems which generally have higher gross
margins than conventional products and the increase in sales that allowed the
absorption of fixed manufacturing overhead expenses over a larger unit base.
Operating expenses
Operating expenses totaled $13.6 million in 1998 and $17.1 million in 1997,
representing a decrease of 20.7%. As a percentage of net sales, operating
expenses were 31.1% and 48.7% in the three months ended March 31, 1998 and 1997,
respectively. Included in other operating expenses in 1997 were legal expenses
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 $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 legal and
compensation expenses, operating expenses increased 27.9% from 1997 to 1998 and
were 30.2% of net sales in 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 $4.7 million in 1998 and $3.3
million in 1997, representing an increase of 43.1%. As a percentage of net
sales, research and development expenses were 10.9% and 9.5% in the three months
ended March 31, 1998 and 1997, respectively. The increase in research and
development expenses was principally focused on 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
9
<PAGE> 12
North American sales and support organization, and other administrative expenses
such as legal and accounting.
Selling, general and administrative expenses totaled $8.8 million in 1998
and $7.3 million in 1997, representing an increase of 21.0%. As a percentage of
net sales, selling, general and administrative expenses were 20.2% and 20.7% in
the three months ended March 31, 1998 and 1997, respectively. The principal
reason for the increase in selling, general and administrative expenses in
dollar terms were increased expenses associated with penetrating the
industrial/OEM markets and costs of being a public company.
Interest income (expense)
Interest income totaled $0.4 million in the three months ended March 31,
1998 compared to interest expense of $1.4 million in the three months ended
March 31,1997. 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-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 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 by entering 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 will use 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.
There were no foreign currency gains or losses in the three months ended
March 31, 1998. Foreign currency gains of $2.1 million were recognized in the
three months ended March 31, 1997.
10
<PAGE> 13
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 for 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.
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.
Income tax expense was $1.3 million and $0.1 million in the three months
ended March 31, 1998 and 1997, respectively.
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
March 31, 1998, the Company had working capital of $72.0 million, including cash
and cash equivalents of $31.0 million, compared to working capital at December
31, 1997 of $68.9 million, including cash and cash equivalents of $33.5 million.
Cash used in operating activities was $2.8 million and $1.7 million in the
three months ended March 31, 1998 and 1997, respectively. Cash used in investing
activities, mostly purchases of property, plant and equipment, was $3.3 million
and $1.5 million in the three months ended March 31, 1998 and 1997,
respectively. Cash provided by financing activities was $3.6 million and $1.8
million in the three months ended March 31, 1998 and 1997, respectively. During
the three months ended March 31, 1998, net proceeds from 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 were $3.2 million and
increases in net borrowings under the Company's credit facilities in Japan were
$0.4 million. All of the cash provided by financing activities in the three
months ended March 31, 1997 represented loans and advances or transfers from
Spectra-Physics AB and affiliates.
The above activities resulted in a decrease in cash and cash equivalents of
$2.5 million and $1.3 million in the three months ended March 31, 1998 and 1997,
respectively.
As part of the Reorganization, the Company assumed two short-term credit
facilities in Japan. The credit facilities are with two different banks, are
unsecured, but borrowings from one bank are guaranteed by Spectra-Physics AB
through November 1998. The two facilities allow aggregate borrowings of 1.2
billion Yen ($9.2 million) and bear interest at 1.625% per annum. At March 31,
1998 and December 31, 1997 there were $7.7 million and $7.3 million,
respectively, of borrowings outstanding under these facilities. In October 1997,
the Company obtained a $20.0 million uncommitted, unsecured credit facility with
a bank. At March 31, 1998 and December 31, 1997, there were no borrowings under
this facility.
The Company has reviewed its short- and long-term liquidity needs. The
Company has determined that funding from Spectra-Physics AB will not be
necessary in the future. 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.
11
<PAGE> 14
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
three 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 three
locations. The Company responded to the inquiries by asserting that it was not
responsible for response activities at any of these sites. Since the Company
provided its responses, the environmental regulatory agencies have not pursued
the Company as a potentially responsible party at two of the sites and the
Company received a letter from the environmental agency stating that it does not
consider the Company as a potentially responsible party at this time at the
third site.
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. 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.
Accordingly, 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.
12
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES
Not applicable.
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))
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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))
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))
21.1 List of Subsidiaries (Incorporated by reference to exhibit
21.1 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
14
<PAGE> 17
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: May 11, 1998 /s/ PATRICK L. EDSELL
--------------------------------------
Patrick L. Edsell
Chairman, President and Chief
Executive Officer
Date: May 11, 1998 /s/ THOMAS J. SCANNELL
--------------------------------------
Thomas J. Scannell
Vice President, Finance
(Principal Financial Officer)
15
<PAGE> 18
EXHIBIT INDEX
<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))
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))
21.1 List of Subsidiaries (Incorporated by reference to exhibit
21.1 of the Company's Registration Statement on Form S-1
(No. 333-38329))
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 30,957
<SECURITIES> 0
<RECEIVABLES> 37,137
<ALLOWANCES> 0
<INVENTORY> 26,590
<CURRENT-ASSETS> 108,229
<PP&E> 72,418
<DEPRECIATION> 45,569
<TOTAL-ASSETS> 138,743
<CURRENT-LIABILITIES> 36,242
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 101,080
<TOTAL-LIABILITY-AND-EQUITY> 138,743
<SALES> 43,606
<TOTAL-REVENUES> 43,606
<CGS> 27,020
<TOTAL-COSTS> 27,020
<OTHER-EXPENSES> 13,550
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (377)
<INCOME-PRETAX> 3,413
<INCOME-TAX> 1,297
<INCOME-CONTINUING> 2,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,116
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
