Adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) APB 14-1
During the first quarter of 2009, we adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which requires the liability and equity components of convertible debt instruments to be separately accounted for in a manner that reflects the non-convertible debt borrowing rate for interest expense recognition. In addition, direct issuance costs associated with the convertible debt instruments are required to be allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. These provisions have been applied retrospectively upon adoption. In accordance with FSP APB 14-1, we have recorded a debt discount of $27.5 million and a deferred tax liability of $10.6 million and have allocated $0.9 million of issuance costs to the equity component. Such amounts were calculated using an income approach and assumed a non-convertible debt borrowing rate of 6.25%, which is also the effective interest rate used to calculate interest expense. Due to the valuation allowance maintained against our deferred tax assets, the recording of the deferred tax liability resulted in a reduction to this valuation allowance rather than in a reduction in capital in excess of par value. Upon the adoption of FSP APB 14-1, the amortization of the debt discount resulted in an increase in non-cash interest expense of $4.2 million and $4.9 million for our fiscal years 2008 and 2007, respectively. The cumulative effect of adopting FSP APB 14-1 was an increase in stockholders' equity of $14.6 million as of January 3, 2009. Our consolidated statement of operations for the three months ended March 29, 2008 has been retrospectively adjusted compared with previously reported amounts as follows:

                                                            Three Months
                                                                Ended
                                                              March 29,
         (In thousands)                                         2008

         Additional non-cash interest expense               $       1,299
         Reduction in amortization of debt issuance costs             (63 )

         Retrospective change in net income                 $       1,236


         Change to basic earnings per share                 $       (0.03 )
         Change to diluted earnings per share               $       (0.03 )

Stock-Based Compensation
During the three months ended April 4, 2009, we granted 1.2 million restricted
stock units and 1.0 million stock appreciation rights with a weighted average
grant date fair value of $4.18 and $1.64, respectively.
The total stock-based compensation expense included in our consolidated
statements of operations was as follows:

                                                         Three Months Ended
                                                     April 4,        March 29,
      (In thousands)                                   2009             2008
      Cost of sales                                  $      26       $       45
      Selling, general and administrative expenses         378              650
      Research and development expense                      45               62

                                                     $     449       $      757

Results of Operations for the Three Months Ended April 4, 2009 and March 29, 2008
The following table presents our results of operations for the periods indicated as a percentage of net sales:

                                                       Percentage of Net Sales
                                                          Three Months Ended
                                                       April 4,         March 29,
                                                         2009             2008
     Net sales                                            100.0 %          100.0 %
     Cost of sales                                         61.7             60.0

     Gross profit                                          38.3             40.0

     Selling, general and administrative expenses          30.7             25.9
     Research and development expense                      10.4              9.9

     Operating (loss) income                               (2.8 )            4.2

     Interest and other expense, net                       (2.4 )           (1.5 )

     Income (loss) before income taxes                     (5.2 )            2.7

     Income tax provision                                   0.2              0.6

     Net income (loss)                                     (5.4 )%           2.1 %

In the following discussion regarding our net sales, certain prior period amounts have been reclassified between end markets to conform to the current period presentation.
Net Sales
Net sales for the three months ended April 4, 2009 decreased $25.7 million, or 22.3%, compared with the corresponding period in 2008. Net sales by our Lasers Division decreased $10.6 million, or 22.1%, and net sales by our PPT Division decreased $15.1 million, or 22.5%, compared with the prior year period. We experienced decreases in net sales in the first quarter of 2009 compared with the first quarter of 2008 due primarily to decreased sales to our microelectronics market and industrial manufacturing and other end markets resulting from the continued cyclical downturn in the semiconductor equipment industry and the deterioration of worldwide macro-economic conditions over the past year.
Net sales to the scientific research, aerospace and defense/security markets for the three months ended April 4, 2009 decreased $0.5 million, or 1.4%, compared with the same period in 2008. The decrease in sales to these markets in the first quarter of 2009 compared with the prior year period was due primarily to large shipments for major aerospace and defense/security programs in the 2008 period that did not recur in the 2009 period. Generally, our net sales to these markets by each of our divisions may fluctuate from period to period due to changes in overall research and defense spending levels and the timing of large sales relating to major research and aerospace/defense programs and, in some cases, these fluctuations may be offsetting between our divisions or between such periods.
Net sales to the microelectronics market for the three months ended April 4, 2009 decreased $18.9 million, or 50.8%, compared with the same period in 2008. The decrease in sales to this market during the three months ended April 4, 2009 compared with the same period in 2008 was due primarily to a significant decline in sales to our semiconductor manufacturing equipment customers as a result of the severe cyclical downturn in that industry, as well as lower sales of laser-based disk texturing systems, offset in part by an increase in sales to solar cell manufacturing customers.
Net sales to the life and health sciences market for the three months ended April 4, 2009 decreased $1.2 million, or 5.4%, compared with the same period in 2008, due primarily to decreased sales of products for bioinstrumentation applications and for cosmetic and other elective treatment applications, offset in part by higher sales of products for bioimaging applications.

Net sales to our industrial manufacturing and other end markets for the three months ended April 4, 2009 decreased $5.1 million, or 26.2%, compared with the same period in 2008, due primarily to the current macro-economic climate. Geographically, net sales were as follows:

                             Three Months Ended                          Percentage
                          April 4,      March 29,        Increase         Increase
         (In thousands)     2009           2008         (Decrease)       (Decrease)
         United States    $  36,990     $   52,469     $    (15,479 )         (29.5) %
         Europe              23,433         28,090           (4,657 )          (16.6 )
         Pacific Rim         23,035         29,373           (6,338 )          (21.6 )
         Other                6,078          5,311              767             14.4

                          $  89,536     $  115,243     $    (25,707 )         (22.3) %

The decrease in sales to customers in the United States in the first quarter of 2009 compared with the first quarter of 2008 was due primarily to lower sales to our semiconductor manufacturing equipment and industrial manufacturing customers. The decrease in sales to customers in Europe in the first quarter of 2009 compared with the prior year period was due primarily to large shipments for major aerospace and defense/security programs in the 2008 period that did not recur in the 2009 period and to lower sales to semiconductor manufacturing equipment customers in the 2009 period. Sales to customers in the Pacific Rim decreased in the first quarter of 2009 compared with the prior year period due primarily to lower sales of laser-based disk texturing systems and lower sales to semiconductor equipment manufacturing customers. The increase in sales to customers in other areas of the world in the first quarter of 2009 compared with the first quarter of 2008 was due primarily to increased sales to research customers.
Gross Margin
Gross margin was 38.3% and 40.0% for the three months ended April 4, 2009 and March 29, 2008, respectively. The decrease in gross margin in the 2009 period was due primarily to lower gross margins in our Lasers Division, which experienced reduced absorption of overhead costs due to lower manufacturing volume and a higher proportion of sales of products with lower gross margins. Gross margins in our PPT Division in the first quarter of 2009 were approximately the same as the prior year period. Such margins were negatively impacted by our lower sales volume, but were positively impacted by the recognition of revenue that had been deferred previously but for which the total cost of the related products had been recognized previously. Selling, General and Administrative (SG&A) Expenses SG&A expenses totaled $27.5 million, or 30.7% of net sales, and $29.8 million, or 25.9% of net sales, for the three months ended April 4, 2009 and March 29, 2008, respectively. The decrease in SG&A expenses in absolute dollars in the current year period was due primarily to decreases in personnel costs, travel expenses, consulting expenses and shipping costs.
In general, we expect that SG&A expense will vary as a percentage of sales in the future based on our sales level in any given period. Because the majority of our SG&A expense is fixed in the short term, changes in SG&A expense will likely not be in proportion to the changes in net sales. Research and Development (R&D) Expense
R&D expense totaled $9.4 million, or 10.4% of net sales, and $11.4 million, or 9.9% of net sales, for the three months ended April 4, 2009 and March 29, 2008, respectively. The decrease in R&D expense in absolute dollars in the current year period was due primarily to decreased personnel costs and project supplies expense.
We believe that the continued development and advancement of our key products and technologies is critical to our success, and we intend to continue to invest in key R&D initiatives, while working to ensure that the efforts are focused and the funds are deployed efficiently. In general, we expect that R&D expense as a percentage of net sales

will vary in the future based on our sales level in any given period. Because of our commitment to continued product development, and because the majority of our R&D expense is fixed in the short term, changes in R&D expense will likely not be in proportion to the changes in net sales. Interest and Other Expense, Net
Interest and other expense, net totaled $2.1 million and $1.7 million for the three months ended April 4, 2009 and March 29, 2008, respectively. In the current year period, interest income was negatively impacted by lower average cash balances, due to our use of cash for repurchases of our common stock and extinguishment of our convertible subordinated notes during 2008, and by lower interest rates. This lower interest income was offset in part by reduced interest expense due to the extinguishment of $28 million of our convertible subordinated notes in the fourth quarter of 2008. Income Taxes
Our effective tax rate for the three months ended April 4, 2009 and March 29, 2008 was (3.5%) and 15.2%, respectively. The effective tax rate for the three months ended April 4, 2009 reflects taxes applicable to certain foreign jurisdictions and required state taxes, offset in part by an allocation of tax to other comprehensive income.
Under Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, we are required to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings compared with annual projections. We have maintained a valuation allowance against substantially all of our gross deferred tax assets pursuant to Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, due to the uncertainty as to the timing and ultimate realization of those assets. As a result, until such valuation allowance is reversed, the U.S. tax provision relating to future earnings will be offset substantially by a reduction in the valuation allowance. Accordingly, current and future tax expense will consist of taxes in certain foreign jurisdictions, required state income taxes, the federal alternative minimum tax and the impact of discrete items.
As of April 4, 2009, our valuation allowance was $52.6 million. We will continue to monitor actual results, refine forecasted data and assess the need for retaining a valuation allowance against a portion of our gross deferred tax assets. In the event it is determined that a valuation allowance is no longer required, substantially all of the reversal will be recorded as a discrete item in the appropriate period.
Liquidity and Capital Resources
Our cash and cash equivalents and marketable securities balances decreased to a total of $141.7 million as of April 4, 2009 from $148.4 million as of January 3, 2009. The decrease was primarily attributable to cash used in operations and the repayment of short-term borrowings.
Net cash used in our operating activities of $1.9 million for the three months ended April 4, 2009 was attributable primarily to cash used in our operations, an increase of $7.5 million in inventory, a decrease of $5.8 million in accrued payroll and related expenses due to the timing of payments and the payout of annual bonuses, a decrease of $3.1 million in accrued expenses and other liabilities due to the timing of payments including the semi-annual interest payment on our convertible notes and a decrease of $1.1 million in accounts payable due to the timing of payments, offset in part by a decrease of $11.8 million in accounts receivable due to decreased sales, improved collection efforts and customer prepayments.

Net cash provided by investing activities of $6.5 million for the three months ended April 4, 2009 was attributable to net sales of marketable securities of $7.7 million, offset in part by purchases of property and equipment of $1.2 million.
Net cash used in financing activities of $3.0 million for the three months ended April 4, 2009 was attributable primarily to the repayment of short-term borrowings of $3.2 million.
During June 2008, we issued 300 million yen ($3.0 million at April 4, 2009) in private placement bonds through a Japanese bank. These bonds bear interest at a rate of 1.55% per year, payable in cash semiannually in arrears on June 30 and December 31 of each year. The bonds mature on June 30, 2011. The bonds are included in long-term debt in the accompanying consolidated balance sheets. At April 4, 2009, we had a total of three lines of credit, including one domestic revolving line of credit and two revolving lines of credit with Japanese banks. In addition, we had two other agreements with Japanese banks under which we sell trade notes receivable with recourse.
Our domestic revolving line of credit has a total credit limit of $5.0 million and expires on December 1, 2009. Certain cash equivalents held at this lending institution collateralize this line of credit, which bears interest at either the prevailing London Interbank Offered Rate (LIBOR) (0.48% at April 4, 2009) plus 1.00% or the British Bankers Association LIBOR Daily Floating Rate (0.27% at April 4, 2009) plus 1.00%, at our option, and carries an unused line fee of 0.25% per year. At April 4, 2009, there were no balances outstanding under this line of credit, with $4.0 million available, after considering outstanding letters of credit totaling $1.0 million.
Our two revolving lines of credit with Japanese banks totaled 1.4 billion yen ($14.0 million at April 4, 2009) and expire as follows: $6.0 million on May 29, 2009 and $8.0 million on May 31, 2009. These lines are not secured and bear interest at the prevailing bank rate. At April 4, 2009, we had $6.9 million outstanding and $7.1 million available for borrowing under these lines of credit. Amounts outstanding under these revolving lines of credit are included in short-term obligations in the accompanying consolidated balance sheets. Our two other agreements with Japanese banks, under which we sell trade notes receivable with recourse, totaled 550 million yen ($5.5 million at April 4, 2009), have no expiration dates and bear interest at the bank's prevailing rate. At April 4, 2009, we had $2.7 million outstanding and $2.8 million available for the sale of notes receivable under these agreements. Amounts outstanding under these agreements are included in short-term obligations in the accompanying consolidated balance sheets. As of April 4, 2009, the weighted average effective interest rate on all of our Japanese borrowings, including the private placement bonds, was 1.8%.
In May 2008, our Board of Directors approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of our common stock. Purchases may be made under this program from time to time in the open market or in privately negotiated transactions, and the timing and amount of the purchases will be based on factors including our share price, cash balances, expected cash requirements and general business and market conditions. No purchases were made under this program during the first quarter of 2009. As of April 4, 2009, 3.9 million shares remained available for purchase under the program. During the remainder of 2009, we expect to use $7 million to $10 million of cash for capital expenditures.
We believe our current working capital position, together with our expected future cash flows from operations, will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks including those discussed in Item 1A (Risk Factors) of Part I of our Annual Report on Form 10-K for the year ended January 3, 2009, and there can be no assurance that we will not require additional funding in the future. Except for the aforementioned capital expenditures, we have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to

finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
Recent Accounting Pronouncements
In April 2009, the FASB issued a series of Staff Positions related to the application of fair value measurements, disclosing fair value measurements and recognizing other than temporary impairments. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidance for estimating the fair value of an asset or liability when the volume or level of trading activity has significantly decreased. In addition, FSP FAS 157-4 requires companies to disclose inputs and valuation techniques used in interim and annual periods and any changes in valuation techniques and related inputs. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, requires public companies to include the disclosures required by Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, to be included in interim filings. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the guidance for recognizing an other-than-temporary impairment on debt securities. If a company . . .