10-Q 1 f72223e10-q.txt 10-Q 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 MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 000-23461 ------------------------ SPECTRA-PHYSICS LASERS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 77-0264342 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1335 TERRA BELLA AVENUE, MOUNTAIN VIEW, CALIFORNIA, 94043 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 650-961-2550 (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Registrant's common stock, par value $0.01 per share, at March 31, 2001 was 16,699,522 shares. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 SPECTRA-PHYSICS LASERS, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 INDEX

~~DELAWARE~~PAGE 77-~~0264342~~--- ~~(STATE~~PART ORI ~~OTHER~~FINANCIAL ~~JURISDICTION~~INFORMATION OFItem 1. Financial statements and supplementary data: (Ia) Consolidated Balance Sheets at March 31, 2001 and December 31, 2000.R.S..................................... ~~EMPLOYER~~1 ~~INCORPORATION~~(b) ORConsolidated ~~ORGANIZATION~~Statements of Operations for the three months ended March 31, 2001 and 2000........................ 2 (c) ~~IDENTIFICATION~~Consolidated NOStatements of Cash Flows for the three months ended March 31, 2001 and 2000........................ 3 (d) Notes to Consolidated Financial Statements.............. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 14 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................... 15 Item 2. Changes in Securities....................................... 16 Item 3. Defaults Upon Senior Securities............................. 16 Item 4. Submission of Matters to a Vote by Security Holders......... 16 Item 5. Other Information........................................... 16 Item 6. Exhibits and Reports on Form 8-K............................ 16 Signatures.................................................. 17

3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SPECTRA-PHYSICS LASERS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS

~~PAGE~~MARCH 31, DECEMBER 31, 2001 2000 ----------- ~~Part~~------------ I(UNAUDITED) ~~Financial~~(SEE ~~information~~NOTE) ~~Item~~Current 1assets: Cash and cash equivalents................................. ~~Financial~~$ ~~statements~~7,810 ~~and~~$ ~~supplementary~~22,639 ~~data~~Accounts ~~(unaudited):~~receivable, ~~(a)~~less ~~Consolidated~~allowance ~~Balance~~for ~~Sheets~~doubtful ataccounts ~~September~~of 30$1,043 ~~2000~~ and ~~December~~$842, 31respectively....................... 39,291 ~~1999~~42,725 Inventories............................................... 350,819 ~~(b)~~47,498 ~~Consolidated~~Deferred ~~Statements~~tax ofassets....................................... ~~Operations~~5,046 ~~for~~5,046 ~~the~~Prepaid ~~three~~expenses and ~~nine~~other ~~months~~current ~~ended~~assets................. ~~September~~6,108 306,925 ~~2000~~-------- -------- Total current assets.............................. 109,074 124,833 -------- -------- Property, plant and ~~1999~~equipment, net.......................... 63,135 57,746 Goodwill and other intangible assets, net of accumulated amortization of $3,208 and $2,989, respectively........... 3,921 4,140 Other assets................................................ 6,499 4,112 ~~(c)~~-------- ~~Consolidated~~-------- ~~Statements~~Total ofassets...................................... ~~Cash~~$182,629 ~~Flows~~$190,831 ~~for~~======== ~~the~~======== ~~nine~~LIABILITIES ~~months~~AND ~~ended~~STOCKHOLDERS' ~~September~~EQUITY ~~30,~~Current ~~2000~~liabilities: ~~and~~Accounts ~~1999~~payable.......................................... 5$ ~~(d)~~11,910 ~~Notes~~$ to17,561 ~~Consolidated~~Borrowings ~~Financial~~under ~~Statements~~credit facilities with banks............. 20,059 22,311 Borrowings under a credit facility with an affiliated company................................................ 67,000 ~~Item~~-- 2.Accrued ~~Management's~~and ~~Discussion~~other current liabilities, including $421 and ~~Analysis~~$1,294, ofrespectively ~~Financial~~due ~~Condition~~to ~~and~~affiliated ~~Results~~companies....... of22,632 ~~Operations~~29,929 -------- -------- Total current liabilities.............. ~~10 Item 3~~........... ~~Quantitative~~61,601 ~~and~~69,801 ~~Qualitative~~Long ~~Disclosures~~term ~~About Market Risk~~debt.............................................. 175,625 ~~Part~~7,500 II Other ~~Information~~long term liabilities................................. 732 714 Commitments and contingencies Stockholders' equity: Common stock.............................................. 167 167 Additional paid-in capital... ~~18 Signatures~~............................. 104,067 102,976 Retained earnings......................................... 10,894 10,875 Accumulated other comprehensive income (loss)............. (457) (1,202) -------- -------- Total stockholders' equity........................ 20114,671 112,816 -------- -------- Total liabilities and stockholders' equity........ $182,629 $190,831 ======== ========

--------------- Note: The balance sheet at December 31, 2000 has been derived from the Company's 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 4 SPECTRA-PHYSICS LASERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

~~September~~THREE ~~30,~~MONTHS ~~December~~ENDED MARCH 31, ~~2000 1999~~ ------------------ 2001 2000 ------- ------- ~~(Unaudited)~~Net ~~(See~~sales................................................... ~~Note) ASSETS Current assets: Cash and cash equivalents~~ $ 2154,~~432~~554 $ 2339,~~278~~368 ~~Accounts~~Cost ~~receivable, including $52 and $68, respectively, due from affiliated companies, less allowance for doubtful accounts~~ of ~~$750~~products ~~and $1,253, respectively~~sold....................................... 4236,~~965~~698 3823,~~246~~233 ~~Inventories~~------- ~~37,625~~------- ~~26,582~~Gross ~~Deferred~~margin........................................... ~~tax assets 5~~17,~~046~~856 916,~~657~~135 ~~Prepaid expenses and other current assets 5,594 5,906~~ --------- --------- ~~Total~~Operating ~~current~~expenses: ~~assets~~Research ~~112,662 103,669 Property, plant~~ and ~~equipment,~~development.................................. ~~net 48~~5,~~945~~667 425,~~015~~499 ~~Goodwill and other intangible assets~~Selling, ~~net~~general ~~of accumulated amortization of $2,763~~ and ~~$2,487,~~administrative....................... ~~respectively 4~~11,~~356~~315 18,~~794~~397 Other..................................................... ~~assets~~587 ~~4,184 4,799~~ -- ------- --------- Total ~~assets~~operating $expenses.......................... ~~170~~17,~~147~~569 ~~$ 152~~13,~~277~~896 ~~=========~~------- ~~=========~~------- ~~LIABILITIES~~Operating ~~AND~~income.................................. ~~STOCKHOLDERS'~~287 ~~EQUITY Current liabilities: Accounts payable $ 12~~2,~~104~~239 $------- ~~10,015~~------- ~~Borrowings~~Other ~~under~~income ~~credit~~(expense): ~~facilities~~Interest ~~23,324~~income ~~13,655~~(expense)................................. ~~Accrued~~(121) ~~and~~238 ~~other~~Foreign ~~current~~currency ~~liabilities,~~gain ~~including~~(loss).............................. ~~$1,286~~(135) ~~and~~155 ~~$170, respectively, due to affiliated companies 21,313 22,052~~ --------- --------- Total ~~current~~other ~~liabilities~~income ~~56,741~~(expense)...................... ~~45,722~~(256) ~~Long-term~~393 ~~liabilities 1,163 1,093~~ --------- --------- ~~Commitments~~Income ~~and~~before ~~contingencies~~income ~~Stockholders'~~taxes ~~equity:~~and ~~Common~~cumulative ~~stock~~effect ~~166~~of ~~162~~change ~~Additional paid-~~in ~~capital~~accounting ~~102,913~~method................... ~~98,320~~31 ~~Retained earnings 10~~2,~~466~~632 ~~9,428~~Income ~~Accumulated~~tax ~~other~~expense.......................................... ~~comprehensive loss~~ (~~1,302~~12) (21,~~448~~000) --------- --------- ~~Total~~Income ~~stockholders'~~before ~~equity~~cumulative ~~112~~effect of change in accounting method................................ 19 1,~~243~~632 ~~105~~Cumulative effect of change in accounting method (net of income taxes of $1,~~462~~778)................................... -- (2,022) ------- --------- ~~Total~~Net ~~liabilities~~income ~~and~~(loss)...................................... ~~stockholders' equity~~ $ ~~170,147~~19 $ ~~152,277~~(390) ========= ========= Per share: Income before cumulative effect of change in accounting method: Basic.................................................. $ 0.00 $ 0.10 Diluted................................................ $ 0.00 $ 0.09 Cumulative effect of change in accounting method: Basic.................................................. $ -- $ (0.12) Diluted................................................ $ -- $ (0.12) Net Income (loss) per share: Basic.................................................. $ 0.00 $ (0.02) Diluted................................................ $ 0.00 $ (0.02) Shares used in computing net income (loss) per share: Basic.................................................. 16,692 16,464 Diluted................................................ 17,274 17,354

See Notes to Consolidated Financial Statements. 2 5 SPECTRA-PHYSICS LASERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

~~Three~~THREE ~~Months~~MONTHS ~~Ended~~ENDED ~~Nine~~MARCH ~~Months Ended September 30~~31, ~~September 30,~~ -------------------~~----~~ ~~-----------------------~~2001 2000 ~~1999 2000 1999~~ --------- --------- ~~---------~~OPERATING ~~---------~~ACTIVITIES Net ~~sales~~income (loss)........................................... $ ~~47,444~~19 $ ~~34,149~~(390) $Adjustments ~~127,061~~to $reconcile ~~100,131~~net ~~Cost~~income of(loss) ~~products~~to ~~sold~~cash provided by (used in) operating activities: Depreciation and amortization............................. 312,~~600~~616 221,~~345~~828 ~~80,010~~Changes ~~65,256~~in ~~Cost~~operating ofassets ~~products~~and ~~sold-inventory~~liabilities: ~~write-offs~~Accounts --receivable.................................... 3,~~700~~434 ~~-- 3~~9,~~700~~833 ~~-------- --------- --------- --------- Gross margin~~ Inventories......................... ~~15,844 8,104 47,051 31,175 -------- --------- --------- --------- Operating expenses: Research and development~~ ............... ~~5,708 3,968 17,288 12,353 Selling, general and administrative~~ .... 9(3,~~594~~321) (8,~~378~~223) ~~27,237~~Prepaid ~~25,708~~expenses ~~Purchased in process research~~ and ~~development~~other current assets.............. 817 400 Accounts payable............ ~~1,500 -- 1,500 -- Restructuring~~ ........................... ~~-- 1~~(5,~~999~~652) (~~115~~697) ~~2,540~~Accrued ~~--------~~and ~~---------~~other ~~---------~~current ~~--------- Total operating expenses~~ liabilities.................. 16(5,~~802~~792) 14(1,~~345~~581) ~~45,910 40,601~~ -------- --------- ~~---------~~Total ~~---------~~cash ~~Operating~~provided ~~income~~by (~~loss~~used in) operating activities....................................... (~~958) (6~~7,~~241~~879) 1,~~141~~170 ~~(9,426)~~ -------- --------- ~~---------~~INVESTING ~~---------~~ACTIVITIES ~~Other~~Purchases ~~income~~of property, plant and equipment.................. (~~expense~~7,946): ~~Interest~~(2,711) ~~income~~ Investment.................................................. ~~69 187 551 638 Foreign currency gain~~ (~~loss~~955) -- Other....................................................... (841,366) (34147) ~~260 79~~ -------- --------- ~~--------- ---------~~ Total ~~other~~cash ~~income~~used ~~(expense)~~in investing activities........... (1510,267) ~~153~~(2,858) ~~811 717~~ -------- --------- ~~---------~~FINANCING ~~---------~~ACTIVITIES ~~Income~~Net borrowings (~~loss~~payments) ~~before~~under ~~income~~credit ~~taxes~~ facilities........... ~~(973)~~2,891 (~~6,088~~777) ~~1,952~~Net ~~(8,709)~~proceeds ~~Income~~from ~~tax~~issuance ~~expense~~of ~~(benefit)~~common stock.................. ~~(148) (2~~1,~~313)~~091 ~~914 (~~3,~~309)~~818 -------- --------- ~~---------~~Total ~~---------~~cash ~~Net~~provided ~~income~~by ~~(loss)~~financing activities.......~~.............~~ ~~$ (825) $ (~~3,~~775)~~982 ~~$ 1~~3,~~038~~041 $-------- ~~(5,400)~~------- ~~========~~Effect ~~=========~~of ~~=========~~changes ~~=========~~in ~~Net~~foreign ~~income~~currency ~~(loss)~~exchange ~~per share: Basic~~ rates........~~..........................~~ $ (~~0.05~~665) $ (~~0.23~~286) $-------- ~~0.06~~------- $Increase (~~0.33~~decrease) ~~Diluted~~in cash and cash equivalents................................ ~~$ (0~~.~~05) $ (0~~.~~23) $ 0~~.06... $ (~~0.33~~14,829) ~~Shares~~1,067 ~~used~~Cash inand ~~computing~~cash ~~net~~equivalents ~~income~~at ~~(loss)~~beginning ~~per~~of ~~share: Basic~~ year..............~~....................~~ 1622,~~619~~639 1623,~~168~~278 ~~16,554~~-------- ~~16,168~~------- ~~Diluted~~Cash and cash equivalents at end of period..................~~..............~~ ~~16,619~~$ 167,~~168~~810 17$24,~~448~~345 ~~16,168~~======== =======

See Notes to Consolidated Financial Statements. 3 6 SPECTRA-PHYSICS LASERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Spectra-Physics Lasers, Inc. ("the Company") designs, develops, manufactures and distributes lasers, laser systems and optics 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, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 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, 2000. The Company's fiscal year ends on December 31. The Company's fiscal quarters end on the Friday of the thirteenth week of each quarter. For presentation purposes, the financial statements reflect the calendar month-end date. 2. INVENTORIES Inventories consisted of the following (in thousands):

~~Nine~~MARCH ~~months~~31, ~~ended~~DECEMBER ~~September 30~~31, 2001 2000 ---------~~----------~~ ~~2000 1999~~ ------- -----~~---~~ ~~OPERATING~~Raw ~~ACTIVITIES~~material......................................... ~~Net income (loss)~~ $ 115,~~038~~012 $ (519,~~400)~~519 ~~Adjustments~~Work ~~to reconcile net income (loss) to cash provided by (used~~ in) ~~operating activities: Depreciation and amortization 5,785 4,862 Purchased in~~ process...................................... ~~research and development 1~~12,~~500~~900 - Deferred tax assets 4,611 - Inventory write-offs - 3,700 Non-cash portion of restructuring charge - 655 Changes in operating assets and liabilities, excluding acquisition: Accounts receivable, including long-term (2,142) 9,~~751~~533 ~~Inventories~~Finished ~~(10,745)~~goods (~~6,382)~~including ~~Prepaid expenses and other current assets 336 (3,919) Accounts payable 1,830 (1,685) Accrued and other current liabilities 769 (~~$4,~~694)~~850 ~~-------- -------- Net cash provided by (used in) operating activities 2,982 (3,112) -------- -------- INVESTING ACTIVITIES Purchases of property, plant~~ and ~~equipment (12~~$5,~~114) (8,740) Payment for intangible asset (~~600) -at ~~Acquisition~~customer ~~of LAS (900) - Other (1~~locations,~~459)~~ ~~(190~~respectively).................. ~~-------- -------- Net cash used in investing activities (15~~22,~~073)~~907 (818,~~930)~~446 -------- -------- FINANCING ACTIVITIES Net borrowings (payments) under credit facilities 6,944 (772) Exercises of common stock options 4,597 - -------- -------- Net cash provided by (used in) financing activities 11,541 (772) -------- -------- Effect of changes in foreign currency exchange rates (1,296) (427) -------- -------- Decrease in cash and cash equivalents (1,846) (13,241) Cash and cash equivalents at beginning of year 23,278 34,620 -------- -------- Cash and cash equivalents at end of period $ 2150,~~432~~819 $ 2147,~~379~~498 ======== =======~~= Supplemental disclosures: Debt assumed on acquisition of LAS $ 2,967 ========~~

3. 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. 4 7 SPECTRA-PHYSICS LASERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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):

~~September~~THREE ~~30,~~MONTHS ~~December~~ENDED MARCH 31, ~~2000 1999~~ ------------------ 2001 2000 ------- ------- ~~Raw~~Numerator: ~~material~~Net income (loss)...................................... $~~16,354~~ 19 $~~15,277~~ ~~Work~~(390) in======= ~~process~~======= Denominator: Denominator for basic net income (loss) per share: Weighted average shares............................. 1016,~~241~~692 316,~~482~~464 ~~Finished~~Effect ~~goods~~of dilutive securities: Employee stock options.............................. ~~11,030~~582 ~~7,823~~890 ------- ------- ~~$37~~Denominator for diluted net income (loss) per share.... 17,~~625~~274 ~~$26~~17,~~582~~354 ======= ======= Net income (loss)per share -- Basic...................... $ 0.00 $ (0.02) Net income (loss) per share -- Diluted................... $ 0.00 $ (0.02)

4. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) was as follows (in thousands):

~~Three~~THREE ~~Months~~MONTHS ~~Ended~~ENDED ~~Nine~~MARCH ~~Months Ended September 30~~31, ~~September 30,~~ ---------------~~-------~~ ~~-----------------------~~2001 2000 ~~1999 2000 1999~~ ------~~---~~ -----~~----~~ ~~--------- --------- Numerator:~~ Net income (loss) .......................................... $ ~~(825)~~19 $ (~~3,775~~390) $Foreign ~~1,038~~currency $translation adjustments................... (~~5,400~~743) ~~=======~~(430) ~~========~~Unrealized ~~=======~~gain ~~========~~on ~~Denominator:~~forward ~~Denominator~~foreign ~~for~~currency ~~basic~~contracts, net of income ~~(loss) per share: Weighted average shares~~ taxes............ ~~16,619 16,168 16,554 16,168 Effect of dilutive securities: Employee stock options~~ .............................. --1,488 --857 ~~894~~ -- ----~~---~~ -----~~---~~ ~~-------~~Total ~~--------~~comprehensive ~~Denominator for diluted net~~ income ~~(loss) per share~~ ............ ~~16,619 16,168 17,448 16,168 ======= ======== ======= ======== Net income (loss) per share -- Basic~~ .... ~~$ (0~~.~~05) $ (0~~.~~23) $ 0~~.~~06 $ (0~~.~~33) Net income (loss) per share -- Diluted~~ .. ~~$ (0~~.~~05)~~ $ ~~(0.23)~~764 $ ~~0.06~~37 $====== ~~(0.33)~~=====

Accumulated other comprehensive income presented in the accompanying consolidated balance sheets consists of the cumulative foreign currency translation adjustments and net unrealized gains (losses) on forward foreign currency contracts. 5. LEGAL AND ENVIRONMENTAL MATTERS See Part II., Item 1. 6. SEGMENT REPORTING DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH OF THE REPORTABLE SEGMENT DERIVES ITS REVENUES In 2000, the Company realigned its business units to support growth in telecommunications and other strategic markets. The Company's current structure includes four operating groups, the Passive Telecommunications Group, the Active Telecommunications Group, the Laser Group, and Spectra-Physics Distribution. Prior to 2000, the Company had five reportable segments: the Passive Components (PC) 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. 5 8 SPECTRA-PHYSICS LASERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The Passive Telecommunications Group (PTG) which consists primarily of the Passive Component business unit produces passive components for sale to telecommunication customers and for use by the Laser Group in the Company's laser products. The Laser Group (LG) which consists of ISL, OEM and Laser Analytical Systems GmbH primarily produces high power solid state and conventional lasers for sale in all of the Company's principal markets. The Active Telecom Group (ATG) which consists principally of Opto Power Corporation primarily produces semiconductor lasers for sale to telecommunication, medical, industrial manufacturing and image recording customers and for use by the Laser Group in the Company's solid state laser products. The Spectra-Physics Distribution (SPD) business unit is primarily responsible for selling and servicing products directly in the United States, Japan, Germany, the United Kingdom, and the Netherlands, and through approximately 30 independent distributors throughout the remainder of the world. Certain 2000 segment information has been reclassified to conform to the 2001 presentation. 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, 2000. 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 identified by Group. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production methods. Information about segments (in thousands):

~~Three~~ALL ~~months~~ATG ~~ended~~PTG ~~Nine~~LG ~~months~~SPD ~~ended~~OTHERS ~~September~~TOTAL ~~30, September 30,~~ ------- ------- ------- ------- ------ -------- ~~2000~~Three ~~1999~~months ~~2000~~ended ~~1999~~March ~~-------~~31, ~~-------~~2001 ~~------- -------~~ Net ~~income~~sales ~~(loss)~~to external customers........ $ 682 $ 13 $ 286 $51,467 $2,106 $ 54,554 Intersegment net sales.................~~.......~~ ~~$ (825) $(3~~9,~~775)~~949 ~~$ 1~~7,~~038~~191 ~~$(5~~38,~~400)~~459 ~~Foreign~~-- ~~currency~~-- ~~translation~~55,599 ~~adjustments~~Segment EBIT......... ~~(741) 651 (1,296) (534) Unrealized gain (loss) on forward foreign currency contracts, net of income taxes~~ .................. ~~880~~(322) (21,~~521~~302) 27,~~442~~195 (13,~~203~~956) ~~-------~~1,132 ~~-------~~2,747 ~~-------~~Segment ~~------- Comprehensive income (loss)~~ assets......................... $46,069 ~~(686) $(5~~28,~~645)~~420 ~~$ 2~~63,~~184~~393 ~~$(7~~81,~~137)~~078 ~~=======~~-- ~~======= ======= =======~~218,960

~~All~~ALL PCATG ~~ISL~~PTG ~~OEM~~LG ~~OPC~~ SPD ~~Others~~OTHERS ~~Total~~TOTAL -------- -------- -------- -------- -------- -------- ~~--------~~ Three months ended ~~September~~March 3031, 2000: Net sales to external customers ........ $ 791,115 $ --6 $ --88 $ ~~733 $ 45~~38,~~847~~133 $ ~~785~~26 $ 4739,~~444~~368 Intersegment net sales ............. ~~6,535 22,846 15,027 8,205 -- -- 52,613 Segment EBIT~~ ....~~...................~~ (15,~~440)~~880 3,~~923~~248 ~~3,434 308 (2,658) (1,404) 2,163 Segment assets ..................... 22,662 34,294 17,886 38,251 77,765 86,369 277,227 Three months ended September~~ 30,319 ~~1999: Net sales to external customers .... $ 137 $~~ -- $ -- ~~$ 887 $ 32~~39,~~380~~447 $Segment ~~745 $ 34,149 Intersegment net sales~~ EBIT............. ~~3,732 18,145 9,457 5,212 -- -- 36,546 Segment EBIT~~ ..............~~.........~~ (~~729~~527) ~~3,487 1,812~~ (~~1,226~~877) (16,~~891)~~993 (1,~~731~~592) (~~278~~741) 3,256 Segment assets ......................... 1234,~~509~~260 2810,~~793~~919 1148,~~471~~520 3666,~~619~~623 ~~64,423~~-- 77160,~~292 231,107~~322

6 9 SPECTRA-PHYSICS LASERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Reconciliation of segment information to financial statements (in thousands):

~~All~~THREE PCMONTHS ~~ISL~~ENDED ~~OEM~~MARCH ~~OPC~~31, ~~SPD Others Total~~ --------- --------- --~~-------~~ ~~-----------~~2001 ~~---------~~2000 --------- --------- ~~Nine months ended September 30, 2000:~~ Net sales: toTotal external ~~customers~~sales for reportable segments......... $ ~~268~~52,448 $ --39,342 $Intersegment --sales $for ~~2,580~~reportable $segments........... ~~123~~55,~~743~~599 $39,447 ~~470~~Other $sales.......................................... ~~127~~2,~~061~~106 ~~Intersegment~~26 ~~net~~Elimination ~~sales~~of intersegment sales.................... 16(55,~~721~~599) 62(39,~~940~~447) ~~41,978 21,240~~ -------- -------- ~~142,879~~Total ~~Segment~~consolidated ~~EBIT~~net sales.................~~.....~~ ~~(3,033)~~$ 1054,~~790~~554 9$ 39,~~968~~368 ~~(481)~~======== ~~(9,499)~~======== Income (~~4,856~~loss) ~~2,889~~before ~~Nine~~income ~~months~~taxes ~~ended~~and ~~September~~cumulative ~~30,~~effect ~~1999:~~of ~~Net~~change ~~sales~~in toaccounting ~~external~~method: ~~customers~~Total EBIT for reportable segments................... $ ~~539~~1,615 $ --3,997 $Other --EBIT........................................... ~~$ 4~~1,~~695~~132 $(741) ~~92,981~~Corporate $expenses................................... (1,~~916~~873) ~~$ 100~~(1,~~131~~019) ~~Intersegment~~Other ~~net~~expenses ~~sales~~not allocated to segments............. ~~10,489~~(587) ~~54,346~~2 ~~24,104~~Interest ~~13,107~~income (expense)............................ (121) 238 Foreign currency gain (loss)......................... (135) 155 -------- -------- ~~102,046~~Total ~~Segment~~consolidated ~~EBIT~~income before income taxes and cumulative effect of change in accounting method.......................... ~~(1,471)~~$ ~~10,470~~31 ~~3,172~~$ (2,~~715)~~632 ~~(6,529)~~======== ~~(5,094) (2,167)~~========

7. SUBSEQUENT EVENTS In April 2001, the Company announced measures to reduce its workforce in the Passive Telecommunications Group in Oroville, California and centralize all of its European distribution operations in one location in Darmstadt, Germany, near Frankfurt. As a result the Company expects to recognize in the second quarter of fiscal 2001 a one-time charge to earnings principally for severance payments of approximately $1.0 million covering 140 employees. 8. REVENUE RECOGNITION Effective January 1, 2000, the Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", as amended ("SAB 101"), issued by the Securities and Exchange Commission in December 1999. The adoption of SAB 101 resulted in a change in method of accounting for revenue related to certain product shipments. The cumulative effect of this accounting change was $2.0 million (net of taxes). The accounting change did not have a material effect on revenue and quarterly earnings during 2000. The Company restated its results for the first three quarters of the year ended December 31, 2000, as reflected in footnote 10 of the Notes to the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2000. 7 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 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 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 We design, develop, manufacture and distribute semiconductor-based lasers and laser optics for a variety of end-markets. Our forty years of laser and optic experience has enabled us to offer passive and active optical component products to the telecommunications industry. We began shipping optical components for the telecommunications industry in 1999 and have been shipping lasers for commercial applications since the early 1960s. Thermo Electron Corporation, a company whose common stock is traded on the New York Stock Exchange, indirectly owns approximately 77.8% of our outstanding common stock at March 31, 2001. Prior to its acquisition by Thermo Electron Corporation in February 1999, Spectra-Physics AB, a Swedish company, beneficially owned approximately 80% of our outstanding common stock. We derive our revenue primarily from the sale of high power semiconductor-based and conventional lasers. High power semiconductor-based lasers are sold primarily into the telecommunications, computer and microelectronics manufacturing, industrial manufacturing, medical, image recording and research and development markets. Conventional lasers are primarily sold into the medical and research and development markets. Over the last several years, a growing proportion of our total net sales and most of our sales growth have been from high power semiconductor-based lasers used primarily in commercial applications. We have also begun to sell passive and active optical components to telecommunications customers. We have developed our passive telecommunications products based on our experience and capabilities in optical fabrication and thin film coating. Although these products currently represent a small percentage of our total revenues, we are focusing significant efforts on increasing revenues to telecommunications customers. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time product is shipped. Provision is made at the time the related revenue is recognized for estimated product returns. We provide for the estimated cost of product warranties upon shipment. We warrant our products for 12 to 24 months depending on the product line. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Revenue earned from services is recognized ratably over the contractual period or as the services are performed. Shipping and handling costs are included in cost of goods sold. Effective January 1, 2000, we adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", as amended ("SAB 101"), issued by the Securities and Exchange Commission in December 1999. Our adoption of SAB 101 resulted in a change in method of accounting for revenue related to certain product shipments. The cumulative effect of this accounting change was $2.0 million (net of taxes). The accounting change did not have a material effect on revenue and quarterly earnings during 2000. We restated our results for the first three quarters of the year ended December 31, 2000, as reflected in footnote 10 8 11 of the Notes to our Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2000. Our sales have shown a pattern in the last several years whereby the fiscal fourth quarter net sales represent a large share of our annual net sales and whereby our first quarter net sales decline significantly compared to the fourth quarter of the prior fiscal year. We believe these sales patterns result in part because of seasonal sales patterns related to customers' fiscal years and in part from our incentive compensation plan, which compensates employees based on annual results. We anticipate that this pattern is likely to continue. Our gross margin is affected by a number of factors, including product mix, product pricing, cost of materials, the proportion of third party products incorporated into our systems, foreign currency exchange rates and manufacturing costs. For example, since high power semiconductor-based lasers generally have higher gross margins than conventional lasers, absent other factors, a shift in sales toward high power semiconductor-based lasers would lead to a gross margin improvement for us. On the other hand, if market conditions in the highly competitive conventional laser market forced us to lower unit prices, we would suffer a decline in gross margin unless we 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 our business, operating results and financial condition. We spend a significant amount of resources on research and development for products for all six of our principal markets. For example, in 2001 and 2000, we expended a significant amount of research and development effort on ultra violet semiconductor-based lasers and telecommunications products. We expect to continue to spend substantial resources in developing high power semiconductor-based lasers and optical components products for our six principal markets. A significant proportion of our sales are to international customers and are denominated in currencies other than the U.S. dollar. We also have sales and support operations located in certain European countries and in Japan which operate in local currencies. As a result, while we attempt to hedge our economic risk of foreign currency fluctuations, we are 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 our results of operations. In 2000, we realigned our business units to support growth in telecommunications and other strategic markets. Our current structure includes four operating groups, the Passive Telecommunications Group, the Active Telecommunications Group, the Laser Group, and Spectra-Physics Distribution. We previously had five reportable segments: the Passive Components business unit; the Industrial and Scientific Lasers business unit; the Original Equipment Manufacturer business unit; Opto Power Corporation; and Spectra-Physics Distribution business unit. Reference is made to the footnotes of our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2000, incorporated by reference herein for disclosures of certain financial information related to the reportable segments. 9 12 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the Company's results of operations as a percentage of net sales:

~~Three~~THREE ~~months~~MONTHS ~~ended~~ENDED ~~Nine~~MARCH ~~months ended September 30~~31, ~~September 30,~~ --------------~~---------~~ ~~-----------------------~~2001 2000 ~~1999 2000 1999~~ -----~~----~~ -----~~----~~ ~~--------- ---------~~ Net ~~Sales: Total external~~ sales ~~for reportable segments~~ .......... ~~$ 46,659 $ 33,404 $ 126,591 $ 98,215 Intersegment sales for reportable segments~~ ............ ~~52,613 36,546 142,879 102,046 Other sales~~ ............................. 100.0% 100.0% Gross margin............ ~~785 745 470 1,916 Elimination of intersegment sales~~ .................................... ~~(52,613)~~32.7 ~~(36,546)~~41.0 ~~(142,879)~~Operating ~~(102,046)~~expenses: ~~---------~~Research ~~---------~~and ~~--------- --------- Total consolidated net sales~~ development.................................. $10.4 ~~47,444~~14.0 ~~$ 34~~Selling,~~149~~ $general ~~127,061~~and ~~$ 100,131 ========= ========= ========= ========= Income (loss) before income taxes: Total EBIT for reportable segments~~ administrative....................... $20.7 21.3~~,567~~ ~~$ 1,453 7,745 $ 2,927~~ Other ~~EBIT~~ ............................................ ~~(16) (619) (16) (1,931) Corporate expenses~~ ......... 1.1 -- ----- ----- Total operating expenses.......................... ~~(1,388)~~32.2 ~~(1,112) (4,840) (~~35.3~~,163)~~ ~~Other~~----- ~~expenses~~----- ~~not~~Operating ~~allocated to segments~~ income.............. ~~(1,621) (264) (363) (1,019) In process research and development~~ ......................... ~~(1,500)~~0.5 --5.7 Other income (~~1,500~~expense): --Interest ~~Inventory~~income ~~write-offs~~ (expense).................................. -- (~~3,700~~0.2) --0.6 ~~(3,700)~~Foreign ~~Restructuring~~currency gain (loss).............................. (0.2) 0.4 ----- ----- Total other income (expense)...................... -- (~~1,999~~0.4) ~~115~~1.0 ~~(2,540)~~----- ~~Interest~~----- Income before income taxes and cumulative effect of change in accounting method.......................... 0.1 6.7 Income tax expense........... ~~69 187 551 638 Foreign currency gain (loss)~~ ............................... ~~(84)~~0.1 ~~(34)~~2.6 ~~260 79~~ -----~~----~~ -----~~----~~ ~~---------~~Income ~~--------- Total consolidated income (loss)~~ before ~~income~~cumulative ~~taxes~~effect $of ~~(973)~~change $in ~~(6,088)~~accounting $method.................................................... 0.0% 4.1~~,952~~% ~~$ (8,709)~~ =====~~====~~ =====~~==== ========= =========~~

THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Net sales Net sales were $54.6 million and $39.4 million in the three months ended March 31, 2001 and 2000, respectively, representing an increase of 38.6%. Net sales for the three months ended March 30, 2001, calculated using foreign currency exchange rates for the same period in 2000, increased 42.1%. Net sales in the following end user markets were:

~~Percent~~THREE ofMONTHS ~~Net~~ENDED ~~Sales~~MARCH ~~Three Months Ended Three Months Ended Percent September 30~~31, ~~September 30, Change~~ ------------------~~---~~ ~~-------------------~~2001 ~~1999 to~~ 2000 ~~1999 2000 1999 2000~~ -------- -------- ~~-----~~(IN ~~------~~THOUSANDS) ~~------- Net sales~~ Telecommunications....................................... $ 473,~~444~~911 $ ~~34,149~~379 ~~100.0~~Computer %and ~~100.0~~microelectronics ~~% 38~~manufacturing.~~9% Cost of products sold~~ .............~~...........~~ 317,~~600~~777 228,~~345~~437 ~~66.6~~Industrial 65manufacturing.~~4 41~~.~~4 Cost of products sold-inventory write-offs~~ ... ~~-- 3,700 -- 10~~.~~8 (100~~.~~0) -------- -------- ----- ----- ------ Gross margin~~ ..........................~~...~~ ~~15,844~~ 8,~~104~~159 ~~33.~~4,395 23Medical.~~8 95~~.~~5 -------- -------- ----- ----- ------ Operating expenses: Research and development~~ ................... ~~5,708 3,968 12~~.~~0 11~~.~~6 43~~.~~9 Selling, general and administrative~~ ........ ~~9,594 8,378 20~~.~~2 24~~.~~5 14~~.~~5 Purchased in-process research and development~~...............~~................~~ 19,~~500~~501 --5,963 ~~3.2~~Image ~~-- 100~~recording.~~0 Restructuring~~ .............................. ~~-- 1,999 -- 5~~.~~9 (100~~.~~0) -------- -------- ----- ----- ------ Total operating expenses~~ .........~~........~~ 163,~~802~~437 141,~~345~~907 ~~35.4~~Research ~~42.0~~and 17development.~~1 -------- -------- ----- ----- ------ Operating income (loss)~~ .................. ~~(958) (6,241) (2~~.~~0) (18~~.~~2) 84~~.~~6 -------- -------- ----- ----- ------ Other income (expense): Interest income~~ ...........~~.................~~ 6920,669 ~~187~~17,176 0Other.~~2 0~~.~~5 (63~~.~~1) Foreign currency gain (loss)~~ ............... ~~(84) (34) (0~~.~~2) (0~~.~~1) (147~~.~~1) -------- -------- ----- ----- ------ Total other income (expense)~~ ............. ~~(15) 153 -- 0~~.~~4 NM -------- -------- ----- ----- ------ Income (loss) before income taxes~~ ........ ~~(973) (6,088) (2~~.~~0) (17~~.~~8) 84~~.~~0 Income tax expense (benefit)~~ ......~~...........~~ ~~(148)~~1,100 (21,~~313)~~111 ~~(0.3) (6.8) 93.6~~ -------- -------- ~~----- ----- ------ Net income (loss) ........................~~ $54,554 ~~(825)~~ $ (339,~~775)~~368 ~~(1.7)% (11.0)% 78.2%~~ ======== =======~~= ===== ===== ======~~

Sales of telecommunications, semiconductor-based lasers and conventional products were 7.2%, 62.0% and 30.8% of total net sales in 2001, compared to 1.0%, 65.9% and 33.1% in 2000. 10 13 Net Sales in the following geographic markets were:

~~Percent~~THREE ofMONTHS ~~Net~~ENDED ~~Sales~~MARCH ~~Nine Months Ended Nine Months Ended Percent September 30~~31, ~~September 30, Change~~ ------------------~~----~~ ~~-------------------~~2001 2000 ~~to 2000 1999 2000 1999 1999~~ -------- --------- ~~-----~~(IN ~~------~~THOUSANDS) ~~-------~~North ~~Net sales~~ America.................................... ~~$127,061 $100,131 100~~.~~0% 100~~.~~0% 26~~.~~9% Cost of products sold~~ .....~~...................~~ 80$27,~~010~~744 65$17,~~256~~903 63Japan.~~0 65~~.~~2 22~~.~~6 Cost of products sold-inventory write-offs~~ ... ~~-- 3,700 -- 3~~.~~7 (100~~.~~0) -------- -------- ----- ----- ------ Gross margin~~ ............................. ~~47,051 31,175 37~~.~~0 31~~.~~1 50~~.~~9 -------- -------- ----- ----- ------ Operating expenses: Research and development~~ ............~~.......~~ 1715,~~288~~412 12,~~353~~634 13Europe.~~6 12~~.~~3 40~~.~~0 Selling, general and administrative~~ ........ ~~27,237 25,708 21~~.~~4 25~~.~~7 6~~.~~0 Purchased in-process research and development~~............................... ~~1,500 -- 1~~.~~2 -- 100~~.~~0 Restructuring~~ ....~~..........................~~ ~~(115) 2~~8,~~540~~079 ~~(0.1) 2.5 NM -------- -------- ----- ----- ------ Total operating expenses ................. 45~~6,~~910~~024 ~~40,601 36.1 40.5 13.1 -------- -------- ----- ----- ------ Operating income (loss) .................. 1,141 (9,426) 0.9 (9.4) NM -------- -------- ----- ----- ------~~ Other ~~income (expense): Interest income~~ Asia............................ ~~551 638 0~~.~~4 0~~.~~6 (13~~.~~6) Foreign currency gain~~ ................~~......~~ ~~260 79 0.2 0.~~1,059 ~~229.~~1,575 ~~--------~~Rest ~~--------~~of ~~-----~~the ~~----- ------ Total other income~~ World....................... ~~811 717 0~~.~~6 0~~.~~7 13~~.~~1 -------- -------- ----- ----- ------ Income (loss) before income taxes~~ ........ ~~1,952 (8,709) 1~~.~~5 (8~~.~~7) NM Income tax expense (benefit)~~ ....~~.............~~ ~~914~~2,260 (31,~~309)~~232 ~~0.7 (3.3) NM~~ -------- -------- ~~----- ----- ------ Net income (loss) ........................~~ $ 154,~~038~~554 $ (539,~~400)~~368 ~~0.8% (5.4)% NM~~ ======== =======~~= ===== ===== ======~~

Net sales are attributed in the above table based on the location of our 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 Spectra-Physics' European and Japan sales subsidiaries, respectively. Export sales to countries not located in Asia are included in Rest of the World. Net sales at actual currency exchange rates percentage increase/(decrease) were as follows:

~~Three Months Ended September 30,~~ 2000 ~~1999~~TO ~~-------~~2001 ------- ~~(in~~North ~~thousands) Telecommunications~~ America................ ~~$ 1,220 $ 358 Computer and microelectronics manufacturing~~ ................... ~~9,234 4,982 Industrial manufacturing~~ ............ ~~5,955~~48.2% ~~5,068 Medical~~ Japan....................................................... 30.7~~,810~~% ~~5,106 Image recording~~ Europe................... ~~2,986 1,340 Research and development~~ ................................... ~~18,637~~35.8% ~~16,422~~ Other Asia.................................................. ~~1,602~~(32.8)% ~~873~~Rest ~~-------~~of ~~-------~~World............................................... ~~$47,444~~83.4% ~~$34,149~~Worldwide................................................... ~~======= =======~~38.6%

Net sales at constant currency exchange rates percentage increase/(decrease) were as follows:

~~Three Months Ended September 30,~~ 2000 ~~1999~~TO ~~-------~~2001 ------- ~~(in thousands)~~ North America ............................................... ~~$24,868~~48.2% ~~$16,065~~ Japan ....................................................... ~~9,206~~36.3% ~~8,855~~ Europe ...................................................... ~~9,695~~47.0% ~~7,300~~ Other Asia .................................................. ~~1,325~~(32.8)% ~~928~~ Rest of ~~the~~ World ............................................... ~~2,350~~83.4% ~~1,001~~Worldwide................................................... ~~------- ------- $47,444 $34,149 ======= =======~~42.1%

Cost of products sold and gross margin Cost of products sold includes all manufacturing materials and labor and a proportionate share of manufacturing overhead costs, as well as costs of shipping, tooling, royalties, third party products incorporated in our 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 us, and manufacturing costs. Gross margin was $17.9 million and $16.1 million for the three months ended March 31, 2001 and 2000, respectively, representing an increase of 10.7%. As a percentage of net sales, gross margin was 32.7% and 41.0% in the three months ended March 31, 2001 and 2000, respectively. The principal reasons for the decrease in gross margin as a percentage of net sales was under absorption of fixed costs and infrastructure investments for passive and active telecommunication components, and to a lesser extent, the effect of changes in foreign currency exchange rates and product mix. 11 14 Operating expenses Operating expenses totaled $17.6 million and $13.9 million in the three months ended March 31, 2001 and 2000, respectively, representing an increase of 26.4%. As a percentage of net sales, operating expenses were 32.2% and 35.3% in the three months ended March 31, 2001 and 2000, respectively. Included in operating expenses for the three months ended March 31, 2001 were $0.6 million of legal and accounting expenses related to a litigation described in Part II, Item 1 and to a potential financing. Research and development expenses represent expenses associated with our 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 $5.7 million and $5.5 million for the three months ended March 31, 2001 and 2000, respectively, representing an increase of 3.1%. As a percentage of net sales, research and development expenses were 10.4% and 14.0% in the three months ended March 31, 2001 and 2000, respectively. The decline in research and development expense as a percentage of net sales in 2001 as compared to 2000 resulted primarily from the inclusion of certain telecommunication product related expenses in cost of sales in 2001 as these products entered production subsequent to the three months ended March 31, 2000. Such costs were generally included in research and development expenses in the three months ended March 31, 2000. Selling, general and administrative expenses include the expenses of our sales and support subsidiaries in Europe, Japan and North America, and other marketing and administrative expenses. Selling, general and administrative expenses totaled $11.3 million and $8.4 million for the three months ended March 31, 2001 and 2000, respectively, representing an increase of 34.8%. As a percentage of net sales, selling, general and administrative expenses were 20.7% and 21.3% in the three months ended March 31, 2001 and 2000, respectively. Interest income (expense) Net interest expense totaled $0.1 million in the three months ended March 31, 2001, and net interest income totaled $0.2 million in the three months ended March 31, 2000, respectively. We incurred interest expense under our credit facilities and earned interest income on our invested cash and cash equivalents. The increase in interest expense for the three months ended March 31, 2001 resulted from increased borrowings under our credit facilities during the period. Foreign currency gain (loss) At March 31, 2001, we had contracts for the sale of foreign currencies and the purchase of U.S. dollars totaling $54.9 million. At March 31, 2001, we had deferred gains relating to our foreign currency contracts of approximately $3.0 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 our foreign currency derivative financial instruments outstanding as of March 31, 2001. The information is provided in U.S. dollar amounts, as presented in our 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. 12 15 Foreign currency spot/forward contracts (in thousands, except average contract rates):

~~Nine~~AVERAGE ~~Months~~NOTIONAL ~~Ended~~CONTRACT ~~September~~AMOUNT ~~30,~~RATE ~~2000 1999~~ -------- -------- ~~(in~~Japanese ~~thousands) Telecommunications~~ Yen................ ~~$ 2,292 $ 520 Computer and microelectronics manufacturing~~ ................... ~~25,293 13,184 Industrial manufacturing~~ .......... 15$32,~~095~~337 ~~13,060~~107.8178 ~~Medical~~British Pound Sterling........................... ~~20,115 17,048 Image recording~~ ....... 3,253 0.6844 Euro........... ~~8,119 4,161 Research and development~~ .......... ~~51,957 48,772 Other~~ ............................... 419,~~190~~314 ~~3,386~~1.0940 -------- ~~--------~~ $~~127~~54,~~061~~904 ~~$100,131~~ ======== Estimated fair value.................................... $ 2,984 ========

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 months ended March 31, 2001 and 2000, we recorded a foreign currency loss of $0.1 million and a foreign currency gain of $0.2 million, respectively. These losses and gains related to foreign exchange rate movements on unhedged accounts receivable. Income tax expense (benefit) Prior to February 2000, we filed consolidated tax returns with certain members of Thermo Electron Corporation's (or predecessor company's) consolidated tax group. Income tax expense was provided in the financial statements as if we were a separate taxable entity. Effective February 2000, we are no longer a member of such consolidated tax group for federal income tax purposes. As a result of our no longer filing consolidated tax returns with the Thermo Electron Corporation consolidated group, in the third quarter of 2000 we received approximately $5.5 million from Thermo Electron Corporation in settlement of the use by Thermo Electron Corporation in its consolidated tax return of certain of our net operating loss carryforwards. These net operating loss carryforwards are no longer available to us to reduce future taxable income. We recorded income tax expense of $12,000 and $1.0 million for the three months ended March 31, 2001 and 2000, respectively. For the three months ended March 31, 2001, our effective tax rate was 40.0%. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we had working capital of $47.5 million, including cash and cash equivalents of $7.8 million, compared to working capital at December 31, 2000 of $55.0 million, including cash and cash equivalents of $22.6 million. Cash used by operating activities was $7.9 million in the three months ended March 31, 2001, and cash provided by operating activities was $1.2 million in the three months ended March 31, 2000. Substantially all the net cash used by operating activities in the three months ended March 31, 2001 represented the net income for the period ($19,000) adjusted for the non-cash impact of depreciation and amortization ($2.6 million), offset by the use of cash for operating assets and liabilities ($10.5 million). Substantially all the net cash provided by operating activities in the three months ended March 31, 2000 represented the net loss for the period ($0.4 million) adjusted for the non-cash impact of depreciation and amortization ($1.8 million), offset by the use of cash for operating assets and liabilities ($0.2 million). Cash used in investing activities, primarily purchases of property, plant and equipment, was $10.2 million and $2.9 million in the three months ended March 31, 2001 and 2000, respectively. Cash provided by financing activities was $4.0 million and $3.0 million in the three months ended March 31, 2001 and 2000, respectively. During the three months ended March 31, 2001, financing activities were primarily net borrowings under credit facilities of $2.9 million and exercises of employee stock options and purchases of common stock under our Employee Stock Purchase Plan of $1.1 million. During the three months ended March 31, 2000, financing activities were primarily net payments on credit facilities of $0.8 million offset by exercises of employee stock options of $3.8 million. 13 16 The effect of foreign currency exchange rate changes on cash were losses of $0.7 million and $0.3 million in the three months ended March 31, 2001 and 2000, respectively. These activities resulted in decreases in cash and cash equivalents of $14.8 million in the three months ended March 31, 2001, and increases in cash and cash equivalents of $1.1 million in the three months ended March 31, 2001. We have a short-term credit facility in Japan. The credit facility is with several banks, is unsecured, allows aggregate borrowings of 2.8 billion Yen ($22.0 million), bears interest at 1.75% per annum and expires at various times through December 2001. At March 31, 2001, there were approximately $11.9 million of borrowings outstanding under this facility. Our foreign subsidiaries other than in Japan have credit facilities aggregating $4.1 million, of which $0.7 million was outstanding as of March 31, 2001. From time to time, the amount available under credit facilities will be reduced by the amount of performance bonds outstanding guaranteed by the applicable bank to our customers, foreign currency contracts outstanding with the applicable bank and similar arrangements. At March 31, 2001, we had outstanding a $13.1 million term loan with a bank. The term loan is repayable in eight equal quarterly installments through December 2002. The loan bears interest at LIBOR (4.7% at March 31, 2001) plus 1.75%. We have a short-term credit facility with Thermo Electron Corporation. The agreement provides for a one year, $20.0 million revolving credit facility through March 2002. At March 31, 2001, there were approximately $7.0 million of borrowings outstanding under this facility. The facility bears interest at 2.75% above the prevailing LIBOR rate. We have reviewed our short- and long-term liquidity needs. Our liquidity needs for at least the next twelve months will be met by cash flows from operations, existing cash balances and borrowings available under our credit facilities. EUROPEAN MONETARY UNION (EMU) The euro is the new currency introduced by certain European countries collectively known as the European Monetary Union, or EMU. The euro was introduced on January 1, 1999 and the eleven participating EMU members established fixed conversion rates between their existing currencies, or 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. The introduction of the euro could have an adverse impact on our information systems, our markets and the economies in which we operate. With regard to information systems, the euro had no material impact on our information systems through March 31, 2001. We believe the euro will have no material impact on our systems in 2001. Furthermore, our review indicates that our information systems can operate when the legacy currencies are withdrawn in 2002. As that date gets closer, we expect to conduct another survey concerning the euro's impact on our information systems. With regard to our markets, we have reviewed our customer list and current selling practices and expect no material adverse impact from the introduction of the euro. We are currently unable to determine the ultimate long term financial impact of the exclusive use of the euro on our markets and on the economies of the countries in which we operate. 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 our exposure to market risk since December 31, 2000. See Spectra-Physics Lasers, Inc.'s Annual Report on Form 10-K dated December 31, 2000. 14 17 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Our facilities and operations are subject to various 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 we believe that our operations are in compliance in all material respects with current requirements under environmental laws and employee safety laws, the nature of our operations exposes us to the risk of liabilities or claims with respect to such matters. Some environmental laws hold owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of certain hazardous substances. These laws also provide for responses to and liability for releases of certain hazardous substances into the environment. The nature of our operations and the long history of industrial uses at some of our current or former facilities expose us to risk of liabilities or claims under these laws. In 1988, we were named on the General Notification List of the Environmental Protection Agency stating that we may be a potentially responsible party under the laws for hazardous substances which may have been generated by our former operations at a former site. Since that time, we have not been named in the Environmental Protection Agency's first or second tier lists, and have not been pursued as a potentially responsible party by the Environmental Protection Agency or any of the other potentially responsible parties. In 1991, we were named by the California Regional Water Quality Control Board as a discharger of solvents to soil and groundwater from our Mountain View facility. Since 1984, our facilities in Mountain View 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 Superfund List under federal environmental laws. We are subject to orders that require us to perform remediation on-site and off-site and investigate other potentially responsible parties. Pursuant to these orders and other orders issued to other responsible parties, we and other responsible parties are jointly performing and funding 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 these systems have been incurred. Based on our experience to date, we believe 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 our 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 our 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 us that may be material. On June 19, 2000, Rockwell Technologies LLC filed a complaint against both Spectra Physics and our Opto Power subsidiary in the United States District Court for the District of Delaware. The complaint alleges that both we and Opto Power have infringed U.S. Patent No. 4,368,098 entitled "Epitaxial Composite and Method of Making." Rockwell avers that Opto Power has infringed the patent by performing the patented process and by using wafers manufactured by the patented process and that we have infringed the patent by using and/or selling products made by the patented process. Rockwell seeks damages, including increased damages due to defendants' alleged willful infringement, plus costs and attorney fees. Rockwell has not sought injunctive relief as the patent has already expired. On January 9, 2001, the Court entered a Scheduling Order setting the trial date for February 5, 2002. We believe that Rockwell's allegations are without merit and we intend to vigorously defend this action. The resolution of this dispute is uncertain, in part because the issues underlying the case depend upon discovery of many facts, some of which concern inventions and related circumstances dating back many years, 15 18 and in part because the action has been recently filed and our analysis of the case is ongoing. We cannot assure that Rockwell will not ultimately prevail in this dispute. If Rockwell were to prevail, it is possible that Rockwell could recover substantial monetary damages, based on past sales of our products for a number of years. Our efforts to defend Rockwell's claim against us may involve significant expense to us and could divert the attention of our technical and management personnel. An adverse outcome in this case could materially harm our business or results of operations. We are subject to various claims which arise in the normal course of business. We believe the ultimate resolution of these claims will not have a material adverse effect on our financial position or results of operations. 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:

~~Nine~~EXHIBIT ~~Months~~NUMBER ~~Ended~~EXHIBIT ~~September~~DESCRIPTION ~~30,~~ ------- ------------------- 2.1 Plan of Reorganization of Spectra-Physics (Incorporated by reference to exhibit 2.1 of Spectra-Physics' ~~2000~~Registration ~~1999~~Statement on Form S-1 (No. 333-38329)) 3.1 Certificate of Incorporation of Spectra-Physics, as amended (Incorporated by reference to exhibit 3.1 of Spectra-Physics' Registration Statement on Form S-1 (No. 333---38329)) 3.2 Bylaws of Spectra-~~-------~~Physics (inIncorporated ~~thousands)~~by ~~North~~reference ~~America~~to exhibit 3.~~.......~~2 $of ~~63,507~~Spectra-Physics' $Registration ~~46,253~~Statement ~~Japan~~on Form S-1 (No. 333-38329)) 4.~~..............~~1 ~~29,771~~Specimen ~~24,326~~of ~~Europe~~Common ~~...............~~Stock ~~23,163~~Certificate ~~23,119~~(Incorporated ~~Other~~by ~~Asia~~reference to exhibit 4.~~..........~~1 ~~5,158~~of ~~3,488~~Amendment ~~Rest~~No. 1 of ~~the~~Spectra-Physics' ~~World~~Registration ~~....~~Statement ~~5,462~~on ~~2,945~~Form S-~~-------~~1 (No. 333-~~-------~~38329)) ~~$127~~10.01 Loan Agreement dated March 1,~~061~~ ~~$100~~2001,~~131~~ ~~========~~between ~~========~~the Company and Thermo Electron Corporation (Filed hereinwith)

(b) REPORTS ON FORM 8-K: None. 16 19 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 10, 2001 /s/ PATRICK L. EDSELL -------------------------------------- Patrick L. Edsell Chairman, President and Chief Executive Officer Date: May 10, 2001 /s/ SETH S. HALIO -------------------------------------- Seth S. Halio Vice President, Finance, and Treasurer (Principal Financial Officer) 17 20 EXHIBIT INDEX

~~AVERAGE~~EXHIBIT ~~NOTIONAL~~NUMBER ~~CONTRACT~~EXHIBIT ~~AMOUNT~~DESCRIPTION ~~RATE~~------- -------- ----------- ~~Japanese~~2.1 ~~Yen~~Plan ~~.............~~of ~~$32,343~~Reorganization ~~101~~of Spectra-Physics (Incorporated by reference to exhibit 2.~~135~~1 ~~British~~of ~~Pound~~Spectra-Physics' ~~Sterling~~Registration Statement on Form S-1 (No.~~...~~ 333-38329)) 3.1 Certificate of Incorporation of Spectra-Physics,~~353~~ ~~0.662~~as ~~German~~amended ~~Marks~~(Incorporated ~~.............~~by reference to exhibit 3~~,336~~.1 of Spectra-Physics' Registration Statement on Form S-1 (No.~~998~~ ~~Euro~~333-38329)) 3.2 Bylaws of Spectra-Physics (Incorporated by reference to exhibit 3.~~....................~~2 ~~10,216~~of Spectra-Physics' Registration Statement on Form S-1 (No.~~074~~ ~~Other~~333-38329)) 4.1 Specimen of Common Stock Certificate (Incorporated by reference to exhibit 4.1 of Amendment No.~~..................~~ 1~~,712~~ --of Spectra-~~------~~Physics' ~~$50,960~~Registration ~~=======~~Statement ~~Estimated~~on ~~fair~~Form ~~value~~S-1 (No. 333-38329)) 10.~~...~~01 $Loan Agreement dated March 1,~~531~~ ~~=======~~2001, between the Company and Thermo Electron Corporation (Filed hereinwith)

EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 2000 Spectra-Physics Lasers, Inc. Stock Incentive Plan, as amended 10.2 Amendment No. 1 to the 1997 Spectra-Physics Lasers, Inc. Stock Option Plan 27.1 Financial Data Schedule

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