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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 27, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-5255
COHERENT, INC.
DELAWARE 94-1622541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 PATRICK HENRY DRIVE, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 764-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Rights
(Title of Class)
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
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As of December 1, 1997, 11,585,847 shares of common stock were
outstanding. The aggregate market value of the voting shares (based on the
closing price reported by the NASDAQ National Market System on December 1,
1997) of Coherent, Inc., held by nonaffiliates was $405,855,509. For
purposes of this disclosure, shares of common stock held by persons who own
5% or more of the outstanding common stock and shares of common stock held by
each officer and director have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the Rules and
Regulations of the Act. This determination of affiliate status is not
necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed prior to February
27, 1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934
are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The statements in this 10-K that relate to future plans, events or
performance are forward-looking statements that involve risks and
uncertainties. Actual results, events and performance may materially differ.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly the result of any revisions to these forward-
looking statements that may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
RISK FACTORS
COMPETITIVE ENVIRONMENT. Coherent encounters aggressive competition in all
areas of its business activity. Coherent's competitors are numerous, ranging
from some of the world's largest corporations to many relatively small and
highly specialized firms. Coherent competes primarily on the basis of
technology, performance, price, quality, reliability, distribution, customer
service and support. To remain competitive, Coherent will be required to
continue to develop new products, periodically enhance its existing products
and compete effectively in the areas described above.
NEW PRODUCT INTRODUCTIONS. Coherent's future operating results are dependent
on its ability to rapidly develop, manufacture and market technologically
innovative products that meet customers' needs. In addition, after the
products are developed, Coherent must quickly manufacture such products in
sufficient volumes at acceptable costs to meet demand. Without the
introduction of new products and product enhancements, Coherent's products are
likely to become technologically obsolete, in which case inventory may be
written off and revenues would be materially and adversely affected. There can
be no assurance that such new products, if and when introduced, will receive
market acceptance. However, Coherent anticipates that it will continue to
incur significant research and development expenditures in order to maintain
its competitive position with a continuing flow of innovative, high-quality
products.
INTERNATIONAL SALES. The Company conducts a significant portion of its
business internationally. International sales accounted for 55% and 53% of the
Company's sales for fiscal 1997 and 1996, respectively. The Company expects
that international sales will continue to account for a significant portion of
its net sales in the future. A significant amount of these sales occur
through its international subsidiaries, some of which also perform research,
development, manufacturing and service functions. As a result of the Company's
international sales and operations, it is subject to the risks of conducting
business internationally, such as protective tariffs, import/export controls,
and government takeover of business. The most common risk is fluctuation in
foreign exchange rates, which could affect the sales price in local currencies
of the Company's products in foreign markets, as well as the Company's local
costs and expenses of its foreign operations. The Company uses forward
exchange, currency swap contracts, and other risk management techniques, to
hedge its exposure to currency fluctuations relating to its intercompany
transactions and certain firm foreign currency commitments; however, its
international subsidiaries remain exposed to the economic risks of foreign
currency fluctuations. There can be no assurance that such factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices.
ASIA-PACIFIC. Recent economic trends, particularly in the Asia-Pacific
marketplace, have caused a heightened awareness of the impact this portion of
the world's economy can have on the overall economy. As the Asia-Pacific
market currently represents almost one-third of the worlds buying power and
approximately 25% of Coherent's sales are to this region, changes in this
area's economic growth rate may impact suppliers of product into that market.
While the actual magnitude of the business at risk is
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unknown, it is likely that capital spending in this market will decrease
which could have an adverse impact on Coherent's sales and results of
operations.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. A variety of factors may cause
period-to-period fluctuations in the operating results of Coherent. Such
factors include, but are not limited to, product mix, competitive pricing
pressures, material costs, revenue and expenses related to new products and
enhancements of existing product, as well as delays in customer purchases in
anticipation of the introduction of new products or product enhancements by
Coherent or its competitors. The majority of Coherent's revenues in each
quarter results from orders received in that quarter. As a result, Coherent
establishes its production, inventory and operating expenditure levels based on
anticipated revenue levels. Thus, if sales do not occur when expected,
expenditure levels could be disproportionately high and operating results for
that quarter and potentially future quarters, would be adversely affected.
VOLATILITY OF STOCK PRICE. The market price of Coherent's Common Stock may be
affected by quarterly fluctuations in Coherent's operating results,
announcements by Coherent or its competitors of technological innovations or
new product introductions and other factors. If revenue or earnings in any
quarter fail to meet expectations of the investment community, there could be
an immediate impact on Coherent's stock price. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations,
particularly among stocks of high technology companies, which, on occasion,
have been unrelated to the operating performance of particular companies.
Factors not directly related to Coherent's performance, such as negative
industry reports or disappointing earnings announcements by publicly traded
competitors, may have an adverse impact on the market price of Coherent's
common stock. See Item 5., "Market for the Registrant's Common Equity and
Related Stockholder Matters".
PATENTS. The laser industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Because patent applications
are maintained in secrecy in the United States until such patents are issued
and are maintained in secrecy for a period of time outside the United States,
the Company can conduct only limited searches to determine whether its
technology infringes any patents or patent applications. Any claims for patent
infringement could be time-consuming, result in costly litigation, diversion
of technical and management personnel, cause shipment delays, require the
Company to develop non-infringing technology or to enter into royalty or
licensing agreements. Although patent and intellectual property disputes in
the laser industry have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
often require the payment of ongoing royalties, which could have a negative
impact on gross margins. There can be no assurance that necessary licenses
would be available to the Company on satisfactory terms, or that the Company
could redesign its products or processes to avoid infringement, if necessary.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling some of its products. This could have a
material adverse effect on the Company's business, results of operations and
financial condition. Conversely, costly and time consuming litigation may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others.
GOVERNMENT REGULATION. The medical devices marketed and manufactured by the
Company are subject to extensive regulation by the FDA and some foreign
governments. Pursuant to the Federal Food, Drug and Cosmetic Act of 1976, as
amended, and the regulations promulgated thereunder, the FDA regulates the
clinical testing, manufacture, labeling, sale, distribution and promotion of
medical devices. Before a new device can be introduced into the market, the
manufacturer must obtain market clearance through either the 510(k) premarket
notification process or the lengthier premarket approval ("PMA") application
process. Compliance with this process is expensive and time-consuming.
Noncompliance with applicable requirements, including good manufacturing
practices ("GMP") can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution. The FDA also has the authority to request
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repair, replacement or refund of the cost of any medical device manufactured
or distributed by the Company.
REIMBURSEMENT. Approximately half of the Company's medical products are
purchased by doctors, clinics, hospitals and other users, which bill various
third-party payors, such as governmental programs and private insurance plans,
for covered health care services provided to their patients. Third-party
payors are increasingly scrutinizing whether to cover new products and the
level of reimbursement for covered products used for these health care
services. While the Company believes that the laser procedures using its
products (except for most aesthetic applications, which comprise approximately
half of the Medical segment's revenue) have generally been reimbursed, payors
may deny coverage and reimbursement for the Company's products if they
determine that the device was not reasonable and necessary for the purpose for
which used, was investigational or not cost-effective. Failure by doctors,
clinics, hospitals and other users of the Company's products to obtain adequate
reimbursement for use of the Company's products from third-party payors, and/or
changes in government legislation or regulation or in private third-party
payors' policies toward reimbursement for procedures employing the Company's
products could have a material adverse effect on the Company's business,
results of operations and financial condition. Moreover, the Company is unable
to predict what legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the
future, or what effect such legislation or regulation may have on the Company.
EARTHQUAKES. A substantial portion of Coherent's research and development
activities, manufacturing, its corporate headquarters and other critical
business operations are located near major earthquake faults. Operating results
could be materially affected in the event of an earthquake or other natural
disasters.
YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex, as virtually
every computer operation will be affected in the same way by the rollover of
the two digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company is utilizing both
internal and external resources to identify, correct or reprogram, and test the
systems for year 2000 compliance. It is anticipated that all reprogramming
efforts will be completed by December 31, 1998, allowing adequate time for
testing. This process includes getting confirmations from the Company's
primary vendors that plans are being developed or are already in place to
address processing of transactions in the year 2000. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely, will also be converted in a timely manner or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems. Management is in the process of completing its assessment of the year
2000 compliance costs however, based on information to date (excluding the
possible impact of vendor systems) management does not believe that it will
have a material effect on the Company's earnings.
THE LASER COMPANY
Coherent, Inc., a Delaware corporation, (herein referred to as "Coherent"
or "Company") is a leading designer, manufacturer and supplier of electro-
optical systems and medical instruments utilizing laser, precision optic and
microelectronic technologies. The Company integrates these technologies into a
wide variety of products and systems designed to meet the productivity and
performance needs of its customers. Major markets include the scientific
research community, medical institutions, clinics and private practices, and
commercial and OEM (original equipment manufacturer) applications ranging from
semiconductor processing and disk mastering to light shows and entertainment.
Coherent also produces and sells optical and laser components to other laser
system manufacturers.
The word "laser" is the acronym for "light amplification by stimulated
emission of radiation." The emitted radiation oscillates within an optical
resonator and is amplified by an active media, resulting
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in a monochromatic beam of light which is narrow, highly coherent and thus
can be focused to a small spot with a high degree of precision.
INDUSTRY LEADERSHIP
Since inception in 1966, the Company has grown through a combination of
internal expansion, joint ventures and strategic acquisitions of companies with
related technologies and products. Coherent is a technical leader in every
market it serves. Driven by new product application innovations, Coherent has
approximately 189 U.S. patents in force, and over the past several years has
committed from 10% to 11% of annual revenues to research and development
efforts.
The Company is committed to quality and customer satisfaction, Coherent
designs and produces many of its own components to retain quality control.
Coherent provides customers with around-the-clock technical expertise and
quality that is ISO 9000 certified at its principal manufacturing sites.
MISSION AND GOALS
Coherent's mission is to focus on laser product innovations. Leveraging
its competitive strengths in laser technology development, new product
applications, engineering R&D and manufacturing expertise, Coherent is
dedicated to customer satisfaction, quality and service. Coherent's mission is
to continue its tradition of providing medical, scientific, commercial and OEM
customers with cost effective laser products that provide performance
breakthroughs and application innovations.
Coherent's goals are to serve its customers, employees and stockholders.
Specific goals include providing:
- Customers with innovative products, superb technology, total quality,
support and satisfaction.
- Employees with a challenging, fulfilling place to work while
expanding their skills and horizons.
- Stockholders with consistent returns on equity capital and long-term
growth in sales and earnings.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The sales and operating results of both industry segments and the
identifiable assets attribut-able to both industry segments for the three years
ended September 27, 1997 are set forth in Note 12, "Business Segments," of the
Notes to Consolidated Financial Statements.
PRODUCTS
BUSINESS STRUCTURE
Coherent's business structure reflects its two major business segments,
Medical and Electro-Optical. Medical serves the medical-surgical community,
while Electro-Optical serves the needs of scientific and commercial customers
(both end users and OEMs), including customers who purchase components.
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PRODUCT AND MARKET APPLICATIONS
Coherent currently produces more than 150 lasers, laser systems,
precision optics and component products. Medical products range in price from
$25,000 to $500,000. Scientific and commercial products range from $10,000 to
$450,000. Component products (including diodes) range in price from $500 to
$50,000 and consist of precision optics, thin film coatings, accessories, laser
measurement and testing instruments. Applications within Coherent's market
segments are shown in the table below:
APPLICATIONS BY MARKET
<TABLE>
<CAPTION>
MEDICAL SCIENTIFIC COMMERCIAL
<S> <C> <C>
Ophthalmology Spectroscopy Optics & Optical Coating
Photorefractive Keratectomy Chemistry Semiconductor Processing &
Aesthetic Surgery Photochemistry Inspection
Dermatology/Plastic Surgery Physics DUV Photolithography
Cosmetic and Reconstructive Viral Research Interferometric Wafer Inspection
Surgery Genetics Machine Vision
Orthopedics Environmental Research Marking
Urology Semiconductor Research Materials Processing & Control
Gynecology Biology Process Control
Otolaryngology Biochemistry Magnetic Disk Texturing
Neurological Surgery Engineering Video & CD-ROM Disk Mastering
Oral Maxillofacial Surgery Forensics Stereolithography/Rapid
Oncology Holography Prototyping
Podiatry Isotope Separation Reprographics/Printing
General Surgery Metrology Graphic & Architectural Displays
Medical Therapy Non-destructive Testing Multimedia Entertainment
Medical Imaging Combustion Analysis Micromachining
Cytofluoresence
Analytical Instrumentation
Pulsed Laser Deposition
</TABLE>
PRODUCT NARRATIVE
MEDICAL
Coherent's Medical Group (CMG) develops, manufactures and distributes a
broad line of medical laser systems used in ophthalmology, dermatology,
gynecology, plastic surgery, aesthetic surgery, orthopedics, otolaryngology,
neurological surgery, urology, podiatry, oncology and other surgical
specialties. These lasers are designed to improve the quality of patient care
and frequently decrease overall healthcare costs compared to conventional
procedures. Most of these products also make it possible to perform treatments
in a doctor's office, surgi-centers or outpatient centers in hospitals instead
of requiring patient hospitalization.
SURGICAL PRODUCTS
Coherent introduced the first solid state holmium laser, the
VersaPulse-Registered Trademark-, in 1988. With its wide variety of fiber
optic delivery devices, which are much smaller than conventional
instrumentation, the VersaPulse quickly established itself as a first choice
for minimally invasive surgery. Since that time, product enhancements and
improvements have allowed Coherent to maintain its leadership position.
In 1993, the VersaPulse Select-TM- was introduced. This revolutionary
product doubled the holmium laser power available to the arthroscopic surgeon
while reducing the physical size of the system to just half that of previous
models. The tissue effects allowed cutting, ablation and smoothing of
cartilaginous tissue with minimal bleeding. An additional effect of precise
collagen shrinkage has emerged as the procedure of choice for joint
instability.
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In urology, the VersaPulse Select holmium laser is emerging as a
revolutionary option for lithotripsy. With the advent in the mid-1990's of
more flexible, miniturized endoscopic devices, all areas of the urinary system
could be accessed, opening the door for new treatment options. The holmium
laser, coupled with flexible fiber optic delivery devices has proven to be the
most effective lithotrite and the VersaPulse Select is the choice of leading
urologists around the world.
In 1994, Coherent introduced the VersaPulse Select Dual Wavelength laser
for urology. For the first time, two complementary laser wavelengths, Holmium
and ND:YAG, were incorporated in one system. Via single delivery device and
with the touch of a foot pedal, the surgeon could quickly switch from the
precise cutting, ablation and other fragmentation of Holmium to the deep
penetration and coagulation of Nd:YAG. This combination not only allows
maximal versatility in treating the broadest range of urologic applications but
also provides maximal utilization of the VersaPulse Select within the surgical
arena.
AESTHETIC PRODUCTS
Coherent is a leading supplier of lasers to the rapidly growing aesthetic
laser market. Starting in 1994, with the UltraPulse for treatment of wrinkles,
Coherent has introduced a complete line of innovative laser products for
aesthetic procedures including laser skin resurfacing, cosmetic eyelid surgery,
treatment of tattoos, treatment of pigmented lesions, treatment of vascular
lesions including leg veins, and laser-assisted hair transplant. In addition,
in November 1997 Coherent became the exclusive distributor for Palomar's laser-
based hair removal products throughout most of the world.
The UltraPulse 5000C with Computer Pattern Generator is a leading laser
for treatment of wrinkles. Called laser skin resurfacing, this procedure uses
the unique high energy pulsed output of the UltraPulse laser to produce
precise, controlled and repeatable vaporization of a thin outer layer of skin.
The laser is also widely used for aesthetic incisional procedures including
cosmetic eyelid surgery. Since its introduction in 1994, it has become one of
the largest selling lasers to aesthetic surgeons for these procedures.
The UltraFine erbium laser for skin resurfacing was introduced in August
1997. This system complements the UltraPulse 5000C, providing new treatment
capabilities for the aesthetic surgeon. The UltraPulse remains the laser of
choice for mild to severe wrinkles. The UltraFine erbium laser extends this
treatment to a new group of patients who require more superficial treatment.
In addition, this laser can be used in concert with the UltraPulse to enhance
the overall therapy.
In 1996, Coherent introduced the multiwavelength VersaPulse aesthetic
laser. Featuring four lasers in one box, this product can be used for the
removal of tattoos and treatment of both vascular and pigmented lesions, such
as birthmarks, port wine stains, and "telangiectasias," the unsightly veins of
the legs and face. Physicians use up to four separate laser systems to achieve
the capabilities offered by a single VersaPulse aesthetic laser. New laser
technology developed at Coherent allows treatment of lesions containing larger
vessels that often do not respond to conventional lasers.
The UltraCut incisional scanner for laser-assisted hair transplant was
introduced in October 1997. Used with the UltraPulse 5000C laser, the UltraCut
laser prepares sites in the scalp to receive hair grafts. This system, which
has been in clinical trials for over three years, offers a number of advantages
to the hair-transplant surgeon including reduced bleeding, faster procedures
and improved cosmetic results.
In November 1997, Coherent signed a partnering agreement with Palomar
Medical Technologies for laser-based hair removal systems. Coherent is the
exclusive distributor for Palomar's laser-based hair removal systems in the
United States, the Far East and most countries in Europe. Coherent is
responsible for sales, marketing, service, training and education. Palomar is
responsible for design, development and manufacture of its laser-based hair
removal systems.
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OPHTHALMIC PRODUCTS
Coherent pioneered the use of lasers in the ophthalmology market segment
27 years ago and is still the global leader. CMG offers argon and multiple
wavelength lasers for photocoagulation and treatment of retinal disease and
glaucoma. The Company's Nd:YAG lasers for photodisruption are used for
treatment of secondary cataracts. Coherent also sells an excimer refractive
surgery system in many countries in the world other than the U.S. for
correction of vision disorders including myopia, hyperopia and astigmatism.
Coherent's argon photocoagulator was the first such device to achieve
widespread acceptance by the medical community for treatment of diabetic
retinopathy, retinal detachments and glaucoma. The argon photocoagulator is
also used in treatment of age-related macular degeneration.
The Ultima-Registered Trademark- 2000 and Novus-Registered Trademark- 2000
photocoagulator product lines utilize a patented "power-on-demand" laser tube
design where power is on only when required for treatment by the physician.
This innovation substantially extends the laser tube life and eliminates the
need for an external water supply. A broad line of accessories allows these
products to provide Laser Indirect Ophthalmoscopic laser treatment and surgical
endophotocoagulation with Acculite-TM- probes in addition to slit lamp
applications with the LaserLink-TM- Adapter. The portable design of the Ultima
2000 product line allows the system to be transported to the patient for
treatment in convalescent or retirement care facilities, or used in the
operating room, as well as in intensive care nurseries for retinopathy of
prematurity.
The Novus Omni-TM-, introduced in fiscal 1994, attains a new level of
compactness, reliability, and flexibility in ophthalmic multi-wavelength
applications. With instantaneous switching among red, yellow, and green
treatment options, the retinal surgeon can now benefit from the proven
technology improvements in the Novus and Ultima lasers and multiple wavelength
lasers.
Coherent's Nd:YAG laser photodisruptors are used primarily for posterior
capsulotomies. These solid-state, Q-switched lasers provide ophthalmologists
with a method for treating secondary cataracts in a non-invasive manner.
Unlike the argon and multiple wavelength lasers used in photocoagulation,
Nd:YAG lasers produce high power pulses as short as ten billionths of a second.
These brief but powerful pulses produce an "optical breakdown" effect which
disrupts (cuts or perforates) the tissue rather than producing a thermal burn.
Nd:YAG lasers are also used for iridotomies, a procedure used in the treatment
of closed angle glaucoma, whereby the laser makes a hole in the iris
facilitating the outflow of fluid trapped in the eye. This outflow relieves
pressure which, if left untreated, could cause damage to the optic nerve.
In October 1997, Coherent introduced the next generation EPIC-TM-
ophthalmic laser system which enables the ophthalmologist to perform most laser
treatments with one system. In December 1997, the Company received government
approval to sell this product. This three-in-one laser incorporates a new clip-
on Nd:YAG laser, a frequency doubled laser and an argon laser. The EPIC laser
system is a portable laser which adapts to the ophthalmologists existing
examination slit lamp. Shipments of EPIC will begin in January 1998.
In 1996, Coherent introduced Selecta 7000, a new Q-switched, frequency
doubled laser for the treatment of glaucoma. The treatment involves the
selective targeting of trabecular meshwork cells which increases fluid outflow
from the eye. There are minimal side effects and the treatment called
selective laser trabeculoplasty (SLT) could prove an important advance in
glaucoma therapy. The procedure is currently investigational in the U.S. with
FDA clearance expected in late 1998.
In March 1994, Coherent and Herbert Schwind GmbH & Co. KG entered into a
marketing and sales agreement which gives Coherent the exclusive right to sell
the Keratom-TM- excimer refractive surgery system in many countries of the
world. This product uses a high energy argon fluoride excimer laser from
Lambda Physik, an 80% owned Coherent subsidiary in Germany, to obtain a high
quality laser beam that is more uniform, and optical components that are
simpler, more reliable and more durable than
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competing machines. Keratom uses the patented HaloPure-TM- generator to
provide ultra-pure halogen, as needed from a self-contained, solid-state
source through a computer controlled chemical reaction.
The medical laser systems manufactured by Coherent's Medical Group are
subject to regulation and control by the U.S. Food and Drug Administration and
other international regulatory agencies. See "Impact of Medical Device
Regulations".
The laser systems manufactured by the Medical Group typically range in
price from $25,000 to $500,000.
ELECTRO-OPTICAL
Coherent's electro-optical products include lasers and laser systems for
scientific, medical research, micromachining, commercial applications,
precision optics and related accessories. The principal types of lasers
produced by the Company's Electro-Optical segment are argon and krypton ion,
excimer, carbon dioxide (CO2), liquid dye, Nd:YAG, Titanium:Sapphire
(Ti:Sapphire), diode-pumped solid-state (DPSS), and semiconductor lasers (laser
diodes). These lasers have a broad range of power and operate in the visible
(V), ultraviolet (UV) and infrared (IR) portions of the electromagnetic
spectrum. The Company's optics and optical products include special purpose
lenses, mirrors and advanced optical coatings. Coherent's electro-optical
products are sold for scientific, medical, commercial end users and OEM
applications.
SCIENTIFIC AND COMMERCIAL GROUP
The Coherent Laser Group (CLG) and Coherent Lambda Physik (CLP), the
Company's 80% owned subsidiary in Gottingen, Germany, comprise the Scientific
and Commercial Group.
CLG is headquartered in Santa Clara, California, and is a leading
developer and manufacturer of ion, dye, solid-state Nd:YAG, Ti:Sapphire, DPSS,
diode and CO2 lasers for the scientific, OEM and micromachining markets. The
lasers sold by CLG are used in basic and applied research in medicine,
chemistry, physics, biology, biochemistry, engineering and forensic sciences,
and in a variety of commercial applications including materials processing,
semiconductor microlithography, stereolithography, interferometric wafer
inspection, reprographics, optical disk manufacturing, analytical
instrumentation, laser light shows, and manufacturing process control.
In fiscal 1996, CLG changed its organizational structure from a product
line focus to a market focus in order to better serve its customers in their
different market channels. As a result, two business units were formed: a
Commercial business unit which focuses on OEM and industrial accounts and a
Scientific business unit focusing on the scientific community.
In March 1995, the Company (and ATx Telecom Systems, Inc. (AMOCO))
entered into an "Asset Purchase and Sale Agreement" whereby the Company
purchased certain assets (consisting primarily of patents and technology
licenses) relating to AMOCO's diode pumped solid-state laser technology. In
June 1995, the Company acquired the business and net assets of Adlas GmbH and
Co. KG (Adlas), in Lubeck, Germany, a manufacturer of CW infrared, green and
Q-switched lasers whose products complement the DPSS product line.
In fiscal 1997, the following important events occurred: CLG continued to
provide its customers with lasers for a growing range of applications,
especially in the CO2 (i.e., material drilling and marking) and diode-pumped
solid state (DPSS) (i.e., disk texturing) product lines. The Group also
purchased the assets and technology of Micracor, Inc. of Massachusetts to
position CLG for entrance into the telecommunications market. Also, CLG saw
continued strong growth for the Lubeck operation, including shipments of the ZT
laser for the disk texturing market. With these acquisitions and
aforementioned products, CLG has consolidated its patent position in the DPSS
area, increased its portfolio of product offerings to better address the
commercial and micromachining markets, and has opened up a
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manufacturing and service entity in Europe for such products. The first
shipments occurred on the Verdi-TM-, a CW diode-pumped solid-state visible
laser that provides a compact, high-power, efficient option for many
scientific and commercial laser applications.
Coherent's 80% owned subsidiary Coherent Lambda Physik (CLP), develops and
manufactures excimer, DPSS, and tunable lasers including dye lasers and optical
parametric oscillators (OPOs). These powerful pulsed lasers cover the spectral
range from 157 nm to over 4 um. Producing UV light without frequency
conversion techniques, the excimer laser is very efficient, gaining strong
market share in industrial and medical applications. The diode-pumped solid-
state developments are driven by the challenge to produce the highest possible
frequency conversion efficiencies and beam quality for UV-power with
outstanding brilliance at 1 kHz.
All Lambda Physik products are certified with the CE-mark, a prerequisite
for the European market. This is an important milestone of Lambda Physik's
quality program and opens up excellent opportunities in the medical and
industrial marketplace.
During fiscal 1997, Lambda Physik improved the Novaline-Litho-TM- 248, an
excimer laser for deep ultraviolet (DUV) photolithography systems used in
semiconductor processing, according to customers' needs by significant
reduction of bandwidth and pulse-to-pulse amplitude fluctuation. In parallel,
new Novaline medium and narrow bandwidth models for the more advanced
wavelength of 193 nm were released. There are only three companies with the
technological capability to manufacture DUV excimer lasers at 248 nm for
photolithography systems. The companies are Cymer, Inc., Coherent Lambda
Physik (CLP) and Komatsu. Cymer is well ahead of the competition as it has
been focused on this market for the past 10 years and it has a market share in
excess of 90%. Also in fiscal 1997, the LAMBDA StarLine-TM- family of diode-
pumped YAG lasers was expanded by adding 4 new models with different repetition
rates and energies. These new lasers open a variety of applications ranging
from spectroscopy through LIDAR to hole drilling and micro machining. Lambda
Physik has produced some of the most respected pulsed laser models for
spectroscopy in the world. The present pulsed dye laser, SCANmate-TM-, and
parametric oscillator, SCANmate OPPO-TM-, set a new standard in the scientific
world in narrow-linewidth tunable light sources for high resolution
spectroscopy in the range from 189 nm to over 4 um.
The lasers and laser systems produced by CLG, with the exception of
semiconductor lasers, typically range in price from $10,000 to $250,000.
The lasers and laser systems produced by CLP typically range in price from
$10,000 to $450,000.
SEMICONDUCTOR GROUP
In July 1995, the Company acquired the laser diode operations of Uniphase
Corporation. With this acquisition, the Company added high power
semiconductor laser diodes with wavelength emissions from 670 to 980 nanometers
to its product lines. These laser diodes are key components for the Company's
growing segment of diode-pumped laser products, thereby reducing its dependence
on outside vendors. Laser diodes are also widely used in medical, printing,
OEM instrumentation, remote sensing, and machine vision industries. In December
1996, the Company acquired 80% of the outstanding capital stock of Tutcore OY,
Ltd., and an option to acquire the remaining 20% in five years. Tutcore is
located in Tampere, Finland and is the leading manufacturer of aluminum-free
semiconductor wafers that are incorporated into laser diodes. In February
1997, CLG completed construction of a 10,000 square foot clean room facility to
support the diode business. In August 1997, the Company formed a separate
group which is now known as Coherent Semiconductor Group; previously, such
operations were a part of CLG. This group consists of the Santa Clara laser
diode division as well as the Tutcore division located in Tampere, Finland.
Semiconductor laser diode prices range from $500 to $3,000.
10
<PAGE>
COMPONENTS GROUP
Coherent's Auburn Group (CAG) manufactures optics, thin film coatings for
high-performance laser optics, laser accessories and electro-optical components
for the Company as well as other manufacturers. CAG also distributes products,
manufactured by others, through its catalog business.
Optics and thin film coatings, which consist of mirrors and lenses used
for imaging and directing a laser beam, are used in the Company's own laser
products, in low-loss coated optics for OEMs and other commercial applications.
During fiscal 1997, the Optics Division introduced a number of specialized
coatings for OEM's developing systems in the UV spectral region. Applications
include photolithography systems being built for the next generation
semiconductor "fabs"; micromachining and photorefractive keratotomy. In
England, the Leicester operations developed a revolutionary new system for
manufacturing graded interference filters which have use in commercial lighting
systems and analytical instrumentation devices. Patents have been applied for
on the technology.
CAG also designs and manufactures laser measurement instruments and
accessories that are used to measure and maximize the performance of laser
systems. In the fourth quarter of fiscal 1997, the LaserCheck was introduced,
a complete laser power measurement system that is the size of a penlight.
Also during fiscal 1997, the Auburn Group purchased the assets and
operations of Ealing Electro-Optics (Ealing) based in Watford, England and its
U.S. subsidiary located in Holliston, Massachusetts from The 600 Group plc.
Ealing is a recognized leader in the design and manufacture of precision
optical assemblies as well as complete lens and thermal imaging test systems.
The Ealing "Gold" catalog sells over 5,000 components to the photonics
industry. This acquisition gives CAG the capability to do higher level electro-
optic assemblies in Watford, and adds a complete worldwide catalog operation
for sale of all the Group's products.
Products made by CAG typically range in price from $500 to $50,000 and are
sold through CAG's field and telemarketing salesforce, the aforementioned
catalog and through an international network of independent distributors as
well as other Coherent sales groups.
MARKETING, DISTRIBUTION AND CUSTOMER SERVICE & SUPPORT
Coherent markets its products domestically through a direct sales force.
Coherent's products are sold internationally through direct sales personnel
located in the United Kingdom, Sweden, Germany, France, Belgium, The
Netherlands, Japan (Lambda Physik for commercial products only), The Peoples
Republic of China and Hong Kong, as well as through independent representatives
in other parts of the world. The Company's foreign sales are made principally
to customers in Europe, Japan and Asia Pacific, but sales are also made to
customers in Canada, Mexico, Latin America, Australia, the Middle East and
Africa. Sales made to independent representatives and distributors are
generally priced in U.S. dollars. Foreign sales made directly by the Company
are generally priced in local currencies and are therefore subject to currency
exchange fluctuations. Foreign sales are also subject to other normal risks
of foreign operations, such as protective tariffs and export/import controls.
Coherent's products are broadly distributed and no one customer accounted for
more than 10% of total sales during fiscal 1997.
Coherent commenced direct sales and service for its Medical and Electro-
Optical business segments in Japan effective February 1996 and April 1997,
respectively. Japan is the largest international market for both business
segments, and creating closer relationships with the Japanese customers enables
the Company to provide stronger support. Furthermore, the Company can develop
products more rapidly for the Japanese market.
The Company gives various warranties on its products and offers service on
a contractual basis after the initial product warranty has expired.
11
<PAGE>
Coherent maintains a customer support and field service staff in major
markets in the United States, Mexico, Europe, Japan and Asia Pacific. This
organization works closely with customers and customer groups in servicing
equipment, training customers to use the Company's products and exploring
additional applications of the Company's technologies.
PRODUCTION AND SOURCES AND AVAILABILITY OF MATERIALS
The Company's production operations consist primarily of assembling and
testing its products, although the Company manufactures substantially all of
its own laser tubes, optics and diode wafers. The Company depends upon outside
suppliers for most product components, many of which are manufactured to the
Company's specifications. The Company has not experienced any significant
difficulty in obtaining raw materials or components in the past. There is
always a possibility of periodic, short-term disruption in supplies of
critical, high technology components; however, the Company does not believe
that such disruptions would have a material adverse impact on its financial
position or results of operations.
PATENTS AND LICENSES
Coherent has a significant number of U.S. and foreign technology patents
incorporated into its products. The Company believes it owns, or has the
right to use, the basic patents covering its products. However, each year
there are hundreds of patents granted worldwide related to lasers and their
applications and, from time to time, the Company has been notified that it may
be infringing upon patents owned by others. In the past, the Company has been
able to obtain patent licenses for patents related to its products on
commercially reasonable terms. The failure to obtain a key patent license from
a third party could cause the Company to incur liabilities for patent
infringement and, in the extreme case, to discontinue the manufacturing of
products that infringe upon the patent. Management believes that none of the
Company's current products infringe upon a valid claim of any patents owned by
third parties, where the failure to license the patent would have a material
and adverse effect on the Company's financial position or results of
operations.
BACKLOG
At September 27, 1997, the Company's backlog of orders scheduled for
shipment was approximately $75,429,000, compared with $59,974,000 at September
28, 1996. Orders used to compute backlog are generally cancelable without
substantial penalties. Historically, the rate of cancellation experienced by
the Company has not been significant; however, since orders are cancelable, the
backlog of orders, at any one time, is not necessarily indicative of future
revenues. The Company anticipates filling the present backlog during fiscal
1998. Backlog at September 27, 1997, was higher than at September 28, 1996, in
the Electro-Optical business segment and lower in the Medical business segment.
Higher backlog in the Electro-Optical business is driven by the commercial and
OEM side, as this business has grown faster than the Scientific business and
traditionally has higher backlog due to the nature of the booking process for
OEMs. This increase was partially offset by the decrease in Medical backlog,
because manufacturing bottlenecks relating to certain aesthetic products which
existed at the prior fiscal year end, were resolved in the current fiscal year.
Therefore, Medical segment backlog dropped to a more manageable level, as
customers realized faster delivery on their orders.
COMPETITION
Coherent is the largest laser company in both of its business segments.
No competitor offers the wide range of products that are manufactured and sold
by Coherent. However, competition is intense in both business segments because
there are a number of small laser companies selling products which compete
directly with one or more Coherent products.
The markets in which Coherent is engaged are subject to keen competition
and rapid technological change. The principal factors of competition for all
products are reliability, price,
12
<PAGE>
performance, service, marketing and distribution, technological achievement
and human resources. Coherent believes that it competes favorably in these
areas, but continued emphasis upon development of new and improved products,
and the continued development of successful channels of distribution will be
necessary to maintain or increase the Company's share of the laser markets in
which it competes.
RESEARCH AND DEVELOPMENT
Coherent maintains separate research and development staffs in both of its
major business segments. Development of new and improved electro-optical and
medical products is primarily the responsibility of engineering department and
applications staffs located in the U.S., Germany and the United Kingdom. Such
engineering staffs design and develop both new products and enhancements to
existing products. Coherent works closely with customers, both individually
and through Company sponsored seminars, to develop products to meet customer
application and performance needs.
The Company operates in an industry which is subject to rapid
technological change. Its ability to compete and operate successfully depends
upon, among other things, its ability to react to such change. Accordingly,
Coherent is committed to the development of new products as well as the
improvement and refinement of existing products. Fiscal 1997 expenditures for
research and development were $39,406,000, 10% of sales, compared to
$37,705,000, 10% of sales, and $31,042,000, 11% of sales, during fiscal 1996
and 1995, respectively.
IMPACT OF ENVIRONMENTAL REGULATION
The Company believes that compliance with federal, state and local
environmental protection regulations will not have a material adverse effect on
the capital expenditures, earnings, competitive and financial position of the
Company. The Company is a respondent under Remedial Action Orders issued by
the California Department of Toxic Substance Control relating to an
investigation and remediation of soil and groundwater contamination at its
former facility in the Stanford Industrial Park, Palo Alto, California. See
Note 11, "Commitments and Contingencies", of the Notes to Consolidated
Financial Statements.
IMPACT OF MEDICAL DEVICE REGULATIONS
The Company's medical products are subject to regulation and control by
the Center for Devices and Radiological Health, a branch of the Food and Drug
Administration (FDA) within the Department of Health and Human Services. The
FDA medical device regulations require either an Investigational Device
Exemption (IDE), Pre-Market Approval (PMA) or 510(K) clearance before new
products can be marketed to, or utilized by, the physician. The Company's
medical products are subject to similar regulations in its major international
markets. Complying with these regulations is necessary for the Company's
strategy of expanding the markets for and sales of its products into these
countries.
These approvals may include clinical testing, limitations on the number of
sales, controls of end user purchase price and the extent of product
commercialization. In certain instances, these constraints can delay planned
shipment schedules as design and engineering modifications are made in response
to regulatory concerns and requests. The Company's competitors in the medical
field are subject to the same regulations.
The Company believes that its long established working relationship with
the medical community and the high quality of its products allow it to work
effectively within these regulatory constraints.
13
<PAGE>
EMPLOYEES
At September 27, 1997, Coherent employed 2,131 persons. The Company's
continued success will depend in large measure on its ability to attract and
retain highly skilled employees, who are in great demand.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information relating to foreign and domestic operations for the
three years ended September 27, 1997, is set forth in Note 12, "Business
Segments", of the Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's corporate headquarters and major electro-optical facility is
located in Santa Clara, California, consisting of approximately 8.5 acres of
land and a 200,000-square-foot building owned by the Company.
Additional electro-optical facilities are located in Auburn, California.
The Auburn facilities consist of two 60,000-square-foot buildings and a 50,000-
square-foot building, all of which are owned by the Company.
The Company's principal medical products facility is located in Palo Alto,
California consisting of two buildings totaling approximately 100,000 square
feet of floor area under leases expiring in 1999. The Company also has a
16,200-square-foot warehouse located in Redwood City, California under a lease
expiring in 2000. In January 1997, the Company entered into an operating lease
for approximately 11 acres of land and an existing building in Santa Clara,
California for future use as headquarters for its Medical Group. The existing
130,000 square foot building on this property is currently being renovated and
expanded to 210,000 square feet. Occupancy of this facility is anticipated by
mid fiscal 1998.
During fiscal 1993, the Company sold the net assets of Coherent General,
Inc. The sale did not include land consisting of approximately 36 acres (11
developed acres) and facilities consisting of a 58,000-square-foot building
owned by the Company in Sturbridge, Massachusetts. This building is currently
leased (until August 1998) to the acquirer of Coherent General, Inc.
Lambda Physik GmbH's facility in Gsttingen, Germany consist of two
buildings totaling 54,000 square feet, which are owned by the Company.
Lambda Physik's domestic facility is located in Fort Lauderdale, Florida,
consisting of an 11,000-square-foot building leased until March, 2002.
Lambda Physik Japan's facility is located in Yokohama, Japan, consisting
of a 5,000 square-foot building leased until October, 1998.
Coherent GmbH's facility in Dieburg, Germany consists of a 16,740-square-
foot building leased by the Company until 1999 with a five year renewal option.
Coherent Lubeck's facility in Lubeck, Germany consists of a 19,913-square-
foot building leased by the Company until 1999 with a five year renewal option.
Coherent Optics Europe Ltd.'s facilities consist of two leased buildings
(four units) in Leiceseter, England totaling 34,537 square feet with leases
expiring from 2005 to 2007.
Coherent Ealing Electro-Optics Ltd.'s facility consists of one owned
building in Watford, England totaling 39,000 square feet.
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<PAGE>
Coherent Tutcore's leased facility is located in Tampere, Finland where
they manufacture semiconductor wafers. The facility is 5,000 square feet.
Coherent Japan's facilities include 13,600-square-feet consisting of four
buildings leased until 1998.
The Company also maintains sales and service offices under short-term
leases in the United States, Mexico, Germany, the United Kingdom, France,
Belgium, The Netherlands, Sweden, Hong Kong, and Peoples Republic of China.
In general, the Company's facilities are considered both suitable and
adequate to provide for future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a respondent under Remedial Action Orders
issued by the California Department of Toxic Substance Control in connection
with the investigation and remediation of soil and ground water contamination
at its former facility in the Stanford Industrial Park, Palo Alto, California.
See Note 11, "Commitments and Contingencies", of the Notes to Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Coherent's Common Stock is traded on the NASDAQ National Market
System under the symbol COHR. The table below sets forth the high and low
closing prices for each quarterly period during the past two fiscal years as
reported by the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------------------------
Fiscal 1997 Fiscal 1996
------------------------------------------- -----------------------------------------
Dec. 28 Mar. 29 June 28 Sept. 27 Dec. 30 Mar. 30 June 29 Sept. 28
------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Price:
High $44.50 $50.25 $47.38 $53.50 $43.50 $49.00 $55.50 $52.75
Low $31.88 $42.25 $38.88 $44.50 $28.00 $33.75 $40.13 $32.00
</TABLE>
The number of stockholders of record as of November 29, 1997 was 2,027.
No cash dividends have been declared or paid since Coherent was founded and the
Company has no present intention to declare or pay cash dividends. The
Company's agreements with its banks restrict the payment of dividends on the
Company's Common Stock. See Note 5, "Short-term Borrowings", of the Notes to
Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------------------
Sept. 27, Sept. 28, Sept. 30, Oct. 1, Sept. 25,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net sales $391,038 $364,430 $285,499 $215,367 $196,883
- ------------------------------------------------------------------------------------------------------------
Gross profit 205,502 187,218 142,483 105,429 97,300
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations 26,292 30,314 19,323 10,301 9,319
- ------------------------------------------------------------------------------------------------------------
Gain (loss) from discontinued
operations 1,154 (4,409)
- ------------------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes 5,637
- ------------------------------------------------------------------------------------------------------------
Net income (1) $ 26,292 $ 30,314 $ 19,323 $ 11,455 $ 10,547
- ------------------------------------------------------------------------------------------------------------
COMMON AND EQUIVALENT PER SHARE DATA:
Income from continuing
operations $ 2.24 $ 2.63 $ 1.75 ` $ 1.00 $ .93
Gain (loss) from discontinued
operations .11 (.44)
Cumulative effect of change
in accounting for income taxes .56
- ------------------------------------------------------------------------------------------------------------
Net income (1) $ 2.24 $ 2.63 $ 1.75 $ 1.11 $ 1.05
- ------------------------------------------------------------------------------------------------------------
Total assets $361,650 $311,516 $255,874 $211,766 $193,796
- ------------------------------------------------------------------------------------------------------------
Long-term obligations 9,665 3,921 5,139 8,865 14,122
- ------------------------------------------------------------------------------------------------------------
Other long-term liabilities 13,927 12,403 9,597 6,789 3,468
- ------------------------------------------------------------------------------------------------------------
Minority interest in subsidiaries 4,348 2,738 1,782 4,089 3,806
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity $231,233 $197,587 $161,191 $133,464 $117,023
- ------------------------------------------------------------------------------------------------------------
</TABLE>
No dividends have been declared in any of the periods presented. See
"Item 5" for a discussion of the Company's dividend history.
(1) Includes in fiscal 1997, a $9.0 million ($0.77 per share), after tax
charge for the write-off of purchased in-process technology. See Note 2 of
Notes to Consolidated Financial Statements.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. This process includes getting
confirmations from the Company's primary vendors that plans are being developed
or are already in place to address processing of transactions in the year 2000.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely also will be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems. Management is in the process of completing its assessment of
the year 2000 compliance costs however, based on information to date (excluding
the possible impact of vendor systems) management does not believe that it will
have a material effect on the Company's earnings.
ASIA-PACIFIC RISK
Recent economic trends, particularly in the Asia-Pacific marketplace, have
caused a heightened awareness of the impact this portion of the world's economy
can have on the overall economy. As the Asia-Pacific market currently
represents almost one-third of the worlds buying power and approximately 25% of
Coherent's sales are to this region, changes in this area's economic growth
rate may impact suppliers of product into that market. While the actual
magnitude of the business at risk is unknown, it is likely that capital
spending in this market will decrease and thus, Coherent's ability to grow
sales in this region may be negatively impacted.
RESULTS OF OPERATIONS
FOREIGN CURRENCY IMPACT
With more than half of the Company's revenues outside the United States,
sales and orders were negatively impacted due to the continued strengthening of
the U.S. dollar against other major currencies. If exchange rates had remained
at last year's levels, sales and orders would have grown 11% and 18%,
respectively, compared to the same twelve months a year ago, instead of the 7%
and 14% increases actually recorded. At current exchange rates, we anticipate
quarter to quarter comparisons will continue to be negatively effected by
currency adjustments through the first two quarters of fiscal 1998.
EFFECTS OF HEDGING
The Company enters into forward exchange contracts to minimize the short-
term impact of foreign currency fluctuations on assets and liabilities and firm
commitments denominated in currencies other than the functional currency of the
reporting entity. All foreign exchange forward contracts are designated as and
effective as a hedge and are highly inversely correlated to the hedged item as
required by generally accepted accounting principles. Gains and losses on the
contracts that hedge foreign currency assets and liabilities are included in
other income and offset foreign exchange gains or losses from the revaluation
of intercompany balances or other current assets and liabilities denominated in
17
<PAGE>
currencies other than the functional currency of the reporting entity. The
cash flow impact of the Company's derivative hedges offsets the cash flow
impact of the foreign exchange movements on the underlying exposed asset and
liability commitments. Gains and losses on contracts that hedge firm
commitments of foreign currency purchases or sales are deferred and recognized
at the time the hedged transaction is recorded as an offset to the amount of
the related purchase or sale. Fair values of exchange contracts are determined
by obtaining quoted market prices of comparable contracts, adjusted through
interpolation where necessary for maturity differences.
CONSOLIDATED SUMMARY
During fiscal 1997, proforma net income (excluding the first quarter $9.0
million after-tax write-off of purchased in-process technology) increased to
$35.3 million ($3.01 per share) compared to net income of $30.3 million ($2.63
per share) for fiscal 1996 and $19.3 million ($1.75 per share) for fiscal
1995. Proforma income before income taxes, excluding the aforementioned write-
off, increased $6.8 million (14%) to $56.1 million for fiscal 1997 compared to
income before income taxes of $49.3 million for fiscal 1996 and $31.8 million
for fiscal 1995. These increases resulted primarily from higher sales volumes,
gross profits as a percentage of sales, and other income. The Company's
proforma effective tax rate was 37% (excluding the aforementioned write-off)
and was 39% for both fiscal 1996 and 1995. Actual net income, income before
income taxes and the effective tax rate for fiscal 1997 were $26.3 million,
$46.8 million and 44%, respectively.
1997 COMPARED TO 1996
NET SALES AND GROSS PROFIT
CONSOLIDATED
During fiscal 1997, net sales increased $26.6 million (7%) to $391.0
million from $364.4 million in the prior fiscal year, primarily as a result of
increased sales volumes. The higher sales volumes were primarily in the
Electro-Optical segment (OEMs and commercial customers) and in the Medical
segment (lasers for ophthalmic procedures). International sales grew at a
higher rate than domestic sales for a total increase of $21.1 million (11%).
Accordingly, international sales were 55% of net sales for the current fiscal
year compared to 53% last year, reflecting the Company's commitment to grow
its international business.
The gross profit rate improved to 53% for the current fiscal year compared
to 51% for fiscal 1996. The improvement in the overall margin resulted
primarily from the higher sales volumes, higher volumes of higher margin
products and manufacturing efficiencies.
ELECTRO-OPTICAL
Electro-Optical net sales increased $19.5 million (10%) in the current
fiscal year to $221.1 million from $201.6 million in the prior fiscal year.
Domestic sales increased $16.0 million (20%) and international sales increased
$3.5 million (3%) in the current fiscal year. The increase in sales
worldwide, resulted primarily from higher sales volumes to OEM's and
commercial customers, due to broader acceptance of new products introduced
within the past two years.
The gross profit rate decreased to 51% from 52% in the prior fiscal year.
The decrease from the prior year resulted primarily from inefficiencies
associated with the start-up phase of the Company's Semiconductor group based
in Santa Clara, California.
MEDICAL
Medical net sales increased $7.1 million (4%) to $170.0 million in fiscal
1997 from $162.8 million in fiscal 1996. International sales increased $17.6
million (25%) while domestic sales decreased $10.5 million (11%) in the current
fiscal year. The growth was primarily attributable to higher sales volumes in
the ophthalmic business unit.
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<PAGE>
The gross profit rate increased to 55% from 51% in the prior fiscal year
primarily due to the higher sales volumes which also are comprised of higher
margin products, such as the VersaPulse for cosmetic procedures, as well as a
higher level of sales through direct sales channels including Japan, China and
Scandinavia.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Years Ended
Sept. 27, Sept. 28,
1997 1996
---------- ---------
(in thousands)
<S> <C> <C>
Research & development $ 39,406 $ 37,705
Purchased in-process technology 9,315
Selling, general & administrative 114,471 104,813
-------- --------
Total operating expenses $163,192 $142,518
-------- --------
-------- --------
</TABLE>
Total operating expenses increased $20.7 million (15%) from the prior
fiscal year. Exclusive of the first quarter write-off of purchased in-process
technology, operating expenses increased $11.4 million (8%), but as a
percentage of sales remained constant at 39%.
Current year research and development (R&D) expenses increased $1.7
million (5%) from the prior year and remained flat at 10% of sales. The
absolute dollar increase was primarily in the Company's Electro-Optical
business segment due to more headcount and related expenses associated with
the Company's continued emphasis on product development and its recent
strategic acquisitions.
Selling, general and administrative (SG&A) expenses increased $9.7 million
(9%) but remained at 29% of sales compared to the prior fiscal year. Sales,
marketing and service expenses increased $7.6 million (10%) and as a
percentage of sales increased to 21% from 20% in fiscal 1996. This expense was
driven by an increase in headcount to support the growing business, the change
to direct sales in Japan, China and Scandinavia, as well as an increase in the
level of workshops and trade shows worldwide. Administration expenses
increased $2.1 million (7%) but as a percentage of sales remained at 9%. This
increase was driven by costs related to recent strategic acquisitions, facility
expansions, and selling in direct channels in Japan, China and Scandinavia.
OTHER INCOME (EXPENSE)
Other income, net, decreased $0.1 million during the current year compared
to the corresponding prior year period. The current year's other income
included a $3.5 million gain on the Company's sale of its former facility while
the previous fiscal year's other income included a $1.6 million gain on sale of
the Company's holdings in another medical laser company. The remaining
fluctuation of $1.8 million was due to lower interest income on lower average
cash and investment balances, higher interest expense due to the fiscal 1996
capitalization of interest ($0.7 million) on the refurbishing of the former
facility (sold in fiscal 1997), higher foreign exchange losses due to the
strengthening of the U.S. dollar against the major foreign currencies, and
higher minority interest income from the improved performance in the Lambda
Physik Group.
INCOME TAXES
The Company's effective tax rate for the current year was 44%. The
Company's proforma effective tax rate for the fiscal year (excluding the $9.3
million pre-tax write-off of purchased in-process technology) was 37%,
compared to 39% for the same period last year. The Company's proforma
effective tax rate decreased as a result of increases in foreign tax credit
utilization, foreign sales corporation benefit and changes in the
distribution of taxable income by taxing jurisdiction.
19
<PAGE>
1996 COMPARED TO 1995
NET SALES AND GROSS PROFIT
CONSOLIDATED
During fiscal 1996, net sales increased $78.9 million (28%) to $364.4
million from $285.5 million, resulting primarily from increased sales volumes.
Such higher volumes occurred primarily with OEM's and commercial customers in
the Electro-Optical segment and with lasers for aesthetic surgery in the
Medical segment. International sales grew at a higher rate than domestic sales
in both segments for a total increase of $45.2 million (31%). Accordingly,
international sales were 53% of net sales for fiscal 1996 year compared to 51%
for fiscal 1995, reflecting the Company's commitment to grow its international
business.
The gross profit rate improved to 51% for fiscal 1996 compared to 50% for
fiscal 1995. The improvement in the overall margin resulted primarily from
higher sales volumes of high margin products and manufacturing efficiencies.
ELECTRO-OPTICAL
Electro-Optical net sales increased $42.3 million (27%) in fiscal 1996 to
$201.6 million from $159.3 million in fiscal 1995. International sales
increased $26.6 million (28%) and domestic sales increased $15.7 million (24%)
in fiscal 1996 compared to fiscal 1995. The increased sales, both
internationally and domestically, resulted primarily from higher sales volumes
to OEM's and commercial customers, due to broader acceptance of new products
introduced within the past two years and due in part to increased sales
associated with business acquisitions.
The gross profit rate increased to 52% in fiscal 1996 from 50% in fiscal
1995. The increase over the prior year resulted from efficiencies gained from
the higher sales volumes and a more favorable product mix.
MEDICAL
Medical net sales increased $36.6 million (29%) to $162.8 million in
fiscal 1996 from $126.2 million in fiscal 1995. International sales increased
$18.7 million (36%) while domestic sales increased $18.0 million (24%) in
fiscal 1996. The growth was primarily attributable to higher sales volumes of
the Ultrapulse for cosmetic applications.
The gross profit rate increased to 51% in fiscal 1996 from 50% in fiscal
1995 primarily due to the higher sales volumes which also are comprised of
higher margin products, such as the Ultrapulse for cosmetic procedures.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Years Ended
Sept. 28, Sept. 28,
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Research & development $ 37,705 $ 31,042
Selling, general & administrative 104,813 81,529
-------- --------
Total operating expenses $142,518 $112,571
-------- --------
-------- --------
</TABLE>
20
<PAGE>
Total operating expenses increased $29.9 million (27%) from fiscal 1995
but as a percentage of sales remained constant at 39%.
Fiscal 1996 research and development (R&D) expenses increased $6.7 million
(21%) from the prior year but decreased as a percentage of sales from 11% to
10%. The absolute dollar increase was most significant in the Company's
Electro-Optical business segment due to more headcount and related expenses
associated with the Company's continued emphasis on product development and its
recent strategic acquisitions. The Company intends to build upon its
leadership position and continue this strong commitment to product development.
For example, two new models of our UltraPulse-Registered Trademark- medical
laser system allow physicians from all size practices to participate in the
growing market for skin resurfacing with the laser that is recognized as the
"gold standard" for this application. The Company's new diode-pumped solid-
state (DPSS) laser, used to improve the performance of computer hard-disk
drives, provides hard-disk media manufacturers a laser capable of handling high-
volume production while maintaining the highly stable operations required for
this application. At the American Academy of Ophthalmology in Chicago in the
fall of 1996, the Company introduced the Selecta 7000-TM-. Based on initial
results using this system for Selective Laser Trabeculoplasty (SLT), the
Company believes that the Selecta 7000 has the potential for becoming the
standard treatment for treating primary open-angle glaucoma.
Selling, general and administrative (SG&A) expenses increased $23.3
million (29%) during fiscal 1996 but remained at 29% of sales compared to the
prior fiscal year. Sales, marketing and service expenses increased $17.7
million (32%) and as a percentage of sales increased to 20% from 19% in fiscal
1995. This expense was driven by an increase in headcount to support the
growing business, the Medical segment's change to direct sales in Japan, and an
increase in the level of workshops and trade shows worldwide. Administration
expenses increased $5.6 million (21%) but as a percentage of sales remained at
9%. This increase was driven by costs related to recent strategic
acquisitions, facility expansions, and bonuses associated with improved
operating performance over the prior year.
OTHER INCOME (EXPENSE)
Total other income, net increased by $2.7 million during fiscal 1996.
This increase resulted primarily from a $1.6 million gain from the third
quarter sale of the Company's holdings in another medical laser company, and
$1.2 million higher interest and dividend income, net, due to capitalization of
interest associated with the refurbishment of the Porter facility ($0.7
million) and the construction of the Auburn Building III ($0.1 million). The
funds generated by operations and the sales of shares under the employee stock
option and purchase plans helped fund the acquisition of such facilities
without increasing average borrowings nor significantly reducing average cash
and short-term investments. The Porter Drive facility was completed in
September, 1996 and was sold in fiscal 1997.
INCOME TAXES
The Company's effective tax rate for fiscal 1996 and fiscal 1995 remained
constant at 39%.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash and short-term
investments of $31.6 million at September 27, 1997. Additional sources of
liquidity are the Company's multi-currency line of credit and bank credit
facilities totaling $54.3 million as of September 27, 1997, of which $35.8
million is unused and available under these credit facilities. During fiscal
1997, such facilities have been used in Europe and Japan. Because of the
Company's low debt to equity ratio (0.14:1), management believes that
additional cash could be borrowed if necessary; however, cash flow from
operations, cash and
21
<PAGE>
equivalents, short-term investments and available lines of credit are
expected to be sufficient to fund operations for fiscal 1998. The Company
has certain financial covenants related to its lines of credit. At September
27, 1997, the Company is in compliance with these covenants (see Note 5,
"Short-term Borrowings", of the Notes to Consolidated Financial Statements").
CHANGES IN FINANCIAL CONDITION
Cash and equivalents at September 27, 1997 increased by $12.2 million
(133%) from September 28, 1996. Operations and changes in exchange rates
generated $31.2 million including a decrease in short-term investments of
$15.2 million. Investing activities used $32.3 million; $24.3 million was
used to acquire property and equipment (net of proceeds from disposition of
property and equipment), $15.4 million was used for business acquisitions
partially offset by $9.6 million provided from the sale of the Porter Drive
facility. Financing activities provided $13.3 million, sales of shares under
employee benefit plans and collection of notes receivable from stock sales
generated $5.5 million, increased net borrowings provided $15.7 million and
the reduction of cash overdrafts used $7.9 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors will be set forth under the
caption "Election of Directors - Nominees" in Registrant's proxy statement for
use in connection with the Annual Meeting of Stockholders to be held in March,
1998, (the "1997 Proxy Statement") and is incorporated herein by reference.
The 1997 Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the Registrant's fiscal year.
The following table sets forth the names, ages and office of all of the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Office Held
- -------------------------------------------------------------------------
<S> <C> <C>
Bernard J. Couillaud, Ph.D. 53 President
and Chief Executive Officer
Robert J. Quillinan 50 Executive Vice President
and Chief Financial Officer
John R. Ambroseo, Ph.D. 36 Executive Vice President,
President and General Manager,
Coherent Laser Group
Vittorio Fossati-Bellani, Ph.D. 50 Executive Vice President,
President and General Manager,
Coherent Semiconductor Group
Kevin P. Connors 35 Executive Vice President,
President and General Manager,
Coherent Medical Group
Robert M. Gelber 52 Executive Vice President,
President and General Manager,
Coherent Auburn Group
Dennis C. Bucek 52 Senior Vice President,
Treasurer and Assistant Secretary
Scott H. Miller 43 Senior Vice President and General
Counsel
Larry W. Sonsini 56 Secretary
</TABLE>
There are no family relationships between any of the executive officers
and directors.
Dr. Couillaud has served as President and Chief Executive Officer as well
as a member of the Board of Directors since July 1996. He served as Vice
President and General Manager of Coherent Laser Group from March 1992 to July
1996. From 1990 to March 30, 1992, he served as Manager of the Advanced
Systems Business Unit, and from 1987 to 1990 served as Director of R&D for the
Coherent Laser Group.
23
<PAGE>
Mr. Quillinan has served as Executive Vice President and Chief Financial
Officer since July 1984. He served as Vice President and Treasurer from March
1982 to July 1984 and as Corporate Controller from April 1980 to March 1982.
Dr. Ambroseo became Executive Vice President, and President and General
Manager of Coherent Laser Group in September 1997. He joined Coherent in 1988
as a Sales Engineer and has served as Product Marketing Manager, U. S. Sales
Manager, Director of European Operations and most recently as Scientific
Business Unit Manager.
Dr. Fossati-Belani became Executive Vice President, and President and
General Manager of Coherent Semiconductor Group in September 1997. He joined
the Italian office of Coherent in 1979 as a Scientific Sales Engineer and has
served in the capacity of Product Manager, Director of Marketing, Director of
Business Development, Scientific Business Unit Manager and Diode Laser Business
Unit Manager for the Coherent Laser Group.
Mr. Connors has served as Executive Vice President, and President and
General Manager of Coherent Medical Group since June 1996. He served as
Director of Research and Development from 1995 to 1996 and Manager Engineering
Programs from 1994 to 1995. From 1987 to 1994, Mr. Connors held various
engineering and engineering management positions at Coherent Medical Group.
Mr. Gelber has served as Executive Vice President and President and
General Manager of Coherent Auburn Group since August 1986.
Mr. Bucek has served as Senior Vice President, Treasurer and Assistant
Secretary since August 1985.
Mr. Miller has served as General Counsel to the Company since October 1988
and as Senior Vice President since March 1994.
For over six years, Mr. Sonsini has served as the Company's Secretary. He
is a member of Wilson, Sonsini, Goodrich & Rosati, P.C. Prior to 1988, he
served as general counsel to the Company.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding remuneration of Registrant's directors and executive
officers will be set forth under the caption "Election of Directors - Executive
Compensation" in Registrant's 1997 Proxy Statement and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will be set forth under the captions "Information Concerning
Solicitation and Voting - Record Date and Share Ownership" and "Election of
Directors - Security Ownership of Management" in Registrant's 1997 Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
be set forth under the caption "Election of Directors - Certain Transactions"
in Registrant's 1997 Proxy Statement and is incorporated herein by reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND FORM 8-K REPORTS
Page
----
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of
Coherent, Inc. and its subsidiaries are filed
as part of this report on Form 10-K:
Independent Auditors' Report 30
Consolidated Balance Sheets - September 27, 1997
and September 28, 1996 31
Consolidated Statements of Income - Years ended
September 27, 1997, September 28, 1996
and September 30, 1995 32
Consolidated Statements of Stockholders' Equity -
Years ended September 27, 1997, September 28, 1996,
and September 30, 1995 33
Consolidated Statements of Cash Flows - Years ended
September 27, 1997, September 28, 1996
and September 30, 1995 34
Notes to Consolidated Financial Statements 36
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts 52
Schedules not listed above have been omitted because the matter or
conditions are not present or the information required to be set forth
therein is included in the Consolidated Financial Statements hereto.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
September 27, 1997.
(c) EXHIBITS
Exhibit
Numbers
--------
2.1* Agreement and Plan of Merger. (Previously filed as
Exhibit 2.1 to Form 10-K for the fiscal year ended September
29, 1990.)
25
<PAGE>
(c) EXHIBITS CONTINUED
Exhibit
Numbers
--------
3.1* Restated and Amended Certificate of Incorporation.
(Previously filed as Exhibit 3.1 to Form 10-K for the fiscal
year ended September 29, 1990.)
3.2* Bylaws, as amended. (Previously filed as Exhibit 3.2 to
Form 10-K for the fiscal year ended September 29, 1990.)
4.1* Amended and Restated Common Shares Rights Agreement
dated November 2, 1989 between the Company and the Bank of
Boston. (Previously filed as Exhibit 4.1 to Form 8K filed on
November 3, 1989.)
10.5* Leases dated January 10, 1979, between the Company
and John D. Banks, Allen W. Koering, Frank Lee Crist, Jr.,
George McKee and West Bayshore Associates. (Previously filed
as Exhibit 10.5 to Form 8, Amendment No. 1 to Annual Report
on Form 10-K for the fiscal year ended September 25, 1982.)
10.17* 1981 Incentive Stock Option Plan, as amended, and
forms of agreement. (Previously filed as Exhibits to the
Company's Registration Statement on Form S-8 No. 2-96838
filed April 2, 1985.)
10.18* 1987 Incentive Stock Option Plan and forms of
agreement. (Previously filed as Exhibit 10.18 to Form 10-K
for the fiscal year ended September 30, 1989.)
10.19* Productivity Incentive Plan, as amended.
(Previously filed as Exhibit 10.19 to Form 10K for the fiscal
year ended October 1, 1988.)
10.20* Employee Stock Purchase Plan and form of
Subscription Agreement, as amended. (Previously filed as
Exhibit 10.20 to Form 10K for the fiscal year ended October
1, 1988.)
10.21* Coherent Employee Retirement and Investment Plan.
(Previously filed as Exhibit 10.23 to Form 8, Amendment No. 1
to Annual Report on Form 10-K for the fiscal year ended
September 25, 1982.)
10.30* Patent License Agreements by and between Coherent,
Inc. and Patlex Corporation, effective as of July 1, 1988.
(Previously filed as Exhibit 10.30 to Form 10K for the fiscal
year ended October 1, 1988.)
10.31* Agreement by and between Coherent, Inc. and Dr.
Dirk Basting, dated as of September 15, 1988. (Previously
filed as Exhibit 10.31 to Form 10K for the fiscal year ended
October 1, 1988.)
10.33* 1990 Directors' Option Plan and Form of Agreement.
(Previously filed as Exhibit 10.33 to Form 10-K for the
fiscal year ended September 29, 1990.)
10.34* 1995 Incentive Stock Option Plan and forms of
agreement. (Previously filed as Exhibit 10.34 to Form 10-K
for the fiscal year ended September 29, 1990.)
26
<PAGE>
(c) EXHIBITS CONTINUED
Exhibit
Numbers
-------
10.35* Management Transition Agreement effective June 30,
1996 between the Company and Henry E. Gauthier. (Previously
filed as Exhibit 10.35 to Form 10-K for the fiscal year ended
September 28, 1996.)
21.1 Subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney.
27 Financial Data Schedules
* These exhibits were previously filed with the Commission as indicated and are
incorporated herein by reference.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on December 18,
1997.
COHERENT, INC.
/s/ BERNARD COUILLAUD
-------------------------------------
By: Bernard Couillaud
President and Chief Executive Officer
28
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bernard J. Couillaud and Robert J. Quillinan,
jointly and severally, his attorneys-in-fact, each with the power of
substitution for him in any and all capacities, to sign any amendments to this
report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming that each of said attorneys-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ BERNARD J. COUILLAUD December 18, 1997
- ---------------------------------------------- -----------------------
Bernard J. Couillaud Date
(Director, President & Chief Executive Officer)
/s/ ROBERT J. QUILLINAN December 18, 1997
- ---------------------------------------------- -----------------------
Robert J. Quillinan Date
(Executive Vice President & Chief Financial
Officer)
/s/ HENRY E. GAUTHIER December 18, 1997
- ---------------------------------------------- -----------------------
Henry E. Gauthier Date
(Director, Chairman of the Board)
/s/ CHARLES W. CANTONI December 18, 1997
- ---------------------------------------------- -----------------------
Charles W. Cantoni Date
(Director)
/s/ FRANK CARRUBBA December 18, 1997
- ---------------------------------------------- -----------------------
Frank Carrubba Date
(Director)
/s/ THOMAS SLOAN NELSEN December 18, 1997
- ---------------------------------------------- -----------------------
Thomas Sloan Nelsen Date
(Director)
/s/ JERRY E. ROBERTSON December 18, 1997
- ---------------------------------------------- -----------------------
Jerry E. Robertson Date
(Director)
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Coherent, Inc.:
We have audited the accompanying consolidated financial statements of
Coherent, Inc. and its subsidiaries, listed in Item 14.(a)1. Our audits also
included the consolidated financial statement schedule listed in Item 14.(a)2.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Coherent, Inc. and its
subsidiaries at September 27, 1997 and September 28, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 27, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
San Jose, California
October 28, 1997
30
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 27, September 28,
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 21,455 $ 9,214
Short-term investments 10,182 25,421
Accounts receivable - net of allowances
of $3,499 in 1997 and $3,285 in 1996 95,844 83,360
Inventories 86,446 65,835
Prepaid expenses and other assets 18,971 11,519
Deferred tax assets 22,267 23,071
- -------------------------------------------------------------------------
TOTAL CURRENT ASSETS 255,165 218,420
- -------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 128,532 117,069
ACCUMULATED DEPRECIATION AND AMORTIZATION (56,708) (52,468)
- -------------------------------------------------------------------------
Property and equipment - net 71,824 64,601
- -------------------------------------------------------------------------
GOODWILL - net of accumulated amortization
of $7,199 in 1997 and $5,717 in 1996 13,372 10,639
- -------------------------------------------------------------------------
OTHER ASSETS 21,289 17,856
- -------------------------------------------------------------------------
$361,650 $311,516
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 19,235 $ 4,160
Current portion of long-term obligations 3,629 4,221
Accounts payable 18,039 12,425
Income taxes payable 9,286 12,395
Other current liabilities 52,288 61,666
- -------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 102,477 94,867
- -------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 9,665 3,921
OTHER LONG-TERM LIABILITIES 13,927 12,403
MINORITY INTEREST IN SUBSIDIARIES 4,348 2,738
STOCKHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized - 50,000 shares
Outstanding - 11,463 in 1997 and 11,211
in 1996 114 111
Additional paid-in capital 90,864 82,939
Notes receivable from stock sales (98) (845)
Retained earnings 140,086 113,794
Accumulated translation adjustment 267 1,588
- -------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 231,233 197,587
- -------------------------------------------------------------------------
$361,650 $311,516
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------
SEPT. 27, Sept. 28, Sept. 30,
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $391,038 $364,430 $285,499
COST OF SALES 185,536 177,212 143,016
- ----------------------------------------------------------------------------
GROSS PROFIT 205,502 187,218 142,483
- ----------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 39,406 37,705 31,042
Purchased in-process technology 9,315
Selling, general and administrative 114,471 104,813 81,529
- ----------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 163,192 142,518 112,571
- ----------------------------------------------------------------------------
INCOME FROM OPERATIONS 42,310 44,700 29,912
- ----------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 1,404 2,444 2,392
Interest expense (1,226) (39) (1,148)
Other - net 4,306 2,212 668
- ----------------------------------------------------------------------------
TOTAL OTHER INCOME, NET 4,484 4,617 1,912
- ----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 46,794 49,317 31,824
PROVISION FOR INCOME TAXES 20,502 19,003 12,501
- ----------------------------------------------------------------------------
NET INCOME $ 26,292 $ 30,314 $ 19,323
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 2.24 $ 2.63 $ 1.75
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 27, 1997, September 28, 1996, and September 30, 1995
(In thousands)
<TABLE>
<CAPTION>
Common Stock
--------------- Add. Unreal. Notes Rec. Accum.
Par Paid-in Gain on From Stock Retain. Trans.
Shares Value Capital Investmts. Sales Earnings Adj.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 10,338 $103 $68,646 $ $(1,981) $64,157 $2,539
Sales of shares under employee
stock option plans 359 3 3,615 (326)
Productivity Incentive Plan
distributions 21 422
Sales of shares under Employee
Stock Purchase Plan 151 2 1,772
Tax benefit of stock option
transactions 1,770
Change in unrealized gain on
investments 171
Collection of notes
receivable 1,089
Translation adjustment (114)
Net income 19,323
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 10,869 108 76,225 171 (1,218) 83,480 2,425
Sales of shares under employee
stock option plans 204 2 2,403
Productivity Incentive Plan
distributions 14 626
Sales of shares under Employee
Stock Purchase Plans 124 1 2,042
Tax benefit of stock option
transactions 1,643
Change in unrealized gain
on investments (171)
Collection of notes receivable 373
Translation adjustment (837)
Net income 30,314
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1996 11,211 111 82,939 - (845) 113,794 1,588
Sales of shares under employee
stock option plans 155 2 2,360
Productivity Incentive Plan
distributions 19 730
Sales of shares under Employee
Stock Purchase Plans 78 1 2,436
Tax benefit of stock option
transactions 1,505
Acquisition of business 894
Collection of notes receivable 747
Translation adjustment (1,321)
Net income 26,292
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1997 11,463 $114 $90,864 $ - $ (98) $140,086 $ 267
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
---------------------------------
SEPT. 27, Sept. 28, Sept. 30,
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
OPERATING ACTIVITIES:
Net income $26,292 $ 30,314 $ 19,323
Adjustments to reconcile to net cash
provided by operating activities:
Purchased in-process technology 9,315
Purchases of short-term trading investments (82,605) (103,644) (87,137)
Proceeds from sales of short-term trading
investments 98,400 102,465 79,600
Depreciation and amortization 14,590 12,372 8,955
Issuance of common stock under
Productivity Incentive Plan 730 626 422
Deferred income taxes 710 (8,725) 1,601
Minority interest in subsidiaries 1,610 956 (2,307)
Equity in (income) loss of joint ventures (287) (93) 80
Changes in assets and liabilities:
Accounts receivable (12,830) (21,954) (10,980)
Inventories (19,803) (14,875) (10,383)
Prepaid expenses and other assets (7,571) (478) 125
Accounts payable 5,952 985 3,504
Other current liabilities (5,187) 19,298 7,184
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,316 17,247 9,987
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (24,864) (24,930) (8,384)
Dispositions of property and equipment, net 541 443 654
Sale of Porter Drive facility 9,631
Acquisition of businesses, net of cash
acquired (15,351) (1,941)
Acquisition of Japan distribution rights (5,048)
Purchase of Amoco assets (4,520)
Purchase of Porter Drive facility (4,311)
Other - net (2,215) (4,792) 43
- -------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (32,258) (34,327) (18,459)
- -------------------------------------------------------------------------------------
(continued)
</TABLE>
34
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
(In thousands)
<TABLE>
<CAPTION>
Years Ended
---------------------------------
SEPT. 27, Sept. 28, Sept. 30,
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Long-term debt borrowings $ 3,444 $ 2,547 $ 940
Long-term debt repayments (3,372) (4,723) (5,670)
Short-term borrowings 40,107 7,093 2,960
Short-term repayments (24,432) (9,558) (2,026)
Cash overdrafts (7,957) 4,820 1,226
Repayments of capital lease obligations (24) (91)
Sales of shares under employee stock option
and purchase plans, net 4,799 4,448 5,066
Collection of notes receivable from stock sales 747 373 1,089
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,312 4,909 3,585
- -------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND EQUIVALENTS 1,871 959 (1,926)
- -------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 12,241 (11,212) (6,813)
Cash and equivalents beginning of year 9,214 20,426 27,239
- -------------------------------------------------------------------------------------
CASH AND EQUIVALENTS END OF YEAR $ 21,455 $ 9,214 $20,426
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 1,226 $ 915 $ 1,032
Income taxes $ 26,644 $ 16,682 $13,417
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Coherent,
Inc. and its majority owned subsidiaries (collectively, the Company). All
significant intercompany balances and transactions have been eliminated.
Investments in business entities in which the Company does not have control,
but has the ability to exercise significant influence over operating and
financial policies (generally 20-50% ownership), are accounted for by the
equity method.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to September 30.
Consequently, the Company's fiscal years 1997, 1996 and 1995 included 52
weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include, but are not limited to, allowances
for uncollectible accounts receivable and sales returns reserves, inventory
reserves, warranty costs, depreciation and amortization, taxes and
contingencies. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is their
respective local currencies. Accordingly, gains and losses from the
translation of the financial statements of the foreign subsidiaries are
reported as a separate component of stockholder's equity.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company's policy is to invest in various short-term debt instruments
including certificates of deposit, bankers acceptances and repurchase
agreements of major banks and institutions, obligations of the U.S. Treasury
and U.S. Government agencies, tax-exempt municipal securities and commercial
paper with credit ratings of A1 and P1. All highly liquid debt instruments
purchased with a remaining maturity of three months or less are classified as
cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Purchased parts and assemblies $25,756 $18,446
Work-in-process 28,917 24,244
Finished goods 31,773 23,145
- -----------------------------------------------------------------------------
Inventories $86,446 $65,835
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
36
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are generally depreciated
or amortized using the straight-line method. Cost and estimated useful lives
are as follows:
1997 1996 Useful Life
- -----------------------------------------------------------------------------
(In thousands)
Land $ 7,404 $ 5,833
Buildings and improvements 34,912 43,317 20-31 years
Equipment, furniture and fixtures 75,392 63,723 3-10 years
Leasehold improvements 10,824 4,196 Terms of lease
- -----------------------------------------------------------------------------
Property and equipment $128,532 $117,069
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Included in buildings and improvements is capitalized interest on
construction-in-progress of $121,000 at September 27, 1997 (accumulated
amortization of $1,600) and $824,000 at September 28, 1996 (no accumulated
amortization).
GOODWILL
Goodwill relates to acquired subsidiaries and is being amortized on a
straight-line basis over estimated useful lives of three to forty years. The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable.
WARRANTY
The Company warrants certain of its products and provides for estimated
product warranty costs at the time of sale.
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales upon
shipment or title transfer, if later, and from service upon performance or
over the terms of the service contract as appropriate.
CONCENTRATION OF CREDIT RISK
Financial instruments which may potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
short-term investments and accounts receivable. The Company places its
investments only in U.S. Treasury obligations or with high credit quality
financial institutions and, by policy, limits the amount of credit exposure
to any one institution. The majority of its short-term investments are in
certificates of deposit and notes at September 27, 1997. The majority of the
Company's accounts receivable are derived from sales to customers for medical
and surgical applications, scientific research applications, and OEM's. The
Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary but
generally requires no collateral. The Company maintains reserves for
potential credit losses.
INCOME TAXES
Federal income taxes have not been provided on a portion of the unremitted
earnings of foreign subsidiaries either because such earnings are intended to
be permanently reinvested or because foreign tax credits are available to
offset any planned distributions of such earnings. The total amount of
unremitted earnings of foreign subsidiaries was approximately $17,184,000 at
September 27, 1997.
37
<PAGE>
Withholding taxes of approximately $597,000 would be payable upon
repatriation of such earnings which would result in additional foreign tax
credits.
DERIVATIVES
The Company enters into forward exchange contracts to minimize the
short-term impact of foreign currency fluctuations on assets and liabilities
and firm commitments denominated in currencies other than the functional
currency of the reporting entity. All foreign exchange forward contracts are
designated as and effective as a hedge and are highly inversely correlated to
the hedged item as required by generally accepted accounting principles.
Gains and losses on the contracts that hedge foreign currency assets and
liabilities are included in other income and offset foreign exchange gains or
losses from the revaluation of intercompany balances or other current assets
and liabilities denominated in currencies other than the functional currency
of the reporting entity. The cash flow impact of the Company's derivative
hedges offsets the cash flow impact of the foreign exchange movements on the
underlying exposed asset and liability commitments. Gains and losses on
contracts that hedge firm commitments of foreign currency purchases or sales
are deferred and recognized at the time the hedged transaction is recorded as
an offset to the amount of the related purchase or sale. Fair values of
exchange contracts are determined by obtaining quoted market prices of
comparable contracts, adjusted through interpolation where necessary for
maturity differences.
COMMON AND EQUIVALENT PER SHARE DATA
Common and equivalent per share data is based upon the weighted average
number of common shares outstanding during the period plus dilutive common
share equivalents and shares issuable under the Productivity Incentive Plan.
Dilutive common share equivalents include outstanding stock options when the
exercise price is less than the average market price and shares subscribed
under the Employee Stock Purchase Plan. The number of common and dilutive
common equivalent shares used were 11,740,000 in 1997, 11,544,000 in 1996,
and 11,062,000 in 1995.
STOCK-BASED COMPENSATION
As permitted under the Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation" the Company
accounts for stock-based awards to employees using the intrinsic value method
in accordance with Accounting Principles Bulletin No. 25 (APB 25),
"Accounting for Stock Issued to Employees". See Note 9.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation. Such reclassifications had no impact on net
income or retained earnings for any year presented.
2. ACQUISITIONS
During the three fiscal years ended September 27, 1997, the Company made
the acquisitions described in the following paragraphs, each of which has
been accounted for as a purchase. The consolidated financial statements
include the operating results of each business from the date of acquisition.
Proforma results of operations have not been presented, because the effects
of these acquisitions were not material on either an individual or an
aggregate basis. The amounts allocated to purchase in-process technology were
determined through established valuation techniques in the high technology
industry and were expensed upon acquisition, because technological
feasibility had not been established and no future alternative uses existed.
Research and development costs to bring the products from the acquired
companies to technological feasibility are not expected to have a material
impact on the Company's future results of operations or cash flows. Amounts
allocated to goodwill and other intangibles are amortized on a straight line
basis over periods ranging from five to ten years.
38
<PAGE>
In May 1997, Coherent acquired the assets and operations of Ealing
Electro-Optics, located in Watford, England and its U.S. subsidiary located
in Holliston, Massachusetts for approximately $9.5 million in cash. Ealing
is a recognized leader in the design and manufacture of precision optical
assemblies as well as complete lens and thermal imaging test systems. In
addition, Ealing is a distributor of electro-optic components and its "Gold"
catalog sells over 5,000 components to the photonics industry. The
acquisition was accounted for as a purchase and, accordingly, the Company has
recorded the approximately $4.0 million excess of the purchase price over the
fair value of net assets acquired as goodwill, which is being amortized over
10 years.
In December 1996, Coherent acquired 80% of the outstanding shares of
Tutcore OY Ltd., located in Tampere, Finland for approximately $10.0 million
(consisting of $4.0 million of cash, $5.4 million of deferred payment
obligations and $0.6 million of acquisition costs). Tutcore specializes in
the growth and processing of aluminum-free epitaxial wafers used in
semiconductor lasers. Also in December 1996, Coherent purchased the net
assets of Micracor, Inc. of Acton, Massachusetts for approximately $0.9
million (consisting of $0.8 million of cash and $0.1 million of acquisition
costs). Micracor manufactures materials used in semiconductor-based solid
state microchip lasers for the telecommunications market. These acquisitions
were accounted for as purchases and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market values at the dates
of the acquisitions. The aggregate purchase price of $10.9 million
(including acquisition costs) has been allocated to the assets and
liabilities acquired. Approximately $9.3 million of the total purchase price
for these entities represented the value of in-process technology that had
not yet reached technological feasibility and had no alternative future use,
and was charged to operations during the first quarter of fiscal 1997.
Coherent's consolidated results of operations include the operating results
of the acquired companies from their acquisition dates.
During the second quarter of fiscal 1996, the Company reached agreement
with Matsumoto Medical Instruments, its former distributor of medical
products in Japan, to acquire exclusive distribution rights for Coherent's
products in Japan, effective immediately. The agreement also provided for
Coherent to repurchase its inventory from Matsumoto and allows for Coherent
to assume full service and warranty support to its customers on an exclusive
basis immediately. The $5,048,000 excess of the purchase price over the net
tangible assets acquired has been allocated to the exclusive sales rights and
related regulatory approvals. This amount is being amortized over a five
year period having commenced during the third quarter of fiscal 1996.
In the first quarter of fiscal 1996, the Company acquired certain net
assets of Applied Laser Systems (ALS) and the Laser Optics Division of ATx
Telecom Systems, Inc. (a subsidiary of Amoco Technology Company) for $2.5
million. ALS is a pioneer in the design and manufacture of low power diode
laser modules. ATx is the developer of unique coating processes for optical
components including lenses and mirrors used in the fabrication of solid
state lasers and other products. These technologies complement Coherent's
existing laser instrumentation, precision optics and laser diode product
lines sold to OEMs and end users. The Company recorded $1.2 million of
goodwill associated with the purchases which is being amortized over five
years.
Effective June 30, 1995, the Company acquired the business and net
assets of Adlas GmbH and Co. KG (Adlas), located in Lubeck, Germany for
approximately $7.4 million. The Company paid $1.9 million in cash and
recorded a $3.5 million note payable (paid in December 31, 1995) and a $2.0
million deferred payment due December 31, 1997. These payments do not accrue
interest and are contingent on achieving certain net sales goals. The
Company recorded the payments when it determined the net sales goals were
probable of being attained. The acquisition has been accounted for as a
purchase and, accordingly, the Company has recorded the $7.2 million excess
of the purchase price over the fair value of net tangible assets acquired as
goodwill which is being amortized over ten years. Adlas is a leading
manufacturer of DPSS lasers used in commercial applications such as
semiconductor inspection, reprographics, materials processing, and analytical
instrumentation.
Effective March 24, 1995, Coherent and ATx Telecom Systems, Inc. (AMOCO)
entered into an "Asset Purchase and Sale Agreement" whereby Coherent purchased
certain assets (consisting primarily
39
<PAGE>
of patents and technology licenses) relating to Amoco's diode pumped
solid-state laser technology for $4.5 million in cash. The intangible assets
acquired of $4.3 million are being amortized primarily over a ten year period.
3. BALANCE SHEET DETAILS
Prepaid expenses and other assets consist of the following:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Prepaid income taxes $10,731 $ 6,180
Prepaid expenses and other 8,240 5,339
- -----------------------------------------------------------------------------
Prepaid expenses and other assets $18,971 $11,519
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Other assets consist of the following:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Assets held for investment $ 1,411 $ 1,491
Intangibles and other assets 19,878 16,365
- -----------------------------------------------------------------------------
Other assets $21,289 $17,856
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Assets held for investment at September 27, 1997 and September 28, 1996
include the Company's former manufacturing facility in Sturbridge,
Massachusetts which the Company is leasing to Convergent Energy.
Other current liabilities consist of the following:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Accrued payroll and benefits $18,814 $20,264
Accrued expenses and other 14,648 13,278
Deferred service income 9,193 9,028
Reserve for warranty 7,498 9,450
Cash overdrafts 7,957
Customer deposits 2,135 1,689
- -----------------------------------------------------------------------------
Other current liabilities $52,288 $61,666
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Other long-term liabilities consist of the following:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Deferred tax liabilities $ 3,574 $ 5,955
Environmental remediation costs 1,336 1,760
Deferred income and other 9,017 4,688
- -----------------------------------------------------------------------------
Other long-term liabilities $13,927 $12,403
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
Cash equivalents and short-term investments are stated at fair market
value based on quoted market prices.
40
<PAGE>
The recorded carrying amount of the Company's long-term obligations
approximates fair market value.
The carrying amount and fair value of foreign exchange contracts was
$27.8 million at September 27, 1997. The carrying amount and fair value of
foreign exchange contracts were $19.1 million and $18.9 million, respectively
at September 28, 1996. The fair value of foreign exchange contracts is
estimated by obtaining quoted market prices of comparable contracts, adjusted
through interpolation where necessary for maturity differences.
FOREIGN EXCHANGE CONTRACTS
In the normal course of business, the Company has exposures to foreign
currency fluctuations arising from foreign currency sales and purchases and
intercompany transactions, among other things. The Company uses foreign
exchange forward contracts to limit its exposure to foreign exchange losses
arising from nonfunctional currency payables and receivables and firm
commitments. The Company evaluates its net exposure therefrom and enters
into forward contracts to hedge the net exposure over a specified amount.
These contracts are executed with credit-worthy financial institutions and
are denominated in currencies of major industrial nations. Gains and losses
on these contracts serve as hedges in that they offset fluctuations that
would otherwise impact the Company's financial results. Costs associated
with entering into such contracts are generally amortized over the life of
the instruments and are not material to the Company's financial results.
At September 27, 1997 and September 28, 1996, the Company had foreign
currency forward contracts outstanding to hedge foreign currency accounts
receivable and accounts payable and sales backlog usually shippable within 90
days. These contracts have maturities which typically range from 90 to 180
days and are intended to reduce exposure to foreign currency exchange risk.
The aggregate fair value and unrealized gain (loss) of foreign exchange
contracts is as follows:
Sept. 27, 1997 Sept. 28, 1996
Unrealized Unrealized
Fair Value Gain (Loss) Fair Value Gain (loss)
- ----------------------------------------------- ----------------------------
Japanese Yen $12,314,000 663,000 $ 7,310,000 326,000
German Deutschemark 8,012,000 368,000 7,349,000 441,000
French Franc 3,384,000 55,000 3,456,000 38,000
British Pound Sterling 1,207,000 3,800 500
Austrian Schilling 968,000 (7,000)
Swedish Krone 872,000
Dutch Guilder 555,000 (17,000) 293,000 3,500
Canadian Dollar 470,000 2,000
Hong Kong Dollar 517,000
----------- --------- ----------- -------
$27,782,000 1,067,800 $18,925,000 809,000
----------- --------- ----------- -------
----------- --------- ----------- -------
5. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Borrowings under bank credit lines $18,226 $2,252
Note payable due to minority interest
in subsidiary 1,009 1,908
- -----------------------------------------------------------------------------
Short-term borrowings $19,235 $4,160
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
41
<PAGE>
The note payable to minority interest in subsidiary is due upon four
weeks notice from the note holder and bears interest at FIBOR (Frankfurt
Interbank Offered Rate) plus 0.5% with a maximum of 9.0%.
The Company maintains lines of credit worldwide with several banks. The
Company's primary domestic line of credit is a $20,000,000 unsecured
revolving account from Bank of America which expires December 20, 1999. In
addition, the Company has several foreign lines of credit which allow it to
borrow in the applicable local currency. These lines of credit total
$34,313,000 and are concentrated in Germany and Japan. The Company's lines
of credit generally provide borrowing at the bank reference rate or better
which varies depending on the country where the funds are borrowed. Amounts
outstanding at September 27, 1997 were at a weighted average interest rate of
4.2%. The Company's domestic lines of credit are generally subject to
standard covenants related to financial ratios, profitability and dividend
payments. The Company was in compliance with all financial covenants at
September 27, 1997.
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENTLY PAYABLE:
Federal $ 9,789 $18,179 $5,749
State 1,666 2,452 1,249
Foreign 10,660 6,105 2,694
- -----------------------------------------------------------------------------
22,115 26,736 9,692
- -----------------------------------------------------------------------------
DEFERRED CHARGE (CREDIT):
Federal 1,601 (5,077) 3,439
State (35) (1,348) (125)
Foreign (3,179) (1,308) (505)
- -----------------------------------------------------------------------------
(1,613) (7,733) 2,809
- -----------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $20,502 $19,003 $12,501
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
The components of income before income taxes consist of:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
United States $31,244 $39,820 $27,282
Foreign 15,550 9,497 4,542
- -----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $46,794 $49,317 $31,824
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
The reconciliation of the statutory federal income tax rate to the
effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
INCOME Income Income
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
Non-deductible purchased in-process
technology 6.3
Foreign tax rates in excess of U.S. rates 4.4 3.0 1.9
Foreign tax credit (1.8) (1.3) (2.2)
Foreign sales corporation benefit (1.0)
State income taxes, net of federal income
tax benefit 2.3 1.7 2.3
Research and Development credit,
net of recapture (2.9) (0.4) (2.0)
Other .5 1.5 4.3
- -----------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 43.8% 38.5% 39.3%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
The significant components of deferred tax assets and liabilities were:
42
<PAGE>
SEPTEMBER 27, September 28,
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Reserves and accruals not currently deductible $12,232 $13,289
Operating loss carry forwards and tax credits 4,044 2,804
Intercompany profit 704 331
Deferred service revenue 2,379 2,509
State taxes 1,563 1,098
Other 3,549 2,588
- -----------------------------------------------------------------------------
24,471 22,619
Valuation allowance (2,567) (1,817)
- -----------------------------------------------------------------------------
21,904 20,802
Deferred tax liabilities:
Depreciation 1,580 1,986
Other 1,631 1,700
- -----------------------------------------------------------------------------
3,211 3,686
- -----------------------------------------------------------------------------
Total deferred tax assets and liabilities $18,693 $17,116
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
The total net deferred tax asset is classified on the balance sheet at
September 27, 1997 and September 28, 1996 as follows (in thousands):
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Current deferred income tax assets $22,267 $23,071
Non-current deferred income tax liabilities (3,574) (5,955)
- -----------------------------------------------------------------------------
Net deferred tax assets $18,693 $17,116
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total net operating losses of $712,000 for tax return purposes expire as
follows: 2002 - $654,000 and $58,000 with no expiration. Total tax credits
of $2,813,000 for tax return purposes expire as follows:, 1999 - $2,417,000
and 2002 - $396,000.
Utilization of certain of these carry forwards are subject to
restrictions relating to taxable income of subsidiaries not previously
consolidated for income tax purposes.
7. LONG-TERM OBLIGATIONS
The components of long-term obligations are as follows:
1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Notes payable $ 5,102 $ 3,216
Bonds payable 2,400 2,600
Capital leases 24
Deferred acquisition payment (Note 2) 5,792 2,302
- -----------------------------------------------------------------------------
13,294 8,142
Current portion (3,629) (4,221)
- -----------------------------------------------------------------------------
Long-term obligations $ 9,665 $ 3,921
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NOTES PAYABLE - At September 27, 1997, notes payable consists of $2.3
million at 8% for the mortgage on the CEEL facility, $2.2 million at 1.5%
to 8% of outside financing for Tutcore, $0.4 million at 2% of outside
financing by Lambda Japan and $0.2 million for the financing of equipment
with varying interest rates from 7.8% to 8.1%. Notes payable are generally
secured by the related assets financed.
43
<PAGE>
BONDS PAYABLE - Bonds payable were issued to finance the construction of
certain facilities and acquisition of equipment which secure repayment of the
bonds. The bonds are payable in installments through 2008 with a variable
interest rate (3.3% at September 27, 1997) not to exceed 12%. The bonds are
guaranteed by a letter of credit issued by Union Bank with an annual fee of
1.5%.
Annual maturities of debt are: 1998 - $3,629,000, 1999 - $507,000,
2000 - $1,631,000, 2001 - $879,000, 2002 - $2,979,000 and thereafter
$3,669,000.
8. STOCKHOLDERS' EQUITY
Each outstanding share of the Company's common stock carries a stock
purchase right (right) issued pursuant to a dividend distribution declared by
the Company's Board of Directors and distributed to stockholders of record on
November 17, 1989. When exercisable, each right entitles the stockholder to
buy one share of the Company's common stock at an exercise price of $80. The
rights will become exercisable following the tenth day after a person or
group announces acquisition of 20% or more of the Company's common stock or
announces commencement of a tender offer, the consummation of which would
result in ownership by the person or group of 30% or more of the common
stock. The Company will be entitled to redeem the rights at $.01 per right
at any time on or before the 10th day following the acquisition by a person
or group of 20% or more of the Company's common stock.
If, prior to redemption of the rights, the Company is acquired in a
merger or other business combination in which the Company is the surviving
corporation, or a person or group acquires 30% or more of the Company's
common stock, each right owned by a holder of less than 20% of the common
stock will entitle its owner to purchase, at the right's then current
exercise price, a number of shares of common stock of the Company having a
fair market value equal to twice the right's exercise price. If the Company
sells more than 50% of its assets or earning power or is acquired in a merger
or other business combination in which it is not the surviving corporation,
the acquiring person must assume the obligations under the rights and the
rights will become exercisable to acquire common stock of the acquiring
person at the discounted price.
9. EMPLOYEE STOCK OPTION AND BENEFIT PLANS
PRODUCTIVITY INCENTIVE PLAN
The Productivity Incentive Plan (Plan) provides for quarterly
distributions of common stock and cash to each eligible employee. The
amounts of the distributions are based on consolidated pre-tax profit, the
market price of the Company's common stock and the employee's salary. The
fair market value of common stock and cash that are earned under the Plan
are charged to expense. For fiscal 1997, 15,308 shares (fair market value of
$686,029) and $4,247,005 were accrued for the benefit of employees. For
fiscal 1996, 15,447 shares (fair market value of $644,897) and $3,730,871
were accrued for the benefit of employees. For fiscal 1995, 18,593 shares
(fair market value of $482,672) and $2,597,904 were accrued for the benefit
of employees. At September 27, 1997 the Company had 34,632 shares of its
common stock reserved for future issuance under the Plan.
COHERENT EMPLOYEE RETIREMENT AND INVESTMENT PLAN
Under the Coherent Employee Retirement and Investment Plan, the Company
matches employee contributions to the Plan up to a maximum of 6% of the
employee's individual earnings. Employees become eligible for after tax
participation and for Company matching contributions after completing one
year of service. The Company's contributions (net of forfeitures) for fiscal
1997, 1996, and 1995 were $3,057,000, $2,579,000, and $2,519,000,
respectively.
44
<PAGE>
SUPPLEMENTAL RETIREMENT PLAN
The Company has a Supplemental Retirement Plan for senior management
personnel which permits the participants to contribute up to 24% of their
before tax earnings to a trust. The Company will match these contributions
up to an amount equal to 6% of such participants' earnings less any amounts
contributed by the Company to such participant under the Coherent Employment
Retirement and Investment Plan. The Company's contributions (net of
forfeitures) for fiscal 1997, 1996, and 1995 were $17,834, $13,510, and
$12,344, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan whereby eligible
employees may authorize payroll deductions of up to 10% of their regular base
salary to purchase shares at the lower of 85% of the fair market value of the
common stock on the date of commencement of the offering or on the last day
of the twelve-month offering period. In fiscal 1997, 77,603 shares were
purchased by and distributed to employees at an average price of $31.39 per
share. In fiscal 1996, 124,400 shares were purchased by and distributed to
employees at an average price of $16.43 per share. In fiscal 1995, 150,300
shares were purchased by and distributed to employees at an average price of
$11.80 per share.
At September 27, 1997, $2,625,000 had been contributed by employees that
will be used to purchase a maximum of 113,045 shares in fiscal 1998 at a
price determined under the terms of the Plan. At September 27, 1997, the
Company had 431,000 shares of its common stock reserved for future issuance
under the plan.
STOCK OPTION PLANS
Coherent, Inc. has two Stock Option Plans and a non-employee Directors'
Stock Option Plan. Under these plans, the Company may grant options to
purchase up to 3,000,000 and 150,000 shares of common stock, respectively.
Employee options are generally exercisable three years from the grant date,
which typically coincides with the annual shareholders meeting, however,
initial grants to employees vest 25% annually. Director options are
automatically granted to non-employee directors of the Company. Such
directors initially receive a stock option for 10,000 shares exercisable over
a four-year period. Additionally, the non-employee directors receive an
annual grant of 2,500 shares exercisable four years from the date of grant.
Grants under all plans expire six years from the original grant date, and are
exercisable for the fair market value of the common stock on the date of the
grant.
Option activity for all plans is summarized as follows:
OUTSTANDING OPTIONS
-------------------
Number of Weighted Average Exercise
Shares Price per Share
--------- -------------------------
Outstanding, October 1, 1994 1,036,800 $11.59
Options granted 297,100 27.58
Options exercised (359,000) 10.21
Options canceled (50,500) 13.94
--------- ------
OUTSTANDING, SEPTEMBER 30, 1995
(186,800 EXERCISABLE AT A WEIGHTED
AVERAGE PRICE OF $9.90) 924,400 17.04
Options granted (weighted avg. fair
value of $17.03) 412,000 40.11
Options exercised (204,000) 12.29
Options canceled (42,100) 22.73
--------- ------
OUTSTANDING, SEPTEMBER 28, 1996
(231,100 EXERCISABLE AT A WEIGHTED
AVERAGE PRICE OF $13.02) 1,090,300 26.34
Options granted (weighted avg.
fair value of $17.99) 449,100 41.11
Options exercised (155,000) 15.29
Options canceled (74,500) 34.48
--------- ------
OUTSTANDING, SEPTEMBER 27, 1997
(317,450 EXERCISABLE AT A WEIGHTED
AVERAGE PRICE OF $17.16) 1,309,900 $32.34
--------- ------
--------- ------
45
<PAGE>
At September 27, 1997, 870,300 options were available for future grant under
all plans. The following table summarizes information about fixed stock
options outstanding at September 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 8.63 - 14.00 276,500 1.99 $12.40 255,650 $12.36
14.25 - 27.50 225,800 3.47 27.07 15,450 25.67
28.25 - 38.50 37,650 4.22 34.25 11,700 34.62
39.13 - 39.13 236,500 4.49 39.13 22,000 39.13
39.25 - 39.25 319,850 5.58 39.25 0 0
39.63 - 55.50 213,600 5.14 45.51 12,650 49.28
- ------------------ --------- ---- ------ ------- ------
$ 8.63 - 55.50 1,309,900 4.15 $32.34 317,450 $17.16
- ------------------ --------- ---- ------ ------- ------
- ------------------ --------- ---- ------ ------- ------
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of proforma net
income (loss) and earnings (loss) per share had the Company adopted the fair
value method as of the beginning of fiscal 1996. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life 3.85 to 4.07 years; stock volatility 46.7% for
both years; risk-free interest rates of 6.2% for fiscal 1997 and 5.2% for
fiscal 1996 and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1997 and
1996 awards had been amortized to expense over the vesting period of the
awards, proforma net income and earnings per share would appear as follows:
1997 1996
---- ----
Net income As reported $26,292 $30,314
Proforma $23,765 $29,032
Net income per share As reported $ 2.24 $ 2.63
Proforma $ 2.02 $ 2.51
However, the impact of outstanding non-vested stock options granted prior to
fiscal 1996 has been excluded from the proforma calculation; accordingly, the
fiscal 1997 and 1996 proforma amounts are not indicative of future period
proforma amounts, when the calculation will apply to all applicable stock
options.
NOTES RECEIVABLE FROM STOCK SALES
Notes receivable from stock sales result from the exercise of stock
options for notes. The notes are full recourse promissory notes bearing
interest at 7.1% and are collateralized by the stock issued upon exercise of
the stock options. Interest is payable annually and principal is due through
1999.
46
<PAGE>
10. OTHER INCOME (EXPENSE)
Other income (expense) is as follows:
Years Ended
------------------------------------
SEPT. 27, Sept. 28, Sept. 30,
1997 1996 1995
- -------------------------------------------------------------------------------
Gain on sale of facility $3,526
Minority interest in subsidiaries (1,324) $ (813) $(282)
Royalty income 951 479 134
Foreign exchange gain (loss) (350) 299 112
Equity in income (loss) of joint ventures 287 93 (80)
Gain (loss) on investments, net (41) 1,646 487
Other - net 1,257 508 297
- -------------------------------------------------------------------------------
Other income - net $4,306 $2,212 $ 668
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases several of its facilities under operating leases. In
addition, the Company leases the land for its Auburn manufacturing facilities
under long-term fixed leases.
Future minimum payments under the Company's leases are as follows:
Operating
Fiscal Year Ending Leases
- ----------------------------------------------------------
1998 $ 4,079,000
1999 3,027,000
2000 1,539,000
2001 1,138,000
2002 952,000
Thereafter 6,187,000
- ----------------------------------------------------------
Total $16,922,000
-----------
-----------
Rent expense was $7,462,000 in fiscal 1997, $5,305,000 in fiscal 1996,
and $3,015,000 in fiscal 1995.
In September 1988, the Company entered into several agreements with
Patlex Corporation (Patlex) whereby the Company was granted licenses to
several laser related patents developed by Dr. Gordon Gould and assigned to
Patlex. Under the terms of the agreements, the Company pays royalties to
Patlex of 5% or 3.5% and 2% of certain defined domestic sales and
international sales, respectively, subject to certain exceptions and
limitations. Royalty expense under these agreements was $1,131,000 in fiscal
1997, $1,324,000 in fiscal 1996, and $1,123,000 in fiscal 1995. The patents
expire on various dates through May 2005.
CONTINGENCIES
Certain claims and lawsuits have been filed or are pending against the
Company. In the opinion of management, all such matters have been adequately
provided for, are without merit, or are of such kind that if disposed of
unfavorably, would not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company, along with several other companies, has been named as a
party to a remedial action order issued by the California Department of Toxic
Substance Control relating to soil and groundwater contamination at and in
the vicinity of the Stanford Industrial Park in Palo Alto, California, where
the Porter Drive facility is located. The responding parties to the Regional
Order (including the Company) have completed Remedial Investigation and
Feasibility Reports, which were approved by the
47
<PAGE>
State of California. The responding parties have installed four remedial
systems and have reached agreement with responding parties on final cost
sharing.
The Company was also named, along with other parties, to a remedial
action order for the Porter Drive facility site itself in Stanford Industrial
Park. The State of California has approved the Remedial Investigation Report,
Feasibility Study Report, Remedial Action Plan Report and Final Remedial
Action Report, prepared by the Company for this site. The Company has been
operating remedial systems at the site to remove subsurface chemicals since
April 1992.
During fiscal 1997, the Company settled with the prior tenant and
neighboring companies, on allocation of the cost of investigating and
remediating the site at 3210 Porter Drive and the bordering site at 3300
Hillview Avenue.
Management believes that the Company's probable, nondiscounted net
liability at September 27, 1997 for remaining costs associated with the above
environmental matters is $0.3 million which has been previously accrued.
This amount consists of total estimated probable costs of $1.5 million ($0.2
million included in accrued expenses and $1.3 million included in other
long-term liabilities) reduced by minimum probable recoveries of $1.2 million
included in other assets from other parties named to the order.
12. BUSINESS SEGMENTS
The Company operates in two industry segments. The Company designs,
manufactures and markets electro-optical products such as lasers, optics and
related accessories, and medical products such as laser and optical systems
used for surgical and therapeutic applications.
Intersegment sales are accounted for primarily at domestic selling
prices. Intercompany sales between geographic areas are accounted for at a
discount from domestic selling prices. Corporate assets are principally
those not identifiable to a segment and include such items as cash and
equivalents, short-term investments, certain receivables, prepaid expenses,
deferred income taxes, certain property and equipment, assets held for sale
and other assets. Corporate expenses include depreciation of corporate assets
and general legal expenses.
Geographically, the Company has sales in the United States, Asia-Pacific
(including Australia and New Zealand), Europe (primarily in Germany and the
United Kingdom), and rest of the world.
48
<PAGE>
Information concerning the Company's operations by industry segment and
geographic area is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INDUSTRY SEGMENT DATA 1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
NET SALES, INCLUDING
INTERSEGMENT SALES:
Electro-Optical products $240,031 $223,683 $175,557
Medical products 169,952 162,844 126,308
Intersegment sales (18,945) (22,097) (16,366)
- -------------------------------------------------------------------------------
NET SALES $391,038 $364,430 $285,499
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Electro-Optical products $ 23,270 $ 33,582 $ 22,681
Medical products 17,907 13,181 7,930
Corporate expenses 1,133 (2,063) (699)
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS $ 42,310 $ 44,700 $ 29,912
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
Electro-Optical products $200,657 $152,653 $126,803
Medical products 99,889 90,170 59,850
Eliminations (4,712) (3,120) (4,516)
- -------------------------------------------------------------------------------
Total identifiable assets 295,834 239,703 182,137
Corporate assets 65,816 71,813 73,737
- -------------------------------------------------------------------------------
TOTAL ASSETS $361,650 $311,516 $255,874
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
Electro-Optical products $ 9,610 $ 8,707 $ 6,407
Medical products 4,194 3,205 2,379
Corporate 786 460 169
- -------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 14,590 $ 12,372 $ 8,955
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Electro-Optical products $ 22,217 $ 14,587 $ 5,450
Medical products 2,400 4,801 2,719
Corporate 247 5,542 215
- -------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 24,864 $ 24,930 $ 8,384
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
GEOGRAPHIC REGION INFORMATION 1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
BY GEOGRAPHIC REGION:
United States $309,108 $280,285 $200,057
Europe 60,770 75,147 78,094
Asia-Pacific 21,160 8,998 7,348
- -------------------------------------------------------------------------------
NET SALES $391,038 $364,430 $285,499
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SALES TO AFFILIATES (ELIMINATED IN
CONSOLIDATION) BY GEOGRAPHIC REGION:
United States $ 3,468 $ 9,167 $ 29,278
Europe 35,652 22,309 1,778
Asia-Pacific 10,720 5,710 11,849
- -------------------------------------------------------------------------------
NET SALES $ 49,840 $ 37,186 $ 42,905
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
United States $ 25,750 $ 34,577 $ 31,439
Europe 18,302 11,331 (367)
Asia-Pacific (19) 172 1,014
Corporate expenses (314) (817) (700)
Transfers between geographic areas (1,409) (563) (1,474)
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS $ 42,310 $ 44,700 $ 29,912
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
United States $215,128 $182,926 $127,621
Europe 68,962 51,727 55,186
Asia-Pacific 16,456 8,170 3,846
Eliminations (4,712) (3,120) (4,516)
- -------------------------------------------------------------------------------
Total identifiable assets 295,834 239,703 182,137
Corporate assets 65,816 71,813 73,737
- -------------------------------------------------------------------------------
TOTAL ASSETS $361,650 $311,516 $255,874
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EXPORT SALES:
Asia-Pacific $ 64,523 $ 54,938 $ 44,312
Europe 41,124 40,153 8,894
Rest of world 15,103 12,887 8,246
- -------------------------------------------------------------------------------
TOTAL EXPORT SALES $120,750 $107,978 $ 61,452
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET SALES TO GEOGRAPHIC REGION:
United States $177,803 $172,307 $138,605
Europe 99,371 100,581 74,892
Asia-Pacific 97,022 81,551 61,621
Rest of world 16,842 9,991 10,381
- -------------------------------------------------------------------------------
NET SALES $391,038 $364,430 $285,499
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET ASSETS OF FOREIGN SUBSIDIARIES:
Total assets $107,679 $ 68,531 $ 59,032
Total liabilities (65,305) (47,917) (41,615)
- -------------------------------------------------------------------------------
NET ASSETS $ 42,374 $ 20,614 $ 17,417
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1997 and 1996 are as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
YEAR ENDED SEPTEMBER 27, 1997:
Net sales $93,893 $90,985 $102,335 $103,825
Gross profit 49,050 48,980 54,581 52,891
Net income (loss) (532) 8,870 11,350 6,604
Net income per share (.05) .76 .97 .56
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 28, 1996:
Net sales $83,681 $90,552 $ 89,327 $100,870
Gross profit 42,356 46,721 46,082 52,059
Net income 6,465 7,351 7,918 8,580
Net income per share .57 .64 .68 .74
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
14. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards No. 130 (Reporting Comprehensive
Income), which requires that an enterprise report, by major components and as
a single total, the change in its net assets during the period from nonowner
sources; and No. 131 (Disclosures about Segments of an Enterprise and Related
Information), which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows. Both statements are effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which will be adopted by the Company in the
first quarter of fiscal 1998 as required by the statement. Upon adoption of
SFAS No. 128, the Company will present basic earnings per share and diluted
earnings per share. Basic earnings per share will be computed based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share will be computed based on the weighted average number of
shares outstanding during the period increased by the effect of dilutive
stock options and stock purchase contracts using the treasury stock method.
Proforma basic earnings per share for fiscal 1997 is $2.32 compared to $2.74
for fiscal 1996. Proforma diluted earnings per share for fiscal 1997 is
$2.24 compared to $2.63 for fiscal 1996.
51
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 27, 1997, SEPTEMBER 28, 1996,
AND SEPTEMBER 30, 1995
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Costs and from at End
of Period Expenses Reserves (1) of Period
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 27, 1997:
Accounts receivable allowances $3,285 $ 1,905 $ (1,691) $3,499
Warranty 9,450 12,164 (14,116) 7,498
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 28, 1996:
Accounts receivable allowances $2,834 $ 2,069 $ (1,618) $3,285
Warranty 6,856 9,316 (6,722) 9,450
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995:
Accounts receivable allowances $2,384 $ 1,461 $ (1,011) $2,834
Warranty 5,418 10,010 (8,572) 6,856
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) Reductions from the reserves are for the purpose for which the reserves
were created.
52
<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K Annual Report
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 27, 19977
_______________________________________
COHERENT, INC.
EXHIBITS
_______________________________________
53
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- -------------
21.1 Subsidiaries 55
23.1 Independent Auditors' Consent 56
24.1 Power of Attorney 29
27 Financial Data Schedules 57
All other exhibits required to be filed as part of this report have been
incorporated by reference. See item 14(c) for a complete index of such
exhibits.
54
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
The following table sets forth information as to Coherent's
subsidiaries, all of which are included in the consolidated financial
statements. Coherent owns 100% of the outstanding voting securities of such
corporations except as noted below.
Jurisdiction of
Name Incorporation
___________________________________________________________________
Coherent FSC, Inc. Virgin Islands
Coherent GmbH Germany
Coherent (U.K.) Ltd. United Kingdom
Coherent Japan, Inc. Japan
Lambda Physik GmbH (1) Germany
Lambda Physik U.S. (1) Massachusetts
Lambda Physik Japan, K.K. (2) Japan
Laser, Inc. Massachusetts
Coherent S.A. France
Coherent Optics Europe, Ltd. United Kingdom
Coherent LYbeck GmbH Germany
Coherent Export Co., Inc. United States
Coherent Holding Co., GmbH Germany
Coherent-Ealing Europe, Ltd. United Kingdom
Coherent (U.K.) Holdings, Ltd. United Kingdom
Coherent Benelux The Netherlands
Coherent Tutcore, Ltd. Finland
(1) The Company owns 80% of the outstanding voting securities of these
subsidiaries.
(2) The Company owns 76% of the outstanding voting securities of this
subsidiary.
55
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-303035, 33-66536, 33-35609, 33-31442, 33-21878 and 2-96838 of Coherent,
Inc. on Forms S-8 of our report dated October 28, 1997 appearing in this
Annual Report on Form 10-K of Coherent, Inc. for the year ended September 27,
1997.
DELOITTE & TOUCHE LLP
San Jose, California
December 18, 1997
56
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 21,455
<SECURITIES> 10,182
<RECEIVABLES> 99,342
<ALLOWANCES> 3,499
<INVENTORY> 86,446
<CURRENT-ASSETS> 255,165
<PP&E> 128,532
<DEPRECIATION> 56,708
<TOTAL-ASSETS> 361,650
<CURRENT-LIABILITIES> 102,477
<BONDS> 9,665
0
0
<COMMON> 114
<OTHER-SE> 231,119
<TOTAL-LIABILITY-AND-EQUITY> 361,650
<SALES> 391,038
<TOTAL-REVENUES> 391,038
<CGS> 185,536
<TOTAL-COSTS> 185,536
<OTHER-EXPENSES> 163,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,226
<INCOME-PRETAX> 46,794
<INCOME-TAX> 20,502
<INCOME-CONTINUING> 26,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,292
<EPS-PRIMARY> 2.24
<EPS-DILUTED> 2.23
</TABLE>
