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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 26, 1998
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
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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 November 17, 1998, 23,870,303 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 November 17,
1998) of Coherent, Inc., held by nonaffiliates was $207,527,198. 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
26, 1999, 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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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 differ materially.
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 or acquire 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 general product offerings are
likely to become technologically obsolete. 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% of the Company's sales
for fiscal 1998 and 1997. 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) and from exports from its U.S. operations. As a result, the
Company's international sales and operations are subject to the risks of
conducting business internationally, including 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, currency options 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 24% and 25% of Coherent's fiscal 1998 and 1997 sales,
respectively, 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 which could have an adverse impact on Coherent's sales and
results of operations.
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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, divert
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 1976 Medical Device Amendments to the Federal
Food, Drug and Cosmetic Act, 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 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
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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
disaster.
YEAR 2000 COMPLIANCE. As is true for most companies, the Year 2000 computer
issue creates a risk for Coherent. If systems do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
the Company's operations. The risk for Coherent exists in four areas: (i)
information technology used by the Company to run its business, (ii) systems
used by the Company's suppliers, (iii) potential warranty or other claims from
Coherent's customers, and (iv) the potential for reduced spending by customers
for Coherent's products as a result of significant spending on Year 2000 issues
and related adverse effects of such issues on the customer's business. The
Company is currently evaluating its exposure in all of these areas.
Coherent is in the process of conducting a comprehensive inventory and
evaluation of its internal systems, equipment and facilities, which will be
completed by March 1999. The Company has a number of projects underway to
replace or upgrade systems, equipment and facilities that are already known to
be Year 2000 non-compliant and expects to be substantially complete with these
projects by February 1999. At this time, the Company has not determined a most
reasonablly likely worst case scenario if its Year 2000 remediation efforts are
unsuccessful. The Company has not developed alternative plans if upgrade or
replacement is not feasible. The Company will consider the need for such plans
upon completion of its assessment of the Year 2000 risk in March 1999. For the
Year 2000 non-compliance issues identified to date, the cost of upgrade or
replacement has been less than $0.1 million through September 26, 1998. The
Company currently has budgeted an additional $0.6 million through December 31,
1999 for system upgrades and replacements which it expects to capitalize. The
cost of the upgrades or replacements in the future is not expected to materially
affect the Company's operating results and will be funded by working capital
generated by operations. The Company expects to estimate its additional costs
for Year 2000 compliance, if any, by the end of the 1998 calendar year and
adjust its budget accordingly. If implementation of replacement systems is
delayed, or if significant new non-compliance issues are identified, the
Company's results of operation or financial condition could be adversely
affected. However, the Company believes that it will be able to complete its
Year 2000 compliance review and make any necessary system modifications prior to
any adverse consequences.
Coherent is also in the process of contacting its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant and expects to complete this process by April
1999 for all critical suppliers. Where practical, Coherent will attempt to
mitigate its risks with respect to the failure of suppliers to be Year 2000
ready. In the event that suppliers are not Year 2000 compliant, the Company may
seek alternative sources of supplies. However, such failures remain a
possibility and could have an adverse impact on the Company's results of
operations or financial condition.
The Company believes the large majority of its current products are Year 2000
compliant; however, since all customer situations cannot be anticipated,
particularly those involving third party products, Coherent may see an increase
in warranty and other claims as a result of the Year 2000 transition. While
litigation
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regarding Year 2000 compliance issues is expected to escalate, the Company
does not believe that the impact of customer claims would materially affect
the Company's results of operations or financial condition.
Year 2000 compliance is an issue for virtually all businesses, whose systems and
applications may require significant hardware and software upgrades or
modifications. Companies owning and operating such systems may plan to devote a
substantial portion of their information systems' spending to fund such upgrades
and modifications and divert spending away from the purchase of Coherent
products and services. Such changes in customers' spending patterns could have
an adverse impact on the Company's sales, but the impact on operating results
and financial condition is not known at this time.
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 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 200 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.
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
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The sales and operating results of both industry segments and the
identifiable assets attributable to such industry segments for the three years
ended September 26, 1998 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.
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 semiconductor lasers, precision optics, thin film coatings,
accessories, laser measurement and testing instruments. Some of the
applications within Coherent's market segments are shown in the table below:
APPLICATIONS BY MARKET
<TABLE>
<CAPTION>
MEDICAL SCIENTIFIC COMMERCIAL
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<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
Flow Cytometry
Analytical Instrumentation
Pulsed Laser Deposition
Telecommunications
Photomask Production
Confocal Microscopy
PCB Via Drilling
Direct PCB Imaging
Laser Pumping
Medical Instrumentation
</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.
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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.
In urology, the VersaPulse-Registered Trademark- Select-TM- 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 a single delivery device and
with the touch of a foot pedal, the surgeon can quickly switch from the precise
cutting and ablation 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.
In 1998, Coherent was the first Company to obtain FDA clearance for Holmium
laser prostatectomy. This procedure replaces the conventional treatment,
transurethral resection of the prostrate (TURP), with a procedure that offers
identical surgical effects with less morbidity, shorter hospitalization, and a
quicker return to normal activity. The VersaPulse Select-TM- is quickly
becoming the standard of care for the urologist.
AESTHETIC PRODUCTS
Coherent is a leading supplier of lasers to the rapidly growing aesthetic
laser market. Starting in 1994, with the UltraPulse-TM- 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
Medical Technologies, Inc.'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.
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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 an 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.
In February 1998, Coherent introduced the LightSheer-TM- Diode Laser System
for laser hair removal. This compact, solid-state system manufactured by Star
Medical Systems, a subsidiary of Palomar Medical Technologies, is the only high
energy, short pulse diode laser system available for hair removal. The
treatment light is generated by high power diode arrays using patented packaging
and cooling technology. The high efficiency of the diodes eliminates the
requirement for special facilities. Installation is done by the user and the
system can be easily transported to multiple locations. The diode wavelength is
well suited for laser hair removal and when combined with the patented
ChillTip-TM- contact skin cooling system, allows treatment of a wide range of
patients.
OPHTHALMIC PRODUCTS
Coherent pioneered the use of lasers in the ophthalmology market segment 28
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.
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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 during 1999.
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 $250,000.
ELECTRO-OPTICAL
Coherent's electro-optical products include lasers and laser systems for
scientific, medical research, micromachining, commercial applications,
semiconductor inspection, telecommunications, 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
(CO(2)), 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 CO(2) 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, telecommunications and
manufacturing process control.
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 CO(2) (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 manufacturing and
service entity in Europe for such products. The first shipments of 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 occurred in fiscal 1997.
In fiscal 1998, several important events occurred. CLG shipped the first
units of Avia, a high-power, high-repetition laser serving the printed circuit
board (PCB) via drilling market. In early 1998, CLG also shipped its first
Vittesse laser, offering customers a self-contained, maintenance free, Ultrafast
alternative. Vittesse is another good example of CLG developing a product for
its scientific customers and then leveraging the technology into commercial
applications. CLG continued to provide its customers with lasers for the
growing range of applications, especially in the CO(2) (i.e., material drilling
and marking) and diode-pumped solid state (DPSS) (i.e., reprographics,
holography and rapid prototyping) product lines.
9
<PAGE>
Also, CLG saw continued strong growth for the Lubeck operation, including
shipments of the 315M minilaser for the reprographics market.
In fiscal 1998, CLG continued to position itself for penetration into the
telecommunications market by forming a joint venture with Fiber Optic Network
Solutions (FONS) located in Northboro, Mass. The new entity, CFX Communications
Systems, LLC. (CFX), combines the laser systems and optical engineering
expertise of Coherent with the transmitter and networking technology of CFX to
provide high-powered, broadband transmission products for telecommunications
applications.
Also in fiscal 1998, CLG entered into a worldwide distribution and
minority ownership agreement with Microlase, located in Glasgow, Scotland.
The agreement provides Microlase with the technical and service support
offered by CLG while CLG benefits from the synergy of combining Microlase's
products with its own diverse product offerings. Microlase has developed a
series of technologically advanced lasers, including extremely narrow
linewidth ring lasers and frequency-doubling technology used in scientific
research and precise process monitoring. Microlase has also developed a
series of promising products based on diode-pumped ultrafast laser sources.
Coherent Lambda Physik, Coherent's 80% owned subsidiary, 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 Mum. 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, to meet 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 currently only four 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), Komatsu and USHIO. To date, Cymer has held the largest market
share, estimated to be 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
Mum.
During 1998, Lambda Physik worked in close cooperation with the main
stepper manufacturers to become a supplier of excimer lasers for 193nm
lithography. Multiple orders have been delivered in 1998 and production has
increased to meet further demands in 1999. As announced by ASM Lithography
(ASML), the NovaLine laser is used on ASML's newly introduced PAS500/900
wide-field, 193nm and scan system. SVG Lithography (SVGL) implements the
NovaLine laser for its second generation of 193nm step and scan systems, the
MICRASCAN MS 193. These new generation scanners will be installed at the end
customer sites throughout the next 12 months. Lambda Physik shipped its
first 2kHz DUV excimer laser for the lithography market in October 1998.
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.
10
<PAGE>
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 used to manufacture laser diodes. In February 1997, CSG
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 (CSG); previously, such operations
were a part of CLG. This group consists of the Santa Clara laser diode division
as well as the Coherent Tutcore division located in Tampere, Finland.
Semiconductor laser diode prices range from $200 to $4,000; semiconductor
laser systems range from $3,000 to $20,000. Both laser diodes and laser diode
systems are used in a variety of commercial and OEM applications, including
material processing, reprographics, medical instruments, and laser pumping. CSG
products are incorporated in several other systems manufactured by CLG and CMG.
COMPONENTS GROUP
Coherent's Auburn Group (CAG) manufactures optics, thin films coatings for
high-performance laser optics, laser accessories and electro-optical components
for the Company as well as other manufacturers.
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.
In addition to their normal laser business, in fiscal year 1998, the Optics
Division supplied a number of large specialized optics for the Keck Telescope
and Lawrence Livermore Labs NIF program. In England, our Leicester facility
received a UK Design Council Award for the "Millennium Products" recognizing
their newly introduced system for manufacturing graded interference filters.
CAG also designs and manufactures laser measurement instruments and
accessories that are used to measure and maximize the performance of laser
systems. During fiscal year 1998, the Instrument Division continued to see
growth in low power diode laser module sales, and continued demand for their
standard line of instrumentation.
As a result of the acquisition of Ealing Electro-Optics in fiscal year
1997, the Auburn Group successfully entered the market for E-O assembly
modules, capturing several major programs from U.S. and European contractors.
Also the newly formed Catalog Division, which had taken over the Ealing
"Gold" catalog, printed and distributed in September 1998 the new Coherent
catalog containing 480 pages of 5,000 products, of which 2,000 were new, to
the Photonics Industry.
Products made by CAG typically range in price from $500 to $50,000 and are
sold through CAG's field and telemarketing salesforce, the new Coherent 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, Austria, 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.
11
<PAGE>
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, export/import controls and sovereign risk.
Coherent's products are broadly distributed and no one customer accounted for
more than 10% of total sales during fiscal 1998.
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 Japanese customers
enables the Company to provide stronger support and 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.
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 long-term 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 26, 1998, the Company's backlog of orders scheduled for
shipment was approximately $87,816,000, compared with $75,429,000 at September
27, 1997. 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
1999. Backlog at September 26, 1998, was higher than at September 27, 1997, 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.
COMPETITION
12
<PAGE>
Coherent is one of the largest laser companies 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, 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 1998
expenditures for research and development were $44,534,000, 11% of sales,
compared to $39,406,000, 10% of sales, and $37,705,000, 10% of sales, during
fiscal 1997 and 1996, 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 a 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
13
<PAGE>
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.
EMPLOYEES
At September 26, 1998, Coherent employed 2,261 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 26, 1998, is set forth in Note 12, "Business
Segments", of the Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
At the end of fiscal 1998, the Company's primary locations were as follows:
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
and Northboro, Massachusetts. 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 as well as a 12,000-square-foot building leased
until July 2000. The Massachusetts facility consists of a 4,000-square-foot
building leased until October 2000.
The Company's principal medical products facility is located in Santa
Clara, California consisting of a building of approximately 216,000 square
feet of floor area leased until December 2001. The Company also has a
16,200-square-foot warehouse located in Redwood City, California under a
lease expiring in 2000.
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 1999) to the acquirer of Coherent General, Inc.
Lambda Physik GmbH's facility in Gottingen, Germany consists of two
buildings totaling 61,500 square feet, which are owned by the Company.
Lambda Physik's domestic facility is located in Fort Lauderdale, Florida,
consisting of a 14,665-square-foot building leased until March 2002.
Lambda Physik Japan's facilities are located in Yokohama, Japan, consisting
of a 7,081-square-foot building leased until October 2000 and two buildings
consisting of 2,914 total square feet in Tokyo, Japan leased until 2000.
Coherent GmbH's facility in Dieburg, Germany consists of a
18,090-square-foot building leased by the Company until 2003 with a five year
renewal option.
Coherent Lubeck's facility in Lubeck, Germany consists of a
19,017-square-foot building leased by the Company until 2000 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.
Coherent Tutcore's facility is located in Tampere, Finland where they
manufacture semiconductor wafers. The facility is 15,000 square feet and is
leased until 2007.
Coherent Japan's facilities include 39,706 square feet consisting of four
buildings leased until April 1999.
14
<PAGE>
The Company 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 the 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.
15
<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 1998 Fiscal 1997
-------------------------------------- --------------------------------------
Dec. 27 Mar. 28 June 27 Sept. 26 Dec. 28 Mar. 29 June 28 Sept. 27
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Price:
High $28.75 $24.38 $24.19 $17.38 $22.25 $25.13 $23.69 $26.75
Low $16.94 $17.56 $16.75 $ 8.75 $15.94 $21.13 $19.44 $22.25
</TABLE>
The number of stockholders of record as of November 17, 1998 was 2,118.
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 Notes to
Consolidated Financial Statements.
The Board of Directors declared a 2-for-1 stock split of its common
stock effected in the form of a 100% stock dividend distributed on March 2,
1998 to holders of record as of February 17, 1998. The financial statements,
notes and other references to share and per share data reflect the stock
split for all periods presented.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------------------
SEPT. 26, Sept. 27, Sept. 28, Sept. 30, Oct.1,
1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $410,449 $391,038 $364,430 $285,499 $215,367
- - --------------------------------------------------------------------------------------------------------------
Gross profit 197,865 205,502 187,218 142,483 105,429
- - --------------------------------------------------------------------------------------------------------------
Income from continuing operations 18,811 26,292 30,314 19,323 10,301
- - --------------------------------------------------------------------------------------------------------------
Gain from discontinued
operations 1,154
- - --------------------------------------------------------------------------------------------------------------
Net income (1), (2) $ 18,811 $ 26,292 $ 30,314 $ 19,323 $ 11,455
- - --------------------------------------------------------------------------------------------------------------
EARNINGS PER DILUTED SHARE DATA:
Income from continuing
operations $ .79 $ 1.12 $ 1.31 $ .87 $ .50
Gain from discontinued
operations .05
- - --------------------------------------------------------------------------------------------------------------
Net income (1), (2) $ .79 $ 1.12 $ 1.31 $ .87 $ .55
- - --------------------------------------------------------------------------------------------------------------
Total assets $390,761 $361,650 $311,516 $255,874 $211,766
- - --------------------------------------------------------------------------------------------------------------
Long-term obligations 12,828 9,665 3,921 5,139 8,865
Other long-term liabilities 12,599 13,927 12,403 9,597 6,789
Minority interest in subsidiaries 3,664 4,348 2,738 1,782 4,089
- - --------------------------------------------------------------------------------------------------------------
Stockholders' equity $262,623 $231,233 $197,587 $161,191 $133,464
- - --------------------------------------------------------------------------------------------------------------
</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 1998, a $2.7 million ($0.11 per diluted share)
non-recurring tax benefit.
(2) Includes in fiscal 1997, a $9.0 million ($0.38 per diluted share), after
tax charge for the write-off of purchased in-process technology. See Note 2
"Acquisitions" of Notes to Consolidated Financial Statements.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
During fiscal 1998, the Company's net income decreased to $18.8 million
($0.79 per diluted share) compared to proforma net income (excluding the $9.0
million after-tax write-off of purchased in- process technology) of $35.3
million ($1.50 per diluted share) for fiscal 1997 and $30.3 million ($1.31
per diluted share) for fiscal 1996. Net income for fiscal 1998 included a
$2.7 million ($0.11 per diluted share) non-recurring tax benefit. Income
before income taxes decreased $32.4 million (58%) to $23.7 million for fiscal
1998 compared to proforma income before income taxes, excluding the
aforementioned write-off, of $56.1 million for 1997 and income before income
taxes of $49.3 million for fiscal 1996. These decreases were primarily
attributable to the performance in the Coherent Medical Group not meeting
expectations, a decrease in the gross profit rate due to lower sales of
higher margin medical and electro-optical products, and the continued
negative impact of the strengthening U.S. dollar against major foreign
currencies. With more than half of the Company's revenues outside the United
States, sales 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 would have grown 8% compared to fiscal
1997 instead of the 5% increase actually recorded.
1998 COMPARED TO 1997
NET SALES AND GROSS PROFITS
<TABLE>
<CAPTION>
Years Ended
Sept. 26, Sept. 27,
1998 1997
---- ----
(In thousands)
Net Sales
---------
<S> <C> <C>
Consolidated:
Domestic $185,004 $177,803
International 225,445 213,235
-------- --------
Total $410,449 $391,038
-------- --------
-------- --------
Electro-Optical:
Domestic $106,111 $ 96,314
International 148,648 124,772
-------- --------
Total $254,759 $221,086
-------- --------
-------- --------
Medical:
Domestic $ 78,893 $ 81,489
International 76,797 88,463
-------- --------
Total $155,690 $169,952
-------- --------
-------- --------
</TABLE>
CONSOLIDATED
17
<PAGE>
During fiscal 1998, net sales increased $19.4 million (5%) to $410.4
million from $391.0 million in the prior fiscal year, primarily as a result of
increased sales volumes in the Electro-Optical segment (OEMs and commercial
customers). International sales grew at a higher rate than domestic sales for a
total increase of $12.2 million (6%). Accordingly, international sales were 55%
of net sales for both the current and last fiscal year, reflecting the Company's
commitment to grow its international business.
The gross profit rate decreased to 48% for the current fiscal year
compared to 53% for fiscal 1997. The deterioraton in the overall margin
resulted primarily from lower sales of higher margin medical products, a
shift to higher sales of the lower margin solid state technology products in
the Electro-Optical segment, and the impact of the strengthening U.S. dollar
against major foreign currencies.
ELECTRO-OPTICAL
Electro-Optical net sales increased $33.7 million (15%) in the current
fiscal year to $254.8 million from $221.1 million in the prior fiscal year.
Domestic sales increased $9.8 million (10%) and international sales increased
$23.9 million (19%) in the current fiscal year. The increase in sales
worldwide resulted primarily from higher sales volumes in commercial
solid-state products and in the lithography business and due in part to the
Auburn Group's fiscal 1997 acquisition of Ealing Electro-Optics in Watford,
England. The impact of the strengthening of the U.S. dollar against major
foreign currencies partially offset the increase by adversely impacting
international sales by $8.6 million compared to the prior year.
The gross profit rate decreased to 48% from 51% in the prior fiscal
year. The decrease from the prior year resulted primarily from a change to a
higher mix of lower margin solid state, diode and catalog products, as well
as the strengthening of the U.S. dollar against major foreign currencies.
MEDICAL
Medical net sales decreased $14.3 million (8%) to $155.7 million in
fiscal 1998 from $170.0 million in fiscal 1997. International sales
decreased $11.7 million (13%) and domestic sales decreased $2.6 million (3%)
in the current fiscal year. The decrease in sales resulted primarily from
decreased sales volumes, higher sales returns and allowances and lower
average selling prices, as well as the strengthening of the U.S. dollar
against major foreign currencies. Such strengthening of the U.S. dollar
against major foreign currencies contributed to the decrease in international
sales by $3.9 million compared to the prior year.
The gross profit rate decreased to 49% from 55% in the prior fiscal year
primarily due to lower sales and margins on skin resurfacing products, lower
manufacturing throughput, as well as higher inventory related costs, warranty
costs and manufacturing variances and due in part to the strengthening of the
U.S. dollar against major foreign currencies. These factors were partially
offset by the inaugural sales of the new LightSheer-TM- hair removal laser,
for which Coherent recognizes a commission for its selling efforts.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Years Ended
Sept. 26, Sept. 27,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Research & development $ 44,534 $ 39,406
Purchased in-process technology 9,315
Selling, general & administrative 129,199 114,471
-------- --------
Total operating expenses $173,733 $163,192
-------- --------
-------- --------
</TABLE>
Total operating expenses increased $10.5 million (6%) from the prior
fiscal year. Exclusive of the first quarter fiscal 1997 write-off of
purchased in-process technology, operating expenses increased $19.9 million
(13%), and as a percentage of sales increased to 42% from 39%.
18
<PAGE>
Current year research and development (R&D) expenses increased $5.1
million (13%) from the prior fiscal year and increased to 11% from 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,
including lithography, and its recent strategic acquisitions.
Selling, general and administrative (SG&A) expenses increased $14.7
million (13%) and increased as a percentage of sales from 29% to 31%. Sales,
marketing and service expenses increased $4.5 million (6%) but as a
percentage of sales remained at 21%. The increase, in the Electro-Optical
business segment, was driven by recent business acquisitions, the ramp-up of
catalog operations, increased costs associated with higher headcount and
higher costs associated with the Asia-Pacific region. Administration
expenses increased $10.3 million (30%) and as a percentage of sales increased
to 11% from 9% in fiscal 1997. This increase was driven by (i) restructuring
costs of $2.9 million related to the medical segment, (ii) the relocation of
the medical segment to a new facility, (iii) increased amortization of
intangibles, (iv) the Ealing Electro-Optics acquisition costs associated with
launching the catalog and (v) higher costs in Asia-Pacific associated with
the Laser Group selling direct in Japan since mid fiscal 1997.
OTHER INCOME (EXPENSE)
Other income (expense), net, decreased $4.9 million during the current
year compared to the corresponding prior year period. The prior year's other
income included a $3.5 million gain on the Company's sale of its former
headquarters facility. The remaining fluctuation of $1.4 million was
primarily due to higher foreign exchange losses due to the strengthening of
the U.S. dollar against the major foreign currencies, lower royalty income
and lower interest income on lower average cash and investment balances.
INCOME TAXES
The Company's effective tax rate for the current year was 20.6%. The
Company's proforma effective tax rate for the fiscal year (excluding the $2.7
million non-recurring tax benefit) was 32.1%. The Company's proforma
effective tax rate for the prior fiscal year (excluding the $9.3 million
pre-tax write-off of purchased in-process technology) was 37%. The Company's
proforma effective tax rate decreased as a result of increases in foreign
tax credit utilization, and increased research and development credits offset
by changes in the distribution of taxable income by taxing jurisdiction as
well as the proportionately greater impact of these items due to lower income
before income taxes in the current year.
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, 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 $21.1 million
(11%). Accordingly, international sales were 55% of net sales in fiscal 1997
compared to 53% for fiscal 1996, reflecting the Company's commitment to grow
its international business. With more than half of the Company's revenues
outside the United States, sales were negatively impacted due to the
continued strengthening of the U.S. dollar against other major foreign
currencies. If exchange rates had remained at last year's level, sales would
have grown 11% compared to fiscal 1996 instead of the 7% increase actually
recorded.
19
<PAGE>
The gross profit rate improved to 53% for fiscal 1997 compared to 51% for
fiscal 1996. The improvement in the overall margin resulted primarily from
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 fiscal
1997 to $221.1 million from $201.6 million in fiscal 1996. Domestic sales
increased $16.0 million (20%) and international sales increased $3.5 million
(3%) for fiscal 1997. The increase in sales worldwide, 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.
The gross profit rate decreased to 51% from 52% in fiscal 1996. The
decrease from fiscal 1996 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%) for fiscal 1997. The growth was primarily attributable to higher sales
volumes in the ophthalmic business unit.
The gross profit rate increased to 55% in fiscal 1997 from 51% in fiscal
1996 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. 26,
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 fiscal 1996.
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%.
Fiscal 1997 research and development (R&D) expenses increased $1.7
million (5%) from fiscal 1996 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 fiscal 1996. 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 tradeshows 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.
20
<PAGE>
OTHER INCOME (EXPENSE)
Other income, net decreased by $0.1 million during fiscal 1997 compared
to the corresponding prior year period. Fiscal 1997 other income included a
$3.5 million gain on the Company's sale of its former headquarters 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 headquarters facility (sold in fiscal 1997), higher foreign
exchange losses due to the strengthening of the U.S. dollar against 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 fiscal 1997 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 fiscal 1996. 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.
BUSINESS ENVIRONMENT AND RISK FACTORS
YEAR 2000 COMPLIANCE
As is true for most companies, the Year 2000 computer issue creates a
risk for Coherent. If systems do not correctly recognize date information
when the year changes to 2000, there could be an adverse impact on the
Company's operations. The risk for Coherent exists in four areas: (i)
information technology used by the Company to run its business, (ii) systems
used by the Company's suppliers, (iii) potential warranty or other claims
from Coherent customers, and (iv) the potential for reduced spending by
customers for Coherent products as a result of significant spending on Year
2000 issues and related adverse effects of such issues on the customer's
business. The Company is currently evaluating its exposure in all of these
areas.
Coherent is in the process of conducting a comprehensive inventory and
evaluation of its internal systems, equipment and facilities, which will be
completed by March 1999. The Company has a number of projects underway to
replace or upgrade systems, equipment and facilities that are already known
to be Year 2000 non-compliant and expects to be substantially complete with
these projects by February 1999. At this time, the Company has not
determined a most reasonably likely worst case scenario if its Year 2000
remediation efforts are unsuccessful. The Company has not developed
alternative plans if upgrade or replacement is not feasible. The Company will
consider the need for such plans upon completion of its assessment of the
Year 2000 risk in March 1999. For the Year 2000 non-compliance issues
identified to date, the cost of upgrade or replacement has been less than
$0.1 million through September 26, 1998. The Company currently has budgeted
an additional $0.6 million through December 31, 1999 for system upgrades and
replacements which it expects to capitalize. The cost of the upgrades or
replacements in the future is not expected to materially affect the Company's
operating results and will be funded through working capital generated by
operations. The Company expects to estimate its additional costs for Year
2000 compliance, if any, by the end of the 1998 calendar year and adjust its
budget accordingly. If implementation of replacement systems is delayed, or
if significant new non-compliance issues are identified, the Company's
results of operations or financial condition could be adversely affected.
However, the Company believes that it will be able to complete its Year 2000
compliance review and make any necessary system modifications prior to any
adverse consequences.
Coherent is also in the process of contacting its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant and expects to complete this process by April
1999 for all critical suppliers. Where practical, Coherent will attempt to
mitigate its risks with respect
21
<PAGE>
to the failure of suppliers to be Year 2000 ready. In the event that
suppliers are not Year 2000 compliant, the Company may seek alternative
sources of supplies. However, such failures remain a possibility and could
have an adverse impact on the Company's results of operations or financial
condition.
The Company believes the large majority of its current products are Year 2000
compliant; however, since all customer situations cannot be anticipated,
particularly those involving third party products, Coherent may see an
increase in warranty and other claims as a result of the Year 2000
transition. While litigation regarding Year 2000 compliance issues is
expected to escalate, the Company does not believe that the impact of
customer claims would materially affect the Company's results of operations
or financial condition.
Year 2000 compliance is an issue for virtually all businesses, whose systems
and applications may require significant hardware and software upgrades or
modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from the purchase of
Coherent products and services. Such changes in customers' spending patterns
could have an adverse impact on the Company's sales, but the impact on
operating results and financial condition is not known at this time.
EURO CONVERSION
As with many multinational companies operating in Europe, beginning in
January 1999, Coherent will be affected by the conversion of 11 European
currencies into a common currency, the euro. Based on its preliminary
assessment, the Company does not believe the conversion will have a material
impact on the competitiveness of its products or increase the likelihood of
contract cancellations in Europe, where there already exists substantial
price transparency. The Company also believes its current accounting systems
will accommodate the euro conversion with minimal intervention and does not
expect to experience material adverse tax consequences as a result of the
conversion. The convergence of currencies into the euro is expected to
simplify the Company's currency risk management process, including its use of
derivatives to manage that risk. The cost of addressing the euro conversion
is not expected to be material and will be charged to operations as incurred.
The Company will continue to assess the impact of the introduction of the
euro currency over the transition period as well as the period subsequent to
the transition period, as applicable.
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 24% 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 in the near term capital spending in this market will decrease and thus,
Coherent's ability to maintain or grow sales in this region may be negatively
impacted.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, the Company's primary sources of liquidity are
cash and short-term investments of $32.9 million. Additional sources of
liquidity are the Company's multi-currency line of credit and bank credit
facilities totaling $53.6 million as of September 26, 1998, of which $42.2
million is unused and available under these credit facilities. During fiscal
1998, such facilities have been used in Europe and Japan. Because of the
Company's low debt to equity ratio (0.10:1), management believes that
additional cash could be borrowed if necessary; however, cash flow from
operations, cash and equivalents, short-term investments and available lines
of credit are expected to be sufficient to fund operations for fiscal 1999.
The Company has certain financial covenants related to its lines of credit.
At September 26, 1998, the Company is in compliance with these covenants (see
Note 5, "Short-term Borrowings", of Notes to Consolidated Financial
Statements).
22
<PAGE>
During the first quarter of fiscal 1997, the Company signed a lease for
216,000 square feet of office, research and development and manufacturing
space for its Medical Group headquarters in Santa Clara, California. The
lease expires in December 2001. The Company has an option to purchase the
property for $24.0 million, or at the end of the lease arrange for the sale
of the property to a third party with the Company retaining an obligation to
the owner for the difference between the sale price, if less than $24.0
million, and $24.0 million, subject to certain provisions of the lease. If
the Company does not purchase the property or arrange for its sale as
discussed above, the Company would be obligated for an additional lease
payment of approximately $21.5 million. The Company occupied the building in
July 1998 and commenced lease payments at that time. The lease requires the
Company to maintain specified financial covenants, all of which the Company
was in compliance with as of September 26, 1998.
The Company has signed a definitive agreement with Palomar Medical
Technologies, Inc. (Palomar) to acquire Palomar's majority owned subsidiary,
Star Medical Technologies, Inc., for $65 million in cash. The consummation
of the sale, which is subject to the approval of Palomar's stockholders,
other standard closing conditions and certain regulatory approvals, is
expected to occur in February 1999. The Company is in the process of securing
a private bond placement to finance the acquisition. In the interim, the
Company's bank has agreed to provide a bridge loan in the event that other
financing is not obtained by the closing of the deal.
CHANGES IN FINANCIAL CONDITION
Cash and equivalents at September 26, 1998 decreased by $5.5 million
(26%) from September 27, 1997. Operations and changes in exchange rates
generated $17.7 million including an increase in short-term investments of
$6.8 million. Investing activities used $26.2 million; $22.2 million was used
to acquire property and equipment (net of proceeds from disposition of
property and equipment) and $0.8 million was used for business acquisitions.
Financing activities provided $3.0 million; sales of shares under employee
benefit plans generated $6.8 million and decreased net borrowings used $3.8
million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company maintains a short-term investment portfolio consisting
mainly of income securities with an average maturity of less than one year.
These trading securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent from levels at September 26,
1998, the fair value of the portfolio would decline by an immaterial amount.
The Company has the ability to generally hold its fixed income investments
until maturity and therefore the Company would not expect is operating
results or cash flows to be affected to any significant degree by the effect
of a sudden change in market interest rates on its securities portfolio.
The Company has fixed rate long-term debt of approximately $8
million, and a hypothetical 10 percent decrease in interest rates would not
have a material impact on the fair market value of this debt. The Company
does not hedge any interest rate exposures.
FOREIGN CURRENCY EXCHANGE RISK
The Company has foreign subsidiaries which sell and manufacture the
Company's products in various global markets. As a result, the Company's
earnings and cash flows are exposed to fluctuations in foreign currency
exchange rates. The Company attempts to limit these exposures through
operational strategies and financial market instruments. The Company
utilizes hedge instruments, primarily forward contracts with maturities of
twelve months or less, to manage its exposure associated with firm
intercompany and third-party transactions and net asset and liability
positions denominated in non-functional currencies. The Company does not use
derivative financial instruments for trading purposes.
The Company had $29.1 million of short-term ($.9 million long-term)
forward exchange contracts, denominated in major foreign currencies, which
approximated the fair value of such contracts and their underlying
transactions at September 26, 1998. Gains and losses related to these
instruments at September 26, 1998 were not material. Looking forward, the
Company does not anticipate any material adverse effect on its consolidated
financial position, results of operations, or cash flows resulting from the
use of these instruments. There can be no assurance that these strategies
will be effective or that transaction losses can be minimized or forecasted
accurately.
23
<PAGE>
The following table provides information about the Company's foreign
exchange forward contracts at September 26, 1998. The table presents the
value of the contracts in U.S. dollars at the contract exchange rate as of
the contract maturity date. Due to the short-term nature of these contracts,
the fair value approximates the weighted average contractual foreign currency
exchange rate value of the contracts at September 26, 1998.
Forward contracts to sell (buy) foreign currencies for U.S. dollars:
<TABLE>
<CAPTION>
(in thousands, except contract rates)
Mature < 1 Year Mature 1-3 years
--------------------------- ----------------------------
Average U.S. Average U.S.
Contract Notional Fair Contract Notional Fair
Rate Amount Value Rate Amount Value
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Japanese Yen 129.751 $10,751 $10,317
German Deutschemark 1.799 7,999 8,607 1.733 $828 $858
French Franc 5.934 5,899 6,241
Austrian Schilling 12.531 1,436 1,529
British Pound Sterling 1.672 961 978
Hong Kong Dollar 7.948 679 699
Swedish Krone 7.857 624 622
Norwegian Kroner 7.710 467 486
Belgian Franc 37.290 375 406
Canadian Dollar 1.498 174 172
Finnish Mark 5.461 (293) (314)
Dutch Guilder 1.997 (576) (610)
</TABLE>
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.
24
<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
1999, (the "1998 Proxy Statement") and is incorporated herein by reference. The
1998 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. 54 President
and Chief Executive Officer
Robert J. Quillinan 51 Executive Vice President
and Chief Financial Officer
John R. Ambroseo, Ph.D. 37 Executive Vice President,
President and General Manager,
Coherent Laser Group
Vittorio Fossati-Bellani, Ph.D. 51 Executive Vice President,
President and General Manager,
Coherent Semiconductor Group
Robert M. Gelber 53 Executive Vice President,
President and General Manager,
Coherent Auburn Group
Dennis C. Bucek 53 Senior Vice President,
Treasurer and Assistant Secretary
Scott H. Miller 44 Senior Vice President and General
Counsel
Larry W. Sonsini 57 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.
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
25
<PAGE>
Product Marketing Manager, U. S. Sales Manager, Director of European Operations
and most recently as Scientific Business Unit Manager.
Dr. Fossati-Bellani 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. 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 seven years, Mr. Sonsini has served as the Company's Secretary.
He is a member of Wilson, Sonsini, Goodrich & Rosati, P.C.
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 1998 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 1998 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 1998 Proxy Statement and is incorporated herein by reference.
26
<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 31
Consolidated Balance Sheets - September 26, 1998
and September 27, 1997 32
Consolidated Statements of Income - Years ended
September 26, 1998, September 27, 1997
and September 28, 1996 33
Consolidated Statements of Stockholders' Equity -
Years ended September 26, 1998, September 27, 1997,
and September 28, 1996 34
Consolidated Statements of Cash Flows - Years ended
September 26, 1998, September 27, 1997
and September 28, 1996 35
Notes to Consolidated Financial Statements 37
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts54
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
(i) The Company filed a report on Form 8-K on July 1, 1998 relating
to the adoption of the Company's restated shareholder rights
plan.
(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.)
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.)
27
<PAGE>
3.2* Bylaws, as amended. (Previously filed as Exhibit 3.2 to
Form 10-K for the fiscal year ended September 29, 1990.)
(c) EXHIBITS CONTINUED
Exhibit
Numbers
-------
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.)
10.18* 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.)
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.
* These exhibits were previously filed with the Commission as indicated and
are incorporated herein by reference.
28
<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 16, 1998.
COHERENT, INC.
By: /s/ BERNARD COUILLAUD
-------------------------------------
Bernard Couillaud
President and Chief Executive Officer
29
<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:
BERNARD J. COUILLAUD December 16, 1998
- - --------------------------------------------------- -----------------------
Bernard J. Couillaud Date
(Director, President & Chief Executive Officer)
ROBERT J. QUILLINAN December 16, 1998
- - --------------------------------------------------- -----------------------
Robert J. Quillinan Date
(Executive Vice President & Chief Financial Officer)
HENRY E. GAUTHIER December 16, 1998
- - --------------------------------------------------- -----------------------
Henry E. Gauthier Date
(Director, Chairman of the Board)
CHARLES W. CANTONI December 16, 1998
- - --------------------------------------------------- -----------------------
Charles W. Cantoni Date
(Director)
FRANK CARRUBBA December 16, 1998
- - --------------------------------------------------- -----------------------
Frank Carrubba Date
(Director)
THOMAS SLOAN NELSEN December 16, 1998
- - --------------------------------------------------- -----------------------
Thomas Sloan Nelsen Date
(Director)
JERRY E. ROBERTSON December 16, 1998
- - --------------------------------------------------- -----------------------
Jerry E. Robertson Date
(Director)
30
<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 26, 1998 and September 27, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 26, 1998 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 26, 1998
(December 7, 1998 as to Note 13)
31
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 26, September 27,
1998 1997
- - ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 15,944 $ 21,455
Short-term investments 16,954 10,182
Accounts receivable - net of allowances
of $4,817 in 1998 and $3,499 in 1997 86,822 95,844
Inventories 103,541 86,446
Prepaid expenses and other assets 22,895 18,971
Deferred tax assets 26,618 22,267
- - ----------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 272,774 255,165
- - ----------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 147,775 128,532
ACCUMULATED DEPRECIATION AND AMORTIZATION (64,918) (56,708)
- - ----------------------------------------------------------------------------------
Property and equipment - net 82,857 71,824
- - ----------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
$6,912 in 1998 and $7,199 in 1997 11,595 13,372
OTHER ASSETS 23,535 21,289
- - ----------------------------------------------------------------------------------
$390,761 $361,650
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 11,645 $ 19,235
Current portion of long-term obligations 788 3,629
Accounts payable 17,851 18,039
Income taxes payable 9,160 9,286
Other current liabilities 59,603 52,288
- - ----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 99,047 102,477
- - ----------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 12,828 9,665
OTHER LONG-TERM LIABILITIES 12,599 13,927
MINORITY INTEREST IN SUBSIDIARIES 3,664 4,348
STOCKHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized - 100,000 shares
Outstanding - 23,736 in 1998 and 22,926 in 1997 236 228
Additional paid-in capital 102,469 90,750
Notes receivable from stock sales (310) (98)
Accumulated other comprehensive income 1,331 267
Retained earnings 158,897 140,086
- - ----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 262,623 231,233
- - ----------------------------------------------------------------------------------
$390,761 $361,650
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
SEPT. 26, Sept. 27, Sept. 28,
1998 1997 1996
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $410,449 $391,038 $364,430
COST OF SALES 212,584 185,536 177,212
- - -----------------------------------------------------------------------------------------------
GROSS PROFIT 197,865 205,502 187,218
- - -----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development: 44,534 39,406 37,705
Purchased in-process technology 9,315
Selling, general and administrative 129,199 114,471 104,813
- - -----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 173,733 163,192 142,518
- - -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 24,132 42,310 44,700
- - -----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and dividend income 1,274 1,404 2,444
Interest expense (1,236) (1,226) (39)
Other - net (465) 4,306 2,212
- - -----------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET (427) 4,484 4,617
- - -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 23,705 46,794 49,317
PROVISION FOR INCOME TAXES 4,894 20,502 19,003
- - -----------------------------------------------------------------------------------------------
NET INCOME $ 18,811 $ 26,292 $30,314
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
Basic $ .80 $ 1.16 $ 1.37
Diluted $ .79 $ 1.12 $ 1.31
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
SHARES USED IN COMPUTATION:
Basic 23,374 22,664 22,128
Diluted 23,749 23,480 23,084
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 26, 1998, September 27, 1997, and September 28, 1996
(In thousands)
<TABLE>
<CAPTION>
Common Stock Accum.
------------ Add. Notes Rec. Other Total
Par Paid-in From Stock Retained Comp. Comp.
Shares Value Capital Sales Earnings Income Total Income
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 21,738 $216 $ 76,117 $(1,218) $ 83,480 $2,596 $161,191
Net income 30,314 30,314 $30,314
Other comprehensive income,
net of tax
Translation adjustment (837) (837) (837)
Change in unrealized gain investment (171) (171) (171)
------
Total comprehensive income $29,306
------
Sales of shares under Employee ------
Stock Option Plans 408 4 2,401 2,405
Productivity Incentive
Plan distributions 28 626 626
Sales of shares under Employee
Stock Purchase Plans 248 2 2,041 2,043
Tax benefit of Employee Stock
Option Plan 1,643 1,643
Collection of notes receivable 373 373
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1996 22,422 222 82,828 (845) 113,794 1,588 197,587
Net income 26,292 26,292 $26,292
Other comprehensive income,
net of tax-translation adjustment (1,321) (1,321) (1,321)
------
Total comprehensive income $24,971
------
Sales of shares under Employee ------
Stock Option Plan 310 4 2,358 2,362
Productivity Incentive Plan distributions 38 730 730
Sales of shares under Employee
Stock Purchase Plans 156 2 2,435 2,437
Tax benefit of Employee
Stock Option Plan 1,505 1,505
Acquisition of business 894 894
Collection of notes receivable 747 747
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1997 22,926 228 90,750 (98) 140,086 267 231,233
Net income 18,811 18,811 $18,811
Other comprehensive income,
net of tax-translation adjustment 1,064 1,064 1,064
------
Total comprehensive income $19,875
------
Sales of shares under Employee ------
Stock Option Plan 421 4 3,474 3,478
Productivity Incentive Plan
distributions 17 401 401
Sales of shares under Employee
Stock Purchase Plan 209 2 3,355 3,357
Tax benefit of Employee
Stock Option Plan 1,397 1,397
Issuance of shares pursuant to
1995 business acquisition 125 1 2,874 2,875
Issuance of shares 38 1 218 (212) 7
- - --------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 26, 1998 23,736 $236 $102,469 $ (310) $158,897 $1,331 $262,623
- - --------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
SEPT. 26, Sept. 27, Sept. 28,
1998 1997 1996
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
OPERATING ACTIVITIES:
Net income $ 18,811 $ 26,292 $ 30,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchased in-process technology 9,315
Purchases of short-term trading investments (139,943) (82,605) (103,644)
Proceeds from sales of short-term trading
investments 133,171 98,400 102,465
Depreciation and amortization 17,179 14,590 12,372
Issuance of common stock under
Productivity Incentive Plan 401 730 626
Deferred income taxes (4,229) 710 (8,725)
Minority interest in subsidiaries 909 1,610 956
Dividends paid to minority stockholders (1,421)
Equity in (income) loss of joint ventures (131) (287) (93)
Changes in assets and liabilities:
Accounts receivable 8,958 (12,830) (21,954)
Inventories (16,030) (19,803) (14,875)
Prepaid expenses and other assets (3,887) (7,571) (478)
Accounts payable (500) 5,952 985
Other current liabilities 5,064 (5,187) 19,298
- - -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,352 29,316 17,247
- - -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (22,351) (24,864) (24,930)
Dispositions of property and equipment, net 102 541 443
Sale of Porter Drive facility 9,631
Acquisition of businesses, net of cash
acquired (841) (15,351)
Acquisition of Japan distribution rights (5,048)
Other - net (3,126) (2,215) (4,792)
- - -----------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (26,216) (32,258) (34,327)
- - -----------------------------------------------------------------------------------------------
</TABLE>
(continued)
35
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
(In thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
SEPT. 26, Sept. 27, Sept. 28,
1998 1997 1996
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Long-term debt borrowings $ 4,301 $ 3,444 $ 2,547
Long-term debt repayments (1,347) (3,372) (4,723)
Short-term borrowings 24,018 40,107 7,093
Short-term repayments (30,843) (24,432) (9,558)
Cash overdrafts (7,957) 4,820
Repayments of capital lease obligations (24) (91)
Sales of shares under employee stock option
and purchase plans, net 6,842 4,799 4,448
Collection of notes receivable from stock sales 747 373
- - -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,971 13,312 4,909
- - -----------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND EQUIVALENTS (618) 1,871 959
- - -----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (5,511) 12,241 (11,212)
Cash and equivalents, beginning of year 21,455 9,214 20,426
- - -----------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR $15,944 $21,455 $ 9,214
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,236 $ 1,226 $ 915
Income taxes $10,282 $26,644 $16,682
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for 1995 acquisition
obligation $ 2,875
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
<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 years 1998, 1997, and 1996 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.
ADOPTION OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
was adopted by the Company in the first quarter of fiscal 1998. Upon adoption
of SFAS No. 128, the Company is presenting basic earnings per share and diluted
earnings per share. Basic earnings per share is computed based on the weighted
average number of shares outstanding during the period. Diluted earnings per
share is 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, and shares issuable under
the Productivity Incentive Plan.
The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Weighted average shares outstanding-Basic 23,374 22,664 22,128
Common stock equivalents 354 755 897
Employee stock purchase plan equivalents 21 61 59
-------- ------- -------
Weighted average shares and equivalents-Diluted 23,749 23,480 23,084
-------- ------- -------
-------- ------- -------
Net income for basic and diluted
earnings per share computation $18,811 $26,292 $30,314
-------- ------- -------
-------- ------- -------
</TABLE>
1,546,000 anti-dilutive weighted shares have been excluded from the
dilutive share equivalents calculation at September 26, 1998.
In June 1997, the Financial Accounting Standards Board adopted Statements
of Financial Accounting Standards (SFAS) No. 130 (Reporting Comprehensive
Income), which requires that an
37
<PAGE>
enterprise report, by major components and as a single total, the change in
its net assets during the period from non-owner sources. The Company adopted
the statement during the fourth quarter of fiscal 1998 and has presented its
comprehensive income in the Consolidated Statements of Stockholders' Equity.
Accumulated other comprehensive income at September 26, 1998 and September
27, 1997 is comprised of accumulated translation adjustments of $1,331,000
and $267,000, respectively.
RECENTLY ISSUE ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information". This statement requires
that financial information be reported on the basis used internally for
evaluating segment performance and deciding how to allocate resources to
segments. SFAS 131 will be effective for the Company's fiscal year 1999 and
requires restatement of all previously reported information for comparative
purposes. Management of the Company has not yet evaluated the effects of
this change on its reporting segments.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 will be effective for the Company's fiscal year 1999.
Management believes that this statement will not have a significant impact on
the Company's financial position or results of operations.
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 stockholders' 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:
<TABLE>
<CAPTION>
1998 1997
- - ---------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Purchased parts and assemblies $ 30,421 $25,756
Work-in-process 33,684 28,917
Finished goods 39,436 31,773
- - ---------------------------------------------------------------------------
Inventories $103,541 $86,446
- - ---------------------------------------------------------------------------
- - ---------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 Useful Life
- - -----------------------------------------------------------------------------
(In thousands)
38
<PAGE>
<S> <C> <C> <C>
Land $ 7,282 $ 7,404
Buildings and improvements 41,217 34,912 20-31 years
Equipment, furniture and fixtures 88,942 75,392 3-10 years
Leasehold improvements 10,334 10,824 Terms of lease
- - ------------------------------------------------------------------------------
Property and equipment $ 147,775 $ 128,532
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
</TABLE>
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, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable.
INTANGIBLE ASSETS
Intangible assets, recorded as other assets, include distribution
rights, licenses and patents and are amortized on a straight-line basis over
estimated useful lives of two to seventeen years. The Company evaluates its
long-lived assets, including intangible 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. At September 26, 1998, the majority of its short-term
investments are in U.S. Treasury obligations. 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
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. A valuation
allowance is established to reduce the deferred tax asset if it is "more
likely than not" that the related tax benefits will not be realized in the
future.
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
$29,464,000 at September 26, 1998. Withholding taxes of approximately
$1,077,000 would be payable upon repatriation of such earnings which would
result in additional foreign tax credits.
DERIVATIVES
39
<PAGE>
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.
STOCK SPLIT
The Board of Directors declared a 2-for-1 stock split of its common
stock effected in the form of a 100% stock dividend distributed on March 2,
1998 to holders of record as of February 17, 1998. The financial statements,
notes and other references to share and per-share data reflect the stock
split for all periods presented.
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 Board Opinion 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 stockholders' equity for any year presented.
2. ACQUISITIONS
During the three fiscal years ended September 26, 1998, 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 purchased 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 complete development of the
technology from these 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 arising from such acquisitions are amortized on a straight line
basis over periods ranging from three to ten years.
In December 1997, Coherent entered into a joint venture agreement with
Fiber Optic Network Solutions Corporation (FONS) and Fiber Optic Transmission
Systems Corporation to engage in the business of the design, development,
production and marketing of fiber optic transmission and distribution systems
in the field of CATV, telecommunications and high-speed data transmission. A
limited liability company was formed, CFX Communication Systems, LLC, to
which the Company paid $0.5 million to FONS' owners in exchange for 60%
ownership of CFX. The Company recorded $0.4 million of goodwill associated
with the purchase, which is being amortized over three years.
40
<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 an
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 and is being amortized over a
five year period.
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.
In March 1998, the Company issued 124,645 shares of Company stock
($2,875,000) as payment for the remaining obligation relating to the 1995
acquisition of Adlas GmbH and Co. KG, located in Lubeck, Germany.
3. BALANCE SHEET DETAILS
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Prepaid income taxes $10,275 $10,731
Prepaid expenses and other 12,620 8,240
- - --------------------------------------------------------------------------------
Prepaid expenses and other assets $22,895 $18,971
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Other assets consist of the following:
1998 1997
- - --------------------------------------------------------------------------------
(In thousands)
Assets held for investment $ 1,507 $ 1,411
Intangibles and other assets 22,028 19,878
- - --------------------------------------------------------------------------------
Other assets $ 23,535 $ 21,289
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
Assets held for investment at September 26, 1998 and September 27, 1997
include the Company's former manufacturing facility in Sturbridge, Massachusetts
which the Company is leasing to Convergent Energy.
41
<PAGE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accrued payroll and benefits $20,803 $18,814
Accrued expenses and other 14,495 14,648
Reserve for warranty 10,938 7,498
Deferred service income 10,517 9,193
Customer deposits 2,850 2,135
- - --------------------------------------------------------------------------------
Other current liabilities $59,603 $52,288
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred compensation $ 8,200 $ 6,434
Deferred income and other 3,082 2,583
Environmental remediation costs 1,269 1,336
Deferred tax liabilities 48 3,574
- - --------------------------------------------------------------------------------
Other long-term liabilities $12,599 $13,927
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
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.
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
$29.5 million and $30.0 million at September 26, 1998, respectively. The
carrying amount and fair value of foreign exchange contracts was $27.8
million at September 27, 1997. 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 26, 1998 and September 27, 1997, 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
360 days and are intended to reduce exposure to foreign currency exchange
risk. The aggregate fair value and unrealized gain (loss) of foreign
exchange contracts are as follows:
42
<PAGE>
<TABLE>
<CAPTION>
SEPT. 26, 1998 Sept. 27, 1997
UNREALIZED Unrealized
FAIR VALUE GAIN (LOSS) Fair Value Gain (Loss)
-------------------------- --------------------------
(In thousands)
<S> <C> <C> <C> <C>
Japanese Yen $10,317 $ 106 $ 12,314 $ 663
German Deutschemark 9,465 (184) 8,012 368
French Franc 6,241 (322) 3,384 55
Austrian Schilling 1,529 (51) 968 (7)
British Pound Sterling 978 23 1,207 4
Hong Kong Dollar 699 (15)
Swedish Krone 622 (6) 872
Norwegian Kroner 486 (20)
Belgian Franc 406 (30)
Canadian Dollar 172 2 470 2
Finnish Mark (314) 21
Dutch Guilder (610) 34 555 (17)
---------- --------- ------- -------
$29,991 $ (442) $27,782 $1,068
---------- --------- ------- -------
---------- --------- ------- -------
</TABLE>
5. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
1998 1997
- - -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Borrowings under bank lines $ 9,479 $18,226
Note payable to minority shareholder in subsidiary 2,166 1,009
- - -------------------------------------------------------------------------------------
Short-term borrowings $11,645 $19,235
- - -------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------
</TABLE>
The note payable to shareholder 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
$33,650,000 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 26, 1998 were at a weighted average interest rate of
3.1%. 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 26, 1998.
43
<PAGE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Currently payable:
Federal $ 5,126 $ 9,789 $18,179
State 65 1,666 2,452
Foreign 7,171 10,660 6,105
- - ----------------------------------------------------------------------------------------------------
12,362 22,115 26,736
- - ----------------------------------------------------------------------------------------------------
Deferred charge (credit):
Federal (7,069) 1,601 (5,077)
State (757) (35) (1,348)
Foreign 358 (3,179) (1,308)
- - ----------------------------------------------------------------------------------------------------
(7,468) (1,613) (7,733)
- - ----------------------------------------------------------------------------------------------------
Provision for income taxes $ 4,894 $20,502 $19,003
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
The components of income before income taxes consist of:
<TABLE>
<CAPTION>
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
United States $ 8,037 $31,244 $39,820
Foreign 15,668 15,550 9,497
- - ----------------------------------------------------------------------------------------------------
Income before income taxes $23,705 $46,794 $49,317
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of the statutory federal income tax rate to the
effective rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
INCOME Income Income
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
Benefit from favorable IRS ruling (10.3)
Non-deductible purchased in-process technology 6.3
Foreign tax rates in excess of U.S. rates 7.8 4.4 3.0
Foreign tax credit (8.6) (1.8) (1.3)
Foreign sales corporation benefit (1.0)
State income taxes, net of federal income tax benefit (1.9) 2.3 1.7
Research and Development credit, net of recapture (4.7) (2.9) (0.4)
Other 3.3 0.5 1.5
- - ----------------------------------------------------------------------------------------------------
Provision for income taxes 20.6% 43.8% 38.5%
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
The significant components of deferred tax assets and liabilities were:
<TABLE>
<CAPTION>
SEPTEMBER 26, September 27,
1998 1997
- - -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not currently deductible $18,402 $13,737
Operating loss carry forwards and tax credits 6,683 3,996
Intercompany profit 1,179 695
Deferred service revenue 2,462 2,351
State taxes 1,114 1,563
Depreciation and amortization 620
Other 2,456 1,539
- - -------------------------------------------------------------------------------------------
32,916 23,881
Valuation allowance (3,567) (2,567)
- - -------------------------------------------------------------------------------------------
29,349 21,314
Deferred tax liabilities:
Depreciation and amortization 990
Other 2,779 1,631
- - -------------------------------------------------------------------------------------------
2,779 2,621
- - -------------------------------------------------------------------------------------------
Total deferred tax assets and liabilities $26,570 $18,693
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
</TABLE>
The Company increased its valuation allowance in fiscal 1998 by
$1,000,000 to partially reserve for the current year benefit of foreign tax
credit carryforwards for which realization is not likely.
The total net deferred tax asset is classified on the balance sheet at
September 26, 1998 and September 27, 1997 as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- - -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Current deferred income tax assets $26,618 $22,267
Non-current deferred income tax liabilities (48) (3,574)
- - -------------------------------------------------------------------------------------------
Net deferred tax assets $26,570 $18,693
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
</TABLE>
Total net operating losses of $770,000 for tax return purposes expire as
follows: 2003 - $275,000 and $495,000 with no expiration. Total tax credits
of $3,546,000 for tax return purposes expire as follows: 1999 - $2,461,000,
2002 - $396,000 and 2003 - $689,000.
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:
<TABLE>
<CAPTION>
1998 1997
- - -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Notes payable $ 8,292 $5,102
Bonds payable 2,200 2,400
Capital leases 19
Deferred acquisition payment (Note 2) 3,105 5,792
- - -------------------------------------------------------------------------------------------
13,616 13,294
Current portion (788) (3,629)
- - -------------------------------------------------------------------------------------------
Long-term obligations $12,828 $9,665
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
NOTES PAYABLE - At September 26, 1998, notes payable consists of $2.3
million at 8.0% for the mortgage on the CEEL facility, $3.6 million at 1.0%
to 8.2% of outside financing for Tutcore and $2.4 million at 4.5% of outside
financing by Lambda GmbH. Notes payable are generally secured by the
related assets financed.
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 (4.1% at September 26, 1998) 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: 1999 - $769,000, 2000 - $3,195,000, 2001
- - - $1,476,000, 2002 - $2,571,000, 2003 - $1,275,000 and thereafter $4,311,000.
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 1998, 20,674 shares (fair market value of
$346,889) and $2,467,724 were accrued for the benefit of employees. For
fiscal 1997, 30,616 shares (fair market value of $686,029) and $4,247,005
were accrued for the benefit of employees. For fiscal 1996, 30,894 shares
(fair market value of $644,897) and $3,730,871 were accrued for the benefit
of employees. At September 26, 1998 the Company had 50,647 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 participation
and for Company matching contributions after completing one year of service.
The Company's contributions (net of forfeitures) for fiscal 1998, 1997, and
1996 were $3,322,000, $3,057,000 and $2,579,000, respectively.
SUPPLEMENTAL RETIREMENT PLAN
46
<PAGE>
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 Employee
Retirement and Investment Plan. The Company's contributions (net of
forfeitures) for fiscal 1998, 1997, and 1996 were $13,602, $17,834 and
$13,510, 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 1998, 208,270 shares were
purchased by and distributed to employees at an average price of $16.11 per
share. In fiscal 1997, 155,206 shares were purchased by and distributed to
employees at an average price of $15.69 per share. In fiscal 1996, 248,800
shares were purchased by and distributed to employees at an average price of
$8.21 per share.
At September 26, 1998, $2,749,000 had been contributed by employees that
will be used to purchase a maximum of 226,849 shares in fiscal 1999 at a
price determined under the terms of the Plan. At September 26, 1998, the
Company had 653,000 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 6,000,000 and 300,000 shares of common stock, respectively.
Employee options are generally exercisable three years from the grant date,
at the fair market value of the common stock on the date of the grant, 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 20,000 shares exercisable over a four-year period.
Additionally, the non-employee directors receive an annual grant of 5,000
shares exercisable four years from the date of grant. Grants under all plans
expire six years from the original grant date.
47
<PAGE>
Option activity for all plans is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------
Number of Weighted Average Exercise
Shares Price per Share
--------- -------------------------
<S> <C> <C>
OUTSTANDING, SEPTEMBER 30, 1995 (373,600 EXERCISABLE
AT A WEIGHTED AVERAGE PRICE OF $4.95) 1,848,800 $ 8.52
Options granted (weighted avg. fair value of $8.51) 824,100 20.05
Options exercised (410,100) 6.14
Options canceled (82,200) 11.36
---------- -------
OUTSTANDING, SEPTEMBER 28, 1996 (462,200 EXERCISABLE
AT A WEIGHTED AVERAGE PRICE OF $6.51) 2,180,600 13.17
Options granted (weighted avg. fair value of $9.00) 898,100 20.56
Options exercised (315,200) 7.64
Options canceled (143,700) 17.24
---------- -------
OUTSTANDING, SEPTEMBER 27, 1997 (634,900 EXERCISABLE
AT A WEIGHTED AVERAGE PRICE OF $8.58) 2,619,800 16.17
Options granted (weighted average fair value of $5.25) 983,900 11.71
Options exercised (473,800) 8.68
Options canceled (247,600) 18.56
---------- -------
OUTSTANDING, SEPTEMBER 26, 1998 (757,500 EXERCISABLE
AT A WEIGHTED AVERAGE PRICE OF $14.00) 2,882,300 $15.67
---------- -------
---------- -------
</TABLE>
At September 26, 1998, 841,100 options were available for future grant
under all plans. The following table summarizes information about fixed stock
options outstanding at September 26, 1998:
<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>
$ 6.00 - 7.00 234,900 1.27 $ 6.64 234,900 $ 6.64
7.13 - 8.94 750,650 5.90 8.93 3,000 7.44
9.00 - 18.13 368,600 2.79 14.10 291,200 14.11
18.50 - 19.25 56,100 4.78 18.87 5,600 18.96
19.56 - 19.56 376,850 3.49 19.56 68,200 19.56
19.63 - 19.63 560,350 4.59 19.63 52,350 19.63
19.94 - 23.50 368,400 4.61 22.16 42,050 22.30
23.56 - 27.75 166,450 4.35 24.76 60,200 25.10
- - ---------------- ----------- ------------ -------------- ----------- --------------
$ 6.00 - 27.75 2,882,300 4.28 $15.67 757,500 $14.00
- - ---------------- ----------- ------------ -------------- ----------- --------------
- - ---------------- ----------- ------------ -------------- ----------- --------------
</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.
48
<PAGE>
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life in years 3.87 - 3.98 3.85 - 4.07 3.85 - 4.07
Expected volatility 50.2% 46.7% 46.7%
Risk-free interest rate 5.5% 6.2% 5.2%
Expected dividends NONE none none
</TABLE>
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 1998, 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $18,811 $26,292 $30,314
Proforma $15,283 $23,765 $29,032
Net income per diluted share As reported $ 0.79 $ 1.12 $ 1.31
Proforma $ 0.64 $ 1.01 $ 1.26
</TABLE>
The impact of outstanding non-vested stock options granted prior to fiscal 1996
has been excluded from the proforma calculation; accordingly, the fiscal 1998,
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
5.7% to 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.
10. OTHER INCOME (EXPENSE)
Other income (expense) is as follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
SEPT. 26, Sept. 27, Sept. 28,
1998 1997 1996
- - ------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Gain on sale of facility $3,526
Minority interest in subsidiaries $ (908) (1,324) $ (813)
Royalty income 683 951 479
Foreign exchange gain (loss) (711) (350) 299
Equity in income of joint ventures 131 287 93
Gain (loss) on investments, net 45 (41) 1,646
Other - net 295 1,257 508
- - ------------------------------------------------------------------------------
Other income (expense) net $ (465) $ 4,306 $2,212
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
49
<PAGE>
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.
During the first quarter of fiscal 1997, the Company signed a lease for
216,000 square feet of office, research and development and manufacturing space
for its Medical Group headquarters in Santa Clara, California. The lease
expires in December 2001. The Company has an option to purchase the property
for $24.0 million, or at the end of the lease arrange for the sale of the
property to a third party with the Company retaining an obligation to the owner
for the difference between the sale price, if less than $24.0 million, and $24.0
million, subject to certain provisions of the lease. If the Company does not
purchase the property or arrange for its sale as discussed above, the Company
would be obligated for an additional lease payment of approximately $21.5
million (included in future minimum lease payments below). The Company occupied
the building in July 1998 and commenced lease payments at that time. The lease
requires the Company to maintain specified financial covenants, all of which the
Company was in compliance with as of September 26, 1998.
Future minimum payments under the Company's leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Ending Leases Leases
- - ---------------------------------------------------------------------
(In thousands)
<S> <C> <C>
1999 $19 $ 5,197
2000 4,367
2001 3,224
2002 23,214
2003 1,073
Thereafter 5,405
- - ---------------------------------------------------------------------
Total $19 $42,480
-------
-------
Amount representing interest 1
---
Present value of minimum lease
payments $18
---
---
</TABLE>
Rent expense was $7,593,000 in fiscal 1998, $7,462,000 in fiscal 1997, and
$5,305,000 in fiscal 1996.
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 $893,000 in fiscal 1998, $1,131,000 in fiscal 1997, and
$1,324,000 in fiscal 1996. 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
Company's former Porter Drive corporate headquarters 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 State
of California. The responding parties have installed four remedial systems and
have reached agreement with responding parties on final cost sharing.
50
<PAGE>
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 26, 1998 for remaining costs associated with the above
environmental matters is $1.1 million which has been previously accrued.
This amount consists of total estimated probable costs of $1.5 million ($0.2
million included in other current liabilities and $1.3 million included in
other long-term liabilities) reduced by minimum probable recoveries of $0.4
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.
Information concerning the Company's operations by industry segment and
geographic area is as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
INDUSTRY SEGMENT DATA 1998 1997 1996
(In thousands)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES, INCLUDING
INTERSEGMENT SALES:
Electro-Optical products $ 274,127 $240,031 $223,683
Medical products 156,257 169,952 162,844
Intersegment sales (19,935) (18,945) (22,097)
- - --------------------------------------------------------------------------------------------------------------
NET SALES $ 410,449 $391,038 $364,430
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Electro-Optical products $ 26,551 $ 23,270 $ 33,582
Medical products (4,266) 17,907 13,181
Corporate expenses 1,847 1,133 (2,063)
- - --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS $ 24,132 $ 42,310 $ 44,700
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
Electro-Optical products $ 227,561 $200,657 $152,653
Medical products 99,788 99,889 90,170
Eliminations (7,254) (4,712) (3,120)
- - --------------------------------------------------------------------------------------------------------------
Total identifiable assets 320,095 295,834 239,703
Corporate assets 70,666 65,816 71,813
- - --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 390,761 $361,650 $311,516
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
Electro-Optical products $ 12,103 $ 9,610 $ 8,707
Medical products 4,698 4,194 3,205
Corporate 378 786 460
- - --------------------------------------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 17,179 $ 14,590 $ 12,372
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Electro-Optical products $ 17,813 $ 22,217 $ 14,587
Medical products 4,295 2,400 4,801
Corporate 243 247 5,542
- - --------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 22,351 $ 24,864 $ 24,930
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
GEOGRAPHIC REGION INFORMATION 1998 1997 1996
(In thousands)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
BY GEOGRAPHIC REGION:
United States $ 302,077 $309,108 $280,285
Europe 70,089 60,770 75,147
Asia-Pacific 38,283 21,160 8,998
- - --------------------------------------------------------------------------------------------------------------
NET SALES $ 410,449 $391,038 $364,430
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
SALES TO AFFILIATES (ELIMINATED IN
CONSOLIDATION) BY GEOGRAPHIC REGION:
United States $ 22,340 $ 3,468 $ 9,167
Europe 38,239 35,652 22,309
Asia-Pacific 8,864 10,720 5,710
- - --------------------------------------------------------------------------------------------------------------
NET SALES $ 69,443 $ 49,840 $ 37,186
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
United States $ 5,347 $ 25,750 $ 34,577
Europe 18,633 18,302 11,331
Asia-Pacific 3,307 (19) 172
Corporate expenses (1,027) (314) (817)
Transfers between geographic areas (2,128) (1,409) (563)
- - --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS $ 24,132 $ 42,310 $ 44,700
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
United States $ 223,854 $215,128 $182,926
Europe 81,432 68,962 51,727
Asia-Pacific 22,063 16,456 8,170
Eliminations (7,254) (4,712) (3,120)
- - --------------------------------------------------------------------------------------------------------------
Total identifiable assets 320,095 295,834 239,703
Corporate assets 70,666 65,816 71,813
- - --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 390,761 $361,650 $311,516
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
EXPORT SALES:
Asia-Pacific $ 47,500 $ 64,523 $ 54,938
Europe 53,364 41,124 40,153
Rest of world 16,339 15,103 12,887
- - --------------------------------------------------------------------------------------------------------------
TOTAL EXPORT SALES $ 117,203 $120,750 $107,978
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
NET SALES TO GEOGRAPHIC REGION:
United States $ 185,004 $177,803 $172,307
Europe 110,673 99,371 100,581
Asia-Pacific 97,738 97,022 81,551
Rest of world 17,034 16,842 9,991
- - --------------------------------------------------------------------------------------------------------------
NET SALES $ 410,449 $391,038 $364,430
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
NET ASSETS OF FOREIGN SUBSIDIARIES:
Total assets $ 125,895 $107,679 $ 68,531
Total liabilities (68,383) (65,305) (47,917)
- - --------------------------------------------------------------------------------------------------------------
NET ASSETS $ 57,512 $ 42,374 $ 20,614
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
13. SUBSEQUENT EVENT
On December 7, 1998, the Company signed a definitive agreement with Palomar
Medical Technologies, Inc. (Palomar) to acquire Palomar's majority owned
subsidiary, Star Medical Technologies, Inc., for $65 million in cash. The
consummation of the sale, which is subject to the approval of Palomar's
stockholders, other standard closing conditions and certain regulatory
approvals, is expected to occur in February 1999. The Company is in the process
of securing a private bond placement to finance the acquisition. In the
interim, the Company's bank has agreed to provide a bridge loan in the event
that other financing is not obtained by the closing of the deal.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share amounts)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 26, 1998:
Net sales $101,369 $105,881 $ 98,552 $104,647
Gross profit 52,450 52,696 44,691 48,028
Net income (loss) 7,510 6,838 (1,727) 6,190
Net income (loss) per diluted share .32 .29 (.07) .26
Net income (loss) per basic share .33 .29 (.07) .26
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
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 (loss) per diluted share (.02) .38 .48 .28
Net income (loss) per basic share (.02) .39 .50 .29
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 26, 1998, SEPTEMBER 27, 1997,
AND SEPTEMBER 28, 1996
(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 26, 1998:
Accounts receivable allowances $3,499 $ 6,945 $ (5,627) $ 4,817
Warranty 7,498 10,681 (7,241) 10,938
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
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
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reductions from the reserves are for the purpose for which the reserves
were created.
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- - ------------ ------- --------
<S> <C> <C>
21.1 Subsidiaries 55
23.1 Independent Auditors' Consent 56
24.1 Power of Attorney 28
27 Financial Data Schedules 57
</TABLE>
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.
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- - -----------------------------------------------------------------------------
<S> <C>
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 Lubeck 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. (1) Finland
CFX Communications, LLC. (3) United States
</TABLE>
(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.
(3) The Company owns 60% 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.
333-03035, 33-66536, 33-35609, 33-31442, 33-21878 and 2-96838 of Coherent, Inc.
on Forms S-8 of our report dated October 26, 1998 (December 7, 1998 as to Note
13) appearing in this Annual Report on Form 10-K of Coherent, Inc. for the year
ended September 26, 1998.
DELOITTE & TOUCHE LLP
San Jose, California
December 15, 1998
56
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 15,944
<SECURITIES> 16,954
<RECEIVABLES> 91,639
<ALLOWANCES> 4,817
<INVENTORY> 103,541
<CURRENT-ASSETS> 272,774
<PP&E> 147,775
<DEPRECIATION> 64,918
<TOTAL-ASSETS> 390,761
<CURRENT-LIABILITIES> 99,047
<BONDS> 12,828
0
0
<COMMON> 236
<OTHER-SE> 262,387
<TOTAL-LIABILITY-AND-EQUITY> 390,761
<SALES> 410,449
<TOTAL-REVENUES> 410,449
<CGS> 212,584
<TOTAL-COSTS> 212,584
<OTHER-EXPENSES> 173,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,236
<INCOME-PRETAX> 23,705
<INCOME-TAX> 4,894
<INCOME-CONTINUING> 18,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,811
<EPS-PRIMARY> .80
<EPS-DILUTED> .79
</TABLE>
