<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, 1999
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>
<CAPTION>
DELAWARE 77-0264342
<S> <C>
(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 October 30, 1999 was 16,168,043 shares.
================================================================================
<PAGE> 2
SPECTRA-PHYSICS LASERS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
Part I Financial information
Item 1. Financial statements and supplementary data:
<S> <C> <C>
(a) Consolidated Balance Sheet at September 30, 1999 and December 31, 1998......................... 3
(b) Consolidated Statement of Operations for the three and nine months ended
September 30, 1999 and 1998.................................................................... 4
(c) Consolidated Statement of Cash Flows for the nine months ended September 30, 1999 and 1998.... 5
(d) Notes to Consolidated Financial Statements..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 18
Part II Other Information.................................................................................. 19
Signatures......................................................................................... 22
</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,
1999 1998
------------- ------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,379 $ 34,620
Accounts receivable 36,073 45,824
Inventories 28,248 25,566
Deferred tax assets 7,300 7,300
Prepaid expenses and other current assets 7,408 3,944
--------- ---------
Total current assets 100,408 117,254
--------- ---------
Property, plant and equipment, net 39,034 35,156
Intangible assets, net 1,876 2,122
Other assets 2,613 2,496
--------- ---------
Total assets $ 143,931 $ 157,028
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,577 $ 9,262
Borrowings under credit facilities 10,984 11,756
Accrued and other current liabilities 20,452 23,959
--------- ---------
Total current liabilities 39,013 44,977
Long-term liabilities 1,987 1,983
Commitments and contingencies
Stockholders' equity:
Common stock 162 162
Additional paid-in capital 97,235 97,235
Retained earnings 7,876 13,276
Accumulated other comprehensive income (loss) (2,342) (605)
--------- ---------
Total stockholders' equity 102,931 110,068
--------- ---------
Total liabilities and stockholders' equity $ 143,931 $ 157,028
========= =========
</TABLE>
Note: The balance sheet at December 31, 1998 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)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ................................ $ 34,149 $ 39,731 $ 100,131 $ 123,564
Cost of products sold .................... 22,345 24,574 65,256 76,082
Cost of products sold-inventory write-offs 3,700 -- 3,700 --
--------- --------- --------- ---------
Gross margin ......................... 8,104 15,157 31,175 47,482
--------- --------- --------- ---------
Operating expenses:
Research and development ............... 3,968 4,142 12,353 12,887
Selling, general and administrative .... 8,378 8,282 25,708 25,997
Restructuring .......................... 1,999 -- 2,540 --
--------- --------- --------- ---------
Total operating expenses ............. 14,345 12,424 40,601 38,884
--------- --------- --------- ---------
Operating income (loss) .............. (6,241) 2,733 (9,426) 8,598
--------- --------- --------- ---------
Other income (expense):
Interest income ........................ 187 350 638 1,022
Foreign currency gain (loss) ........... (34) -- 79 --
--------- --------- --------- ---------
Total other income ................... 153 350 717 1,022
--------- --------- --------- ---------
Income (loss) before income taxes .... (6,088) 3,083 (8,709) 9,620
Income tax expense (benefit) ............. (2,313) 822 (3,309) 3,306
--------- --------- --------- ---------
Net income (loss) .................... $ (3,775) $ 2,261 $ (5,400) $ 6,314
========= ========= ========= =========
Net income (loss) per share:
Basic .................................. $ (0.23) $ 0.14 $ (0.33) $ 0.39
Diluted ................................ $ (0.23) $ 0.14 $ (0.33) $ 0.38
Shares used in computing net
income (loss) per share:
Basic .................................. 16,168 16,168 16,168 16,168
Diluted ................................ 16,168 16,168 16,168 16,575
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SPECTRA-PHYSICS LASERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................... $ (5,400) $ 6,314
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization ...................... 4,862 4,213
Inventory write-offs ............................... 3,700 --
Non-cash portion of restructuring charge ........... 655 --
Changes in operating assets and liabilities:
Accounts receivable ............................. 9,751 3,612
Inventories ..................................... (6,382) (3,136)
Prepaid expenses and other current assets ....... (3,919) (1,418)
Accounts payable ................................ (1,685) (3,312)
Accrued and other current liabilities ........... (4,694) (3,136)
-------- --------
Total cash provided by (used in)
operating activities ....................... (3,112) 3,137
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........... (8,740) (9,758)
Other ................................................ (190) (144)
-------- --------
Total cash used in investing activities ........ (8,930) (9,902)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) under credit facilities .... (772) 2,945
Net proceeds from issuance of common stock ........... -- 3,249
-------- --------
Total cash provided by (used in) financing
activities ................................. (772) 6,194
-------- --------
Effect of changes in foreign currency exchange
rates ...................................... (427) --
-------- --------
Decrease in cash and cash equivalents ...... (13,241) (571)
Cash and cash equivalents at beginning of year ....... 34,620 33,487
-------- --------
Cash and cash equivalents at end of period ........... $ 21,379 $ 32,916
======== ========
</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,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. 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, 1998.
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,
1999 1998
------------- ------------
<S> <C> <C>
Raw material ............. $11,161 $ 9,866
Work in process .......... 6,078 7,582
Finished goods ........... 11,009 8,118
------- -------
$28,248 $25,566
======= =======
</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. NET INCOME (LOSS) PER SHARE
Statement of Financial Accounting Standards (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 per share is computed giving effect to all dilutive 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. Diluted net loss per share does not include such incremental common
shares issuable upon the exercise of stock options as they were anti-dilutive.
Approximately 2.1 million options to acquire shares of common stock were
excluded from the calculation of diluted net income (loss) per share for the
three and nine months ended September 30, 1999 as they were antidilutive. Stock
options granted by a subsidiary of the Company were not included in the
calculation of net income (loss) per share as they were anti-dilutive.
6
<PAGE> 7
The following table presents the calculation of basic and diluted net
income (loss) per share as required under SFAS No. 128 (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ..................... $ (3,775) $ 2,261 $ (5,400) $ 6,314
======== ======== ======== ========
Denominator:
Denominator for basic net income (loss)
per share:
Weighted average shares ............ 16,168 16,168 16,168 16,168
Effect of dilutive securities:
Employee stock options ............. -- -- -- 407
-------- -------- -------- --------
Denominator for diluted net
income (loss) per share ............ 16,168 16,168 16,168 16,575
Net income (loss) per share -- Basic .... $ (0.23) $ 0.14 $ (0.33) $ 0.39
Net income (loss) per share -- Diluted .. $ (0.23) $ 0.14 $ (0.33) $ 0.38
</TABLE>
5. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
fourth quarter of 1998. SFAS No. 130 established new rules for the reporting and
display of comprehensive income (loss) and its components. The adoption of SFAS
No. 130 had no impact on the Company's net income (loss) or total stockholders'
equity.
Comprehensive income (loss) was as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ................................ $(3,775) $ 2,261 $(5,400) $ 6,314
Foreign currency translation adjustments ......... 651 903 (534) 579
Unrealized gain (loss) on forward foreign currency
contracts, net of income taxes ................. (2,521) -- (1,203) --
------- ------- ------- -------
Total comprehensive income (loss) ................ $(5,645) $ 3,164 $(7,137) $ 6,893
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheet consists of the cumulative foreign currency
translation adjustments and net unrealized gains (losses) on forward foreign
currency contracts.
6. ENVIRONMENTAL MATTERS
See Part II., Item 1. Legal Proceedings
7
<PAGE> 8
7. SEGMENT REPORTING
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH OF THE
REPORTABLE SEGMENT DERIVES ITS REVENUES
The Company has five reportable segments: the Commercial Systems Group
(CSG) business unit; the Industrial and Scientific Lasers (ISL) business unit;
the Original Equipment Manufacturer (OEM) business unit; Opto Power Corporation
(OPC); and Spectra-Physics Distribution (SPD) business unit. CSG designs and
manufactures optics, thin films, fabricated parts, plasma tubes, and subsystems
for all operating units within the Company and external customers. CSG also
designs, manufactures, and markets low power laser sources and beam delivery
systems for OEM products in the industrial and medical instrumentation markets.
ISL designs, markets and manufactures high power semiconductor-based and
conventional lasers for the industrial and scientific markets. OEM designs,
markets and manufactures high power semiconductor-based lasers for various OEM
markets. OPC designs, markets and manufactures high power semiconductor-based
laser diodes, components and systems. SPD is the Company's worldwide sales,
service and support organization.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The Company evaluates performance and allocates resources based on Earnings
Before Interest and Taxes (EBIT). The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Intersegment sales and transfers are recorded at intercompany transfer
prices which approximate sales as if conducted on an arm's length basis.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that are, except for
SPD, organized primarily by technology (for example, high power
semiconductor-based, semiconductor laser pumped solid state, optics, air cooled
lasers.) The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production methods
and different customer bases.
Information about segments (in thousands):
<TABLE>
<CAPTION>
All
CSG ISL OEM OPC SPD Others Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended September 30, 1999:
Net sales to external customers .... $ 137 $ -- $ -- $ 887 $ 32,380 $ 745 $ 34,149
Intersegment net sales ............. 7,149 15,072 9,786 5,212 -- -- 37,219
Segment EBIT ....................... (680) 2,875 2,142 (929) (1,891) (619) 898
Segment assets ..................... 17,926 23,518 11,471 36,619 64,423 2,096 156,053
Three months ended September 30, 1998:
Net sales to external customers .... $ 338 $ -- $ -- $ 3,576 $ 35,288 $ 529 $ 39,731
Intersegment net sales ............. 7,563 15,557 6,859 4,890 -- -- 34,869
Segment EBIT ....................... (18) 2,408 251 1,959 (860) (614) 3,126
Segment assets ..................... 17,023 21,893 9,692 31,475 57,427 2,054 139,564
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
All
CSG ISL OEM OPC SPD Others Total
--------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Nine months ended September 30, 1999:
Net sales to external customers ... $ 539 $ -- $ -- $ 4,695 $ 92,981 $ 1,916 $ 100,131
Intersegment net sales ............ 21,970 44,189 24,805 13,107 -- -- 104,071
Segment EBIT ...................... (567) 8,220 3,889 (2,299) (6,439) (1,931) 873
Nine months ended September 30, 1998:
Net sales to external customers ... $ 791 $ -- $ -- $ 12,588 $ 105,979 $ 4,206 $ 123,564
Intersegment net sales ............ 24,908 49,149 25,638 13,748 -- -- 113,443
Segment EBIT ...................... 1,369 7,776 3,406 5,933 (4,765) (725) 12,994
</TABLE>
Reconciliation of segment information to financial statements (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales:
Total external sales for reportable segments .......... $ 33,404 $ 39,202 $ 98,215 $ 119,358
Intersegment sales for reportable segments ............ 37,219 34,869 104,071 113,443
Other sales ........................................... 745 529 1,916 4,206
Elimination of intersegment sales ..................... (37,219) (34,869) (104,071) (113,443)
--------- --------- --------- ---------
Total consolidated net sales ....................... $ 34,149 $ 39,731 $ 100,131 $ 123,564
========= ========= ========= =========
Income (loss) before income taxes:
Total EBIT for reportable segments .................... $ 1,517 $ 3,740 $ 2,805 $ 13,719
Other EBIT ............................................ (619) (614) (1,931) (725)
Corporate expenses .................................... (1,112) (1,243) (3,163) (3,547)
Other expenses not allocated to segments .............. (328) 850 (897) (849)
Inventory write-offs .................................. (3,700) -- (3,700) --
Restructuring ......................................... (1,999) -- (2,540) --
Interest income ....................................... 187 350 638 1,022
Foreign currency gain ................................. (34) -- 79 --
--------- --------- --------- ---------
Total consolidated income (loss) before income taxes $ (6,088) $ 3,083 $ (8,709) $ 9,620
========= ========= ========= =========
</TABLE>
8. INVENTORY WRITEOFFS AND RESTRUCTURING CHARGES
In the three months ended September 30, 1999, the Company wrote off $3.7
million of inventory. A portion of these writeoffs related to inventory for the
Company's hard drive disk texturing system product. The Company exited its disk
texturing system business in the quarter. The Company also recorded inventory
writeoffs as a result of technology changes for high power semiconductor-based
lasers.
In the three months ended September 30, 1999, the Company recorded a
restructuring charge of $2.0 million for severance related to the termination of
36 employees as well as other costs associated with exiting the disk texturing
system business. Through September 30, 1999, the Company recorded a total of
$2.5 million of restructuring charges, of which $1.9 million related to
severance for 65 terminated employees and the remainder principally related to
non-cash costs associated with exiting the disk texturing system business. As of
September 30, 1999, approximately $1.1 million of the severance had not been
paid.
9
<PAGE> 10
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, indirectly owns
80.4% of the Company's outstanding Common Stock. On February 22, 1999,
shareholders of Spectra-Physics AB holding approximately 98.4% of the
outstanding shares of Spectra-Physics AB tendered their shares to Thermo
Instrument Systems Inc. (TIS), a U.S. based corporation whose common stock is
traded on the American Stock Exchange, which shares were thereafter accepted by
TIS for approximately $355 million. Accordingly, TIS now indirectly owns
approximately 79.1% of the Company's outstanding common stock.
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 seasonal sales
pattern related to customers' fiscal years 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 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. In addition, the Company expects to spend increasing amounts to develop
both active and passive devices for the telecommunication market.
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.
The Company has five reportable segments: the Commercial Systems Group
(CSG) business unit; the Industrial and Scientific Lasers (ISL) business unit;
the Original Equipment Manufacturer (OEM) business unit; Opto Power Corporation
(OPC); and Spectra-Physics Distribution (SPD) business unit. CSG designs and
manufactures optics, thin films, fabricated parts, plasma tubes, and subsystems
for all operating units within the Company and external customers. CSG also
designs, manufactures and markets low power laser sources and beam delivery
systems for OEM products in the industrial and medical instrumentation markets.
ISL designs, markets and manufactures high power semiconductor-based and
conventional lasers for the industrial and
10
<PAGE> 11
scientific markets. OEM designs, markets and manufactures high power
semiconductor-based lasers for various OEM markets. OPC designs, markets and
manufactures high power semiconductor-based laser diodes, components and
systems. SPD is the Company's worldwide sales, service and support organization.
Reference is made to Footnote 7 of the Consolidated Financial Statements for
disclosures of certain financial information related to the reportable segments.
11
<PAGE> 12
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 1998 to 1999:
<TABLE>
<CAPTION>
Percent of
Net Sales
Three Months Ended Three Months Ended Percent
September 30, September 30, Change
--------------------- ------------------- 1999 to
1999 1998 1999 1998 1998
-------- -------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales ................................ $ 34,149 $ 39,731 100.0% 100.0% -14.0%
Cost of products sold .................... 22,345 24,574 65.4% 61.9% -9.1%
Cost of products sold-inventory write-offs 3,700 -- 10.8% -- 100.0%
-------- -------- ----- ----- -----
Gross margin ......................... 8,104 15,157 23.8% 38.1% -46.5%
-------- -------- ----- ----- -----
Operating expenses:
Research and development ............... 3,968 4,142 11.6% 10.4% -4.2%
Selling, general and administrative .... 8,378 8,282 24.5% 20.8% 1.2%
Restructuring .......................... 1,999 -- 5.9% -- 100.0%
-------- -------- ----- ----- -----
Total operating expenses ............. 14,345 12,424 42.0% 31.3% 15.5%
-------- -------- ----- ----- -----
Operating income (loss) .............. (6,241) 2,733 -18.3% 6.9% NM
-------- -------- ----- ----- -----
Other income (expense):
Interest income ........................ 187 350 0.5% 0.9% -46.6%
Foreign currency gain (loss) ........... (34) -- - 0.1% -- 100.0%
-------- -------- ----- ----- -----
Total other income ................... 153 350 0.4% 0.9% -56.3%
-------- -------- ----- ----- -----
Income (loss) before income taxes .... (6,088) 3,083 -17.8% 7.8% NM
Income tax expense (benefit) ............. (2,313) 822 - 6.8% 2.1% NM
-------- -------- ----- ----- -----
Net income (loss) .................... $ (3,775) $ 2,261 -11.1% 5.7% NM
======== ======== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Percent of
Net Sales
Nine Months Ended Nine Months Ended Percent
September 30, September 30, Change
---------------------- ------------------- 1999 to
1999 1998 1999 1998 1998
-------- --------- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales ................................ $100,131 $123,564 100.0% 100.0% -19.0%
Cost of products sold .................... 65,256 76,082 65.2% 61.6% -14.2%
Cost of products sold-inventory write-offs 3,700 -- 3.7% -- 100.0%
-------- -------- ----- ----- -----
Gross margin ......................... 31,175 47,482 31.1% 38.4% -34.3%
-------- -------- ----- ----- -----
Operating expenses:
Research and development ............... 12,353 12,887 12.3% 10.4% -4.1%
Selling, general and administrative .... 25,708 25,997 25.7% 21.0% -1.1%
Restructuring .......................... 2,540 -- 2.5% -- 100.0%
-------- -------- ----- ----- -----
Total operating expenses ............. 40,601 38,884 40.5% 31.5% 4.4%
-------- -------- ----- ----- -----
Operating income (loss) .............. (9,426) 8,598 -9.4% 7.0% NM
-------- -------- ----- ----- -----
Other income (expense):
Interest income ........................ 638 1,022 0.6% 0.8% -37.6%
Foreign currency gain (loss) ........... 79 -- 0.1% -- 100.0%
-------- -------- ----- ----- -----
Total other income ................... 717 1,022 0.7% 0.8% -29.8%
Income (loss) before income taxes .... (8,709) 9,620 -8.7% 7.8% NM
Income tax expense (benefit) ............. (3,309) 3,306 -3.3% 2.7% NM
-------- -------- ------ ------ ------
Net income (loss) .................... $ (5,400) $ 6,314 -5.4% 5.1% NM
======== ======== ====== ===== ======
</TABLE>
NM -- not meaningful
12
<PAGE> 13
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales
Net sales were $34.1 million and $39.7 million in the three months ended
September 30, 1999 and 1998, respectively, representing a decrease of 14.0%. Net
sales for the three months ended September 30, 1999, calculated using foreign
currency exchange rates for the same period in 1998, decreased 15.9%.
Approximately 35% of the decrease in net sales was attributable to decreased
sales of high power semiconductor-based lasers and laser systems and the
remainder of the decrease in net sales related to reduced sales of conventional
products. The decreased sales of high power semiconductor-based lasers and laser
systems was the result of reduced sales principally in the image recording
market and, to a lesser extent, the medical and industrial manufacturing
markets. The decrease in conventional product sales reflects decreased sales in
the research market in the U.S. These decreases were offset, in part, by
increased sales in the computer and microelectronics manufacturing market. Sales
of high power semiconductor-based lasers and laser systems were 50.0% of total
sales in the three months ended September 30, 1999 compared to 46.6% of total
sales in the three months ended September 30, 1998.
Net Sales in the following geographic markets were:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------- -------
(in thousands)
<S> <C> <C>
North America ..... $16,065 $22,298
Japan ............. 8,855 6,704
Europe ............ 7,300 8,365
Other Asia ........ 928 1,412
Rest of the World . 1,001 952
------- -------
$34,149 $39,731
======= =======
</TABLE>
Net sales for the three months ended September 30, 1999 at actual currency
exchange rates increased 32.1% for Japan and 5.1% for Rest of the World, and
decreased 28.0% for North America, 12.7% for Europe, and 34.3% for Other Asia.
Net sales for the three months ended September 30, 1999, calculated using
foreign currency exchange rates for the same period in 1998, increased 10.1% for
Japan and decreased 7.8% for Europe.
Net sales were $100.1 million and $123.6 million in the nine months ended
September 30, 1999 and 1998, respectively, representing a decrease of 19.0%. Net
sales for the nine months ended September 30, 1999, calculated using foreign
currency exchange rates for the same period in 1998, decreased 21.1%.
Approximately 70% of the decrease in net sales was attributable to decreased
sales of high power semiconductor-based lasers and laser systems. Most of this
decrease was experienced in three markets, computer and microelectronics
manufacturing, industrial manufacturing and image recording. The remainder of
the decrease was conventional products, principally in the research market.
Sales of high power semiconductor-based lasers and laser systems were 46.9% of
total sales in the nine months ended September 30, 1999 compared to 46.5% of
total sales in the nine months ended September 30, 1998.
Net sales in the following geographic markets were:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
North America ........ $ 46,253 $ 68,053
Japan ................ 24,326 23,557
Europe ............... 23,119 24,041
Other Asia ........... 3,488 4,485
Rest of the World .... 2,945 3,428
-------- --------
$100,131 $123,564
======== ========
</TABLE>
13
<PAGE> 14
Net sales for the nine months ended September 30, 1999 at actual currency
exchange rates increased 3.3% for Japan, and decreased 32.0% for North America,
3.8% for Europe, 22.2% for Other Asia, and 14.1% for Rest of the World. Net
sales for the nine months ended September 30, 1999, calculated using foreign
currency exchange rates for the same period in 1998, decreased 10.0% for Japan
and 3.2% for Europe.
Net sales are attributed in the above tables based on the location of the
Company's customer. Substantially all sales in North America, Other Asia and
Rest of the World are denominated in U.S. dollars. Europe and Japan in the above
table include sales from the Company's European and Japanese sales subsidiaries,
respectively. Export sales to countries not located in Asia are included in Rest
of the World.
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 first nine months of
1999, the percentage of total sales of conventional lasers remained relatively
flat compared to the first nine months of 1998. This was due to weaknesses in
certain key OEM markets which are the primary markets of semiconductor based
lasers as described above. Widely published reports foresee no upturn in these
markets until late 1999 thereby limiting sales growth for 1999. However, the
Company believes that the first three quarters of 1999 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 $8.1 million and $15.2 million for the three months ended
September 30, 1999 and 1998, respectively, representing a decrease of 46.5%. As
a percentage of net sales, gross margin was 23.8% and 38.1% in the three months
ended September 30, 1999 and 1998, respectively. Included in cost of sales for
the three months ended September 30, 1999, was $3.7 million of inventory
writeoffs. These inventory writeoffs related to hard drive disk texturing
systems and technology changes for high power semiconductor-based lasers.
Without these inventory writeoffs, gross margin for the three months ended
September 30, 1999 was 34.6% of sales and declined 22.1% compared to the three
months ended September 30, 1998. The principal reason for the decrease in gross
margin as a percentage of net sales was unfavorable overhead absorption
resulting from lower sales.
Gross margin was $31.2 million and $47.5 million for the nine months ended
September 30, 1999 and 1998, respectively, representing a decrease of 34.3%. As
a percentage of net sales, gross margin was 31.1% and 38.4% in the nine months
ended September 30, 1999 and 1998, respectively. Without the $3.7 million
inventory writeoffs referred to above, gross margin for the nine months ended
September 30, 1999 was 34.8% of sales and declined 26.6% compared to the nine
months ended September 30, 1998. The principal reason for the decrease in gross
margin as a percentage of net sales was unfavorable overhead absorption
resulting from lower sales.
Operating expenses
Operating expenses totaled $14.3 million and $12.4 million in the three
months ended September 30, 1999 and 1998, respectively, representing an increase
of 15.5%. As a percentage of net sales, operating expenses were 42.0% and 31.3%
in the three months ended September 30, 1999 and 1998, respectively. Included in
operating expenses for the three months ended September 30, 1999 were
restructuring costs of $2.0 million. Excluding such restructuring costs,
operating expenses for the three months ended September 30, 1999 decreased 0.6%
compared to the three months ended September 30, 1998.
Operating expenses totaled $40.6 million and $38.9 million in the nine
months ended September 30, 1999 and 1998, respectively, representing an increase
of 4.4%. As a percentage of net sales, operating expenses were 40.5% and 31.5%
in the nine months ended September 30, 1999 and 1998, respectively. Included in
operating expenses for the nine months ended September 30, 1999 were
restructuring costs of $2.5 million. Excluding such restructuring costs,
operating expenses for the nine months ended September 30, 1999 were 38.0% of
sales and decreased 2.1% compared to the nine months ended September 30, 1998.
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 $4.0 million and $4.1 million for
the three months ended September 30, 1999 and 1998, respectively, representing a
decrease of 4.2%. As a percentage of net sales, research and development
expenses were 11.6% and 10.4% in the three months ended September 30, 1999 and
1998, respectively. Research and development expenses totaled $12.4 million and
$12.9 million for the nine months ended September 30, 1999 and 1998,
respectively, representing a decrease of 4.1%. As a percentage of net sales,
research and development expenses were 12.3% and 10.4% in the nine months ended
September 30, 1999 and 1998, respectively.
14
<PAGE> 15
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 $8.4 million and $8.3
million for the three months ended September 30, 1999 and 1998, respectively,
representing an increase of 1.2%. As a percentage of net sales, selling, general
and administrative expenses were 24.5% and 20.8% in the three months ended
September 30, 1999 and 1998, respectively. Selling, general and administrative
expenses totaled $25.7 million and $26.0 million for the nine months ended
September 30, 1999 and 1998, respectively, representing a decrease of 1.1%. As a
percentage of net sales, selling, general and administrative expenses were 25.7%
and 21.0% in the nine months ended September 30, 1999 and 1998, respectively.
Interest income
Interest income totaled $0.2 million and $0.4 million in the three months
ended September 30, 1999 and 1998, respectively. Interest income totaled $0.6
million and $1.0 million in the nine months ended September 30, 1999 and 1998,
respectively. Interest income was earned on the Company's invested cash and cash
equivalents. The decline in interest income for the three and nine months ended
September 30, 1999 resulted from lower average cash and cash equivalent balances
during the period.
Foreign currency gain (loss)
At September 30, 1999, the Company had contracts for the sale of foreign
currencies and the purchase of U.S. dollars totaling $46.9 million. At September
30, 1999, the Company had deferred losses relating to its foreign currency
contracts of approximately $1.2 million (net of income taxes), substantially all
of which is expected to be recognized in income over the next twelve months.
The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of September 30, 1999.
The information is provided in U.S. dollar amounts, as presented in the
Company's consolidated financial statements. The table presents the notional
amount (at contract exchange rates) and the weighted average contractual foreign
currency exchange rates. All contracts mature within twelve months.
Foreign currency spot/forward contracts (in thousands, except average
contract rates):
<TABLE>
<CAPTION>
AVERAGE
NOTIONAL CONTRACT
AMOUNT RATE
-------- --------
<S> <C> <C>
Japanese Yen ............. $ 28,747 110.5939
British Pound Sterling.... 4,587 0.615
German Marks ............. 7,039 1.7498
Netherland Guilder ....... 2,402 1.9804
French Franc ............. 4,124 5.9088
--------
$ 46,899
========
Estimated fair value . $ (1,224)(*)
========
</TABLE>
- ----------
(*) The estimated fair value is based on the estimated amount at which the
contracts could be settled based on forward exchange rates.
During the three and nine months ended September 30, 1999, the Company
recorded a foreign currency loss of $0.03 million and gain of $0.08 million,
respectively, principally related to losses and gains incurred as a result of
foreign exchange rate movements on unhedged accounts receivable.
15
<PAGE> 16
Income tax expense
Income taxes have been provided in the financial statements as if the
Company were a separate taxable entity.
The Company's effective tax rate is 38% of pre tax income (loss). During
the three months ended September 30, 1998 the Company adjusted its tax reserves
to the appropriate amount. An income tax benefit of $2.3 million was recorded in
the three months ended September 30, 1999 and income tax expense of $0.8 million
was recorded in the three months ended September 30, 1998. An income tax benefit
of $3.3 million was recorded in the nine months ended September 30, 1999 and
income tax expense of $3.3 million was recorded in the nine months ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $61.4 million,
including cash and cash equivalents of $21.4 million, compared to working
capital at December 31, 1998 of $72.3 million, including cash and cash
equivalents of $34.6 million.
Cash used in operating activities was $3.1 million in the nine months ended
September 30, 1999 and cash provided by operating activities was $3.1 million in
the nine months ended September 30, 1998. Cash used in investing activities,
primarily purchases of property, plant and equipment, was $8.9 million and $9.9
million in the nine months ended September 30, 1999 and 1998, respectively. Cash
used in financing activities was $0.8 million in the nine months ended September
30, 1999. Cash provided by financing activities was $6.2 million in the nine
months ended September 30, 1998. All of the cash used in financing activities in
the nine months ended September 30, 1999 represented decreases in net borrowings
under the Company's credit facilities. 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. The effect of foreign
currency exchange rate changes on cash was $0.4 million in the nine months ended
September 30, 1999.
These activities resulted in a decrease in cash and cash equivalents of
$13.2 million and $0.6 million in the nine months ended September 30, 1999 and
1998, respectively.
The Company has unsecured short-term credit facilities with several banks
in Japan. The facilities allow aggregate borrowings of 2.4 billion Yen ($22.8
million) and bear interest at 1.625% per annum. At September 30, 1999 and
December 31, 1998 there were approximately $11.0 million and $11.8 million,
respectively, of borrowings outstanding under these facilities. The Company's
foreign subsidiaries other than Japan have credit facilities aggregating $4.1
million, none of which was outstanding as of September 30, 1999. From time to
time, the amount available under the credit facilities will be reduced by the
amount of performance bonds outstanding guaranteed by the applicable bank to the
Company's customers. The Company also has available in the U.S. two committed,
unsecured credit facilities aggregating $20.0 million and a $10.0 million
uncommitted, unsecured credit facility. The committed facilities are through
June 2000. At September 30, 1999 and December 31, 1998, there were no borrowings
under the U.S. facilities. At September 30, 1999 the Company was in technical
default of certain covenants of its U.S. credit facilities. The Company has
applied for a waiver from its banks relating to this default. There can be no
assurance such waiver will be obtained. Through September 30, 1999, the Company
has not been required to borrow, and has not borrowed, under any of its U.S.
credit facilities.
The Company has reviewed its short- and long-term liquidity needs. The
Company anticipates that its liquidity needs for at least the next twelve months
will be met by cash flows from operations and existing cash balances.
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 a review of Spectra-Physics' (a)
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 items that
were not Y2K compliant and has created a plan to bring them into compliance in
advance of the year 2000. As of the end of the third quarter of 1999, all
modifications and/or replacement of critical computer systems have been
completed. Also, all non-compliant facilities have been replaced or modified and
are now Y2K compliant. Substantially all critical manufacturing and R&D
equipment is Y2K compliant as of the end of the third quarter of 1999, with the
remainder scheduled for the fourth quarter of 1999. Costs in connection with
this process was approximately $0.4 million.
16
<PAGE> 17
Products
The Company has completed a thorough review of its products. This review has
uncovered no material Y2K issues with Spectra-Physics products.
Vendors and Suppliers
The Company has performed a review of its suppliers and vendors and has
identified a subset of them as being "critical" vendors. Spectra-Physics has
sent letters and follow-up letters to each of these critical vendors asking them
about their Y2K readiness. The Company has received responses from a majority of
these vendors and is satisfied with their Y2K readiness. Those vendors who did
not respond, or whose response the Company found inadequate, are being
individually contacted by the Company's purchasing department. For those vendors
that the Company feels are at risk of not being compliant, the purchasing
department is working to establish alternate sources. 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 prepared a listing of its top customers during the first quarter
of 1999 and sent a Y2K compliance letter to them in the second quarter of 1999.
Most of the letters have been returned stating they are Y2K compliant. 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 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.
Costs
The reviews of Company products, systems, vendors and suppliers, and
customers were performed by the Company's manufacturing, facilities, research
and development, and IT staff as part of their on-going duties. The only
incremental costs the Company incurred related to certain outside computer
consultants and the replacement of certain non-Y2K compliant hardware and
software, and the related installation services.
EUROPEAN MONETARY UNION (EMU)
The euro is the new currency introduced by certain European countries
collectively known as the European Monetary Union (EMU). The euro was introduced
on January 1, 1999 and the eleven participating EMU members established fixed
conversion rates between their existing currencies (legacy currencies) and the
euro. The legacy currencies have no value of their own but are 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 regard to information systems, through September 30, 1999, the euro
had no material impact on the Company's information systems. The Company
believes the euro will have no material impact on its systems in 1999.
Furthermore, the Company's review indicates that 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 regard to the Company's markets, the Company has reviewed its customer
list and current selling practices and expects no material adverse impact from
the introduction of the euro.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's exposure to market risk
since December 31, 1998. See Spectra-Physics Lasers, Inc.'s Annual Report on
Form 10-K dated December 31, 1998.
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. In 1988, the Company was
named on the General Notification List of the Environmental Protection Agency
(EPA) stating that the Company may be a Potentially Responsible Party (PRP)
under the Superfund Laws for Hazardous Substances which may have been generated
by its former operations at a former site. Since that time, the Company has not
been named in the EPA's first or second tier lists, and has not been pursued as
PRP by the EPA or any of the other PRPs.
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-site 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 vapor extraction and 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 1999, the Company has been granted approval to shut
down two of its extraction wells in the North Bayshore Extraction System (NBES)
and also to shut down two soil vapor extraction systems (on site) by the
Regional Water Quality Control Board (RWQCB).
In October 1997, the Company was served with a complaint that had been
filed on behalf of five individuals 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.). As of December 31, 1998, there has been a
summary judgement ruling in the case in favor of the Company and its
co-defendants in regards to the four adults in the case. Since that time, the
four adult plaintiffs had filed an appeal but shortly thereafter dropped their
appeal. The minor plaintiff has agreed to settle for a nominal amount but the
final documents are still to be finalized. 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 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))
10.5 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))
10.6 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))
10.7 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))
10.8 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))
10.9 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))
10.10 Employment Agreement dated January 1, 1998, between the Company and
Patrick L. Edsell (Incorporated by reference to Exhibit 10.10 of the
Company's 1998 Annual Report on Form 10-K)
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
Report on Form 8-K dated July 30, 1999 filed on August 6, 1999.
19
<PAGE> 20
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 8, 1999 /s/ PATRICK L. EDSELL
----------------------------------------
Patrick L. Edsell
Chairman, President and
Chief Executive Officer
Date: November 8, 1999 /s/ SETH HALIO
----------------------------------------
Seth Halio
Vice President, Finance, and Treasurer
(Principal Financial Officer)
20
<PAGE> 21
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 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))
10.5 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))
10.6 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))
10.7 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))
10.8 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))
10.9 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))
10.10 Employment Agreement dated January 1, 1998, between the Company and
Patrick L. Edsell (Incorporated by reference to Exhibit 10.10 of the
Company's 1998 Annual Report on Form 10-K)
27.1 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION RETRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S FORM 1O-Q FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,379
<SECURITIES> 0
<RECEIVABLES> 36,073
<ALLOWANCES> 0
<INVENTORY> 28,248
<CURRENT-ASSETS> 100,408
<PP&E> 39,034
<DEPRECIATION> 51,252
<TOTAL-ASSETS> 143,931
<CURRENT-LIABILITIES> 39,013
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 102,769
<TOTAL-LIABILITY-AND-EQUITY> 143,931
<SALES> 100,131
<TOTAL-REVENUES> 100,131
<CGS> 68,956
<TOTAL-COSTS> 68,956
<OTHER-EXPENSES> 40,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 638
<INCOME-PRETAX> (8,709)
<INCOME-TAX> (3,309)
<INCOME-CONTINUING> (5,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,400)
<EPS-BASIC> ($0.33)
<EPS-DILUTED> ($0.33)
</TABLE>
