<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________
Commission File Number: 0-5255
COHERENT, INC.
(Exact name of registrant as specified in its charter)
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)
(408) 764-4000
(Registrant's telephone number, including area code)
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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUES:
The number of shares outstanding of registrant's common stock, par value $.01
per share, at August 3, 2000 was 27,011,067 shares.
<PAGE>
COHERENT, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item I. Consolidated Financial Statements
Condensed Consolidated Statements of Income --
Three months and nine months ended July 1, 2000 and July 3, 1999 3
Condensed Consolidated Balance Sheets --
July 1, 2000 and October 2, 1999 4
Condensed Consolidated Statements of Cash Flows --
Three months and nine months ended July 1, 2000 and July 3, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION 26
Item I. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
----------------------- --------------------
JULY 1, July 3, JULY 1, July 3,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $149,436 $115,051 $413,311 $337,219
COST OF SALES 75,227 60,306 208,296 177,266
-------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 74,209 54,745 205,015 159,953
-------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 15,494 11,917 42,2563 3,611
In-process research and development 16,000 16,000
Selling, general and administrative 41,978 32,553 117,460 99,601
Intangibles amortization 2,163 1,413 6,564 3,625
-------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 59,635 61,883 166,280 152,837
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 14,574 (7,138) 38,735 7,116
OTHER INCOME (EXPENSE):
Interest and dividend income 1,075 651 3,673 2,057
Interest expense (1,621) (1,428) (4,815) (2,296)
Foreign exchange gain (loss) 154 (60) (201) (63)
Other - net 590 94 224 (734)
-------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE), NET 198 (743) (1,119) (1,036)
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 14,772 (7,881) 37,616 6,080
PROVISION (BENEFIT) FOR INCOME TAXES 4,875 (2,817) 12,643 1,498
-------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 9,897 $ (5,064) $ 24,973 $ 4,582
===================================================================================================================
NET INCOME (LOSS) PER SHARE:
BASIC $ .39 $ (.21) $ 1.00 $ .19
DILUTED $ .36 $ (.21) .93 $ .19
===================================================================================================================
SHARES USED IN COMPUTATION:
BASIC 25,314 24,018 24,908 23,914
DILUTED 27,500 24,018 26,896 24,451
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT PAR VALUE PER SHARE)
<TABLE>
<CAPTION>
JULY 1, October 2,
2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 30,538 $ 38,279
Short-term investments 44,611 30,637
Accounts receivable - net of allowances of
$6,035 in 2000 and $4,592 in 1999 109,392 95,003
Inventories 122,468 97,902
Prepaid expenses and other assets 29,215 18,738
Deferred tax assets 38,686 37,014
----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 374,910 317,573
----------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT 180,244 165,630
ACCUMULATED DEPRECIATION AND AMORTIZATION (84,465) (75,676)
----------------------------------------------------------------------------------------------------------------
Property and equipment - net 95,779 89,954
----------------------------------------------------------------------------------------------------------------
GOODWILL - net of accumulated amortization of
$13,218 in 2000 and $9,372 in 1999 38,722 39,490
OTHER ASSETS 53,725 48,451
----------------------------------------------------------------------------------------------------------------
$563,136 $495,468
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 13,177 $ 14,371
Current portion of long-term obligations 7,747 8,599
Accounts payable 27,911 18,343
Income taxes payable 11,778 8,221
Other current liabilities 85,955 73,120
----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 146,568 122,654
----------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 69,474 74,745
OTHER LONG-TERM LIABILITIES 21,034 16,819
MINORITY INTEREST IN SUBSIDIARIES 5,548 3,945
STOCKHOLDERS' EQUITY:
Common stock, par value $.01
Authorized - 50,000 shares
Outstanding 25,476 in 2000 and 24,062 in 1999 253 240
Additional paid-in capital 128,548 106,748
Notes receivable from stock sales (1,392) (557)
Accumulated other comprehensive income (loss) (2,608) 136
Retained earnings 195,711 170,738
----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 320,512 277,305
----------------------------------------------------------------------------------------------------------------
$563,136 $495,468
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
-----------------------------------------
JULY 1, July 3,
2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,973 $ 4,582
Adjustments to reconcile net income to net cash
provided by operating activities:
Write-off of in-process research and development 16,000
Purchases of short-term investments (157,797) (85,857)
Proceeds from sales of short-term investments 143,776 76,700
Changes in assets and liabilities (27,981) (3,964)
Depreciation and amortization 12,584 10,375
Intangibles amortization 6,564 3,625
Other adjustments 3,115 1,229
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,234 22,690
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (19,862) (15,524)
Acquisition of businesses, net of cash acquired (4,422) (64,012)
Other - net (4,591) 1,154
----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (28,875) (78,382)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 2,862 71,679
Long-term debt repayments (8,326) (1,009)
Short-term borrowings 25,182 15,399
Short-term repayments (25,241) (12,553)
Cash overdrafts 2,935 1,634
Sales of shares under employee stock plans 15,995 2,348
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,407 77,498
----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND EQUIVALENTS 2,493 36
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (7,741) 21,842
Cash and equivalents, beginning of period 38,279 15,944
----------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 30,538 $37,786
======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles,
consistent with those reflected in our annual report to stockholders
for the year ended October 2, 1999. All adjustments necessary for a
fair presentation have been made which comprise only normal recurring
adjustments; however, interim results of operations are not necessarily
indicative of results to be expected for the year.
Certain prior period amounts have been reclassified to conform with the
current period presentation. Such reclassification had no impact on net
income or retained earnings for any period presented.
2. In December 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles (GAAP)
to revenue recognition in financial statements. We are required to
adopt SAB 101 in the fourth quarter of 2001. Although we believe our
revenue recognition policies are in accordance with GAAP, we are
currently studying SAB 101 and have not determined its impact, if any,
on our financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (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 value of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. In May 1999, SFAS 133 was amended to defer its
effective date. SFAS 133 will be effective for our first quarterly
filing of fiscal 2001. Management believes that this statement will not
have a significant impact, if any, on our financial position or results
of operations.
3. In December 1999, we acquired the remaining 75% interest of Microlase
Optical Systems, Ltd (Microlase), in Glasgow, Scotland, for
approximately $3.2 million cash. We now own the entire share capital of
Microlase. Microlase is the manufacturer of a range of advanced
solid-state lasers that are used in a number of developing applications
including scientific research and semiconductor test equipment. The
acquisition was accounted for as a purchase and, accordingly, we have
recorded the approximately $2.2 million excess of the purchase price
over the fair value of net assets acquired as goodwill and other
intangible assets, which will be amortized over 5 years.
In May 2000, we acquired the net assets of Lasertec BV, in Barendrecht,
Netherlands, for approximately $1.3 million cash. Lasertec provides us
with a subsystem strategy to process materials for customers using a
variety of laser technologies. The acquisition was accounted for as a
purchase, and accordingly, we have recorded the approximately $1.3
million excess of the purchase price over the fair value of assets
acquired as goodwill, which will be amortized over 3 years.
6
<PAGE>
4. The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $9,897 $(5,064) $24,973 $4,582
Translation adjustment (832) (1,400) (2,789) (3,293)
Changes in unrealized gain on investment 45 45
------- -------- ------- -------
Total comprehensive income $9,110 $(6,464) $22,229 $1,289
======= ======== ======= ======
</TABLE>
Accumulated other comprehensive income at July 1, 2000 is comprised of
accumulated translation adjustments of ($2,653,000) and unrealized gain
investments of ($45,000), respectively. Accumulated other comprehensive
income at October 2, 1999 is comprised of accumulated translation
adjustments of $136,000.
5. 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>
Three Months Ended Nine Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average shares outstanding - Basic 25,314 24,018 24,908 23,914
Common stock equivalents 2,007 1,804 321
Employee stock purchase plan equivalents 179 184 216
------- ------- -------- -------
Weighted average shares and equivalents - Diluted 27,500 24,018 26,896 24,451
======= ======= ======== =======
Net income for basic and diluted
earnings per share computation $ 9,897 $ (5,064) $24,973 $ 4,582
======= ========= ======== =======
</TABLE>
53,000 and 1,570,000 anti-dilutive weighted shares have been excluded
from the dilutive share equivalents calculation for the three months
ended July 1, 2000 and July 3, 1999, respectively. 556,000 and
1,896,000 anti-dilutive weighted shares have been excluded from the
dilutive share equivalents calculation for the nine months ended July
1, 2000 and July 3, 1999, respectively.
6. Balance Sheet Detail:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows:
<TABLE>
<CAPTION>
July 1, October 2,
2000 1999
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Purchased parts and assemblies $ 41,285 $26,200
Work-in-process 41,547 33,098
Finished goods 39,636 38,604
--------------------------------------------------------------------------------------------------------
Net inventories $122,468 $97,902
========================================================================================================
</TABLE>
7
<PAGE>
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
July 1, October 2,
2000 1999
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes $13,968 $ 4,943
Prepaid expenses and other 15,247 13,795
--------------------------------------------------------------------------------------------------------
Prepaid expenses and other assets $29,215 $18,738
========================================================================================================
</TABLE>
Other assets consist of the following:
<TABLE>
<CAPTION>
July 1, October 2,
2000 1999
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Other assets $31,771 $22,470
Intangible assets 20,757 24,729
Assets held for investment 1,197 1,252
--------------------------------------------------------------------------------------------------------
Other assets $53,725 $48,451
========================================================================================================
</TABLE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
July 1, October 2,
2000 1999
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits $29,620 $25,132
Accrued expenses and other 23,333 22,567
Reserve for warranty 16,239 13,269
Deferred income 11,702 9,695
Customer deposits 5,061 2,457
--------------------------------------------------------------------------------------------------------
Other current liabilities $85,955 $73,120
========================================================================================================
</TABLE>
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
July 1, October 2,
2000 1999
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred compensation $16,111 $11,233
Deferred income and other 3,147 3,435
Environmental remediation costs 1,169 1,169
Deferred tax liabilities 607 982
--------------------------------------------------------------------------------------------------------
Other long-term liabilities $21,034 $16,819
========================================================================================================
</TABLE>
7. Certain claims and lawsuits have been filed or are pending against
Coherent. 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
our consolidated financial position or results of operations.
Coherent, 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 our former headquarters facility is located. The
responding parties to the Regional Order (including Coherent) have
completed Remedial Investigation and Feasibility
8
<PAGE>
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.
Coherent 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 us for this site. We have been
operating remedial systems at the site to remove subsurface chemicals
since April 1992. During fiscal 1997, we settled with the prior tenant
and neighboring companies, on allocation of the cost of investigating
and remediating the site at 3210 Porter Drive, Palo Alto, and the
bordering site at 3300 Hillview Avenue, Palo Alto.
Management believes that its probable, nondiscounted net liability at
July 1, 2000 for remaining costs associated with the above
environmental matters is $1.0 million which has been previously
accrued. This amount consists of total estimated probable costs of $1.3
million ($0.1 million included in other current liabilities and $1.2
million included in other long-term liabilities) reduced by estimated
minimum probable recoveries of $0.3 million included in other assets
from other parties named to the order.
8. Operating Segments:
In fiscal 1999, we adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for
reporting information about operating segments and related disclosures
about products, geographic information and major customers. Our
corporate expenses, except for depreciation of corporate assets and
general legal expenses, are allocated to the operating segments and are
included in corporate and other in the reconciliation of operating
results. Furthermore, interest expense, interest income and the
provision for income taxes are included in corporate and other in the
reconciliation of operating results. Information on reportable segments
is as follows:
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
------------------------- ---------------------
(IN THOUSANDS)
JULY 1, July 3, JULY 1, July 3,
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales:
Electro-Optics $ 70,782 $ 58,674 $195,625 $171,538
Medical 55,554 40,483 152,933 116,435
Lambda Physik 23,100 15,894 64,753 49,246
---------- ---------- ---------- ---------
Total Net Sales $149,436 $ 115,051 $413,311 $337,219
========== ========== ========== =========
Intersegment Net Sales:
Electro-Optics $ 7,780 $ 5,717 $ 20,893 $ 15,615
Medical 627 244 1,457 639
Lambda Physik 190 141 781 653
---------- ---------- ---------- ---------
Total Intersegment Sales $ 8,597 $ 6,102 $ 23,131 $ 16,907
========== ========== ========== =========
Pretax Income (Loss):
Electro-Optics $ 11,255 $ 4,494 $ 26,493 $ 16,860
Medical 3,479 (12,384) 7,274 (12,448)
Lambda Physik 136 912 4,722 2,488
Corporate and other (98) (903) (873) (820)
----------- ---------- ----------- ---------
Total Pretax Income (Loss) $ 14,772 $ (7,881) $ 37,616 $ 6,080
========== ========== =========== =========
</TABLE>
9. Subsequent Event:
9
<PAGE>
On July 26, 2000, we completed a public offering of 1,500,000 shares of
common stock at an offering price of $65.00 per share. The net proceeds
to Coherent, after deducting underwriting discounts and offering
expenses was approximately $91,800,000. These net proceeds will be used
for acquisitions of or investments in businesses, technologies and
products, continued development of new technologies and general
corporate purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The statements in this document that relate to future plans, events or
performance are forward-looking statements that involve risks and uncertainties,
including risks associated with uncertainties related to currency translations,
contract cancellations, manufacturing risks, competitive factors, uncertainties
pertaining to customer orders, demand for products and services, development of
markets for our products and services and other risks identified in our SEC
filings. 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. We undertake 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. For a discussion of these risks
and uncertainties, see the section of this Form 10-Q entitled "Risk Factors". We
also refer you to our annual report on Form 10-K for the fiscal year ended
October 2, 1999 under the heading "Risk Factors" in Part I, Item 1. Business.
We are one of the world's leading suppliers of photonics-based solutions for a
broad range of commercial, medical and scientific applications. We design,
manufacture and market lasers, laser-based systems, precision optics and related
accessories for a diverse group of customers. Since inception in 1966, we have
grown through a combination of internal expansion and strategic acquisitions of
companies with related technologies and products. While our products address a
broad range of applications, we are now increasingly concentrating our efforts
on three rapidly growing segments of the photonics market: semiconductor and
related manufacturing, optical telecommunications and medical applications.
Within these three market segments, we are focusing on the following five key
initiatives:
- deep ultra-violet, or DUV, lithography;
- semiconductor processing and microelectronics packaging;
- optical telecommunications;
- hair removal; and
- age-related macular degeneration, or AMD, an emerging ophthalmic
market.
We are also focusing on the development and production of high power,
semiconductor-based lasers for a variety of applications.
We have three reportable business segments: Electro-Optics, Medical and Lambda
Physik, which work with customers to provide cost-effective photonics-based
solutions. In addition to the semiconductor and related manufacturing and
optical telecommunications markets, the Electro-Optics segment focuses on
markets such as materials processing, scientific research, printing and
reprographics and advanced packaging. Our Medical segment focuses on the
aesthetic, ophthalmic and surgical markets, with an emphasis in the aesthetic
market on hair removal and in the ophthalmic market on the treatment of retinal
diseases, including age-related macular degeneration, or AMD. Lambda Physik
focuses on lithography, with other target markets
10
<PAGE>
including lasers for the production of flat panel displays, ink jet printers
and fiber bragg gratings, refractive surgery, scientific research, materials
processing and micro-machining applications.
As lasers become less expensive, smaller and more reliable, they are
increasingly replacing conventional tools and enabling technological advances in
a variety of applications and industries. Our three reportable business
segments, Electro-Optics, Medical and Lambda Physik, provide products that
address a broad range of applications, including the following:
- SEMICONDUCTOR AND RELATED MANUFACTURING - Lasers are increasingly being
used for multiple steps in the semiconductor manufacturing process. We
currently provide excimer lasers for DUV lithography, a process used to
print a master image of a circuit layer onto a semiconductor wafer, and
for the flat panel display industry. We manufacture ion lasers for
direct imaging of photomasks and printed circuit boards, and
diode-pumped solid-state, or DPSS, lasers to detect defects in
photomasks, semiconductor chips and printed circuit boards. In the
semiconductor, inspection, measurement, test and repair sector, our
DPSS lasers and carbon dioxide, or CO2, lasers are used for advanced
packaging and interconnects.
- OPTICAL TELECOMMUNICATIONS - We manufacture lasers and optical
components that enable increased bandwidth by allowing multiple
wavelengths of light to travel across the same fiber. We are developing
a new type of laser, an Optically Pumped Semiconductor laser, that
generates sufficient power to eliminate the need for multiple pump
lasers in fiber optic networks. Before this laser can be commercially
deployed, we must develop packaging for the product and the product
must meet Telcordia requirements. We also serve the fiber bragg grating
market with our ion and excimer lasers, and provide a new etalon for
optical telecommunications applications, which enhances the frequency
stability of laser transmitters when integrated into dense wavelength
division multiplexing, or DWDM, network components.
- MEDICAL - We pioneered the development of lasers used in medical
applications 30 years ago and remain a leader and innovator in the
aesthetic, ophthalmic and surgical markets. For example, our laser
systems are used for the treatment of secondary cataracts, retinal
diseases and the wet "classical" form of AMD, which is a leading cause
of blindness in the elderly. We also produce a compete line of
innovative laser products for aesthetic procedures, including the first
semiconductor laser system that received clearance from the FDA to
claim permanence in hair reduction. We also provide excimer lasers for
refractive surgery.
- PRINTING AND REPROGRAPHICS - Working with professionals in the printing
industry, we design semiconductor and DPSS lasers used in complex
computer-to-plate printing systems that simplify the process of
engraving printing plates. We also provide excimer lasers for the
production of ink jet printers (drilling of ink jet nozzles to provide
higher resolution, better quality printers).
- MATERIALS PROCESSING - Our semiconductor and CO2 lasers are used for
cutting, marking, welding and other applications where high accuracy,
high speed and low processing costs are important.
- SCIENTIFIC AND INSTRUMENTATION - Historically, we have maintained close
relationships with the scientific market, which has provided an ideal
test market for leading-edge laser technology. For example, our ion
lasers are sold to instrument manufacturers for applications such as
cell sorting and DNA and protein sequencing. Excimer lasers are used in
biotechnology, environmental, spectroscopy, physical chemistry and
photochemistry.
We operate in a technologically advanced, dynamic and highly competitive
environment. Our future operating results are, and will continue to be, subject
to quarterly variations based on a variety of factors, many of which are beyond
our control. While we attempt to identify and respond to these conditions in a
timely manner, such conditions represent significant risks to our performance.
We conduct a significant portion of our business internationally. International
sales accounted for 58% of our net sales for fiscal 1999 and were 57% and 58% of
net sales for the current quarter and nine months ended
11
<PAGE>
July 1, 2000, respectively. We anticipate that international sales will
continue to account for a significant portion of our net sales in the
foreseeable future. A portion of our international sales occurs through our
international sales subsidiaries and the remainder of our international sales
results from exports to foreign distributors and resellers. As a result, our
international sales and operations are subject to the risks of conducting
business internationally. We are also subject to the risks of fluctuating
foreign exchange rates, which could materially adversely affect the sales
price of our products in foreign markets as well as the costs and expenses of
our international subsidiaries. While we use forward exchange contracts,
currency swap contracts, currency options and other risk management
techniques to hedge our currency exposure, we remain exposed to the economic
risks of foreign currency fluctuations. There can be no assurance that such
factors will not adversely impact our operations in the future or require us
to modify current business practices.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
Net income for the current quarter and nine months ended July 1, 2000 was $9.9
million ($0.36 per diluted share) and $25.0 million ($0.93 per diluted share).
Net income for the nine months ended July 3, 1999 was $4.6 million ($0.19 per
diluted share), which includes the fiscal 1999 third quarter $10.7 million
($0.45 per diluted share) after tax write-off of purchased in-process research
and development resulting from the acquisition of Star Medical Technologies,
Inc. of Pleasanton, California. Proforma net income (exclusive of this
write-off) for the third quarter and nine months ended July 3, 1999 was $5.7
million ($0.24 per diluted share) and $15.3 million ($0.63 per diluted share),
respectively. Proforma net income increased $4.2 million and $9.7 million for
the current quarter and year-to-date, respectively, compared to the prior year
corresponding periods. The increases in proforma net income were primarily
attributable to increases in sales volumes and higher gross profit as a
percentage of sales.
NET SALES
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ----------------------
(IN THOUSANDS)
JULY 1, July 3, JULY 1, July 3,
2000 1999 2000 1999
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
NET SALES
CONSOLIDATED
Domestic $ 64,953 $ 52,518 $172,173 $143,890
International 84,483 62,533 241,138 193,329
---------- ---------- ---------- ---------
Total $149,436 $115,051 $413,311 $337,219
======== ======== ======== ========
ELECTRO-OPTICAL:
Domestic $ 30,538 $ 25,435 $ 82,536 $ 70,207
International 40,244 33,239 113,089 101,331
---------- ---------- ---------- ---------
Total $ 70,782 $ 58,674 $195,625 $171,538
========== ========= ======== ========
MEDICAL:
Domestic $ 31,525 $ 21,859 $ 76,334 $ 59,010
International 24,029 18,624 76,599 57,425
---------- ---------- ---------- ---------
Total $ 55,554 $ 40,483 $152,933 $116,435
========= ========= ======== ==========
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LAMBDA PHYSIK:
Domestic $ 2,890 $ 5,224 $ 13,303 $ 14,673
International 20,210 10,670 51,450 34,573
---------- ---------- ---------- ---------
Total $ 23,100 $ 15,894 $ 64,753 $ 49,246
========= ========= ========== =========
</TABLE>
CONSOLIDATED
Net sales for the current fiscal quarter and nine months ended July 1, 2000
increased $34.4 million (30%) and $76.1 million (23%), respectively, from the
same periods a year ago. During the current quarter, international sales
increased $22.0 million (35%) to 57% of net sales and domestic sales increased
$12.4 million (24%). Year to date, international sales increased $47.8 million
(25%) to 58% of net sales and domestic sales increased $28.3 million (20%).
ELECTRO-OPTICS
Electro-Optics net sales increased $12.1 million (21%) and $24.1 million (14%)
for the third quarter and nine months ended July 1, 2000, respectively, compared
to the corresponding prior year periods. International sales increased $7.0
million (21%) while domestic sales increased $5.1 million (20%) during the
current quarter. Year to date, domestic sales increased $12.3 million (18%)
while international sales increased $11.8 million (12%). The increases were
primarily due to higher sales volumes in commercial solid-state products,
including semiconductor lasers to the computer-to-plate, disk mastering,
non-metal printed circuit board, or PCB, hole drilling and optical
telecommunications markets. Optical telecommunications market sales for the
current quarter and nine months ended July 1, 2000 increased 427% and 86% to
$3.4 million and $5.9 million, respectively, from the corresponding prior year
periods.
MEDICAL
Medical net sales increased $15.1 million (37%) and $36.5 million (31%) for the
third quarter and nine months ended July 1, 2000, respectively, compared to the
corresponding prior year periods. Domestic sales increased $9.7 million (44%)
while international sales increased $5.4 million (29%) during the current
quarter. Year to date, international sales increased $19.2 million (33%) while
domestic sales increased $17.3 million (29%). The increases were primarily due
to strong sales growth in Ophthalmic products, including the Opal-TM-
Photoactivator-TM- which received FDA clearance on April 13, 2000, and due to
the acquisition of Star Medical in May 1999, where we now recognize the full
sales value of the LightSheer-TM- family of hair removal systems instead of only
the commission revenue recognition through May 1999.
LAMBDA PHYSIK
Lambda Physik net sales increased $7.2 million (45%) and $15.5 million (31%) for
the third quarter and nine months ended July 1, 2000, respectively, compared to
the corresponding prior year periods. International sales increased $9.5 million
(89%) while domestic sales decreased $2.3 million (45%) during the current
quarter. Year to date, international sales increased $16.9 million (49%) while
domestic sales decreased $1.4 million (9%). The increases were primarily due to
increased shipments of commercial products, primarily lasers used in lithography
systems.
GROSS MARGIN
CONSOLIDATED
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<PAGE>
The gross margin rate increased to 49.7% from 47.6% for the current quarter
compared to the same quarter one year ago and increased to 49.6% from 47.4% for
the nine months ended July 1, 2000 compared to the same period one year ago.
Margins improved in the Electro-Optics and Medical segments. The margin
improvement was primarily due to higher sales volumes in the Electro-Optics
segment and higher sales and increased sales of higher margin Opal and hair
removal systems in the Medical segment.
ELECTRO-OPTICS
The gross margin rate increased to 52.6% from 48.9% for the current quarter
compared to the same quarter one year ago and increased to 50.8% from 47.5% for
the nine months ended July 1, 2000 compared to the same period one year ago. The
improvement was primarily due to increased sales of higher margin commercial
solid-state products and higher sales volumes relative to fixed overhead costs.
MEDICAL
The gross margin rate increased to 50.3% from 47.7% for the current quarter
compared to the same quarter one year ago and increased to 50.4% from 48.7% for
the nine months ended July 1, 2000 compared to the same period one year ago. The
improvement was primarily due to higher sales and a better mix of product sales,
primarily our Opal Photoactivator to treat the wet "classical" form of
age-related macular degeneration and our hair removal systems.
LAMBDA PHYSIK
The gross margin rate decreased to 39.0% from 42.5% for the current quarter
compared to the same quarter one year ago and decreased slightly to 44.2% from
44.3% for the nine months ended July 1, 2000 compared to the same period one
year ago. The current quarter deterioration is primarily due to increased
warranty provisions for lithography systems and higher inventory provisions for
obsolescence.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
------------------------- ---------------------
JULY 1, July 3, JULY 1, July 3,
2000 1999 2000 1999
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Research & development $15,494 $11,917 $ 42,256 $ 33,611
In-process research and development 16,000 16,000
Selling, general & administrative 41,978 32,553 117,460 99,601
Intangibles amortization 2,163 1,413 6,564 3,625
------------------------------------------------------------------------------------------------------------------
Total operating expenses $59,635 $61,883 $166,280 $152,837
==================================================================================================================
</TABLE>
Total operating expenses for the current quarter decreased $2.2 million
(4%) and as a percentage of net sales decreased from 54% to 40%, compared to the
same period a year ago. Total year-to-date operating expenses increased $13.4
million (9%), but as a percentage of net sales decreased from 45% to 40%,
compared to the same period a year ago. Exclusive of the fiscal 1999 third
quarter write-off of purchased in-process research and development, current
quarter operating expenses increased $13.8 million (30%), but remained at 40% of
net sales. Exclusive of the fiscal 1999 third quarter write-off of purchased
in-process research and development, current year-to-date operating expenses
increased $29.4 million (22%), but as a percentage of net sales decreased to 40%
from 41%.
Research and development (R&D) expenses increased $3.6 million (30%)
during the third quarter compared to the same period last year, but as a
percentage of net sales remained at 10%. Year to date,
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<PAGE>
R&D expenses increased $8.6 million (26%), but as a percentage of net sales
remained at 10%. The increases were primarily due to increased spending on
lithography, optical telecommunications and other projects, the acquisition
of Star Medical in May 1999, and an increased number of employees.
Selling, general and administrative (SG&A) expenses increased $9.4
million (29%) for the current quarter, but as a percentage of net sales remained
at 28% compared to the same period last year. Year to date, such expenses
increased $17.9 million (18%), but decreased as a percentage of net sales from
30% to 28% compared the same period last year. The dollar increases were
primarily due to higher commissions as a result of higher sales, higher
marketing expenses for new and pending product introductions, increased
investments in information technology, higher headcount-related expenses and the
write-off of permanently impaired intangible assets of $1.5 million related to
the catalog and optics business unit of the Electro-Optics segment.
Intangibles amortization expenses increased $0.7 million (53%) and $2.9
million (81%) for the current quarter and nine months ended July 1, 2000,
respectively. The increases are primarily due to the acquisition of Star
Medical.
OTHER INCOME (EXPENSE)
Other income, net increased $0.9 million to net income of $0.2 million
from net expense of $0.7 million during the current quarter and decreased $0.1
million to net expense of $1.1 million from net expense of $1.0 million for the
nine months ended July 1, 2000 compared to the corresponding prior year periods.
The current quarter increase was primarily due to increased interest income on
increased investments, increased net foreign exchange gains and the
non-recurrence of other miscellaneous expenses, partially offset by increased
interest expense on the Star acquisition debt. The year-to-date decrease was
primarily due to increased interest expense on the Star acquisition debt and
increased minority interest expense, partially offset by increased interest
income on increased investments, the receipt of an insurance settlement at one
of our manufacturing facilities and the non-recurrence of other miscellaneous
expenses.
INCOME TAXES
Our effective tax rate for the current quarter was 33%. Our proforma
effective tax rate (excluding the $10.7 million write-off of purchased
in-process research and development) for the third quarter of fiscal 1999 was
30%. Our effective tax rate for the nine months ended July 1, 2000 was 34%
compared to a year-to-date fiscal 1999 proforma tax rate of 31%. Our effective
tax rate increased as a result of higher profit before income taxes in fiscal
2000 with relatively flat tax credits compared to fiscal 1999.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At July 1, 2000 our primary sources of liquidity were cash, cash
equivalents and short-term investments of $75.1 million. Additional sources of
liquidity were our multi-currency line of credit and bank credit facilities
totaling $72.2 million as of July 1, 2000, of which $61.2 million was unused and
available.
During the first quarter of fiscal 1997, we signed a lease for 216,000
square feet of office, research and development and manufacturing space for our
Medical segment headquarters in Santa Clara, California. The lease expires in
December 2001. We have 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
while retaining an obligation to the owner for the difference between the sale
price, if less than $20.8 million, and $20.8 million, subject to certain
provisions of the lease. If we do not purchase the property or arrange for its
sale
15
<PAGE>
as discussed above, we would be obligated for an additional lease payment of
approximately $20.8 million. We occupied the building in July 1998 and
commenced lease payments at that time. The lease requires that we maintain
specified financial covenants. At July 1, 2000, we were in compliance with
these convenants.
We have committed approximately $13 million to build an additional
building at our Electro-Optics facility in Auburn, California to enable us to
expand our manufacturing capacity for optical telecommunications products.
Additionally, we have committed approximately $9 million to provide coating
equipment at this facility. We have also committed approximately $10 million to
expand our Lambda Physik manufacturing facility in Gottingen, Germany to expand
our manufacturing capacity for DUV lithography systems.
CHANGES IN FINANCIAL CONDITION
Cash, cash equivalents and short-term investments increased $6.2
million (9%) in the first nine months of fiscal 2000.
Cash and cash equivalents, at July 1, 2000, decreased $7.7 million
(20%) from October 2, 1999. Operations and changes in exchange rates provided
$7.7 million, including $14.0 million, net, used to purchase short-term
investments. Investing activities used $28.9 million, including $19.9 million
used to acquire property and equipment, net, $4.4 million used to acquire
businesses and other, net used $4.6 million. Financing activities provided $13.4
million with $16.0 million from the sale of shares under employee stock plans,
partially offset by net debt repayments of $2.6 million.
Net accounts receivable increased $14.4 million (15%) from October 2,
1999 to July 1, 2000 primarily due to increases in the Medical segment sales.
Net inventories increased $24.6 million (25%) from October 2, 1999 to
July 1, 2000 primarily due to increases in the Lambda Physik segment to support
the lithography business and increases in the Electro-Optics and Medical
segments to support increased sales.
Accounts payable increased $9.6 million (52%) from October 2, 1999 to
July 1, 2000 due to increased inventory levels and other purchases to support
increased sales volumes.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE MAY EXPERIENCE QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR NET SALES AND
OPERATING RESULTS IN THE FUTURE, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK
PRICE.
Our net sales and operating results may vary significantly from quarter to
quarter and from year to year in the future. A number of factors, many of which
are outside of our control, may cause these variations, including:
- fluctuations in demand for, and sales of, our products or prolonged
downturns in the industries that we serve;
- ability of our suppliers to produce and deliver components and parts,
including sole or limited source components, in a timely manner, in the
quantity and quality desired and at the prices we have budgeted;
- timing or cancellation of customer orders and shipment scheduling;
- fluctuations in our product mix;
16
<PAGE>
- foreign currency fluctuations;
- introductions of new products and product enhancements by our
competitors, entry of new competitors into our markets, pricing
pressures and other competitive factors;
- our ability to develop, introduce, manufacture and ship new and
enhanced products in a timely manner without defects;
- rate of market acceptance of our new products;
- delays or reductions in customer purchases of our products in
anticipation of the introduction of new and enhanced products by us or
our competitors;
- our ability to control expenses;
- timing of regulatory approvals and changes in domestic and regulatory
environments;
- level of capital spending of our customers;
- economic conditions, especially in the Asia-Pacific market;
- potential obsolescence of our inventory; and
- costs related to acquisitions of technology or businesses.
In addition, we often recognize a substantial portion of our sales in
the last month of the quarter. Our expenses for any given quarter are typically
based on expected sales and if sales are below expectations in any given
quarter, the adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust spending quickly to compensate for the
shortfall. We also base our manufacturing on our forecasted product mix for the
quarter. If the actual product mix varies significantly from our forecast, we
may not be able to fill some orders during that quarter, which would result in
delays in the shipment of our products. Accordingly, variations in timing of
sales, particularly for our higher priced, higher margin products, can cause
significant fluctuations in quarterly operating results. As a result of all
these factors, our operating results in one or more future periods may fail to
meet the expectations of market analysts or investors. In that event, the
trading price of our common stock would likely decline.
For example, in the third quarter of fiscal 1998 we experienced a
problem with our VersaPulse family of products for aesthetic applications
because it did not meet customer expectations. As a result, we saw a significant
increase in returns and allowances and decrease in sales, which caused a
substantial decline in our quarterly results. This situation persisted into the
first half of fiscal 1999, by which time we had improved both the reliability
and functionality of these products.
Due to these and other factors, we believe that quarter-to-quarter and
year-to-year comparisons of our past operating results may not be meaningful.
You should not rely on our results for any quarter or year as an indication of
our future performance. Our operating results in future quarters and years may
be below public market analysts' or investors' expectations, which would likely
cause the price of our common stock to fall.
WE DEPEND ON SOLE SOURCE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY
COMPONENTS AND MATERIALS, INCLUDING EXOTIC MATERIALS AND CRYSTALS, IN OUR
PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS
THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We currently purchase several key components and materials used in the
manufacture of our products from sole source or limited source suppliers. Some
of these suppliers are relatively small private companies that may discontinue
their operations at any time. We typically purchase our components and
17
<PAGE>
materials through purchase orders and we have no guaranteed supply
arrangement with any of these suppliers. We may fail to obtain these supplies
in a timely manner in the future. We may experience difficulty identifying
alternative sources of supply for certain components used in our products.
Once identified, we would experience further delays from evaluating and
testing the products of these potential alternative suppliers. Furthermore,
financial or other difficulties faced by these suppliers or significant
changes in demand for these components or materials could limit their
availability. Any interruption or delay in the supply of any of these
components or materials, or the inability to obtain these components and
materials from alternate sources at acceptable prices and within a reasonable
amount of time, would impair our ability to meet scheduled product deliveries
to our customers and could cause customers to cancel orders.
We rely exclusively on our own production capability to manufacture
certain strategic components, optics and optical systems, semiconductor lasers,
lasers and laser-based systems. Because we manufacture, package and test these
components, products and systems at our own facilities, and such components,
products and systems are not readily available from other sources, any
interruption in manufacturing would adversely affect our business. In addition,
our failure to achieve adequate manufacturing yields at our manufacturing
facilities may materially and adversely affect our operating results and
financial condition.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO INCREASE OUR SALES VOLUMES AND
DECREASE OUR COSTS TO OFFSET ANTICIPATED DECLINES IN THE AVERAGE SELLING PRICES
OF OUR PRODUCTS AND, IF WE ARE UNABLE TO REALIZE GREATER SALES VOLUMES AND LOWER
COSTS, OUR OPERATING RESULTS MAY SUFFER.
Our future success depends on the continued growth of the markets for
lasers, laser systems, precision optics and related accessories, as well as our
ability to identify in advance emerging markets for laser-based systems and
other photonic solutions. We cannot assure you that we will be able to
successfully identify new high-growth markets in the future. Moreover, we cannot
assure you that new markets will develop for our products or our customers'
products, or that our technology or pricing will enable such markets to develop.
Future demand for our products is uncertain and will depend to a great degree on
the continued technological development and the introduction of new or enhanced
products. If this does not continue, sales of our products may decline and our
business will be harmed.
We have historically been the industry's high quality, high priced
supplier of laser systems. We have in the past experienced decreases in the
average selling prices of some of our products. We anticipate that as competing
products become more widely available, the average selling price of our products
may decrease. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our net sales will decline. In
addition, to maintain our gross margins, we must continue to reduce the cost of
our products. Further, as average selling prices of our current products
decline, we must develop and introduce new products and product enhancements
with higher margins. If we cannot maintain our gross margins, our operating
results could be seriously harmed, particularly if the average selling prices of
our products decrease significantly.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.
Our current products address a broad range of commercial, medical and
scientific applications in the photonics markets. We cannot assure you that the
market for these applications will continue to generate significant or
consistent demand for our products. Demand for our products could be
significantly diminished by new technologies or products that replace them or
render them obsolete.
Over the last three fiscal years, our research and development expenses
have been in the range of 10% to 11% of net sales. Our future success depends on
our ability to anticipate our customers' needs and develop products that address
those needs. Introduction of new products and product enhancements will require
that we effectively transfer production processes from research and development
to manufacturing and coordinate our efforts with those of our suppliers to
achieve volume production rapidly. If we fail to effectively transfer production
processes, develop product enhancements or introduce new products in sufficient
quantities to meet the needs of our customers as scheduled, our net sales may be
reduced and our business may be harmed.
18
<PAGE>
WE HAVE VERY LITTLE EXPERIENCE IN PROVIDING OPTICAL COMPONENTS TO THE OPTICAL
TELECOMMUNICATIONS MARKET SEGMENT; WE DO NOT CURRENTLY HAVE THE ABILITY TO
PACKAGE ACTIVE COMPONENTS; AND, EVEN IF SUCCESSFUL IN DEVELOPING THIS PACKAGING,
WE STILL MAY NOT MEET THE STRINGENT TELCORDIA SPECIFICATIONS, ANY OF WHICH COULD
LIMIT OUR ABILITY TO SUCCEED IN THIS MARKET.
We have only recently begun to develop products for the optical
telecommunications market. Sales to that market accounted for only $6.0 million,
or 1.5%, of net sales during the first nine months of fiscal 2000. Our lack of
prior experience in this market could put us at a competitive disadvantage. In
addition, we have not yet developed qualified packaging for our active
components. Even as we develop this packaging, we still may not meet the
stringent Telcordia specifications. Telcordia specifications are worldwide
industry telecommunications standards established by an industry consortium.
Most potential telecommunications customers demand that we meet these
specifications. We do not anticipate that we will have a Telcordia-qualified
product before early 2002. Our failure to develop qualified packaging or to meet
the Telcordia specifications would seriously harm our future sales of our active
optical telecommunications products.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the fiscal years ended September 26, 1998 and October 2, 1999 and
the nine months ended July 1, 2000, 55%, 58% and 58%, respectively, of our net
sales were derived from international sales. We anticipate that international
sales will continue to account for a significant portion of our revenues in the
foreseeable future. A portion of our international sales occurs through our
international sales subsidiaries and the remainder of our international sales
result from exports to foreign distributors and resellers. Our international
operations and sales are subject to a number of risks, including:
- longer accounts receivable collection periods;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- certification requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences;
- political and economic instability; and
- preference for locally produced products.
We are also subject to the risks of fluctuating foreign exchange rates,
which could materially adversely affect the sales price of our products in
foreign markets as well as the costs and expenses of our international sales
subsidiaries. While we use forward exchange contracts, currency swap contracts,
currency options and other risk management techniques to hedge our foreign
currency exposure, we remain exposed to the economic risks of foreign currency
fluctuations. For additional discussion about our foreign currency risks, see
"Item 3 - Quantitative and Qualitative Disclosures About Market Risk."
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH COULD ADVERSELY
AFFECT OUR COMPETITIVE ADVANTAGE.
We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We currently hold approximately 325 patents and have approximately 240
pending patent applications that have been filed. We cannot assure you that our
patent
19
<PAGE>
applications will be approved, that any patents that may issue will protect
our intellectual property or that any issued patents will not be challenged
by third parties. Other parties may independently develop similar or
competing technology or design around any patents that may be issued to us.
We cannot be certain that the steps we have taken will prevent the
misappropriation of our intellectual property, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as
in the United States.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
The laser industry is characterized by a very large number of patents,
many of which are of questionable validity and some of which appear to overlap
with other issued patents. As a result, there is a significant amount of
uncertainty in the industry regarding patent protection and infringement. In
recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. In the future, we may
be a party to litigation to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property. These claims and any
resulting lawsuit, if successful, could subject us to significant liability for
damages or invalidation of our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
- stop manufacturing, selling or using our products that use the
infringed intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; or
- redesign the products that use the technology.
If we are forced to take any of these actions, our business may be
seriously harmed. We do not have insurance to cover potential claims of this
type.
We may in the future initiate claims or litigation against third
parties for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and the
diversion of our technical and management personnel.
WE DEPEND ON SKILLED PERSONNEL TO OPERATE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING OR HIRE ADDITIONAL
PERSONNEL, OUR ABILITY TO DEVELOP AND SELL OUR PRODUCTS COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel. None of our officers or key employees in the United States is bound
by an employment agreement for any specific term and these personnel may
terminate their employment at any time. In addition, we do not have "key person"
life insurance policies covering any of our employees.
We intend to hire a significant number of additional employees during
the next 12 months. Our ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining whether we will be successful
in the future. Competition for highly skilled personnel is intense, especially
in the Silicon Valley, where two of our major operating facilities are located.
We may not be successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs. This is particularly
challenging for a mature public company such as Coherent, as many employees are
seeking jobs with pre-public and newly public companies. Our failure to attract
additional employees and retain our existing employees could adversely affect
our growth and our business.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE US TO INCUR SIGNIFICANT
EXPENSES WITHOUT OFFSETTING REVENUES.
20
<PAGE>
Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products before making a decision to
purchase them, resulting in a lengthy initial sales cycle. While our customers
are evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to the customer's needs. We may also expend significant
management efforts, increase manufacturing capacity and order long lead-time
components or materials prior to receiving an order. Even after this evaluation
process, a potential customer may not purchase our products. As a result, these
long sales cycles may cause us to incur significant expenses without ever
receiving revenue to offset those expenses.
THE MARKETS IN WHICH WE SELL OUR PRODUCTS ARE INTENSELY COMPETITIVE AND
INCREASED COMPETITION COULD CAUSE REDUCED SALES LEVELS, REDUCED GROSS MARGINS OR
THE LOSS OF MARKET SHARE.
Competition in the various laser markets in which we provide products
is very intense. In the semiconductor and related manufacturing market, we
compete against a number of companies, including SDL, Inc., Spectra-Physics
Lasers, Inc., Cymer, Inc. and Komatsu Ltd. In the optical telecommunications
market, we compete, or expect to compete, against SDL, Inc., JDS Uniphase
Corporation and Spectra-Physics Lasers, Inc., among others. Our medical products
compete against products offered by ESC Medical Systems Ltd., Candela
Corporation and The Carl Zeiss Group, among others. Some of our competitors are
large companies that have significant financial, technical, marketing and other
resources. These competitors may be able to devote greater resources than we can
to the development, promotion, sale and support of their products. Several of
our competitors that have large market capitalizations or cash reserves are much
better positioned than we are to acquire other companies in order to gain new
technologies or products that may displace our product lines. Any of these
acquisitions could give our competitors a strategic advantage. Any business
combinations or mergers among our competitors, forming larger competitors with
greater resources, could result in increased competition, price reductions,
reduced margins or loss of market share, any of which could materially and
adversely affect our business, results of operations and financial condition.
Additional competitors may enter the market and we are likely to
compete with new companies in the future. We expect to encounter potential
customers that, due to existing relationships with our competitors, are
committed to the products offered by these competitors. As a result of the
foregoing factors, we expect that competitive pressures may result in price
reductions, reduced margins and loss of market share. Our medical products are
subject to US and international medical regulations and controls, which impose
substantial financial costs on us and which can prevent or delay the
introduction of new products. Our ability to sell our medical products is
subject to various federal, state and international rules and regulations
governing the medical products industry. In the United States, we are subject to
inspection and market surveillance by the Food and Drug Administration, or FDA,
to determine compliance with regulatory requirements. The FDA regulates the
clinical testing, manufacturing, labeling, sale, distribution and promotion of
medical devices. The regulatory process is costly, lengthy and uncertain. Unless
an exemption applies, each medical device that we wish to market in the United
States must receive either 510(k) clearance or pre-marketing approval in advance
from the FDA. The FDA's 510(k) clearance process usually takes from four to 12
months, but it can take longer. For products subject to pre-market approval, the
regulatory process generally takes from one to three years or more and involves
substantially greater risks and commitment of resources than the 510(k)
clearance process. We may not be able to obtain necessary regulatory approvals
or clearances on a timely basis, if at all, for any of our products under
development and delays in receipt of or failure to receive such approvals or
clearances could have an adverse effect on our business.
Following clearance or approval, marketed products are subject to
continuing regulation. We are required to adhere to the FDA's Quality System
Regulation, or QSR, and similar regulations in other countries, which include
design, testing, quality control and documentation requirements. Ongoing
compliance with QSR, labeling and other applicable regulatory requirements is
monitored through periodic inspections and market surveillance by the FDA and by
comparable agencies in other countries.
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Our failure to comply with applicable requirements could lead to an
enforcement action, which could have an adverse effect on our financial
condition and results of operations. The FDA can institute a wide variety of
enforcement actions, ranging from a public warning letter to more severe
sanctions such as:
- fines, injunctions and civil penalties;
- recall or seizure of our products;
- the issuance of public notices or warnings;
- operating restrictions, partial suspension or total shutdown of
production;
- refusal of our request for 510(k) clearance pre-market approval of new
products;
- withdrawal of 510(k) clearance or pre-market approvals already granted;
and
- criminal prosecution.
The FDA also has the authority to require repair, replacement or refund
of the cost of any medical device manufactured or distributed by us.
Our medical products are subject to additional similar regulations in
most of the international markets in which we sell our products. Changes to
existing US and international rules and regulations could adversely affect our
ability to sell our current line of medical products in the United States and
internationally, could increase our costs and could materially adversely impact
our results of operations.
SOME OF OUR LASER SYSTEMS ARE COMPLEX IN DESIGN AND MAY CONTAIN DEFECTS THAT ARE
NOT DETECTED UNTIL DEPLOYED BY OUR CUSTOMERS, WHICH COULD INCREASE OUR COSTS AND
REDUCE OUR REVENUES.
Laser systems are inherently complex in design and require ongoing
regular maintenance. The manufacture of our lasers, laser products and systems
involves a highly complex and precise process. As a result of the technical
complexity of our products, changes in our or our suppliers' manufacturing
processes or the inadvertent use of defective or contaminated materials by us or
our suppliers could result in a material adverse effect on our ability to
achieve acceptable manufacturing yields and product reliability. To the extent
that we do not achieve such yields or product reliability, our business,
operating results, financial condition and customer relationships would be
adversely affected.
Our customers may discover defects in our products after the products
have been fully deployed and operated under peak stress conditions. In addition,
some of our products are combined with products from other vendors, which may
contain defects. As a result, should problems occur, it may be difficult to
identify the source of the problem. If we are unable to fix defects or other
problems, we could experience, among other things:
- loss of customers;
- increased costs of product returns and warranty expenses;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
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<PAGE>
The occurrence of any one or more of the foregoing factors could
seriously harm our business, financial condition and results of operations.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
PRODUCTS, WE COULD INCUR ADDITIONAL COSTS AND INCUR SIGNIFICANT DELAYS IN
SHIPMENTS, WHICH COULD RESULT IN LOSS OF CUSTOMERS.
We use rolling forecasts based on anticipated product orders and a
material requirements planning system to determine our product requirements. It
is very important that we accurately predict both the demand for our products
and the lead times required to obtain the necessary components and materials. We
depend on our suppliers for most of our product components and materials. Lead
times for components and materials that we order vary significantly and depend
on factors including the specific supplier requirements, the size of the order,
contract terms and current market demand for components. For substantial
increases in our sales levels, some of our suppliers may need at least six
months lead time. If we overestimate our component and material requirements, we
may have excess inventory, which would increase our costs. If we underestimate
our component and material requirements, we may have inadequate inventory, which
could interrupt and delay delivery of our products to our customers. Any of
these occurrences would negatively impact our net sales, business and operating
results.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE DISRUPTED,
WHICH COULD HARM OUR OPERATING RESULTS.
Our ability to successfully offer our products and implement our
business plan in evolving markets requires an effective planning and management
process. We continue to expand the scope of our operations domestically and
internationally. The growth in employee headcount and in sales, combined with
the challenges of managing geographically-dispersed operations, has placed, and
our anticipated growth in future operations will continue to place, a
significant strain on our management systems and resources, particularly our
information technology systems. We expect that we will need to continue to
improve our information technology systems, financial and managerial controls,
reporting systems and procedures and continue to expand, train and manage our
work force worldwide. The failure to effectively manage our growth could disrupt
our business and harm our operating results.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
We have in the past made strategic acquisitions of other corporations,
and we continue to evaluate potential strategic acquisitions of complementary
companies, products or technologies. In the event of any future acquisitions, we
could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- pay cash;
- incur debt;
- assume liabilities; or
- incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These purchases also involve numerous risks, including:
- problems combining the acquired operations, technologies or products;
- unanticipated costs or liabilities;
- diversion of management's attention from our core businesses;
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<PAGE>
- adverse effects on existing business relationships with suppliers and
customers; and
- potential loss of key employees, particularly those of the purchased
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.
RISKS RELATED TO OUR INDUSTRY
OUR MARKET IS UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND
EVOLVING STANDARDS, AND, IF WE FAIL TO ADDRESS CHANGING MARKET CONDITIONS, OUR
BUSINESS AND OPERATING RESULTS WILL BE HARMED.
The photonics industry is characterized by extensive research and
development, rapid technological change, frequent new product introductions,
changes in customer requirements and evolving industry standards. Because this
market is subject to rapid change, it is difficult to predict its potential size
or future growth rate. Our success in generating revenues in this market will
depend on, among other things:
- maintaining and enhancing our relationships with our customers;
- the education of potential end-user customers about the benefits of
lasers, laser systems and precision optics; and
- our ability to accurately predict and develop our products to meet
industry standards.
We incurred expenditures for research and development of $42.3 million,
or 10%, of net sales, during the first nine months of fiscal 2000. For our
fiscal years ended October 2, 1999, September 26, 1998 and September 27, 1997,
our research and development costs were $46.8 million, or 10%, of net sales,
$44.5 million, or 11%, of sales, and $39.4 million, or 10%, of net sales,
respectively. We cannot assure you that our expenditures for research and
development will result in the introduction of new products or, if such products
are introduced, that those products will achieve sufficient market acceptance.
Our failure to address rapid technological changes in our markets could
adversely affect our business and results of operations.
A DOWNTURN IN THE SEMICONDUCTOR MANUFACTURING INDUSTRY COULD ADVERSELY AFFECT
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our net sales depend in part on the demand for our products by
semiconductor equipment companies. The semiconductor industry is highly cyclical
and has historically experienced periodic and significant downturns, which have
often severely affected the demand for semiconductor manufacturing equipment,
including laser-based tools and systems. If a downturn should occur in the
semiconductor industry in the future, we believe this would result in decreased
demand for semiconductor manufacturing equipment and consequently a decreased
demand for our products. Although such a downturn would reduce our sales, we
would not be able to reduce expenses commensurately, due in part to the need for
continual development in research and development and the need to maintain
extensive ongoing customer service and support capability. Accordingly, any
downturn in the semiconductor industry could have a material adverse effect on
our financial condition and results of operations.
SOME OF OUR MEDICAL SEGMENT CUSTOMERS' WILLINGNESS TO PURCHASE OUR PRODUCTS
DEPENDS ON THEIR ABILITY TO OBTAIN REIMBURSEMENT FOR MEDICAL PROCEDURES USING
OUR PRODUCTS FROM THIRD-PARTY PAYORS AND OUR REVENUES COULD SUFFER FROM CHANGES
IN THIRD-PARTY COVERAGE AND REIMBURSEMENT POLICIES.
Our medical segment customers include doctors, clinics, hospitals and
other health care providers whose willingness and ability to purchase our
products depends in part upon their ability to obtain reimbursement for medical
procedures using our products from third-party payors, including private
insurance companies, health maintenance organizations, or HMOs, and federal,
state and local government
24
<PAGE>
programs, including Medicare and Medicaid. Many therapeutic, ophthalmic and
surgical procedures performed using our products currently qualify for
reimbursement. However, third-party payors are increasingly scrutinizing
health care costs submitted for reimbursement and changing coverage levels
for reimbursement of medical procedures and equipment. Payors may deny
coverage and reimbursement for the medical procedures made possible by our
products. Failure by doctors, clinics, hospitals and other health care
providers to obtain adequate reimbursement from third-party payors for
medical procedures that use our products or changes in third-party coverage
and reimbursement policies could have a material adverse effect on our sales,
results of operations and financial condition.
A NEW ACCOUNTING PRONOUNCEMENT MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
In December 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," or SAB 101. SAB 101 summarizes certain of the SEC's views
in applying generally accepted accounting principles, or GAAP, to revenue
recognition in financial statements. We are required to adopt SAB 101 in the
fourth quarter of fiscal 2001. Although we believe that our revenue recognition
policies are in accordance with GAAP, we are currently studying SAB 101 and have
not determined its impact, if any, on our financial statements.
WE USE STANDARD LABORATORY AND MANUFACTURING MATERIALS THAT COULD BE CONSIDERED
HAZARDOUS; AND WE COULD BE LIABLE FOR ANY DAMAGE OR LIABILITY RESULTING FROM
ACCIDENTAL ENVIRONMENTAL CONTAMINATION OR INJURY.
Although most of our products do not incorporate any hazardous or toxic
materials or chemicals, some of the gases used in our excimer lasers and some of
the liquid dyes used in some of our scientific laser products are highly toxic.
In addition, our operations involve the use of standard laboratory and
manufacturing materials that could be considered hazardous. Although we believe
that our safety procedures for handling and disposing of such materials comply
with all federal and state regulations and standards, the risk of accidental
environmental contamination or injury from such materials cannot be entirely
eliminated. In the event of such an accident involving such materials, we could
be liable for any damage and such liability could exceed the amount of our
liability insurance coverage and the resources of our business.
IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS WOULD BE
SERIOUSLY HARMED.
Our facilities could be subject to a catastrophic loss such as fire,
flood or earthquake. A substantial portion of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in Santa Clara,
California, an area with a history of seismic events. Any such loss at any of
our facilities could disrupt our operations, delay production, shipments and
revenue and result in large expenses to repair and replace the facility. While
we have obtained insurance to cover most potential losses at our facilities, we
cannot assure you that our existing insurance coverage will be adequate against
all possible losses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
We maintain 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 July 1, 2000 the fair value of the
portfolio would decline by an immaterial amount. We have the ability to
generally hold our fixed income investments until maturity and therefore we
would not expect our operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates on
our securities portfolio.
At July 1, 2000, we had fixed rate long-term debt of approximately
$73.4 million, and a hypothetical 10% percent decrease in interest rates would
not have a material impact on the fair market value of this debt. We do not
hedge any interest rate exposures.
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FOREIGN CURRENCY EXCHANGE RISK
We maintain operations in various countries outside of the United
States and foreign subsidiaries that sell and manufacture our products in
various global markets. As a result, our earnings and cash flows are exposed to
fluctuations in foreign currency exchange rates. We attempt to limit these
exposures through operational strategies and financial market instruments. We
utilize hedge instruments, primarily forward contracts with maturities of twelve
months or less, to manage our exposure associated with firm intercompany and
third-party transactions and net asset and liability positions denominated in
non-functional currencies. We do not use derivative financial instruments for
trading purposes.
We had $30.0 million of short-term forward exchange contracts,
denominated in major foreign currencies, which approximated the fair value of
such contracts and their underlying transactions at July 1, 2000. Gains and
losses related to these instruments at July 1, 2000 were not material. Looking
forward, we do not anticipate any material adverse effect on our 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.
The following table provides information about our foreign exchange
forward contracts at July 1, 2000. 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 July 1, 2000.
Forward contracts to sell (buy) foreign currencies for U.S. dollars:
<TABLE>
<CAPTION>
(in thousands, except contract rates)
------------------------------------------
Average U.S.
Contract Notional Fair
Rate Amount Value
-------- -------- -------
<S> <C> <C> <C>
Euro 0.9840 $15,402 $14,933
British Pound Sterling 1.5954 6,828 6,476
Japanese Yen 102.1510 3,133 3,012
Swedish Krone 8.6470 2,972 2,917
Hong Kong Dollar 7.7950 1,180 1,181
Norwegian Kroner 7.7180 737 735
Danish Krone 7.5540 721 697
</TABLE>
COHERENT, INC.
26
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PART II. OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 1. Legal Proceedings
N/A
ITEM 2. Changes in Securities and Use of Proceeds
N/A
ITEM 3. Defaults Upon Senior Securities
N/A
ITEM 4. Submission of Matters to a Vote of Security Holders
N/A
ITEM 5. Other Information
N/A
ITEM 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
</TABLE>
<TABLE>
<CAPTION>
Number Exhibit Description
------ -------------------
<S> <C>
27.1 Financial Data Schedules
b) Reports on Form 8-K
None
</TABLE>
27
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COHERENT, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COHERENT, INC.
(Registrant)
Date: August 11, 2000 By/S/: ROBERT J. QUILLINAN
-----------------------------------------
Robert J. Quillinan
Executive Vice President and Chief
Financial Officer
28
