-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGOMAjJBcx946p85P1brZqdTzZsSOOoaH/zoXyTKT3nFIj7oXBDsC8ygSPtjba3y 6QOkDgo6qRaEVGnkDYkY6w== 0000912057-99-009381.txt : 19991216 0000912057-99-009381.hdr.sgml : 19991216 ACCESSION NUMBER: 0000912057-99-009381 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COHERENT INC CENTRAL INDEX KEY: 0000021510 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 941622541 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-05255 FILM NUMBER: 99774543 BUSINESS ADDRESS: STREET 1: 5100 PATRICK HENRY DR CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4087644000 MAIL ADDRESS: STREET 1: 5100 PATRICK HENRY DRIVE STREET 2: MAIL STOP P38 CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: COHERENT RADIATION DATE OF NAME CHANGE: 19770604 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 October 2, 1999 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 (State or other jurisdiction 94-1622541 of (I.R.S. Employer incorporation or organization) Identification No.)
5100 PATRICK HENRY DRIVE, SANTA CLARA, CALIFORNIA 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 764-4000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Common Stock Purchase Rights (Title of Class) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of November 18, 1999, 24,617,751 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 18, 1999) of Coherent, Inc., held by nonaffiliates was $420,198,352. 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 25, 2000, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. Coherent 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 is one of the largest companies in each of its business segments. No single competitor offers as wide a range of products as are manufactured and sold by Coherent. However, competition is intense in all business segments because there are a number of smaller and larger companies selling products which compete directly with one or more Coherent products. Coherent's competitors are numerous, ranging from some of the world's largest corporations to many relatively small and highly specialized firms. Major competitors in Coherent's respective market segments include, but are not limited to, the following list of companies: the Electro-Optics segment competes primarily against Spectra-Physics Lasers, Inc., SDL, Inc., Rofin Sinar Technologies, Inc., Continuum (a division of Hoya), Excel Technology, Inc., II-VI Inc., Optical Coating Labs, II-VI, and Newport Corporation. The Medical segment's direct competition includes, but is not limited to ESC Medical Systems Ltd., Candela Corporation, Cynosure, Laser Scope, The Carl Zeiss Group, Nidek, HGM Medical, and IRIDEX Corporation. The Lambda segment's main competitors include Cymer, Inc., Komatsu, Ltd., Ushio, Lumonics, SOPRA, Continuum, and Spectra-Physics Lasers, Inc. 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 performance, reliability, price, service, marketing and distribution, technological achievement and human resources. A failure to remain competitive in these markets could cause a loss of market share, declining growth, and the inability to manage inventories if competitors gain increased market acceptance for their products. Some of the competitors are larger than Coherent and have a greater access to capital, technical, marketing, sales and other resources than does Coherent. In addition, there can be no assurance that Coherent's current or potential competitors will develop or acquire comparable or superior products to those developed by Coherent. Any possible business combinations or mergers by competitors, forming a larger, more significant competitor, could result in increased competition, price reductions, reduced margins, or loss of market share, any of which could materially and adversely affect Coherent's businesses, operating results, and financial condition. 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. INTERNATIONAL SALES. Coherent conducts a significant portion of its business internationally. International sales accounted for 58% and 55% of Coherent's sales for fiscal 1999 and 1998, respectively. Coherent 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 2 also perform research, development, manufacturing and service functions) and from exports from its U.S. operations. As a result, Coherent's international sales and operations are subject to the risks of conducting business internationally. Risks include fluctuation in foreign exchange rates, which could affect the sales price in local currencies of products in foreign markets as well as the local costs and expenses of foreign operations. Coherent 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 Coherent's operations in the future or require it to modify current business practices. ASIA-PACIFIC. Recent economic trends 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. The Asia-Pacific market currently represents almost one-third of the worlds buying power and approximately 26% and 24% of Coherent's fiscal 1999 and 1998 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 possible that a decrease in capital spending in this market could have an adverse impact on Coherent's sales and results of operations. QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. A variety of factors may cause period-to-period fluctuations in the operating results of Coherent. Such factors include, but are not limited to, product mix, competitive pricing pressures, material costs, revenue and expenses related to new products and enhancements of existing product, as well as delays in customer purchases in anticipation of the introduction of new products or product enhancements by Coherent or its competitors. The majority of Coherent's revenues in each quarter results from orders received in that quarter. As a result, Coherent establishes its production, inventory and operating expenditure levels based on anticipated revenue levels. Thus, if sales do not occur when expected, expenditure levels could be disproportionately high and operating results for that quarter, and potentially future quarters, would be adversely affected. VOLATILITY OF STOCK PRICE. The market price of Coherent's common stock may be affected by quarterly fluctuations in Coherent's operating results, announcements by Coherent or its competitors of technological innovations or new product introductions and other factors. If revenue or earnings in any quarter fail to meet expectations of the investment community, there could be an immediate impact on Coherent's stock price. In addition, the stock market has from time to time experienced extreme price and volume fluctuations, particularly among stocks of high technology companies, which, on occasion, have been unrelated to the operating performance of particular companies. Factors not directly related to Coherent's performance, such as negative industry reports or disappointing earnings announcements by publicly traded competitors, may have an adverse impact on the market price of Coherent's common stock. See Item 5, "Market for the Registrant's Common Equity and Related Stockholder Matters". PATENTS AND LICENSES. 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, Coherent 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 Coherent 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. These payments could have a negative impact on gross margins. There can be no assurance that necessary licenses would be available to Coherent on satisfactory terms, or Coherent could redesign its products or processes to avoid infringement. Accordingly, an adverse determination in a 3 judicial or administrative proceeding or failure to obtain necessary licenses could prevent Coherent from manufacturing and selling some of its products. This could have a material adverse effect on Coherent's business, results of operations and financial condition. Conversely, costly and time consuming litigation may be necessary to enforce patents issued to Coherent 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. Coherent has a significant number of U.S. and foreign technology patents incorporated into its products. Coherent believes it owns or has the right to use the basic patents covering its products. REIMBURSEMENT. A significant portion of Coherent's medical products are purchased by doctors, clinics, hospitals and other users, which bill various third-party payors, such as governmental programs and private insurance plans, for covered health care services provided to their patients. Third-party payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products used for these health care services. While Coherent 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 Coherent's products if they determine that the device was not reasonable and necessary for the purpose for which used or was investigational or not cost-effective. Failure by doctors, clinics, hospitals and other users of Coherent's products to obtain adequate reimbursement for use of Coherent'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 Coherent's products could have a material adverse effect on Coherent's business, results of operations and financial condition. Moreover, Coherent 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. PRODUCTION AND SOURCES AND AVAILABILITY OF MATERIALS. Coherent's production operations consist primarily of assembling and testing its products, although Coherent manufactures substantially all of its own laser tubes, optics and diode wafers. Coherent depends upon outside suppliers for most product components, many of which are manufactured to Coherent's specifications. Coherent maintains a diverse supplier base, and as a result, typically no individual supplier makes up more than 5% of total purchases. Coherent 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. RESEARCH AND DEVELOPMENT. Coherent maintains separate research and development staffs in all of its operating segments. Development of new and improved Electro-Optical, Lambda and Medical products is primarily the respon sibility of engineering department and applications staffs located in the U.S., Germany, Finland 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. Coherent 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 1999 expenditures for research and development were $46,759,000, 10% of sales, 4 compared to $44,534,000, 11% of sales, and $39,406,000, 10% of sales, during fiscal 1998 and 1997, respectively. IMPACT OF ENVIRONMENTAL REGULATION. Coherent believes that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on the capital expenditures, earn ings, competitive and financial position of Coherent. Coherent 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 12, "Commitments and Contingencies", of the Notes to Consolidated Financial Statements. IMPACT OF MEDICAL DEVICE REGULATIONS. Coherent'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. 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 Coherent. Coherent's medical products are subject to similar regulations in its major international markets. Complying with these regulations is necessary for Coherent's strategy of expanding the markets for and sales of its products into these countries. These approvals may include clinical testing, limitations on the number of sales, controls of end user purchase price and the extent of product commercialization. In certain instances, these constraints can delay planned shipment schedules as design and engineering modifications are made in response to regulatory concerns and requests. Coherent's competitors in the medical field are subject to the same regulations. Coherent 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 October 2, 1999, Coherent employed 2,417 persons. Coherent's continued success will depend in large measure on its ability to attract and retain highly skilled employees, who are in great demand, particularly in the Silicon Valley of California, where the Company is based. THE LASER COMPANY Coherent, Inc., a Delaware corporation, (herein referred to as "Coherent" or "Company") is a global leader in the design, manufacture and sales of lasers, laser systems, precision optics and related accessories. Coherent 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/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." Energy is amplified to extremely high intensity by an atomic process called stimulated emission. The term 5 "radiation" is often misinterpreted because the term is also used to describe radioactive materials or ionizing radiation. The use of the word in this context, however, refers to an energy transfer. Energy moves from one location to another by conduction, convection, and radiation. The color of laser light is normally expressed in terms of the laser's wavelength. The most common unit in expressing a laser's wavelength is a nanometer ("nm"). There are one billion nanometers in one meter. A laser uses a source of energy such as electricity, light or a chemical reaction to excite electrons in a "lasing medium." When these excited electrons return to their grounded or normal state, energy is emitted in the form of light at one or a few specific wavelengths. The lasing medium can be gasses such as CO(2) or argon, liquid dyes, or solid-state crystals such as the commonly used yttrium aluminum garnet ("YAG"). The emitted light is collected and refined using a series of mirrors and lenses, forming a high intensity, tightly focused beam of "coherent" light. A laser beam can be made powerful enough to cut steel or precise enough to perform eye surgery. The semiconductor or diode laser uses these same physical principles, but miniaturizes the entire assembly into a monolithic structure using semiconductor wafer fabrication processes to build the device. In addition to miniaturizing the laser, the use of solid-state materials greatly increases the life of the device and provides power efficiencies over 100 times greater than a typical gas or lamp based laser. A widely used analogy in the laser industry is that the development of the semiconductor laser will have as significant an impact on the use of lasers as the transition of the vacuum tube to the transistor to the integrated circuit has on the electronics industry. INDUSTRY LEADERSHIP Since inception in 1966, Coherent 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 228 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. 6 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Coherent operates in two industry segments: the design, manufacture and marketing of 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. Coherent has two operating segments within the Electro-Optical industry segment: Electro-Optics and Lambda. The Medical industry segment is also an operating segment. (See Note 13). PRODUCTS BUSINESS STRUCTURE Coherent's business structure reflects its three major operating segments: Medical, Electro-Optics and Lambda. Medical serves the medical-surgical community, while Electro-Optics and Lambda segments serve the needs of commercial and scientific 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 $185,000. Commercial and scientific products range from $10,000 to $1,000,000. 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 MEDICAL SCIENTIFIC COMMERCIAL - ------------------------------- ------------------------------- ------------------------------- Ophthalmology Spectroscopy Optics & Optical Coating Photodynamic Therapy Chemistry Semiconductor Processing & Aesthetic/Cosmetic Surgery Photochemistry Inspection Dermatology/Plastic Surgery Physics DUV Photolithography Cosmetic, Plastic and Viral Research Interferometric Wafer Inspection Reconstructive Surgery Genetics Optics Inspection Orthopedics Environmental Research Optical Data Storage Urology Semiconductor Research Fiber Bragg Gratings Gynecology Biology Machine Vision Otolaryngology Biochemistry Holography Neurological Surgery Engineering Marking Oral Maxillofacial Surgery Forensics Materials Processing & Control Oncology Isotope Separation Process Control Podiatry Atom Trapping Magnetic Disk Texturing General Surgery Metrology Video & DVD Disk Mastering Medical Therapy Seismic Monitoring Stereolithography/Rapid Medical Imaging Non-destructive Testing Prototyping Combustion Analysis Reprographics/Printing Graphic & Architectural Display Multimedia Entertainment Micromachining Soldering Wire Stripping Circuit Board Drilling Via Hole Drilling Rubidium Vapour Pumping Flow Cytometry Analytical Instrumentation Pulsed Laser Deposition Telecommunications
7 PRODUCT NARRATIVE MEDICAL OPERATING SEGMENT 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. 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 April 1999, Coherent finalized the acquisition of Star Medical (Star) from Palomar Medical Technologies, Inc. for the LightSheer brand of laser-based hair removal products. Prior to concluding the acquisition of Star, Coherent had been the exclusive distributor for the LightSheer, and introduced it to the market in February 1998. This compact, solid-state system is the only high-energy, short pulse laser diode 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 is 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. In March of 1999, the LightSheer received clearance from the FDA to claim permanence in hair removal or reduction, the only company to have achieved this for a diode laser system. The UltraPulse 5000C with Computer Pattern Generator (CPG) 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. In August 1997, the UltraFine erbium laser for skin resurfacing was introduced. This system complements the UltraPulse 5000C and provides new treatment capabilities for the aesthetic surgeon. While 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 are seeking 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 C aesthetic laser. Featuring four lasers in one instrument, this product can be used for a wide variety of skin procedures such as the removal of tattoos, the treatment of pigmented lesions, including birthmarks and port wine stains, and the removal of "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 line of lasers, the UltraCut laser prepares sites in the scalp to receive hair grafts. 8 This system offers a number of advantages to hair-transplant surgery including reduced bleeding, faster procedures and improved cosmetic results. OPHTHALMIC PRODUCTS Coherent pioneered the use of lasers in the ophthalmology market segment 30 years ago and is continuing this leadership both domestically and globally today. CMG offers green and multicolor lasers for photocoagulation and treatment of retinal disease and glaucoma. Coherent's Nd:YAG lasers for photodisruption are used for treatment of secondary cataracts. Recently Coherent introduced a new product for Ophthalmic Photodynamic Therapy (PDT) for the treatment of neovascular Age-Related Macular Degeneration (AMD). 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 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-Registered Trademark- Verdi-TM- photocoagulator was introduced in 1999 and represents Coherent's first fully solid-state photocoagulator. The Novus Verdi features rugged portable design, advanced diode pumped green technology, and patented ClearView-TM- optics all backed by Coherent's solid commitment to customer service. The Verdi fills out Coherent's photocoagulator product line resulting in the widest range of choices available to the customer. 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. For example, as surgeons use lasers in operations and bleeding occurs, a normal red light will be blended in with the blood of the patient and will not work correctly. Allowing the doctor to switch the colors of the lasers eliminates this problem with a more efficient solution. 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 tears) 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 1996, Coherent introduced the Selecta 7000-TM- laser, designed to perform Selective Laser Trabeculotherapy (SLT). Coherent is working with the FDA to obtain approval for the Selecta 7000. SLT is an exciting new therapy for the treatment of open angle glaucoma, the leading cause of preventable blindness in Americans over the age of 40. SLT lowers intraocular pressure by using short pulses of low energy laser light to illuminate specific cells in the eye's trabecular meshwork--resulting in increased fluid outflow SLT is being performed today in many international markets using Coherent's Selecta 7000. 9 Domestically, Coherent has received exclusive license to commercialize SLT and market the relevant laser technology. In October 1997, Coherent introduced the next generation EPIC-TM-ophthalmic laser system that enables the ophthalmologist to perform most laser treatments with one system. In December 1997, Coherent 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. In 1999, Coherent introduced the Opal Photoactivator for Visudyne-TM- PDT therapy for neovascular AMD (the therapy). In November 1999, the FDA Ophthalmic Drugs Subcommittee recommended approval of the Opal Photoactivator and Visudyne Therapy for the wet form of age-related macular degeneration. The FDA is expected to make a final decision regarding the approval of the Visudyne application on or before February 2, 2000. Regulatory applications are also pending in the European Union, Canada, Switzerland, Norway, Iceland, Australia and New Zealand. This new therapy offers a treatment option for the wet form of AMD, the leading cause of blindness in people over the age of 50 in the western world. The results of the pivotal Phase III trials showed a statistically significant benefit at 12 months to those patients treated with Visudyne therapy compared to those administered a placebo. Results also showed that Visudyne therapy was well tolerated, with the majority of adverse events occurring in similar numbers among the treatment and placebo groups. SURGICAL PRODUCTS Coherent introduced the first solid state holmium laser, the VersaPulse-Registered Trademark-, in 1988. With its wide variety of fiber optic delivery devices, which are much smaller than conventional instrumentation, the VersaPulse quickly established itself as a first choice for minimally invasive surgery. Since that time, product enhancements and improvements have allowed Coherent to maintain its leadership position. In 1993, the VersaPulse Select-TM- was introduced. This revolutionary product doubled the holmium laser power available to the arthroscopic surgeon while reducing the physical size of the system to just half that of previous models. The tissue effects allowed cutting, ablation and smoothing of cartilaginous tissue with minimal bleeding. An additional effect of precise collagen shrinkage has emerged as the procedure of choice for joint instability. 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. 10 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 $185,000. ELECTRO-OPTICS OPERATING SEGMENT Coherent's electro-optical products include lasers and laser systems for micromachining, commercial applications, semiconductor inspection, telecommunications, scientific, medical research, precision optics and related accessories. The principal types of lasers produced by Coherent's Electro-Optics segment are diode-pumped solid-state (DPSS), semiconductor lasers (laser diodes), argon and krypton ion, excimer, carbon dioxide (CO(2)), liquid dye, Nd:YAG, and Titanium:Sapphire (Ti:Sapphire). These lasers have a broad range of power and operate in the visible (V), ultraviolet (UV) and infrared (IR) portions of the electromagnetic spectrum. Coherent's optics and optical products include special purpose lenses, mirrors and advanced optical coatings. Coherent's electro-optical products are sold for commercial and OEM applications, scientific and medical end users. LASER AND COMPONENTS GROUP The Coherent Laser Group (CLG) and Coherent Auburn, a division of the Coherent Laser Group, comprise the Laser and Components Group. CLG is headquartered in Santa Clara, California, and is a leading developer and manufacturer of DPSS, diode, ion, dye, solid-state Nd:YAG, Ti:Sapphire, and CO(2) lasers for the OEM, micromachining and scientific 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, 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) 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, 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. Also, CLG saw continued strong growth for the Lubeck operation, including shipments of the 315M minilaser for the reprographics market. 11 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. In 1999, CLG announced a new 980-nm Optically Pumped Semiconductor (OPS) laser technology that provides the highest power 980-nm laser output from a single-mode device. High-power 980 nm is critical for pumping Erbium-doped Fiber Amplifiers (EDFAs)--key components in Dense Wavelength Division Multiplexed (DWDM) telecommunication systems. EDFAs are used to boost optical telecommunications signals that have degraded after being transported over long distances. Amplifiers for DWDM networks require higher pump-powers as the number of wavelengths transmitted through the system is increased. Current 980 nm pump lasers are fundamentally limited to less than 200 mW (technology limit) necessitating the "ganging" of several pump lasers with complex schemes to provide adequate pump power for wide-bandwidth, high-gain DWDM telecommunications systems. In 1999, CLG expanded the Verdi and AVIA DPSS lasers as well as the CO(2) laser product line. Higher power and increased speed lasers were introduced to the market place with great success. The material processing and electronic packaging applications for these lasers continued to grow in 1999. The lasers and laser systems produced by CLG, with the exception of semiconductor lasers, typically range in price from $10,000 to $250,000. Coherent Auburn (Auburn) manufactures optics, thin films coatings for high-performance laser optics, laser accessories and electro-optical components for Coherent 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 Coherent'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 product line 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. Auburn also designs and manufactures laser measurement instruments and accessories that are used to measure and maximize the performance of laser systems. The instrument product line 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, Auburn successfully entered the market for E-O assembly modules, capturing several major programs from U.S. and European contractors. Also the Catalog product line, which had taken over the Ealing "Gold" catalog, printed and distributed in September 1998 the new 480 page Coherent catalog containing 5,000 products, of which 2,000 were new, to the Electro-Optics Industry. Products made by Auburn typically range in price from $500 to $50,000 and are sold through Auburn's field and telemarketing salesforce, the new Coherent catalog, and through an international network of independent distributors as well as other Coherent sales groups. SEMICONDUCTOR GROUP CSG, was spun off from the Laser Group in 1997 to specifically serve customers in the semiconductor area with high-power laser diodes. Coherent has been designing and manufacturing a wide variety of lasers 12 based on diodes since 1986. In 1995, the Company acquired the laser diode operations of Uniphase Corporation. This acquisition added high power semiconductor laser diodes with wavelength emission to Coherent's product line. These 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 used in medical, printing, OEM instrumentation, remote sensing, and machine vision industries. In December 1996, Coherent acquired 80% of the outstanding capital stock of Tutcore OY, Ltd., and an option to acquire the remaining 20% in five years. Tutcore is located in Tampere, Finland, and is the leading manufacturer of aluminum-free semiconductor wafers that are incorporated into laser diodes. This acquisition added capabilities to the line that no other significant supplier had and allows for a considerable competitive advantage. These high-powered diode lasers are expected to have a tremendous impact on the future of the laser market. These lasers will be used in applications such as heat-treating, welding, and direct-to-plate printing. These lasers are created by building rows of miniature lasers on a gallium arsenide wafer, using semiconductor deposition and etching technology, thereby creating laser bars. These bars have power outputs equivalent to lasers several cubic feet in size, therefore making them more portable. Coherent currently has the highest power bars available in the commercial markets. Larger competitors such as SDL, Inc., and Spectra Physics Lasers also make such lasers but produce them containing aluminum. With the Tutcore acquisition, the semiconductor group is in the forefront on this laser technology producing aluminum free lasers. In February 1997, CSG completed a new, purpose-built diode manufacturing factory in Santa Clara, California. This 10,000-square foot facility includes large cleanrooms for wafer processing and packaging, as well as extensive life-testing and R&D labs. 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. LAMBDA OPERATING SEGMENT Coherent Lambda Physik (CLP), Coherent's 80% owned subsidiary, in Gottingen, Germany, 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 2.5mm. The excimer laser is very efficient in producing UV light without frequency conversion techniques, gaining strong market share in commercial 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 up to 3 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. Some lasers, which are produced primarily for medical applications, are even further certified with the CE mark for systems used in medical products. In fiscal year 1999, Lambda Physik pioneered the development of 157 nm lasers for various applications. The Lambda LPF and the portable OPTex excimer laser optimized for the wavelength at 157 nm were released. The LPF laser is the only commercial available laser system at 157 nm that delivers several Watts of output power. Typical applications are found in spectroscopy, microelectronics, material processing, material characterization and in chemical vapor deposition. The OPTex has been especially developed for customers who require a small and economical, but highly sophisticated, excimer laser. The NovaLine F600 and F1000 series are designed for material testing and feasibility studies of lithography at 157 nm wavelength. These lasers demonstrate stable operation up to 1 kHz. Lambda Physik 13 also sells large industrial systems into the TFT annealing market via the cooperation of an OEM customer in Japan. New models, have been added to the product line of 248 nm and 193 nm excimer lasers for microlithography in order to follow up on the trend of higher power and tighter laser bandwidth requirements. In September 1999, Lambda Physik received its first multiple production orders for their high performance excimer laser systems from a semiconductor equipment manufacturer. The orders are for Lambda Physik's 248 NovaLine-Registered Trademark- excimer laser systems operating at 2 kHz pulse rate and will be used in conjunction with a semiconductor equipment manufacturer's systems. These systems are high-productivity tools, capable of processing more than 200 mm wafers per hour, and designed to achieve cost-effective, mix-and-match lithography solutions. Presently, only Lambda Physik has delivered 2 kHz lasers for 193 nm. The LAMBDA StarLine-TM- family of diode-pumped Nd:YAG lasers has been optimized in close cooperation with industrial key customers. These lasers open a variety of applications ranging from spectroscopy through LIDAR to hole drilling and micromachining. Lambda Physik has produced some of the most respected pulsed laser models for spectroscopy in the world. The present pulsed dye laser, SCANmate-TM-OG 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 1 mm. SCANmate-TM-OG is the only commercial dye laser with automatic Autocalibration system. Also in fiscal year 1999, ongoing development of the L4308, 200 watt laser series and line beam optics produced by MicroLas with respect to special needs of production conditions of polycrystalline flat panel displays has gained a 90% market share in this fast growing market. The lasers and laser systems produced by CLP typically range in price from $50,000 to $1,000,000. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Financial information relating to foreign and domestic operations for the three years ended October 2, 1999, is set forth in Note 13, "Operating Segments", of the Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES At the end of fiscal 1999, Coherent's primary locations were as follows: Coherent's corporate headquarters and major electro-optics facility is located in Santa Clara, California, consisting of approximately 8.5 acres of land and a 200,000-square-foot building owned by Coherent. Additional electro-optics facilities are located in Auburn, California. The Auburn facilities consist of two 60,000-square-foot buildings and a 50,000-square-foot building, all of which are owned by Coherent as well as a 12,000-square-foot building leased until June 2000. Coherent'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. During fiscal 1993, Coherent 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 Coherent in Sturbridge, Massachusetts. This building is currently leased (until June 2000) to the acquirer of Coherent General, Inc. Lambda Physik GmbH's facility in Gottingen, Germany consists of two owned buildings totaling 63,500 square feet on 3.7 acres of owned land. 14 Lambda Physik's domestic facility is located in Fort Lauderdale, Florida, consisting of an 18,597-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 through October 2000. Coherent GmbH's facility in Dieburg, Germany consists of a 21,571-square-foot building leased by Coherent until 2003 with a five year renewal option. Coherent Lubeck's facility in Lubeck, Germany consists of a 30,157-square-foot building leased by Coherent until March 2000 with a one 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 37,900 square feet on 1.6 acres of owned land. Coherent Tutcore's facility is located in Tampere, Finland where they manufacture semiconductor wafers. The facility is 17,438 square feet and is leased until 2007. Coherent Japan's facilities include 39,706 square feet consisting of four buildings leased until April 2001. During fiscal 1999, Coherent acquired Star Medical Technologies, Inc., which leases four buildings totaling 28,581 square feet in Pleasanton, California. The leases expire from 2002 to 2003. Coherent maintains sales and service offices under varying leases expiring from 2003 through 2005 in France and the Netherlands, and under short-term leases in Mexico, the United Kingdom, Hong Kong, Sweden, and the People Republic of China. In general, Coherent's facilities are considered both suitable and adequate to provide for future requirements. ITEM 3. LEGAL PROCEEDINGS Coherent 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 12, "Commitments and Contingencies", of the Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 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.
QUARTERS ENDED ------------------------------------------------------------------------------------- FISCAL 1999 FISCAL 1998 ----------------------------------------- ----------------------------------------- DEC. 26 APR. 3 JULY 3 OCT. 2 DEC. 27 MAR. 28 JUNE 27 SEPT. 26 -------- -------- -------- -------- -------- -------- -------- -------- Closing Price: High................................. $13.91 $16.88 $18.94 $22.31 $28.75 $24.38 $24.19 $17.38 Low.................................. $ 7.75 $11.75 $12.25 $16.00 $16.94 $17.56 $16.75 $ 8.75
The number of stockholders of record as of November 18, 1999 was 2,038. No cash dividends have been declared or paid since Coherent was founded and Coherent has no present intention to declare or pay cash dividends. Coherent's agreements with its banks restrict the payment of dividends on its 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
YEARS ENDED -------------------------------------------------------- OCT. 2, SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, 1999 1998 1997 1996 1995 -------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................. $468,869 $410,449 $391,038 $364,430 $285,499 Gross profit.............................. 220,666 197,865 205,502 187,218 142,483 Income from operations.................... 18,077 24,132 42,310 44,700 29,912 -------- -------- -------- -------- -------- Net income (1), (2), (3).................. $ 11,841 $ 18,811 $ 26,292 $ 30,314 $ 19,323 -------- -------- -------- -------- -------- Net income per share data: (1), (2), (3) Basic................................... $ .49 $ .80 $ 1.16 $ 1.37 $ .91 Diluted................................. $ .48 $ .79 $ 1.12 $ 1.31 $ .87 -------- -------- -------- -------- -------- Total assets.............................. $495,468 $390,761 $361,650 $311,516 $255,874 -------- -------- -------- -------- -------- Long-term obligations..................... 74,745 12,828 9,665 3,921 5,139 Other long-term liabilities............... 16,819 12,599 13,927 12,403 9,597 Minority interest in subsidiaries......... 3,945 3,664 4,348 2,738 1,782 -------- -------- -------- -------- -------- Stockholders' equity...................... $277,305 $262,623 $231,233 $197,587 $161,191 -------- -------- -------- -------- --------
No dividends have been declared in any of the periods presented. See "Item 5" for a discussion of Coherent's dividend history. (1) Includes in fiscal 1999, a $10.7 million ($0.44 per diluted share), after tax charge for the write-off of purchased in-process research and development. See Note 2 "Acquisitions" of Notes to Consolidated Statements. (2) Includes in fiscal 1998, a $2.7 million ($0.11 per diluted share) non-recurring tax benefit. (3) 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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS CONSOLIDATED SUMMARY During fiscal 1999, Coherent's net income was $11.8 million ($0.48 per diluted share), which includes the third quarter $10.7 million ($0.44 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 fiscal 1999 was $22.6 million ($0.92 per diluted share). Fiscal 1998 net income was $18.8 million ($0.79 per diluted share), including a $2.7 million ($0.11 per diluted share) non-recurring tax benefit. Fiscal 1997 proforma net income (excluding the $9.0 million after tax write-off of purchased in-process technology) was $35.3 million ($1.50 per diluted share). Proforma income before income taxes, excluding the aforementioned write-off, increased $8.5 million (36%) to $32.2 million for fiscal 1999 compared to income before income taxes of $23.7 million for fiscal 1998, which decreased $23.9 million (43%) compared to proforma income before income taxes of $56.1 million for fiscal 1997, excluding the aforementioned write-off. The current year increase was primarily attributable to increases in international sales volumes and lower SG&A expenses as a percentage of net sales. 1999 COMPARED TO 1998 NET SALES AND GROSS PROFITS
YEARS ENDED -------------------- OCT. 2, SEPT. 26, 1999 1998 -------- --------- (IN THOUSANDS) NET SALES Consolidated: Domestic.............................................. $198,599 $185,004 International......................................... 270,270 225,445 -------- -------- Total................................................. $468,869 $410,449 ======== ======== Electro-Optics: Domestic.............................................. $ 95,399 $ 87,119 International......................................... 137,658 106,319 -------- -------- Total................................................. $233,057 $193,438 ======== ======== Medical: Domestic.............................................. $ 82,433 $ 78,893 International......................................... 80,286 76,797 -------- -------- Total................................................. $162,719 $155,690 ======== ======== Lambda: Domestic.............................................. $ 20,767 $ 18,992 International......................................... 52,326 42,329 -------- -------- Total................................................. $ 73,093 $ 61,321 ======== ========
17 CONSOLIDATED During fiscal 1999, net sales increased $58.5 million (14%) to $468.9 million from $410.4 million in the prior fiscal year, primarily as a result of increased sales volumes in the Electro-Optics and Lambda segments (OEMs and commercial customers). International sales grew at a higher rate than domestic sales for a total increase of $44.8 million (20%). In particular, Asia-Pacific sales increased by 26% while European sales increased 16%. The increase in Asia-Pacific sales reflects signs of an economic recovery. Accordingly, international sales were 58% of net sales in fiscal 1999 compared to 55% for fiscal 1998, reflecting Coherent's commitment to grow its international business. The gross margin rate decreased to 47% for the current fiscal year compared to 48% for fiscal 1998. The deterioration in the overall margin resulted primarily from higher sales of lower margin products and inventory obsolescence write-downs of $1.3 million in the Lambda segment. ELECTRO-OPTICS Electro-Optics net sales increased $39.7 million (20%) in the current fiscal year to $233.1 million from $193.4 million in the prior fiscal year. Domestic sales increased $8.3 million (10%) and international sales increased $31.3 million (29%) in the current fiscal year. Sales increased primarily due to higher sales volumes in commercial solid state products and in commercial systems. The gross margin rate remained at 47%, consistent with the prior fiscal year. MEDICAL Medical net sales increased $7.0 million (5%) to $162.7 million in fiscal 1999 from $155.7 million in fiscal 1998. International sales increased $3.5 million (5%) and domestic sales increased $3.5 million (4%) in the current fiscal year. The increase in sales is primarily due to an increase of almost $28 million in sales of LightSheer hair removal systems partially offset by lower sales of non-hair removal Aesthetic products and the expiration of our agreement to distribute ophthalmic refractive systems for a German manufacturer. The gross margin rate decreased 0.2% to 48.3% from 48.5% in the prior fiscal year. LAMBDA Lambda net sales increased $11.8 million (19%) in the current fiscal year to $73.1 million from $61.3 million in the prior fiscal year. International sales increased $10.0 million (24%) and domestic sales increased $1.8 million (9%). The increase in sales is primarily due to increased shipments of commercial products, primarily photolithography laser systems. The gross margin rate decreased to 45% from 51% in the prior fiscal year. The decrease from the prior year resulted primarily from increased manufacturing costs for photolithography systems, lower average selling prices for sales of scientific products and additional provisions for inventory obsolescence of $1.3 million. 18 OPERATING EXPENSES
YEARS ENDED -------------------- OCT. 2, SEPT. 26, 1999 1998 -------- --------- (IN THOUSANDS) Research & development.................................. $ 46,759 $ 44,534 In-process research and development..................... 16,000 Selling, general & administrative....................... 134,129 124,555 Intangibles amortization................................ 5,701 4,644 -------- -------- Total operating expenses................................ $202,589 $173,733 ======== ========
Total operating expenses increased $28.9 million (17%) from the prior fiscal year. As a percentage of sales, operating expenses increased to 43% from 42% in the prior year. Exclusive of the third quarter fiscal 1999 write-off of purchased in-process research and development, operating expenses increased $12.9 million (7%), but as a percentage of sales decreased to 40% from 42%. Current year research and development (R&D) expenses increased $2.3 million (5%) from the prior fiscal year but decreased to 10% from 11% of sales. The absolute dollar increase was primarily due to increased headcount and spending on projects in the Electro-Optics segment. Selling, general and administrative (SG&A) expenses increased $9.6 million (8%) but decreased as a percentage of sales from 30% to 29%. The dollar increase is primarily due to increases in headcount and related payroll costs in the Electro-Optics segment to support increased sales volumes. This dollar increase was also due in part to increased investments in information technology, outside consulting costs and increased payroll related costs offset partially by the non-recurrence of fiscal 1998 charges, including: (1) restructuring costs of $2.9 million related to the medical segment, (2) the relocation of the medical segment to a new facility, and (3) the Ealing Electro-Optics acquisition costs associated with the development of a catalog. Intangibles amortization increased $1.1 million (23%) primarily due to the acquisition of Star. OTHER INCOME (EXPENSE) Other income (expense), net, decreased $1.4 million during the current year compared to the corresponding prior year period. The decrease was primarily due to increased interest expense related to financing of the Star acquisition, partially offset by increased interest income. INCOME TAXES Coherent's effective tax rate for the current year was 27.0% and its proforma effective tax rate for the current year (excluding the $10.7 million write-off of purchased in-process research and development) was 30.0%. Coherent's proforma effective tax rate for the prior fiscal year (excluding the $2.7 million non-recurring tax benefit) was 32.1%. The proforma effective tax rate decreased as a result of the non-recurrence of reserves for exposure items offset by changes in the distribution taxable income by taxing jurisdiction. 19 1998 COMPARED TO 1997 NET SALES AND GROSS PROFITS
YEARS ENDED --------------------- SEPT. 26, SEPT. 27, 1998 1997 --------- --------- (IN THOUSANDS) NET SALES Consolidated: Domestic.............................................. $185,004 $177,803 International......................................... 225,445 213,235 -------- -------- Total................................................. $410,449 $391,038 ======== ======== Electro-Optics: Domestic.............................................. $ 87,119 $ 76,115 International......................................... 106,319 85,672 -------- -------- Total................................................. $193,438 $161,787 ======== ======== Medical: Domestic.............................................. $ 78,893 $ 81,490 International......................................... 76,797 88,462 -------- -------- Total................................................. $155,690 $169,952 ======== ======== Lambda: Domestic.............................................. $ 18,992 $ 20,198 International......................................... 42,329 39,101 -------- -------- Total................................................. $ 61,321 $ 59,299 ======== ========
CONSOLIDATED During fiscal 1998, net sales increased $19.4 million (5%) to $410.4 million from $391.0 million in fiscal 1997, primarily as a result of increased sales volumes in the Electro-Optics segment (OEM and commercial customers). International sales grew at a higher rate than domestic sales for a total increase of $12.2 million (6%) and were 55% of net sales in both fiscal 1998 and 1997. The gross margin rate decreased to 48% for fiscal 1998 compared to 53% for fiscal 1997. The deterioration 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-Optics segment, and the impact of the strengthening U.S. dollar against major foreign currencies. ELECTRO-OPTICS Electro-Optics net sales increased $31.7 million (20%) in fiscal 1998 to $193.4 million from $161.8 million in fiscal 1997. Domestic sales increased $11.0 million (14%) and international sales increased $20.6 million (24%) for fiscal 1998. The increase in sales worldwide resulted primarily from higher sales volumes in commercial solid-state products and due in part to the Auburn Division'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 $5.1 million compared to fiscal 1997. 20 The gross margin rate decreased to 47% from 51% in fiscal 1997. The decrease from fiscal 1997 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 fiscal 1998. 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 fiscal 1997. The gross profit rate decreased to 49% in fiscal 1998 from 55% in fiscal 1997 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 hair removal laser, for which Coherent recognized a commission for its selling efforts. LAMBDA Lambda net sales increased $2.0 million (3%) in fiscal 1998 to $61.3 million from $59.3 million in fiscal 1997. Domestic sales decreased $1.2 million (6%) and international sales increased $3.2 million (8%) for fiscal 1998. The increase in sales worldwide resulted primarily from higher sales volumes in the lithography business. The impact of the strengthening of the U.S. dollar against major foreign currencies partially offset the increase by adversely impacting international sales by $3.4 million compared to fiscal 1997. The gross margin rate increased to 51% from 50% in fiscal 1997. The increase from fiscal 1997 resulted primarily from the strengthening of the U.S. dollar against major foreign currencies. OPERATING EXPENSES
YEARS ENDED --------------------- SEPT. 26, SEPT. 27, 1998 1997 --------- --------- (IN THOUSANDS) Research & development.................................. $ 44,534 $ 39,406 Purchased in-process technology......................... 9,315 Selling, general & administrative....................... 124,555 110,813 Intangibles amortization................................ 4,644 3,658 -------- -------- Total operating expenses................................ $173,733 $163,192 ======== ========
Total operating expenses increased $10.5 million (6%) from fiscal 1997. 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%. Fiscal 1998 research and development (R&D) expenses increased $5.1 million (13%) from fiscal 1997 and increased to 11% from 10% of sales. The absolute dollar increase was primarily in Coherent's Electro-Optics and Lambda segments due to due to more headcount and related expenses associated with Coherent's continued emphasis on product development, including lithography, and its recent strategic acquisitions. 21 Selling, general and administrative (SG&A) expenses increased $13.7 million (12%) and increased as a percentage of sales from 28% to 30% in fiscal 1998. The increase, primarily in the Electro-Optics 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. This increase was also driven by (1) restructuring costs of $2.9 million related to the medical segment, (2) the relocation of the medical segment to a new facility, (3) the Ealing Electro-Optics acquisition costs associated with launching the catalog and (4) higher costs in Asia-Pacific associated with the Laser Group selling direct in Japan since mid fiscal 1997. Intangibles amortization expense increased $1.0 million (27%) due to amortization of Palomar distribution rights in the medical segment. OTHER INCOME (EXPENSE) Other income (expense), net, decreased $4.9 million during fiscal 1998 compared to fiscal 1997. Fiscal 1997 other income included a $3.5 million gain on Coherent'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 major foreign currencies, lower royalty income and lower interest income on lower average cash and investment balances. INCOME TAXES Coherent's effective tax rate for fiscal 1998 was 20.6% and the proforma effective tax rate for fiscal 1998 (excluding the $2.7 million non-recurring tax benefit) was 32.1%. Coherent's proforma effective tax rate for fiscal 1997 (excluding the $9.2 million pre-tax write-off of purchased in-process technology) was 37%. The 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 the lower income before taxes in fiscal 1998. BUSINESS ENVIRONMENT 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 Coherent's operations. The risk for Coherent exists in four areas: (i) information technology used by Coherent to run its business, (ii) systems used by Coherent'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. Coherent evaluated its exposure in all of these areas. Coherent completed a comprehensive inventory and evaluation of its internal systems, equipment and facilities on July 30, 1999. Coherent has completed a number of projects that replaced or upgraded systems, equipment and facilities that were already known not to be Year 2000 ready. Coherent substantially completed these projects on October 8, 1999. Coherent has determined that upgrades and replacements to its primary systems will allow Coherent to transition into the new millenium with little or no disruption. Coherent has established contingency problem management programs to address and resolve Y2K related issues as the Company crosses through and into the millenium period. For the Year 2000 issues identified to date, the cost of upgrade or replacement has been less than $1.5 million through October 31, 1999. If significant new issues are identified, Coherent's results of operation or financial condition could be adversely affected. 22 Coherent also contacted its critical suppliers to determine that the suppliers' operations and the products and services they provide are Year 2000 ready. Critical suppliers have provided Coherent Y2K information that indicates they will continue to be a viable supplier into the Year 2000. Where practical, Coherent has attempted 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, Coherent will seek alternative sources of supplies. However, such failures remain a possibility and could have an adverse impact on Coherent's results of operations or financial condition. Coherent 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, Coherent does not believe that the impact of customer claims would materially affect Coherent's results of operations or financial condition. Year 2000 readiness 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 Coherent's sales, operating results and financial condition. EURO CONVERSION As with many multinational companies operating in Europe, beginning in January 1999, Coherent was affected by the conversion of eleven European currencies into a common currency, the euro. Based on its assessment, Coherent 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. Coherent 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 has simplified Coherent'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. Coherent 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. MARKETING, DISTRIBUTION AND CUSTOMER SERVICE AND 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, Finland, Germany, Italy, 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. Coherent's foreign sales are made principally to customers in Europe, Japan and Asia Pacific, but sales are also made to customers in Canada, Mexico, Latin America, Australia, the Middle East and Africa. Sales made to independent representatives and distributors are generally priced in U.S. dollars. Foreign sales made directly by Coherent 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 1999. Coherent commenced direct sales and service for its Medical and Electro-Optics industry segments in Japan effective February 1996 and April 1997, respectively. Japan is the largest international market for both industry segments. The local presence continues to build closer relationships with Japanese customers 23 and enable the Company to provide stronger support and allow development of new products more rapidly for the Japanese market. 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, customer groups and independent representatives in servicing equipment, training customers to use Coherent's products and exploring additional applications of Coherent's technologies. Additionally, Coherent gives various warranties on its products and offers service on a contractual basis after the initial product warranty has expired. The Company has also implemented a 24-hour a day service station, where customers can call a number at any time and receive service on their particular products. If components of the laser need to be fixed, then the customers can Federal Express the component back to Coherent as Coherent sends a new part, so that time is not lost in the production process of the customer. BACKLOG At October 2, 1999 Coherent's backlog of orders scheduled for shipment was approximately $101,556,000 compared with $87,816,000 at September 26, 1998. Orders used to compute backlog are generally cancelable without substantial penalties. Historically, the rate of cancellation experienced by Coherent has not been significant; however, since orders are cancelable, the backlog of orders, at any one time, is not necessarily indicative of future revenues. Coherent anticipates filling the present backlog during fiscal 2000. Backlog at October 2, 1999 was higher than at September 26, 1998, in all three operating segments. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES At October 2, 1999, Coherent's primary sources of liquidity are cash and short-term investments of $68.9 million. Additional sources of liquidity are Coherent's multi-currency line of credit and bank credit facilities totaling $58.9 million as of October 2, 1999, of which $46.9 million is unused and available under these credit facilities. During fiscal 1999, such facilities have been used in Europe and Japan. Because of Coherent's low debt to equity ratio (.35), 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 2000. Coherent has certain financial covenants related to its lines of credit. At October 2, 1999, Coherent is in compliance with these covenants (see Note 5, "Short-term Borrowings", of Notes to Consolidated Financial Statements). During the first quarter of fiscal 1997, Coherent 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. Coherent 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 Coherent 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 Coherent does not purchase the property or arrange for its sale as discussed above, Coherent would be obligated for an additional lease payment of approximately $21.5 million. Coherent occupied the building in July 1998 and commenced lease payments at that time. The lease requires Coherent to maintain specified financial covenants, all of which Coherent was in compliance with as of October 2, 1999. CHANGES IN FINANCIAL CONDITION Cash and equivalents at October 2, 1999 increased by $22.3 million (140%) from September 26, 1998. Operations and changes in exchange rates generated $37.2 million including an increase in short-term 24 investments of $13.7 million. Investing activities used $90.3 million; $21.3 million was used to acquire property and equipment (net of proceeds from disposition of property and equipment) and $64.0 million was used for business acquisitions. Financing activities provided $75.4 million; sales of shares under employee benefit plans generated $3.3 million and increased net borrowings provided $72.1 million. 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 Coherent 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 October 2, 1999, the fair value of the portfolio would decline by an immaterial amount. Coherent has the ability to generally hold its fixed income investments until maturity and therefore Coherent 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. Coherent has fixed rate long-term debt of approximately $77.1 million, and a hypothetical 10 percent decrease in interest rates would not have a material impact on the fair market value of this debt. Coherent does not hedge any interest rate exposures. FOREIGN CURRENCY EXCHANGE RISK Coherent has foreign subsidiaries, which sell and manufacture its products in various global markets. As a result, Coherent's earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. Coherent attempts to limit these exposures through operational strategies and financial market instruments. Coherent 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. Coherent does not use derivative financial instruments for trading purposes. Coherent had $24.1 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 October 2, 1999. Gains and losses related to these instruments at October 2, 1999 were not material. Looking forward, Coherent 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. The following table provides information about Coherent's foreign exchange forward contracts at October 2, 1999. 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 October 2, 1999. 25 Net forward contracts to sell (buy) foreign currencies for U.S. dollars:
(IN THOUSANDS, EXCEPT CONTRACT RATES) -------------------------------------- AVERAGE U.S. CONTRACT NOTIONAL FAIR RATE AMOUNT VALUE -------- -------- -------- Euro....................................... 1.077 $9,675 $9,635 Japanese Yen............................... 114.715 7,806 8,528 British Pound Sterling..................... 1.602 2,963 3,060 Swedish Krone.............................. 8.285 1,485 1,511 Hong Kong Dollar........................... 7.771 579 579 Danish Kroner.............................. 7.081 395 404 Norwegian Kroner........................... 7.900 228 234 Canadian Dollar............................ 1.466 171 169
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. 26 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 2000, (the "1999 Proxy Statement") and is incorporated herein by reference. The 1999 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 Coherent:
NAME AGE OFFICE HELD - ---- -------- --------------------------------------------------- Bernard J. Couillaud, Ph.D................ 55 President and Chief Executive Officer Robert J. Quillinan....................... 52 Executive Vice President and Chief Financial Officer John R. Ambroseo, Ph.D.................... 38 Executive Vice President, President and General Manager, Coherent Laser Group Vittorio Fossati-Bellani, Ph.D............ 52 Executive Vice President, President and General Manager, Coherent Semiconductor Group James Taylor.............................. 50 Executive Vice President, President and General Manager, Coherent Medical Group Dennis C. Bucek........................... 54 Senior Vice President, Treasurer and Assistant Secretary Scott H. Miller........................... 45 Senior Vice President and General Counsel Larry W. Sonsini.......................... 58 Secretary
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. Dr. Couillaud has been with Coherent since 1983, received his Ph.D. from Bordeaux University and was a Professor of Physics at Stanford University. 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. Mr. Quillinan received his masters of science in accounting from Clarkson University and is a CPA. Dr. Ambroseo became Executive Vice President, and President and General Manager of Coherent Laser Group in September 1997. He joined Coherent in 1988 as a Sales Engineer and has served as Product Marketing Manager, U. S. Sales Manager, Director of European Operations and most recently as Scientific Business Unit Manager. Dr. Ambroseo received his Ph.D. in chemistry from the University of Pennsylvania. 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. Dr. Fossati-Bellani received his doctorate degree in physics in 1970 from the University of Milano, Italy. Mr. Taylor has served as Executive Vice President and President and General Manager of Coherent Medical Group since February 1999. From 1997 to 1999, Mr. Taylor served as President and CEO of Andros, Inc., an analytical instruments company headquartered in Berkeley, CA. From 1995 through 1997, 27 Mr. Taylor served as President of Ohmeda Medical Systems Division and from 1993-1994 as Vice President, Marketing, Medical Systems Division of Ohmeda Medical, Inc. Mr. Taylor holds a master's degree from John Hopkins University and attended the Stanford Executive Institute. Mr. Bucek has served as Senior Vice President, Treasurer and Assistant Secretary since August 1985. He received a bachelor's degree from Mankato State University and is a CPA. Mr. Miller has served as General Counsel to Coherent since October 1988 and as Senior Vice President since March 1994. He received a bachelor's degree in economics from UCLA in 1977 and J.D. in 1980 from Stanford Law School. For over eight years, Mr. Larry Sonsini has served as Coherent's Secretary. He is a member of the law firm Wilson, Sonsini, Goodrich & Rosati, P.C. in Palo Alto, California. 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 1999 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 1999 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 1999 Proxy Statement and is incorporated herein by reference. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND FORM 8-K REPORTS (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- 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.............................. 33 Consolidated Balance Sheets--October 2, 1999 and September 26, 1998................................................ 34 Consolidated Statements of Income--Years ended October 2, 1999, September 26, 1998 and September 27, 1997......... 35 Consolidated Statements of Stockholders' Equity--Years ended October 2, 1999, September 26, 1998 and September 27, 1997................................................ 36 Consolidated Statements of Cash Flows--Years ended October 2, 1999, September 26, 1998 and September 27, 1997...... 37 Notes to Consolidated Financial Statements.................. 39 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts.............. 62
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 None 29 (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.) 3.2* Bylaws, as amended. (Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended September 29, 1990.) 4.1* Amended and Restated Common Shares Rights Agreement dated November 2, 1989 between Coherent 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.) 10.36 Note Purchase Agreement by and between Coherent, Inc. and the purchasers of $70 million series notes dated May 18, 1999. 21.1 Subsidiaries. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney. 27 Financial Data Schedule
- ------------------------ * These exhibits were previously filed with the Commission as indicated and are incorporated herein by reference. 30 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 15, 1999. COHERENT, INC. By: /s/ BERNARD COUILLAUD ----------------------------------------- Bernard Couillaud PRESIDENT AND CHIEF EXECUTIVE OFFICER
31 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bernard J. Couillaud and Robert J. Quillinan, jointly and severally, his attorneys-in-fact, each with the power of substitution for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ BERNARD J. COUILLAUD December 15, 1999 - ------------------------------------------- ---------------------------------------- Bernard J. Couillaud Date (Director, President & Chief Executive Officer) /s/ ROBERT J. QUILLINAN December 15, 1999 - ------------------------------------------- ---------------------------------------- Robert J. Quillinan Date (Executive Vice President & Chief Financial Officer) /s/ HENRY E. GAUTHIER December 15, 1999 - ------------------------------------------- ---------------------------------------- Henry E. Gauthier Date (Director, Chairman of the Board) /s/ CHARLES W. CANTONI December 15, 1999 - ------------------------------------------- ---------------------------------------- Charles W. Cantoni Date (Director) /s/ FRANK CARRUBBA December 15, 1999 - ------------------------------------------- ---------------------------------------- Frank Carrubba Date (Director) /s/ THOMAS SLOAN NELSEN December 15, 1999 - ------------------------------------------- ---------------------------------------- Thomas Sloan Nelsen Date (Director) /s/ JERRY E. ROBERTSON December 15, 1999 - ------------------------------------------- ---------------------------------------- Jerry E. Robertson Date (Director)
32 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Coherent, Inc.: We have audited the accompanying consolidated balance sheets of Coherent, Inc. and its subsidiaries, as of October 2, 1999 and September 26, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended October 2, 1999. 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 Coherent'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 October 2, 1999 and September 26, 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 2, 1999 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 November 1, 1999 33 COHERENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE)
OCTOBER 2, SEPTEMBER 26, 1999 1998 ---------- ------------- ASSETS CURRENT ASSETS: Cash and equivalents...................................... $ 38,279 $ 15,944 Short-term investments.................................... 30,637 16,954 Accounts receivable--net of allowances of $4,592 in 1999 and $4,817 in 1998...................................... 95,003 86,822 Inventories............................................... 97,902 103,541 Prepaid expenses and other assets......................... 18,738 22,895 Deferred tax assets....................................... 37,014 26,618 -------- -------- TOTAL CURRENT ASSETS........................................ 317,573 272,774 -------- -------- PROPERTY AND EQUIPMENT...................................... 165,630 147,775 ACCUMULATED DEPRECIATION AND AMORTIZATION................... (75,676) (64,918) -------- -------- Property and equipment--net............................... 89,954 82,857 -------- -------- GOODWILL--net of accumulated amortization of $9,372 in 1999 and $6,912 in 1998........................................ 39,490 11,595 OTHER ASSETS................................................ 48,451 23,535 -------- -------- $495,468 $390,761 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings..................................... $ 14,371 $ 11,645 Current portion of long-term obligations.................. 8,599 788 Accounts payable.......................................... 18,343 17,851 Income taxes payable...................................... 8,221 9,160 Other current liabilities................................. 73,120 59,603 -------- -------- TOTAL CURRENT LIABILITIES................................... 122,654 99,047 -------- -------- LONG-TERM OBLIGATIONS....................................... 74,745 12,828 OTHER LONG-TERM LIABILITIES................................. 16,819 12,599 MINORITY INTEREST IN SUBSIDIARIES........................... 3,945 3,664 STOCKHOLDERS' EQUITY: Common stock, par value $.01: Authorized--100,000 shares Outstanding--24,142 in 1999 and 23,736 in 1998.......... 240 236 Additional paid-in capital................................ 106,748 102,469 Notes receivable from stock sales......................... (557) (310) Accumulated other comprehensive income.................... 136 1,331 Retained earnings......................................... 170,738 158,897 -------- -------- TOTAL STOCKHOLDERS' EQUITY.................................. 277,305 262,623 -------- -------- $495,468 $390,761 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 34 COHERENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED -------------------------------- OCT. 2, SEPT. 26, SEPT. 27, 1999 1998 1997 -------- --------- --------- NET SALES................................................... $468,869 $410,449 $391,038 COST OF SALES............................................... 248,203 212,584 185,536 -------- -------- -------- GROSS PROFIT................................................ 220,666 197,865 205,502 -------- -------- -------- OPERATING EXPENSES: Research and development.................................. 46,759 44,534 39,406 In-process research and development....................... 16,000 9,315 Selling, general and administrative....................... 134,129 124,555 110,813 Intangibles amortization.................................. 5,701 4,644 3,658 -------- -------- -------- TOTAL OPERATING EXPENSES.................................... 202,589 173,733 163,192 -------- -------- -------- INCOME FROM OPERATIONS...................................... 18,077 24,132 42,310 OTHER INCOME (EXPENSE): Interest and dividend income.............................. 3,042 1,274 1,404 Interest expense.......................................... (3,755) (1,236) (1,226) Foreign exchange loss..................................... (163) (711) (350) Other--net................................................ (971) 246 4,656 -------- -------- -------- TOTAL OTHER INCOME (EXPENSE), NET........................... (1,847) (427) 4,484 -------- -------- -------- INCOME BEFORE INCOME TAXES.................................. 16,230 23,705 46,794 PROVISION FOR INCOME TAXES.................................. 4,389 4,894 20,502 -------- -------- -------- NET INCOME.................................................. $ 11,841 $ 18,811 $ 26,292 ======== ======== ======== NET INCOME PER SHARE: Basic..................................................... $ .49 $ .80 $ 1.16 Diluted................................................... $ .48 $ .79 $ 1.12 ======== ======== ======== SHARES USED IN COMPUTATION: Basic..................................................... 23,957 23,374 22,664 Diluted................................................... 24,633 23,749 23,480 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 35 COHERENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 2, 1999, SEPTEMBER 26, 1998, AND SEPTEMBER 27, 1997 (IN THOUSANDS)
COMMON STOCK ACCUM. ------------------- ADD. NOTES REC. OTHER TOTAL PAR PAID-IN FROM STOCK RETAINED COMP. COMP. SHARES VALUE CAPITAL SALES EARNINGS INCOME TOTAL INCOME -------- -------- -------- ----------- -------- -------- -------- -------- 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, translation adjustment, net of tax...................... (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 Plan......... 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, translation adjustment, net of tax...................... 1,064 1,064 1,064 ------- Total comprehensive income................ $19,875 ======= Sales of shares under Employee Stock Option Plan........... 459 5 3,692 (212) 3,485 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 ------ ------ -------- ----- -------- ------ -------- ------- BALANCE, SEPTEMBER 26, 1998... 23,736 236 102,469 (310) 158,897 1,331 262,623 Net income.................... 11,841 11,841 $11,841 Other comprehensive income, translation adjustment, net of tax...................... (1,195) (1,195) (1,195) ------- Total comprehensive income................ $10,646 ======= Sales of shares under Employee Stock Option Plan........... 201 2 1,974 (247) 1,729 Productivity Incentive Plan distributions............... 25 329 329 Sales of shares under Employee Stock Purchase Plan......... 180 2 1,540 1,542 Tax benefit of Employee Stock Option Plan................. 436 436 ------ ------ -------- ----- -------- ------ -------- BALANCE, OCTOBER 2, 1999...... 24,142 $ 240 $106,748 $(557) $170,738 $ 136 $277,305 ====== ====== ======== ===== ======== ====== ========
36 COHERENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED -------------------------------- OCT. 2, SEPT. 26, SEPT. 27, 1999 1998 1997 -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 11,841 $ 18,811 $26,292 Adjustments to reconcile net income to net cash provided by operating activities: Purchased in-process research and development........... 16,000 9,315 Purchases of short-term trading investments............. (118,933) (139,943) (82,605) Proceeds from sales of short-term trading investments... 105,250 133,171 98,400 Depreciation and amortization........................... 14,155 12,535 10,932 Intangibles amortization................................ 5,701 4,644 3,658 Issuance of common stock under Productivity Incentive Plan.................................................. 329 401 730 Deferred income taxes................................... (10,453) (4,229) 710 Minority interest in subsidiaries....................... 1,118 909 1,610 Dividends paid to minority stockholders................. (1,196) (1,421) Equity in (income) loss of joint ventures............... (436) (131) (287) Changes in assets and liabilities: Accounts receivable................................... (824) 8,958 (12,830) Inventories........................................... 7,914 (16,030) (19,803) Prepaid expenses and other assets..................... 387 (3,887) (7,571) Accounts payable...................................... (895) (500) 5,952 Other current liabilities............................. 8,662 5,064 (5,187) -------- -------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... 38,620 18,352 29,316 ======== ======== ======= CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment..................... (24,225) (22,351) (24,864) Dispositions of property and equipment, net............. 2,934 102 541 Sale of Porter Drive facility........................... 9,631 Acquisition of businesses, net of cash acquired......... (64,012) (841) (15,351) Other--net.............................................. (4,910) (3,126) (2,215) -------- -------- ------- NET CASH USED FOR INVESTING ACTIVITIES...................... (90,213) (26,216) (32,258) ======== ======== ======= (CONTINUED)
37 COHERENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED) (IN THOUSANDS)
YEARS ENDED -------------------------------- OCT. 2, SEPT. 26, SEPT. 27, 1999 1998 1997 -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt borrowings............................... $ 71,784 $ 4,301 $ 3,444 Long-term debt repayments............................... (1,333) (1,347) (3,372) Short-term borrowings................................... 18,271 24,018 40,107 Short-term repayments................................... (17,084) (30,843) (24,432) Cash overdrafts......................................... 694 (7,957) Repayments of capital lease obligations................. (163) (24) Sales of shares under employee stock option and purchase plans, net............................................ 3,271 6,842 4,799 Collection of notes receivable from stock sales......... 747 -------- -------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 75,440 2,971 13,312 ======== ======== ======= EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS..... (1,512) (618) 1,871 -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. 22,335 (5,511) 12,241 Cash and equivalents, beginning of year................. 15,944 21,455 9,214 -------- -------- ------- CASH AND EQUIVALENTS, END OF YEAR........................... $ 38,279 $ 15,944 $21,455 ======== ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.............................................. $ 3,755 $ 1,236 $ 1,226 Income taxes.......................................... $ 14,972 $ 10,282 $26,644 ======== ======== ======= NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock for 1995 acquisition obligation............................................ $ 2,875 Equipment acquired under capital leases................. $ 1,278 ISSUANCE OF COMMON STOCK FOR NOTES RECEIVABLE........... $ 247 $ 212 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 38 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 or Coherent). All significant intercompany balances and transactions have been eliminated. Investments in business entities in which Coherent 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 Coherent's fiscal year for 1999 included 53 weeks, fiscal 1998 and 1997 each 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 Coherent adopted Financial Accounting Standards Board Statement (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information" in fiscal 1999. The statement requires certain financial and descriptive information about operating segments, profit or loss, certain specific revenue and expense items and segment assets. (See Note 13). The adoption of SFAS No. 131 has no impact on the Company's net income, balance sheet or stockholders' equity. RECENTLY ISSUED ACCOUNTING STANDARDS 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. In May 1999, SFAS 133 was amended to defer its effective date. SFAS 133 will be effective for Coherent's first quarterly filing of 2001. 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 Coherent'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 accumulated other comprehensive income. Foreign currency transaction gains and losses are included in net earnings. 39 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Coherent'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:
1999 1998 -------- -------- (IN THOUSANDS) Purchased parts and assemblies........................... $26,200 $ 30,421 Work-in-process.......................................... 33,098 33,684 Finished goods........................................... 38,604 39,436 ------- -------- Inventories.............................................. $97,902 $103,541 ======= ========
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:
1999 1998 USEFUL LIFE -------- -------- -------------- (IN THOUSANDS) Land..................................... $ 7,212 $ 7,282 Buildings and improvements............... 41,939 41,217 20-31 years Equipment, furniture and fixtures........ 103,373 88,942 3-10 years Leasehold improvements................... 13,106 10,334 Terms of lease -------- -------- Property and equipment................... $165,630 $147,775 ======== ========
GOODWILL Goodwill relates to acquired subsidiaries and is being amortized on a straight-line basis over estimated useful lives of three to forty years. Coherent 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, acquired existing technology, licenses and patents and are amortized on a straight-line basis over estimated useful lives of two to seventeen years. Coherent 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. 40 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) WARRANTY Coherent warrants certain of its products and provides for estimated product warranty costs at the time of sale. REVENUE RECOGNITION Coherent 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 Coherent to concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. Coherent invests 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 October 2, 1999, the majority of its short-term investments are in repurchase agreements, corporate obligations and federal agency obligations. The majority of Coherent's accounts receivable are derived from sales to customers for medical and surgical applications, scientific research applications, and commercial applications. Coherent performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary but generally requires no collateral. Coherent maintains reserves for potential credit losses. INCOME TAXES Coherent 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 $46,142,000 at October 2, 1999. Withholding taxes of approximately $2,270,000 would be payable upon repatriation of such earnings which would result in additional foreign tax credits. DERIVATIVES Coherent 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 Coherent's derivative hedges offsets the cash flow impact of the foreign exchange movements on the underlying exposed asset and liability. 41 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 foreign exchange contracts are determined by obtaining quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences. EARNINGS PER SHARE Earnings per share (EPS) are computed as basic EPS using the weighted average number of common shares outstanding and diluted EPS using the weighted average number of common and dilutive common shares outstanding, in accordance with SFAS 128 (See Note 10). COMPREHENSIVE INCOME On September 27, 1998, Coherent adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. STOCK-BASED COMPENSATION As permitted under SFAS 123, "Accounting for Stock-Based Compensation" Coherent 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 October 2, 1999, Coherent 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, except for the acquisition of Star Medical Technologies, Inc., because the effects of these acquisitions were not material on either an individual or an aggregate basis. The amounts allocated to purchased in-process research and development 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 research and development from these acquired companies to technological feasibility are not expected to have a material impact on Coherent'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 fifteen years. In April 1999, Coherent acquired all of the outstanding shares of Star Medical Technologies, Inc. (Star) for approximately $67.0 million (consisting of $65.0 million in cash, $1.7 million of unamortized distribution rights and $0.3 million of acquisition costs) from Palomar Medical Technologies, Inc. and from 42 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) certain Star employees. Star, based in Pleasanton, California, manufactures LightSheer-TM- laser diode systems, which have received FDA approval for hair removal and the treatment of leg veins. The acquisition was treated as a purchase and, accordingly, the acquired assets and liabilities were recorded at their fair market values at the date of acquisition. The aggregate purchase price of $67.0 million (including acquisition costs) has been allocated to the assets and in-process research and development acquired. The total purchase price was allocated among the assets acquired (including acquired in-process research and development) as follows (in thousands): Purchase price allocation: Tangible assets............................................. $ 11,214 In-process research and development......................... 16,000 Intangible assets: Goodwill................................................ 30,868 Existing technology..................................... 19,200 Workforce............................................... 1,700 Liabilities assumed......................................... (10,841) Deferred tax liabilities.................................... (1,170) -------- Total....................................................... $ 66,971 ========
The goodwill is being amortized over its estimated useful life of 15 years. The existing technology and workforce assets are being amortized over their estimated useful lives of 7 and 3 years, respectively. The purchase price allocation and intangible valuation was based on management's estimates of the after-tax net cash flows and gave explicit consideration to the Securities and Exchange Commission's views on purchased in-process research and development as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. Specifically, the valuation gave consideration to the following: (i) the employment of a fair market value premise excluding any Coherent-specific considerations which could result in estimates of investment value for the subject assets; (ii) comprehensive due diligence concerning all potential intangible assets including trademarks\trade names, patents, copyrights, noncompete agreements, assembled workforce, customer relationships and sales channel; (iii) the value of existing technology was specifically addressed, with a view toward ensuring the relative allocations to existing technology and in-process research and development were consistent with the relative contributions of each to the final product; and (iv) the allocation to in-process research and development was based on a calculation that considered only the efforts completed as of the transaction date, and only the cash flow associated with said completed efforts for one generation of the products currently in process. As indicated above, Coherent recorded a one-time charge of $16,000,000 ($10,734,000 net of tax) in 1999 for purchased in-process research and development related to five development projects. The charge related to the portion of these products, excluding existing technology, that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. Management's conclusion that the in-process development effort had no alternative future use was reached in consultation with the engineering personnel from both Coherent and Star. The first of these projects is a new product in the LightSheer family that results in a 50% increase in power and twice the coverage by incorporating a new heat exchanger, thermoelectric cooling system, 43 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) sapphire tip and software. At the time of acquisition, the development was 86% complete and the estimated cost to complete was $0.2 million. Coherent began shipping the product in May 1999. The second of these projects is a next generation LightSheer product that incorporates a new microprocessor and touch-screen as well as redesigns the packaging to improve serviceability. At the time of acquisition, the development was 78% complete and the estimated cost to complete was $0.5 million. Coherent began shipping the product in July 1999. The third of these projects is a new product in the LightSheer family that will result in increased coverage and will require a new clinical trial. At the time of acquisition, the development was 72% complete and the estimated cost to complete was $0.6 million. Management expects that the product will become available for sale in fiscal 2000. The fourth project is a new application of the semiconductor diode array technology, originally developed for hair removal, in a laser-based diagnostic system. At the time of acquisition, the development was 58% complete and the estimated cost to complete was $1.0 million. Management expects that the product will become available for sale in fiscal 2001. The fifth development project is an ensemble of diode array products. At the time of acquisition, the development was 54% complete and the estimated cost to complete was $1.4 million. Management expects that the product will become available for sale in fiscal 2001, however, no assurances can be given as to the availability, if any. Coherent will begin to benefit from the acquired research and development of these products once they begin shipping. Failure to reach successful completion of these projects could result in impairment of the associated capitalized intangible assets and could require Coherent to accelerate the time period over which the intangibles are being amortized, which could have a material adverse effect on Coherent's business, financial condition, or results of operation. Significant assumptions used to determine the value of in-process research and development included several factors, including the following: (i) forecast of net cash flows that were expected to result from the development effort using projections prepared by Coherent's and Star's management; (ii) percentage complete for the projects estimated by considering a number of factors, including the costs invested to date relative to total cost of the development effort and the amount of progress completed as of the acquisition date, on a technological basis, relative to the overall technological achievements required to achieve the functionality of the eventual product. The technological issues were addressed by engineering representatives from both Coherent and Star, and when estimating the value of the technology, the projected financial results of the acquired assets were estimated on a stand-alone basis without any consideration to potential synergic benefits or "investment value" related to the acquisition. Accordingly, separate projected cash flows were prepared for both the existing as well as the in-process projects. These projected results were based on the number of units sold times average selling price less the associated costs. After preparing the estimated cash flows from the products being developed, a portion of these cash flows were attributed to the existing technology, which was embodied in the in-process product lines and enabled a quicker and more cost-effective development of these products. When estimating the value of the existing and in-process technologies, discount rates of 15% and 30% were used, respectively. The discount rates considered both the status and risks associated with the respective cash flows at the acquisition date. 44 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) Selected unaudited proforma combined results of operations for the years ended October 2, 1999 and September 26, 1998, assuming the Star acquisition had occurred on September 28, 1997 are as follows:
1999 1998 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales.................................. $485,617 $422,387 Net income................................. 22,334 980 Net income per diluted share............... 0.91 0.04
In May 1999, Coherent issued $70 million of Senior Notes in a private bond placement to finance the acquisition of Star. $44 million of the notes are due in annual installments from May 2000 through May 2006, at a fixed interest rate of 6.7%, and $26 million of the notes are due in annual installments from May 2004 through May 2006, at a fixed interest rate of 6.91%. 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 Coherent paid $0.5 million to FONS' owners in exchange for 60% ownership of CFX. Coherent recorded $0.4 million of goodwill associated with the purchase. The CFX joint venture was unable to achieve its business objectives and ceased operations in May 1999. The related goodwill has been fully amortized. 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, Coherent 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. 45 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) In March 1998, Coherent 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:
1999 1998 -------- -------- (IN THOUSANDS) Prepaid income taxes...................................... $ 4,943 $10,275 Prepaid expenses and other................................ 13,795 12,620 ------- ------- Prepaid expenses and other assets......................... $18,738 $22,895 ======= =======
Other assets consist of the following:
1999 1998 -------- -------- (IN THOUSANDS) Intangible assets......................................... $24,729 $ 8,609 Other assets.............................................. 22,470 13,419 Assets held for investment................................ 1,252 1,507 ------- ------- Other assets.............................................. $48,451 $23,535 ======= =======
Assets held for investment at October 2, 1999 and September 26, 1998 include Coherent's former manufacturing facility in Sturbridge, Massachusetts which Coherent is leasing to Convergent Energy. Accumulated amortization of intangible assets is $8,534,000 and $6,713,000 at October 2, 1999 and September 26, 1998. Other current liabilities consist of the following:
1999 1998 -------- -------- (IN THOUSANDS) Accrued payroll and benefits.............................. $25,132 $20,803 Accrued expenses and other................................ 22,567 14,495 Reserve for warranty...................................... 13,269 10,938 Deferred income........................................... 9,695 10,517 Customer deposits......................................... 2,457 2,850 ------- ------- Other current liabilities................................. $73,120 $59,603 ======= =======
46 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. BALANCE SHEET DETAILS (CONTINUED) Other long-term liabilities consist of the following:
1999 1998 -------- -------- (IN THOUSANDS) Deferred compensation..................................... $11,233 $ 8,200 Deferred income and other................................. 3,435 3,082 Environmental remediation costs........................... 1,169 1,269 Deferred tax liabilities.................................. 982 48 ------- ------- Other long-term liabilities............................... $16,819 $12,599 ======= =======
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 Coherent's long-term obligations approximates fair market value. The carrying amount and fair value of foreign exchange contracts was $24.1 million at October 2, 1999. The carrying amount and fair value of foreign exchange contracts was $29.5 million and $30.0 million at September 26, 1998, respectively. 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, Coherent has exposures to foreign currency fluctuations arising from foreign currency sales and purchases and intercompany transactions, among other things. Coherent uses foreign exchange forward contracts to limit its exposure to foreign exchange losses arising from nonfunctional currency payables and receivables and firm commitments. Coherent 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 Coherent's financial results. Costs associated with entering into such contracts are generally amortized over the life of the instruments and are not material to Coherent's financial results. At October 2, 1999 and September 26, 1998, Coherent 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 47 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. FINANCIAL INSTRUMENTS (CONTINUED) 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:
OCT. 2, 1999 SEPT. 26, 1998 ------------------------ ------------------------ UNREALIZED UNREALIZED FAIR VALUE GAIN (LOSS) FAIR VALUE GAIN (LOSS) ---------- ----------- ---------- ----------- (IN THOUSANDS) Euro............................................... $ 9,635 $ 302 Japanese Yen....................................... 8,528 703 $10,317 $ 106 British Pound Sterling............................. 3,060 80 978 23 Swedish Krone...................................... 1,511 27 622 (6) Hong Kong Dollar................................... 579 699 (15) Danish Kroner...................................... 404 9 Norwegian Kroner................................... 234 7 486 (20) Canadian Dollar.................................... 169 172 2 German Deutschemark................................ 9,465 (184) French Franc....................................... 6,241 (322) Austrian Schilling................................. 1,529 (51) Belgian Franc...................................... 406 (30) Finnish Mark....................................... (314) 21 Dutch Guilder...................................... (610) 34 ------- ------ ------- ----- $24,120 $1,128 $29,991 $(442) ======= ====== ======= =====
5. SHORT-TERM BORROWINGS Short-term borrowings consist of the following:
1999 1998 -------- -------- (IN THOUSANDS) Borrowings under bank lines............................... $11,850 $ 9,479 Note payable to minority shareholder in subsidiary........ 2,521 2,166 ------- ------- Short-term borrowings..................................... $14,371 $11,645 ======= =======
The note payable to minority shareholder in subsidiary is due upon four weeks notice from the noteholder and bears interest at EURIBOR (Euro Interbank Offered Rate) plus 0.5% with a maximum of 9.0%. Coherent maintains lines of credit worldwide with several banks. Coherent's primary domestic line of credit is a $20,000,000 unsecured revolving account from Bank of America, which expires April 23, 2002. In addition, Coherent has several foreign lines of credit which allow it to borrow in the applicable local currency. These lines of credit total $38,852,000 and are concentrated in Germany and Japan. Coherent'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 October 2, 1999 were at a weighted average interest rate of 2.4%. The Company's domestic lines of credit are generally subject to standard covenants related to financial ratios, profitability and dividend payments. Coherent was in compliance with all financial covenants at October 2, 1999. 48 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES The provision for income taxes consists of the following:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Currently payable: Federal......................................... $ 5,138 $ 5,126 $ 9,789 State........................................... (853) 65 1,666 Foreign......................................... 10,367 7,171 10,660 -------- ------- ------- 14,652 12,362 22,115 -------- ------- ------- Deferred: Federal......................................... (9,772) (7,069) 1,601 State........................................... (342) (757) (35) Foreign......................................... (149) 358 (3,179) -------- ------- ------- (10,263) (7,468) (1,613) -------- ------- ------- Provision for income taxes...................... $ 4,389 $ 4,894 $20,502 ======== ======= =======
The components of income before income taxes consist of:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS) United States.................................... $(3,769) $ 8,037 $31,244 Foreign.......................................... 19,999 15,668 15,550 ------- ------- ------- Income before income taxes....................... $16,230 $23,705 $46,794 ======= ======= =======
The reconciliation of the statutory federal income tax rate to the effective rate is as follows:
1999 1998 1997 -------- -------- -------- % OF % OF % OF PRETAX PRETAX PRETAX INCOME INCOME INCOME -------- -------- -------- 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............ 19.8 7.8 4.4 Foreign tax credit................................... (13.6) (8.6) (1.8) Foreign sales corporation benefit.................... (1.8) State income taxes, net of federal income tax benefit............................................ (4.8) (1.9) 2.3 Goodwill............................................. 1.1 0.3 Research and development credit...................... (2.6) (4.7) (2.9) Other................................................ (5.0) 2.2 0.2 ----- ----- ---- Provision for income taxes........................... 27.0% 20.6% 43.8% ===== ===== ====
49 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) The significant somponents of deferred tax assets and liabilities were:
OCTOBER 2, SEPTEMBER 26, 1999 1998 ---------- ------------- (IN THOUSANDS) Deferred tax assets: Reserves and accruals not currently deductible........ $26,600 $18,402 Operating loss carry forwards and tax credits......... 6,464 6,683 Intercompany profit................................... 2,240 1,179 Deferred service revenue.............................. 2,813 2,462 State taxes........................................... 1,114 Depreciation and amortization......................... 5,891 620 Other................................................. 2,685 2,456 ------- ------- 46,693 32,916 Valuation allowance................................... (2,300) (3,567) ------- ------- 44,393 29,349 Deferred tax liabilities: Other................................................. 2,735 2,779 ------- ------- 2,735 2,779 ------- ------- Total deferred tax assets and liabilities............. $41,658 $26,570 ======= =======
Coherent decreased its valuation allowance in fiscal 1999 by $1,267,000 related to the write-off foreign tax credit carryforwards that expired. The total net deferred tax asset is classified on the balance sheet at October 2, 1999 and September 26, 1998 as follows (in thousands):
1999 1998 -------- -------- (IN THOUSANDS) Current deferred income tax assets........................ $37,014 $26,618 Non-current deferred income tax assets.................... 5,626 Non-current deferred income tax liabilities............... (982) (48) ------- ------- Net deferred tax assets................................... $41,658 $26,570 ======= =======
Total net operating losses of $1,855,000 for tax return purposes expire in 2004. Total tax credits of $923,000 for tax return purposes expire as follows: 2003--$759,000 and 2004--$164,000. Utilization of certain of these carryforwards is subject to restrictions relating to taxable income of subsidiaries not previously consolidated for income tax purposes. 50 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM OBLIGATIONS The components of long-term obligations are as follows:
1999 1998 -------- -------- (IN THOUSANDS) Notes payable............................................. $77,142 $ 8,292 Bonds payable............................................. 1,800 2,200 Capital leases............................................ 1,297 19 Deferred acquisition payment (Note 2)..................... 3,105 3,105 ------- ------- 83,344 13,616 Current portion........................................... (8,599) (788) ------- ------- Long-term obligations..................................... $74,745 $12,828 ======= =======
NOTES PAYABLE--At October 2, 1999, notes payable consists of $70.0 million ($44.0 million at 6.7% and $26.0 million at 6.9%) to finance the Star acquisition, $2.1 million at 8.0% for the mortgage on the CEEL facility, $3.1 million at 1.0% to 8.2% of outside financing for Tutcore and $2.0 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 (4.71% at October 2, 1999) 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: 2000--$8,349,000, 2001--$7,523,000, 2002--$9,663,000, 2003--$7,452,000, 2004--$15,826,000 and thereafter $33,234,000. 8. STOCKHOLDERS' EQUITY Each outstanding share of Coherent's common stock carries a stock purchase right (right) issued pursuant to a dividend distribution declared by Coherent'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 Coherent'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 Coherent'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. Coherent 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 Coherent's common stock. If, prior to redemption of the rights, Coherent is acquired in a merger or other business combination in which Coherent is the surviving corporation, or a person or group acquires 30% or more of Coherent'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 Coherent having a fair market value equal to twice the right's exercise price. If Coherent 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. 51 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 Coherent'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 1999, 25,097 shares (fair market value of $402,003) and $3,080,306 were accrued for the benefit of employees. 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. At October 2, 1999, Coherent had 25,397 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, Coherent 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. Coherent's contributions (net of forfeitures) for fiscal 1999, 1998, and 1997 were $3,757,000, $3,322,000 and $3,057,000, respectively. SUPPLEMENTAL RETIREMENT PLAN Coherent 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. Coherent will match these contributions up to an amount equal to 6% of such participants' earnings less any amounts contributed by Coherent to such participant under the Coherent Employee Retirement and Investment Plan. Coherent's contributions (net of forfeitures) for fiscal 1999, 1998, and 1997 were $18,117, $13,602 and $17,834, respectively. EMPLOYEE STOCK PURCHASE PLAN Coherent 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 1999, 180,295 shares were purchased by and distributed to employees at an average price of $8.55 per share. 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. At October 2, 1999, $3,686,000 had been contributed by employees that will be used to purchase a maximum of 559,988 shares in fiscal 2000 at a price determined under the terms of the Plan. At October 2, 1999, Coherent had 2,223,000 shares of its common stock reserved for future issuance under the plan. STOCK OPTION PLANS Coherent has two Stock Option Plans and a non-employee Directors' Stock Option Plan. Under these plans, Coherent may grant options to purchase up to 9,000,000 and 400,000 shares of common stock, respectively. Employee options are generally exercisable three years from the grant date, at the fair market 52 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE STOCK OPTION AND BENEFIT PLANS (CONTINUED) 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 Coherent. 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. Option activity for all plans is summarized as follows:
OUTSTANDING OPTIONS ------------------------------------- NUMBER OF WEIGHTED AVERAGE EXERCISE SHARES PRICE PER SHARE --------- ------------------------- 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 Options granted (weighted average fair value of ($6.82)..... 1,405,300 14.71 Options exercised........................................... (201,000) 9.83 Options canceled............................................ (393,100) 17.58 --------- ------ OUTSTANDING, OCTOBER 2, 1999 (1,099,000 EXERCISABLE AT A WEIGHTED AVERAGE PRICE OF $16.59)......................... 3,693,500 $15.40 ========= ======
53 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE STOCK OPTION AND BENEFIT PLANS (CONTINUED) At October 2, 1999, 2,821,500 options were available for future grant under all plans. The following table summarizes information about fixed stock options outstanding at October 2, 1999:
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 - --------------------- ----------- ------------ -------------- ----------- -------------- $6.00--6.56.......... 110,170 0.60 $ 6.44 110,180 $ 6.44 6.75--8.94.......... 672,650 4.89 8.92 95,850 8.85 9.00--13.06......... 397,760 5.41 12.61 10,250 9.83 13.19--14.50........ 621,540 3.95 14.15 245,650 13.75 14.63--15.88........ 510,440 5.54 15.69 8,500 15.81 15.94--19.56........ 441,340 3.27 18.99 301,450 19.49 19.63--19.63........ 455,050 3.57 19.63 81,700 19.63 19.94--24.13........ 371,050 3.68 22.12 175,120 21.69 24.25--27.44........ 92,300 3.50 24.46 49,900 24.46 27.75--27.75........ 21,200 2.61 27.75 20,400 27.75 - -------------------- --------- ----- ------ --------- ------ $6.00--27.75......... 3,693,500 4.22 $15.40 1,099,000 $16.59 ========= =========
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of proforma net income (loss) and earnings (loss) per share had Coherent 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 Coherent'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. Coherent's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions:
1999 1998 1997 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Expected life in years................... 3.82 - 4.08 3.87 - 3.98 3.85 - 4.07 Expected volatility...................... 52.3% 50.2% 46.7% Risk-free interest rate.................. 5.3% 5.5% 6.2% Expected dividends....................... NONE none none
54 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE STOCK OPTION AND BENEFIT PLANS (CONTINUED) Coherent's calculations are based on a single option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1999, 1998 and 1997 awards had been amortized to expense over the vesting period of the awards, proforma net income and earnings per share would appear as follows:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income.......................................... As reported $11,841 $18,811 $26,292 Proforma $ 7,306 $15,283 $23,765 Net income per diluted share........................ As reported $ 0.48 $ 0.79 $ 1.12 Proforma $ 0.30 $ 0.64 $ 1.01
The impact of outstanding non-vested stock options granted prior to fiscal 1996 has been excluded from the proforma calculation; accordingly, the fiscal 1999, 1998 and 1997 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 4.7 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 2004. 10. 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:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Weighted average shares outstanding--Basic.................. 23,957 23,374 22,664 Common stock equivalents.................................. 435 354 755 Employee stock purchase plan equivalents.................. 241 21 61 ------- ------- ------- Weighted average shares and equivalents--Diluted............ 24,633 23,749 23,480 ======= ======= ======= Net income for basic and diluted earnings per share computation............................................... $11,841 $18,811 $26,292 ======= ======= ======= Net income per share--basic................................. $ 0.49 $ 0.80 $ 1.16 Net income per share--diluted............................... $ 0.48 $ 0.79 $ 1.12
1,602,000, 1,546,000, and 69,000 anti-dilutive weighted shares have been excluded from the dilutive share equivalents calculation at October 2, 1999, September 26, 1998 and September 27, 1997, respectively. 55 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. OTHER INCOME (EXPENSE) Other income (expense) is as follows:
YEARS ENDED -------------------------------- OCT. 2, SEPT. 26, SEPT. 27, 1999 1998 1997 -------- --------- --------- (IN THOUSANDS) Gain on sale of facility.................................... $ 3,526 Minority interest in subsidiaries........................... $(1,118) $(908) (1,324) Royalty income.............................................. 328 683 951 Equity in income of joint ventures.......................... 436 131 287 Gain (loss) on investments, net............................. (224) 45 (41) Other--net.................................................. (393) 295 1,257 ------- ----- ------- Other income (expense) net.................................. $ (971) $ 246 $ 4,656 ======= ===== =======
12. COMMITMENTS AND CONTINGENCIES COMMITMENTS Coherent leases several of its facilities under operating leases. In addition, Coherent leases the land for its Auburn manufacturing facilities under long-term fixed leases. During the first quarter of fiscal 1997, Coherent 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. Coherent 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 Coherent 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 Coherent does not purchase the property or arrange for its sale as discussed above, Coherent would be obligated for an additional lease payment of approximately $21.5 million (included in future minimum lease payments below). Coherent occupied the building in July 1998 and commenced lease payments at that time. The lease requires Coherent to maintain specified financial covenants, all of which Coherent was in compliance with as of October 2, 1999. Future minimum payments under Coherent's leases are as follows:
CAPITAL OPERATING FISCAL YEAR ENDING LEASES LEASES - ------------------ -------- --------- (IN THOUSANDS) 2000........................................................ $ 308 $ 5,766 2001........................................................ 303 3,096 2002........................................................ 303 23,443 2003........................................................ 303 1,054 2004........................................................ 226 555 Thereafter.................................................. 4,894 ------ ------- Total....................................................... $1,443 $38,808 ======= Amount representing interest................................ 146 ------ Present value of minimum lease payments..................... $1,297 ======
56 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Rent expense was $8,986,000 in fiscal 1999, $7,593,000 in fiscal 1998, and $7,462,000 in fiscal 1997. In September 1988, Coherent entered into several agreements with Patlex Corporation (Patlex) whereby Coherent was granted licenses to several laser related patents developed by Dr. Gordon Gould and assigned to Patlex. Under the terms of the agreements, Coherent 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 $699,000 in fiscal 1999, $893,000 in fiscal 1998, and $1,131,000 in fiscal 1997. The patents expire on various dates through May 2005. CONTINGENCIES 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 Coherent's 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 Coherent's former headquarters facility is located. The responding parties to the Regional Order (including Coherent) 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. 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 Coherent for this site. Coherent has been operating remedial systems at the site to remove subsurface chemicals since April 1992. During fiscal 1997, Coherent 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 Coherent's probable, nondiscounted net liability at October 2, 1999 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 minimum probable recoveries of $0.3 million included in other assets from other parties named to the order. 13. OPERATING SEGMENTS In fiscal 1999, Coherent adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement establishes standards for reporting information about operating segments and related disclosures about products, geographic information and major customers. Coherent is organized around four separately managed business units: the Laser Group, the Semiconductor Group, the Medical Group and the Lambda Group. Consistent with the rules of SFAS No. 131, we have aggregated these four business units into three reportable segments. The Semiconductor Group was 57 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. OPERATING SEGMENTS (CONTINUED) combined with the Laser Group in the Electro-Optics segment as they have similar economic characteristics and are similar in the following: nature of products\services, nature of production process, type/class of customer, distribution methods and nature of regulatory environment. The Electro-Optics segment produces lasers and laser systems for scientific, medical research, micromachining, commercial applications, semiconductor inspection, telecommunications, precision optics and related accessories, including optics and optical products such as special purpose lenses, mirrors and advanced optical coatings. The Medical segment 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. The Lambda segment develops and manufactures excimer, DPSS, and tunable lasers including dye lasers and optical parametric oscillators. Coherent's Chief Executive Officer and Chief Financial Officer have been identified as the chief operating decision makers (CODMs) for SFAS 131 purposes as they assess the performance of the business units and decide how to allocate resources to the business units. Pretax income is the measure of profit and loss that our CODMs use to assess performance and make decisions. Pretax income represents the sales less the cost of sales and direct expenses incurred within the operating segments. In addition, Coherent's corporate expenses, except for depreciation of corporate assets and general legal expenses, are allocated to the operating segments and are included in the results below. Corporate expenses not allocated to the groups (depreciation of corporate assets and general legal expenses) are included in Corporate and Other in the reconciliation of operating results. Further, interest expense, interest income and the provision for income taxes are included in Corporate and Other in the reconciliation of operating results. Intersegment sales are accounted for primarily at domestic selling prices. As the CODMs monitor headcount, depreciation and amortization expense and capital expenditures by operating segment, these amounts are presented below. The CODMs do not review total assets by segment, but they do review net trade receivables, net inventories and net property and equipment by operating segment. The accounting policies for reported segments are the same as for Coherent as a whole (see Note 1). 58 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. OPERATING SEGMENTS (CONTINUED) REPORTABLE OPERATING SEGMENTS Information on reportable segments for the three years ended October 2, 1999, September 26, 1998 and September 27, 1997 is as follows (in thousands, except headcount):
ELECTRO- CORPORATE 1999 OPTICS MEDICAL LAMBDA AND OTHER TOTAL - ---- -------- -------- -------- --------- -------- Net Sales.................................. $233,057 $162,719 $73,093 $468,869 Intersegment Net Sales..................... 20,823 934 999 22,756 Gross Profit............................... 109,291 78,662 32,713 220,666 Research & Development Expense............. 22,694 14,661 9,404 46,759 Purchased Research & Development........... 4,000 12,000 16,000 Selling, General & Administration.......... 55,679 60,616 17,109 $ 725 134,129 Amortization of Intangibles................ 2,241 3,295 165 5,701 -------- -------- ------- -------- -------- Total Operating Expenses................... 84,614 90,572 26,678 725 202,589 Pretax Income (Loss)....................... 23,998 (11,633) 5,480 (1,615) 16,230 Depreciation & Amortization................ 10,747 5,848 2,624 637 19,856 Capital Expenditures....................... 16,456 2,754 3,587 1,428 24,225 Net Trade Receivables...................... 43,529 30,673 21,135 (334) 95,003 Net Inventories............................ 45,404 34,599 17,924 (25) 97,902 Net Property & Equipment................... $ 67,971 $ 7,631 $11,668 $ 2,684 $ 89,954 Headcount.................................. 1,347 698 291 81 2,417
ELECTRO- CORPORATE 1998 OPTICS MEDICAL LAMBDA AND OTHER TOTAL - ---- -------- -------- -------- --------- -------- Net Sales.................................. $193,438 $155,690 $61,321 $410,449 Intersegment Net Sales..................... 23,612 566 2,688 26,866 Gross Profit............................... 91,284 75,584 30,997 197,865 Research & Development Expense............. 20,472 15,427 8,635 44,534 Selling, General & Administration.......... 46,911 61,105 15,874 $ 665 124,555 Amortization of Intangibles................ 2,280 2,183 181 4,644 -------- -------- ------- -------- -------- Total Operating Expenses................... 69,663 78,715 24,690 665 173,733 Pretax Income (Loss)....................... 21,761 (2,667) 4,416 195 23,705 Depreciation & Amortization................ 10,361 4,698 1,742 378 17,179 Capital Expenditures....................... 12,166 4,295 5,647 243 22,351 Net Trade Receivables...................... 37,096 35,658 14,190 (122) 86,822 Net Inventories............................ 43,398 41,143 19,025 (25) 103,541 Net Property & Equipment................... $ 63,463 $ 7,843 $11,157 $ 394 $ 82,857 Headcount.................................. 1,276 656 279 50 2,261
59 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. OPERATING SEGMENTS (CONTINUED)
ELECTRO- CORPORATE 1997 OPTICS MEDICAL LAMBDA AND OTHER TOTAL - ---- -------- -------- -------- --------- -------- Net Sales.................................. $161,787 $169,952 $59,299 $391,038 Intersegment Net Sales..................... 19,563 152 1,959 21,674 Gross Profit............................... 83,081 92,626 29,795 205,502 Research & Development Expense............. 17,878 14,994 6,534 39,406 Purchased Research & Development........... 9,315 9,315 Selling, General & Administration.......... 38,594 57,489 14,081 $ 649 110,813 Amortization of Intangibles................ 2,096 1,322 240 3,658 -------- -------- ------- -------- -------- Total Operating Expenses................... 67,883 73,805 20,855 649 163,192 Pretax Income (Loss)....................... 15,138 19,771 8,216 3,669 46,794 Depreciation & Amortization................ 8,144 4,194 1,466 786 14,590 Capital Expenditures....................... 19,910 2,400 2,307 247 24,864 Net Trade Receivables...................... 35,303 46,979 13,684 (122) 95,844 Net Inventories............................ 36,996 35,224 14,251 (25) 86,446 Net Property & Equipment................... $ 58,663 $ 6,029 $ 6,687 $ 445 $ 71,824 Headcount.................................. 1,186 686 220 39 2,131
GEOGRAPHIC INFORMATION Coherent's foreign operations consist primarily of sales offices and manufacturing facilities in Europe and Asia. Sales, marketing and customer service activities are conducted through sales subsidiaries throughout the world. Geographic sales information for the last three fiscal years is based on the location of the end customer. Geographic long-lived asset information is based on the physical location of the assets at the end of each fiscal year. Sales to unaffiliated customers and long-lived assets by geographic region are as follows (in thousands):
1999 1998 1997 -------- -------- -------- SALES United States............................................... $198,599 $185,004 $177,803 Japan....................................................... 104,096 75,464 73,049 Europe, other............................................... 70,632 61,089 53,476 Germany..................................................... 57,124 49,584 45,895 Asia-Pacific, other......................................... 19,793 22,274 23,973 Rest of World............................................... 18,625 17,034 16,842 -------- -------- -------- Total Sales................................................. $468,869 $410,449 $391,038 ======== ======== ========
60 COHERENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. OPERATING SEGMENTS (CONTINUED) For the fiscal years 1999, 1998 and 1997, no one customer accounted for 10% or more of total net sales.
OCTOBER 2, SEPTEMBER 26, SEPTEMBER 27, 1999 1998 1997 ---------- ------------- ------------- LONG-LIVED ASSETS United States............................................ $ 77,896 $72,641 $67,361 Germany.................................................. 12,605 11,382 6,831 Europe, other............................................ 11,781 9,217 6,782 Asia-Pacific............................................. 4,190 3,316 3,251 -------- ------- ------- Total Long-lived Assets.................................. $106,472 $96,556 $84,225 ======== ======= =======
14. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal 1999 and 1998 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED OCTOBER 2, 1999: Net sales........................................... $105,631 $116,537 $115,051 $131,650 Gross profit........................................ 50,959 54,249 54,745 60,713 Net income (loss)................................... 4,266 5,380 (5,064) 7,259 Net income (loss) per diluted share................. .18 .22 (.21) .29 Net income (loss) per basic share................... .18 .22 (.21) .30 ======== ======== ======== ======== 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 ======== ======== ======== ========
61 VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 2, 1999, SEPTEMBER 26, 1998, AND SEPTEMBER 27, 1997 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND FROM AT END OF PERIOD EXPENSES RESERVES(1) OF PERIOD ---------- ---------- ----------- --------- YEAR ENDED OCTOBER 2, 1999: Accounts receivable allowances...................... $ 4,817 $ 3,207 $ (3,432) $ 4,592 Warranty............................................ 10,938 15,566 (13,235) 13,269 ======= ======= ======== ======= 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 ======= ======= ======== =======
- ------------------------ (1) Reductions from the reserves are for the purpose for which the reserves were created. 62 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999 ------------------- COHERENT, INC. EXHIBITS ------------------- 63 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBER EXHIBIT ------ ------- 10.36 Note Purchase Agreement by and between Coherent, Inc. and the purchasers of $70 million series notes dated May 18, 1999 21.1 Subsidiaries 23.1 Independent Auditors' Consent 24.1 Power of Attorney 27 Financial Data Schedules
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. 64 EX-10.36 2 EXHIBIT 10.36 COHERENT, INC. $70,000,000 $44,000,000 6.70% Series A Senior Notes due May 18, 2006 $26,000,000 6.91% Series B Senior Notes due May 18, 2006 -------- NOTE PURCHASE AGREEMENT -------- Dated May 18, 1999 TABLE OF CONTENTS
SECTION PAGE 1. AUTHORIZATION OF NOTES.. . . . . . . . . . . . . . . . . . . . . . . . . 1 2. SALE AND PURCHASE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . 1 3. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4. CONDITIONS TO CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.1 Representations and Warranties . . . . . . . . . . . . . . . . . 2 4.2 Performance; No Default. . . . . . . . . . . . . . . . . . . . . 2 4.3 Compliance Certificates. . . . . . . . . . . . . . . . . . . . . 2 4.4 Opinions of Counsel. . . . . . . . . . . . . . . . . . . . . . . 2 4.5 Purchase Permitted By Applicable Law, etc. . . . . . . . . . . . 3 4.6 Sale of Other Notes. . . . . . . . . . . . . . . . . . . . . . . 3 4.7 Payment of Special Counsel Fees. . . . . . . . . . . . . . . . . 3 4.8 Private Placement Number . . . . . . . . . . . . . . . . . . . . 3 4.9 Changes in Corporate Structure . . . . . . . . . . . . . . . . . 3 4.10 Funding Instructions . . . . . . . . . . . . . . . . . . . . . . 3 4.11 Proceedings and Documents. . . . . . . . . . . . . . . . . . . . 3 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . . . . . 3 5.1 Organization; Power and Authority. . . . . . . . . . . . . . . . 4 5.2 Authorization, etc.. . . . . . . . . . . . . . . . . . . . . . . 4 5.3 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.4 Organization and Ownership of Shares of Subsidiaries; Affiliates 4 5.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 5 5.6 Compliance with Laws, Other Instruments, etc.. . . . . . . . . . 5 5.7 Governmental Authorizations, etc.. . . . . . . . . . . . . . . . 5 5.8 Litigation; Observance of Agreements, Statutes and Orders. . . . 6 5.9 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.10 Title to Property; Leases. . . . . . . . . . . . . . . . . . . . 6 5.11 Licenses, Permits, etc . . . . . . . . . . . . . . . . . . . . . 6 5.12 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . 7 5.13 Private Offering by the Company. . . . . . . . . . . . . . . . . 7 5.14 Use of Proceeds; Margin Regulations. . . . . . . . . . . . . . . 8 5.15 Existing Indebtedness; Future Liens. . . . . . . . . . . . . . . 8 5.16 Foreign Assets Control Regulations, etc. . . . . . . . . . . . . 8 5.17 Status under Certain Statutes. . . . . . . . . . . . . . . . . . 8 5.18 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . 8 i 5.19 Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6. REPRESENTATIONS OF THE PURCHASER . . . . . . . . . . . . . . . . . . . . 9 6.1 Purchase for Investment. . . . . . . . . . . . . . . . . . . . . 9 6.2 Source of Funds. . . . . . . . . . . . . . . . . . . . . . . . . 9 7. INFORMATION AS TO COMPANY. . . . . . . . . . . . . . . . . . . . . . . . 10 7.1 Financial and Business Information . . . . . . . . . . . . . . . 10 7.2 Officer's Certificate. . . . . . . . . . . . . . . . . . . . . . 12 7.3 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8. PREPAYMENT OF THE NOTES. . . . . . . . . . . . . . . . . . . . . . . . . 13 8.1 Required Prepayments . . . . . . . . . . . . . . . . . . . . . . 13 8.2 Optional Prepayments with Make-Whole Amount. . . . . . . . . . . 13 8.3 Allocation of Partial Prepayments. . . . . . . . . . . . . . . . 14 8.4 Maturity; Surrender, etc.. . . . . . . . . . . . . . . . . . . . 14 8.5 Purchase of Notes. . . . . . . . . . . . . . . . . . . . . . . . 14 8.6 Make-Whole Amount. . . . . . . . . . . . . . . . . . . . . . . . 14 9. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 15 9.1 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . 15 9.2 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9.3 Maintenance of Properties. . . . . . . . . . . . . . . . . . . . 16 9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . . 16 9.5 Corporate Existence, etc.. . . . . . . . . . . . . . . . . . . . 16 10. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 10.1 Transactions with Affiliates . . . . . . . . . . . . . . . . . . 16 10.2 Merger, Consolidation, Sale of Assets, etc . . . . . . . . . . . 16 10.3 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 10.4 Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . 20 10.5 Limitation on Consolidated Debt. . . . . . . . . . . . . . . . . 20 10.6 Minimum Fixed Charges Coverage . . . . . . . . . . . . . . . . . 20 10.7 Limitation on Subsidiary Indebtedness. . . . . . . . . . . . . . 20 10.8 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . 20 11. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 12. REMEDIES ON DEFAULT, ETC.. . . . . . . . . . . . . . . . . . . . . . . . 22 12.1 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.2 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 23 12.3 Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 12.4 No Waivers or Election of Remedies, Expenses, etc. . . . . . . . 23 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. . . . . . . . . . . . . . 23 ii 13.1 Registration of Notes. . . . . . . . . . . . . . . . . . . . . . 23 13.2 Transfer and Exchange of Notes . . . . . . . . . . . . . . . . . 23 13.3 Replacement of Notes . . . . . . . . . . . . . . . . . . . . . . 24 14. PAYMENTS ON NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 14.1 Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . 24 14.2 Home Office Payment. . . . . . . . . . . . . . . . . . . . . . . 24 15. EXPENSES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 15.1 Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . 25 15.2 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT . . . . . . 25 17. AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . 25 17.1 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 25 17.2 Solicitation of Holders of Notes . . . . . . . . . . . . . . . . 26 17.3 Binding Effect, etc. . . . . . . . . . . . . . . . . . . . . . . 26 17.4 Notes held by Company, etc.. . . . . . . . . . . . . . . . . . . 26 18. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 19. REPRODUCTION OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . 27 20. CONFIDENTIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 27 21. SUBSTITUTION OF PURCHASER. . . . . . . . . . . . . . . . . . . . . . . . 28 22. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 22.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 28 22.2 Payments Due on Non-Business Days. . . . . . . . . . . . . . . . 28 22.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 28 22.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . 28 22.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 28 22.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 28 SCHEDULE A -- INFORMATION RELATING TO PURCHASERS SCHEDULE B -- DEFINED TERMS SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 5.3 -- Disclosure Materials SCHEDULE 5.4 -- Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.8 -- Certain Litigation SCHEDULE 5.11 -- Patents, etc. iii SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Indebtedness SCHEDULE 10.3 -- Liens EXHIBIT 1-A -- Form of 6.70% Series A Senior Note due May 18, 2006 EXHIBIT 1-B -- Form of 6.91% Series B Senior Note due May 18, 2006 EXHIBIT 4.4(a) -- Form of Opinion of Special Counsel for the Company EXHIBIT 4.4(b) -- Form of Opinion of General Counsel of the Company EXHIBIT 4.4(c) -- Form of Opinion of Special Counsel for the Purchasers
iv EXHIBIT 10.36 6.70% Series A Senior Notes due May 18 , 2006 6.91% Series B Senior Notes due May 18, 2006 May 18, 1999 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A: Ladies and Gentlemen: Coherent, Inc., a Delaware corporation (the "COMPANY"), agrees with you as follows: 1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $70,000,000 aggregate principal amount of its Senior Notes as follows: $44,000,000 6.70% Series A Senior Notes due May 18, 2006 and $26,000,000 6.91% Series B Senior Notes due May 18, 2006 (respectively, the "SERIES A NOTES" and the "SERIES B NOTES", and collectively the "NOTES", such terms to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement or the Other Agreements (as hereinafter defined)). The Series A Notes shall be substantially in the form set out in Exhibit 1-A and the Series B Notes shall be substantially in the form set out in Exhibit 1-B, in each case with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Purchase Agreements (the "OTHER AGREEMENTS") identical with this Agreement with each of the other purchasers named in Schedule A (the "OTHER PURCHASERS"), providing for the sale at such Closing to each of the Other Purchasers of Notes in the principal amount specified opposite its name in Schedule A. Your obligation hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and you shall have no obligation under any Other Agreement and no liability to any Person for the performance or non-performance by any Other Purchaser thereunder. 3. CLOSING. The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of O'Melveny & Myers LLP, 400 South Hope Street, Los Angeles, California 90071 at 8:00 a.m., Los Angeles time, at a closing (the "CLOSING") on May 18, 1999, or on such other Business Day thereafter on 1 or prior to May 31, 1999, as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $100,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to: Bank of America, San Francisco, California, ABA # 121000358, account name: Incoming Money Transfer, account # 12331-83980, ref: attn. Louise Hosey FBO Coherent. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. 4.2 PERFORMANCE; NO DEFAULT. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by Section 10 hereof had such Section applied since such date. 4.3 COMPLIANCE CERTIFICATES. (a) OFFICER'S CERTIFICATE. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled. (b) SECRETARY'S CERTIFICATE. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and the Agreements. 4.4 OPINIONS OF COUNSEL. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Irell & Manella LLP, special counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you), (b) from Scott H. Miller, Esq., General Counsel of the Company, covering the matters set forth in Exhibit 4.4(b) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you), and (c) from O'Melveny & Myers LLP, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(c) and covering such other matters incident to such transactions as you may reasonably request. 2 4.5 PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact known to the Company as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.6 SALE OF OTHER NOTES. Contemporaneously with the Closing the Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Notes to be purchased by them at the Closing as specified in Schedule A. 4.7 PAYMENT OF SPECIAL COUNSEL FEES. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the reasonable fees, charges and disbursements of your special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. 4.8 PRIVATE PLACEMENT NUMBER. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.9 CHANGES IN CORPORATE STRUCTURE. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. 4.10 FUNDING INSTRUCTIONS. At least three Business Days prior to the date of the Closing, you shall have received written instructions executed by a Responsible Officer of the Company directing the manner of the payment of funds and setting forth (a) the name and address of the transferee bank, (b) such transferee bank's ABA number, (c) the account name and number into which the purchase price for the Notes is to be deposited, and (d) the name and telephone number of the account representative responsible for verifying receipt of such funds. 4.11 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: 3 5.1 ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Notes and to perform the provisions hereof and thereof. 5.1 ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Notes and to perform the provisions hereof and thereof. 5.2 AUTHORIZATION, ETC. This Agreement, the Other Agreements and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3 DISCLOSURE. The Company, through its agent, NationsBanc Montgomery Securities, LLC, has delivered to you and each Other Purchaser a copy of a Private Placement Memorandum, dated March 1999 (the "MEMORANDUM"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since September 26, 1998, there has been no change in the financial condition, operations, business or properties of the Company or any Restricted Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. 5.4 ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES. (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its 4 organization, the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary and whether such Subsidiary is a Restricted Subsidiary or an Unrestricted Subsidiary, (ii) of the Company's Affiliates, other than Subsidiaries, and (iii) of the Company's directors and senior officers. (b) All of the outstanding shares of capital stock or similar equity interests of each Restricted Subsidiary shown in Schedule 5.4 as being owned by the Company and its Restricted Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Restricted Subsidiary free and clear of any Lien, except for directors qualifying shares or any Permitted Lien. (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. (d) No Restricted Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement and customary limitations imposed by corporate law statutes) restricting the ability of such Restricted Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Restricted Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Restricted Subsidiary. 5.5 FINANCIAL STATEMENTS. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Restricted Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Restricted Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 5.6 COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Restricted Subsidiary under, any indenture, mortgage, deed of trust, loan, note purchase or credit agreement, corporate charter or by-laws, or any other Material agreement or instrument to which the Company or any Restricted Subsidiary is bound or by which the Company or any Restricted Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Restricted Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Restricted Subsidiary. 5.7 GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. 5 5.8 LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Restricted Subsidiary or any property of the Company or any Restricted Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Restricted Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 5.9 TAXES. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP or have been determined by the Company and, to the best of the Company's knowledge, are beyond the applicable limitations period for audit by the Internal Revenue Service. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended September 30, 1995. 5.10 TITLE TO PROPERTY; LEASES. The Company and its Restricted Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, to the extent reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Restricted Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement, except for those defects in title and Liens that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. 5.11 LICENSES, PERMITS, ETC. Except as disclosed in Schedule 5.11, (a) the Company and its Restricted Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material and necessary to operate their respective businesses, without known conflict with the rights of others, except for any failure to own or possess that, individually or in aggregate, could not reasonably be expected to have a Material Adverse Effect; (b) to the best knowledge of the Company, no product of the Company infringes in any Material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and 6 (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Restricted Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Restricted Subsidiaries. 5.12 COMPLIANCE WITH ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities, or such deficit, if any, did not exceed 5% of Consolidated Net Worth as of the end of the most recently ended fiscal quarter of the Company. The term "BENEFIT LIABILITIES" has the meaning specified in section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meaning specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Restricted Subsidiaries is not Material or has otherwise been disclosed in the most recent audited consolidated financial statements of the Company and its Restricted Subsidiaries. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you. 5.13 PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and not more than sixty (60) other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 7 5.14 USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 5% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms "MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said Regulation U. 5.15 EXISTING INDEBTEDNESS; FUTURE LIENS. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries, the outstanding principal amount of which exceeds $1,000,000, as of the date hereof, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.15, neither the Company nor any Restricted Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.3. 5.16 FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 5.17 STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Restricted Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 5.18 ENVIRONMENTAL MATTERS. Neither the Company nor any Restricted Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Restricted Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing. (a) neither the Company nor any Restricted Subsidiary has knowledge of any facts which would, in the aggregate, constitute the basis for any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or 8 formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any of its Restricted Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them in a manner contrary to any Environmental Laws and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws, in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) all buildings on all real properties now owned, leased or operated by the Company or any of its Restricted Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. 5.19 YEAR 2000. The Company has initiated a review and assessment of all areas within its and each of its Restricted Subsidiaries' businesses and operations that could be materially adversely affected by the risk that computer applications used by the Company or any of its Restricted Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to any date after December 31, 1999. Based on the foregoing, the Company is taking all steps the Company considers reasonably necessary to ensure that all computer applications that are necessary to its or any of its Restricted Subsidiaries' businesses and operations are able to perform properly date-sensitive functions for all dates before and after January 1, 2000, except to the extent that any such Year 2000 non-compliance could not reasonably be expected to have a Material Adverse Effect. 6. REPRESENTATIONS OF THE PURCHASER. 6.1 PURCHASE FOR INVESTMENT. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, PROVIDED that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. 6.2 SOURCE OF FUNDS. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) the Source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan, treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan, exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with your state of domicile; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or 9 (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 7. INFORMATION AS TO COMPANY. 7.1 FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes: (a) QUARTERLY STATEMENTS -- within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, PROVIDED that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q, without exhibits unless requested by a holder of Notes, prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a), PROVIDED, that such Form 10-Q shall include a quarterly statement containing a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter; (b) ANNUAL STATEMENTS -- within 105 days after the end of each fiscal year of the Company, duplicate copies of, 10 (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by: (A) an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), PROVIDED that the delivery within the time period specified above of the Company's Annual Report on Form 10-K, without exhibits unless requested by a holder of Notes, for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b), PROVIDED, that such Form 10-K shall include an annual statement containing a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year; (c) SEC AND OTHER REPORTS --promptly upon their becoming available, one copy of (i) each financial statement and each report, notice or proxy statement, in each case containing Material financial information, filed by the Company with the Securities and Exchange Commission, and (ii) any press release of the Company generally made available concerning a Material development; (d) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- promptly, and in any event within five Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (c) ERISA MATTERS -- promptly, and in any event within five Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or 11 (ii) the taking by the PBGC of formal steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; (f) NOTICES FROM GOVERNMENTAL AUTHORITY -- promptly, and in any event within 30 days of receipt thereof by a Responsible Officer, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; (g) ADDITIONAL REPORTING REQUIREMENT --in the event that Unrestricted Subsidiaries account for more than 10% of the consolidated total assets of the Company and its Subsidiaries or more than 10% of the consolidated revenue of the Company and its Subsidiaries, then each set of financial information delivered pursuant to Sections 7.1(a) and (b) shall be accompanied by unaudited financial statements for all Unrestricted Subsidiaries of the Company taken as a group, together with consolidating statements reflecting eliminations or adjustments required to reconcile such group statements to the consolidated financial statements of the Company and its Subsidiaries certified in each case by a Senior Financial Officer as fairly presenting, in all material respects, such information; and (h) REQUESTED INFORMATION -- with reasonable promptness and subject to applicable confidentiality requirements, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes, including without limitation, so long as the Company is not subject to the reporting requirements of the Exchange Act, such information as is required by Rule 144A(d)(4) under the Securities Act to be delivered to a prospective transferee of the Notes. 7.2 OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 10.2(c), 10.3(n), 10.4, 10.5, 10.6 and 10.7 hereof, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) EVENT OF DEFAULT -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Restricted Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying 12 the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. 7.3 INSPECTION. The Company shall permit the representatives of each holder of Notes: (a) NO DEFAULT -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Restricted Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) DEFAULT -- if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Restricted Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries), all at such times and as often as may be requested. 8. PREPAYMENT OF THE NOTES. 8.1 REQUIRED PREPAYMENTS. On May 18, 2000, and on each May 18 thereafter to and including May 18, 2005, the Company will prepay $6,286,000 principal amount (or such lesser principal amount as shall then be outstanding) of the Series A Notes and on May 18, 2004 and May 18, 2005, the Company will prepay $8,667,000 principal amount (or such lesser principal amount as shall then be outstanding) of the Series B Notes, each at par and without payment of the Make-Whole Amount or any premium, PROVIDED that upon any partial prepayment of the Notes pursuant to Section 8.2 or purchase of the Notes permitted by Section 8.5 the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment or purchase shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of such prepayment or purchase. 8.2 OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay on any Business Day all, or from time to time any part of, the Notes, in an amount not less than 5% of the aggregate principal amount of the Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date which shall be a Business Day, the aggregate principal amount of the Notes to be prepaid on such Business Day, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. 13 8.3 ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes of all Series (provided that required prepayments pursuant to Section 8.1 shall be allocated only among all of the Notes of the Series being prepaid) at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.4 MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.5 PURCHASE OF NOTES. The Company will not and will not permit any Subsidiary to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Subsidiary pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.6 MAKE-WHOLE AMOUNT. The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, PROVIDED that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "CALLED PRINCIPAL" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) based upon the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page PX1" of the Bloomberg Financial Markets Services Screen (or such other display as may replace Page PX1 on the Bloomberg Financial Markets Services Screen) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of 14 the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, PROVIDED that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1. "SETTLEMENT DATE" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. 9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 9.1 COMPLIANCE WITH LAW. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.2 INSURANCE. The Company will and will cause each of its Restricted Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of similar size and of comparable reputations engaged in the same or a similar business and similarly situated. 15 9.3 MAINTENANCE OF PROPERTIES. The Company will and will cause each of its Restricted Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, PROVIDED that this Section shall not prevent the Company or any Restricted Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.4 PAYMENT OF TAXES AND CLAIMS. The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, PROVIDED that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonfiling or nonpayment, as the case may be, of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect. 9.5 CORPORATE EXISTENCE, ETC. The Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Section 10.2, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Restricted Subsidiaries (unless merged into the Company or a Restricted Subsidiary) and all rights and franchises of the Company and its Restricted Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 10. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 10.1 TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Restricted Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Restricted Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate, PROVIDED that this limitation shall not apply to the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company or to customary indemnity and insurance arrangements for directors, regardless of affiliation. 10.2 MERGER, CONSOLIDATION, SALE OF ASSETS, ETC. (a) The Company will not and will not permit any Restricted Subsidiary to consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person, PROVIDED that: 16 (i) any Restricted Subsidiary may (x) merge or consolidate with or into, or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to, the Company, another Restricted Subsidiary or, in the case of a consolidation or merger, any other Person so long as the surviving or continuing Person is a Restricted Subsidiary (provided that the Company directly or indirectly retains at least the same ownership interest in the surviving Restricted Subsidiary as it held in the disappearing Restricted Subsidiary) and so long as in any merger or consolidation involving the Company, either (1) the Company shall be the surviving or continuing corporation or (2) the merger or consolidation is permitted by clause (ii) of this Section 10.2(a) and (y) convey, transfer or lease all or substantially all of its assets to any Person in compliance with the provisions of Section 10.2(b); and (ii) the Company may consolidate or merge with or into, or convey, transfer or lease substantially all of its assets to, any other Person if, (A) in the case of a consolidation or merger, the surviving or continuing Person is the Company, or (B) the successor Person which results from such consolidation or merger or the corporation to which all or substantially all of the Company's assets have been conveyed, transferred or leased (the "SURVIVING CORPORATION") (x) shall be a solvent non-individual Person organized and existing under the laws of the United States of America or any state thereof or the District of Columbia, and (y) shall have executed and delivered to each holder of the Notes its assumption of the due and punctual performance and observation of all of the covenants and agreements in the Notes, this Agreement and the Other Agreements to be performed or observed by the Company, and the due and punctual payment of the principal of and premium, if any, and interest on all of the Notes, according to their tenor, and shall furnish to such holders an opinion of counsel reasonably satisfactory to the Required Holders to the effect that the instrument of assumption has been duly authorized, executed and delivered and constitutes the legal, valid and binding contract and agreement of the surviving corporation enforceable in accordance with its terms, except as enforcement of such terms may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors' rights generally and by general equitable principles, and (C) immediately after giving effect to any transaction described in clauses (A) or (B) above, no Default or Event of Default would exist. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor Person that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement or the Notes. (b) Subject to Section 10.2(a), the Company will not, and will not permit any Restricted Subsidiary to, sell, lease (as lessor), transfer, abandon or otherwise dispose of assets to any Person; PROVIDED that the foregoing restrictions do not apply to: (i) the sale, lease, transfer or other disposition of assets of the Company to a Wholly-Owned Restricted Subsidiary or of a Restricted Subsidiary to the Company or another Restricted Subsidiary; (ii) the sale in the ordinary course of business of (1) inventory held for sale, or (2) equipment, fixtures, supplies or materials no longer required in the operation of the business of the Company or any of its Restricted Subsidiaries or that is obsolete; (iii) the sale by the Company or any Restricted Subsidiary of property and the subsequent lease, as lessee, of the same property, within 180 days following the acquisition or construction of such property, PROVIDED that the rental payments to be made by the 17 Company or such Restricted Subsidiary, discounted at a reasonable rate, will not exceed the fair market value of such property at the time of such sale; (iv) the sale of assets for cash or other property to a Person or Persons (other than an Affiliate) if all of the following conditions are met: (1) such assets (valued at net book value) do not constitute a "substantial part" of the assets of the Company and its Restricted Subsidiaries; (2) in the opinion of a Responsible Officer of the Company, the sale is for fair value and is in the best interests of the Company; and (3) immediately after the consummation of the transaction and after giving effect thereto, no Default or Event of Default would exist; or (v) the sale of assets meeting the conditions set forth in clauses (2) and (3) of subparagraph (iv) above, as long as the proceeds from such sale in excess of a substantial part of the assets of the Company and its Restricted Subsidiaries are (i) applied within 360 days of the date of sale of such assets to the acquisition of fixed assets or other property useful and intended to be used in the operation of the business of the Company or its Restricted Subsidiaries, and/or (ii) used to repay any Indebtedness of the Company or its Restricted Subsidiaries (other than Subordinated Debt, Indebtedness owing to the Company, any of its Subsidiaries or any Affiliate and Indebtedness in respect of any revolving credit or similar credit facility providing the Company or any of its Restricted Subsidiaries with the right to obtain loans or other extensions of credit from time to time, except to the extent that in connection with such payment of Indebtedness the availability of credit under such credit facility is permanently reduced by an amount not less than the amount of such proceeds applied to the payment of such Indebtedness). (c) For purposes of Section 10.2(b), a sale of assets will be deemed to involve a "SUBSTANTIAL PART" of the assets of the Company and its Restricted Subsidiaries if the book value of such assets, together with all other assets sold during the immediately preceding 12-calendar month period (except those assets sold pursuant to clauses (i) or (ii) of Section 10.2(b)) exceeds 10% of the Consolidated Total Assets determined as of the end of the immediately preceding fiscal year. 10.3 LIENS. The Company will not and will not permit any of its Restricted Subsidiaries to directly or indirectly create, incur or assume (upon the happening of a contingency or otherwise) any Lien on or with respect to any property or asset (including, without limitation, any document or instrument in respect of goods or accounts receivable) of the Company or any such Restricted Subsidiary, whether now owned or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits (unless it makes, or causes to be made, effective provision whereby the Notes will be equally and ratably secured with any and all other obligations thereby secured, such security to be pursuant to an agreement reasonably satisfactory to the Required Holders and, in any such case, the Notes shall have the benefit, to the fullest extent that, and with such priority as, the holders of the Notes may be entitled under applicable law, of any equitable Lien on such property), except for the following (which are collectively referred to as "PERMITTED LIENS"): (a) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the amounts of which individually or in the aggregate are not Material or that are being contested in good faith and for which adequate reserves have been set aside in accordance with GAAP or that are being contested in good faith; 18 (b) Liens incidental to the conduct of business or the ownership of properties and assets (including without limitation landlords', carriers', warehousemen's, mechanics' materialmen's and other similar Liens) and Liens to secure the performance of bids, tenders, leases, or trade contracts, or to secure statutory obligations (including without limitation obligations under workers compensation, unemployment insurance and other social security legislation), surety or appeal bonds or other Liens incurred in the ordinary course of business and not in connection with the borrowing of money; (c) Liens arising from filing Uniform Commercial Code financing statements regarding operating leases or other Uniform Commercial Code financing statements filed for precautionary purposes relating to arrangements not constituting Indebtedness; (d) Liens incidental to the conduct of the ordinary course of business of any Restricted Subsidiary, excluding Liens incurred for the borrowing of money; (e) any interest or title of a licensor in the property subject to a license; (f) Liens on the capital stock of Unrestricted Subsidiaries; (g) Liens resulting from judgments, unless such judgments are not, within 60 days, discharged or stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay; (h) Liens securing Indebtedness of a Restricted Subsidiary to the Company or to another Restricted Subsidiary; (i) Liens in existence at Closing and reflected in Schedule 10.3 hereto; (j) minor survey exceptions and the like which do not Materially detract from the value of such property; (k) leases, subleases, easements, rights-of-way, restrictions and other similar charges or encumbrances incidental to the ownership of property or assets or the ordinary conduct of the Company or any of its Restricted Subsidiaries' businesses, PROVIDED that the aggregate of such Liens do not Materially detract from the value of such property; (l) Liens (i) existing on property at the time of its acquisition or construction by the Company or a Restricted Subsidiary and not created in contemplation thereof; (ii) on property created contemporaneously with its acquisition or within 180 days of the acquisition or completion or construction or improvement thereof to secure the purchase price or cost of construction or improvement thereof; or (iii) existing on property of a Person at the time such Person is consolidated with or merged with the Company or a Restricted Subsidiary and not created in contemplation thereof; PROVIDED that such Liens shall attach solely to the property acquired or constructed and directly-related assets such as proceeds, products, substitutions and replacements and the principal amount of the Indebtedness secured by the Lien shall not exceed the lesser of the cost of acquisition or construction or fair market value of such property (as determined in good faith by one or more officers of the Company or a Restricted Subsidiary to whom authority to enter into the transaction has been delegated by the board of directors of the Company or such Restricted Subsidiary); (m) any Liens renewing, extending or replacing Liens permitted by Sections 10.3(a) through (l), other than 10.3(g), PROVIDED that (i) the principal amount of the Indebtedness secured is not increased or the maturity thereof reduced, (ii) such Lien is not extended to any other property, and (iii) immediately after such extension or refunding, no Default or Event of Default would exist; and (n) other Liens securing Indebtedness of the Company or any Restricted Subsidiary not otherwise permitted by Sections 10.3 (a) through (m), PROVIDED that on the date the Company or such Restricted Subsidiary incurs, assumes, guarantees or otherwise becomes liable with respect to any such 19 Indebtedness and immediately after giving effect thereto and the concurrent retirement of any other Indebtedness, (i) no Default or Event of Default exists, and (ii) Priority Debt does not exceed an amount equal to 20% of Consolidated Net Worth as of the then most recently ended fiscal quarter of the Company. 10.4 MINIMUM CONSOLIDATED NET WORTH. The Company will not permit Consolidated Net Worth to be at any time less than the sum of (i) $200,000,000 PLUS (ii) an aggregate amount equal to 30% of Consolidated Net Income (but only if a positive number) for each completed fiscal year beginning with the fiscal year ended September 26, 1998. 10.5 LIMITATION ON CONSOLIDATED DEBT. The Company will not permit at any time the ratio of (i) Consolidated Debt to (ii) Consolidated Total Capitalization to exceed 0.45 to 1.0. 10.6 MINIMUM FIXED CHARGES COVERAGE. The Company will not permit, as of the end of any fiscal quarter of the Company, the Fixed Charges Coverage Ratio to be less than 2.00 to 1.0. 10.7 LIMITATION ON SUBSIDIARY INDEBTEDNESS. The Company will not at any time permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, guarantee or otherwise become directly or indirectly liable with respect to, any Indebtedness other than: (a) Indebtedness of a Restricted Subsidiary owed to the Company or to a Wholly-Owned Restricted Subsidiary; (b) Indebtedness of a Restricted Subsidiary outstanding at the time such Restricted Subsidiary becomes a Restricted Subsidiary, PROVIDED that (i) such Indebtedness shall not have been incurred in contemplation of such Restricted Subsidiary becoming a Restricted Subsidiary and (ii) immediately after such Restricted Subsidiary becomes a Restricted Subsidiary no Default or Event of Default shall exist; and (c) Indebtedness of a Restricted Subsidiary in addition to that otherwise permitted by the foregoing provisions of this Section 10.7, PROVIDED that on the date the Restricted Subsidiary incurs, assumes, guarantees or otherwise becomes liable with respect to any such additional Indebtedness and immediately after giving effect thereto and the concurrent retirement of any other Indebtedness, (i) no Default or Event of Default exists, and (ii) the total amount of all Indebtedness incurred pursuant to this subparagraph (c) and (without duplication) the Indebtedness secured by Liens permitted under Section 10.3(n) does not exceed an amount equal to 20% of Consolidated Net Worth as of the then most recently ended fiscal quarter of the Company. 10.8 NATURE OF BUSINESS. The Company will not, and will not permit any Restricted Subsidiary, to engage in any business if, as a result, the general nature of the business of the Company and its Restricted Subsidiaries, taken as a whole, which would then be engaged in by the Company and its Restricted Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Restricted Subsidiaries, taken as a whole, on the date of the Closing. 11. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: 20 (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in Section 10; or (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (d) (i) the Company or any Restricted Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least 5% of Consolidated Net Worth as of the end of the most recently ended fiscal quarter of the Company beyond any period of grace provided with respect thereto, or (ii) the Company or any Restricted Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least 5% of Consolidated Net Worth as of the end of the most recently ended fiscal quarter of the Company or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company or any Restricted Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least 5% of Consolidated Net Worth as of the end of the most recently ended fiscal quarter of the Company, or (y) one or more Persons have the right to require the Company or any Restricted Subsidiary so to purchase or repay such Indebtedness; or (g) the Company or any Restricted Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Restricted Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Restricted Subsidiaries, or any such petition shall be filed against the Company or any of its Restricted Subsidiaries and such petition shall not be dismissed within 60 days; or 21 (i) a final judgment or judgments outstanding at any one time for the payment of money aggregating in excess of 5% of Consolidated Net Worth as of the end of the most recently ended fiscal quarter of the Company are rendered against one or more of the Company and its Restricted Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed an aggregate amount equal to 5% of Consolidated Net Worth as of the end of the most recently ended fiscal quarter of the Company, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 12. REMEDIES ON DEFAULT, ETC. 12.1 ACCELERATION. If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (a) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (b) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. 22 12.2 OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. 12.3 RESCISSION. At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of more than 50% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 12.4 NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 13 REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 13.1 REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 13.2 TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable 23 to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $100,000, PROVIDED that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Sections 6.1 and 6.2. 13.3 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (PROVIDED that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $100,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at the expense of the requesting holder shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 14. PAYMENTS ON NOTES. 14.1 PLACE OF PAYMENT. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest (at the rate and on the dates specified in the applicable Note) becoming due and payable on the Notes shall be made in the State of California at the principal office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. 14.2 HOME OFFICE PAYMENT. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. 24 15. EXPENSES, ETC. 15.1 TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2 SURVIVAL. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. 15.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER. 17.1 REQUIREMENTS. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20. 25 17.2 SOLICITATION OF HOLDERS OF NOTES. (a) SOLICITATION. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. In any event, 30 days shall be deemed to constitute sufficient notice. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) PAYMENT. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 17.3 BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 17.4 NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Subsidiaries or Affiliates shall be deemed not to be outstanding. 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the President, or at such other address as the Company shall have specified to the holder of each Note in writing. 26 Notices under this Section 18 will be deemed given only when actually received. 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, PROVIDED that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, PROVIDED that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. 27 21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. 22. MISCELLANEOUS. 22.1 SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 22.2 PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 22.3 SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 22.4 CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 22.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 22.6 GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * 28 If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, COHERENT, INC. By --------------------------------- Name: Title: The foregoing is hereby agreed to as of the date thereof. [ADD PURCHASER SIGNATURE BLOCKS] 29 SCHEDULE A INFORMATION RELATING TO PURCHASERS
Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- [NAME OF PURCHASER] Series A $______________ Series B $______________
(1) All payments by wire transfer of immediately available funds to: with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: (3) All other communications: 30 SCHEDULE B DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "AFFILIATE" means, at any time, and with respect to any Person, (a) any other Person (other than a Restricted Subsidiary) that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests (other than Restricted Subsidiaries). As used in this definition, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. "BUSINESS DAY" means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York or San Francisco, California are required or authorized to be closed. "CAPITAL LEASE" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "CLOSING" is defined in Section 3. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "COMPANY" means Coherent, Inc., a Delaware corporation. "CONFIDENTIAL INFORMATION" is defined in Section 20. "CONSOLIDATED DEBT" means, at any date of determination, the total of all Indebtedness of the Company and its Restricted Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Restricted Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Restricted Subsidiaries in accordance with GAAP. "CONSOLIDATED INCOME AVAILABLE FOR FIXED CHARGES" means, with respect to any period, Consolidated Net Income for such period PLUS all amounts deducted in the computation thereof on account of (a) Fixed Charges and (b) taxes imposed on or measured by income or excess profits. "CONSOLIDATED NET INCOME" means, with respect to any period, the net income (or loss) of the Company and its Restricted Subsidiaries for such period (taken as a cumulative whole), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the Company and its Restricted Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Restricted Subsidiaries in accordance with GAAP, PROVIDED that there shall be excluded: (i) the income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or a Restricted Subsidiary, and the income (or loss) of any Person, substantially all of the assets of which have been acquired in any manner, realized by such other Person prior to the date of acquisition; (ii) the income (or loss) of any Person (other than a Restricted Subsidiary) in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent that any such income has been actually received by the Company or such Restricted Subsidiary in the form of cash dividends or other cash distributions; (iii) the undistributed earnings of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is not at the time permitted by the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period; (v) any aggregate net gain (and any aggregate net loss) during such period arising from the sale, conversion, exchange or other disposition, 31 including any tax effect, of Investments or capital assets (such term to include, without limitation, (a) all non-current assets and, without duplication, (b) the following, whether or not current: all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets, and all Securities); (vi) any gains resulting from any write-up of any assets (and any loss resulting from any write-down of any assets); (vii) any net gain from the collection of the proceeds of any life insurance policies; (viii) any gain arising from the acquisition of any Security of the Company or any Restricted Subsidiary; (ix) any net income or gain (and any net loss) during such period resulting from (a) any change in GAAP, (b) any extraordinary items, or (c) any discontinued operations or the disposition thereof; (x) any deferred or other credit representing the excess of equity in any Restricted Subsidiary at the date of acquisition over the cost of the investment in such Restricted Subsidiary; (xi) in the case of a successor to the Company by consolidation or merger or as a transferee of its assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets; and (xii) any portion of such net income that cannot be freely converted into United States Dollars. "CONSOLIDATED NET WORTH" means, at any time, (a) the sum of (i) the par value (or value stated on the books of the corporation) of the capital stock (but excluding treasury stock and capital stock subscribed and unissued) of the Company and its Restricted Subsidiaries, PLUS (ii) the amount of paid-in capital and retained earnings of the Company and its Restricted Subsidiaries, in each case as such amounts would be shown on the consolidated balance sheet of the Company and its Restricted Subsidiaries as of such time prepared in accordance with GAAP; MINUS (b) the amount by which Restricted Investments exceeds 10% of the amount determined in clause (a); MINUS (c) to the extent included in clause (a), all amounts properly attributable to minority interests, if any, in the stock and surplus of Restricted Subsidiaries. "CONSOLIDATED TOTAL ASSETS" means, at any date of determination, on a consolidated basis for the Company and its Restricted Subsidiaries, total assets, determined in accordance with GAAP. "CONSOLIDATED TOTAL CAPITALIZATION" means, at any time, the sum of Consolidated Net Worth and Consolidated Debt. "DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "DEFAULT RATE" means that rate of interest that is the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (ii) 2% over the rate of interest publicly announced by Bank of America in San Francisco, California as its "base" or "prime" rate. "ENVIRONMENTAL LAWS" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "EVENT OF DEFAULT" is defined in Section 11. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FIXED CHARGES" means, with respect to any period, the sum of (i) Interest Expense for such period and (ii) Lease Rentals for such period, for the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "FIXED CHARGES COVERAGE RATIO" means, at any date of determination, the ratio of (i) Consolidated Income Available for Fixed Charges for the period of four consecutive fiscal quarters ending on such date to (ii) Fixed Charges for such period. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. 32 "GOVERNMENTAL AUTHORITY" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "GUARANTY" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "HAZARDOUS MATERIAL" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "INDEBTEDNESS" with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable and other accrued liabilities arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); 33 (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities valued, if not assumed, at the lesser of the face amount of such Indebtedness or the fair market value of the property subject to the Lien); and (e) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (d) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (e) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "INSTITUTIONAL INVESTOR" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than $2,000,000 of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "INTEREST EXPENSE" means interest expense, as determined in accordance with GAAP. "INVESTMENT" means any investment, made in cash or by delivery of property, by the Company or any of its Restricted Subsidiaries (i) in any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise, or (ii) in any property. "LEASE RENTALS" means, with respect to any period, the sum of the minimum amount of rental and other obligations required to be paid during such period by the Company or any Restricted Subsidiary as lessee under all leases of real or personal property (other than Capital Leases), EXCLUDING any amounts required to be paid by the lessee (whether or not therein designated as rental or additional rental) (a) which are on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges, (b) which are based on profits, revenues or sales realized by the lessee from the leased property or otherwise based on the performance of the lessee, or (c) which are contingent. "LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "MAKE-WHOLE AMOUNT" is defined in Section 8.6. "MATERIAL" means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. "MATERIALLY" means materially in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole. "MEMORANDUM" is defined in Section 5.3. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "NOTES" is defined in Section 1. "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "OTHER AGREEMENTS" is defined in Section 2. 34 "OTHER PURCHASERS" is defined in Section 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PERMITTED LIEN" is defined in Section 10.3. "PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PLAN" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "PREFERRED STOCK" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "PRIORITY DEBT" means (without duplication) the sum of (a) unsecured Indebtedness of Restricted Subsidiaries other than (x) Indebtedness owing to the Company or a Wholly-Owned Restricted Subsidiary and (y) Indebtedness outstanding when such Person became a Restricted Subsidiary, and (b) Indebtedness of the Company and its Restricted Subsidiaries secured by a Lien permitted by Section 10.3(n). "PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "REQUIRED HOLDERS" means, at any time, the holders of more than 50% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Subsidiaries or Affiliates). "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. "RESTRICTED INVESTMENT" means all Investments except (i) property to be used in the ordinary course of business; (ii) current assets arising from the sale of goods and services in the ordinary course of business; (iii) Investments in one or more Restricted Subsidiaries or any Person that concurrently becomes a Restricted Subsidiary; (iv) Investments existing at the date of Closing; (v) Investments in obligations, maturing within two years from the date of acquisition, issued by or guaranteed by the United States of America or an agency thereof; (vi) Investments in municipal securities, maturing within one year, which are rated in one of the top two ratings classifications by at least one national rating agency; (vii) Investments in certificates of deposit or banker's acceptances issued by Bank of America or other commercial banks, maturing within two years, which are rated in one of the top two rating classifications by at least one national rating agency; (viii) Investments in commercial paper, maturing within 270 days, rating in one of the top two rating classifications by at least one national rating agency; (ix) Investments in repurchase agreements maturing within 30 days; and (x) Investments in mutual funds that have at least 95% of their assets in cash or invested exclusively in the types of investments referred to in clauses (v) through (viii) above and that are classified as current assets in accordance with GAAP. "RESTRICTED SUBSIDIARY" means any Subsidiary which (a) at least a majority of the voting securities of which are owned by the Company and/or one or more Wholly-Owned Restricted Subsidiaries, and (b) is not designated as an Unrestricted Subsidiary. The Company may designate in writing to each of the holders of the Notes any Unrestricted Subsidiary as a Restricted Subsidiary and may designate in writing to each of the holders of the Notes any Restricted Subsidiary as an Unrestricted Subsidiary; PROVIDED that (i) no such designation of an Unrestricted Subsidiary as a Restricted Subsidiary shall be effective unless immediately after giving effect thereto such Subsidiary could incur an additional $1.00 of Consolidated Debt under Section 10.5; (ii) no such designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be effective unless such Subsidiary does not own any stock, other equity interest or Indebtedness of the Company or a Restricted Subsidiary; and (iii) no such designation of a Restricted Subsidiary as an Unrestricted Subsidiary or of an Unrestricted Subsidiary as a Restricted Subsidiary shall be effective unless, immediately after giving effect thereto the Company could incur at least $1.00 of additional Consolidated Debt under Section 10.5, and no Default or Event of Default would exist; PROVIDED, FURTHER, that any Subsidiary that has been redesignated as a Restricted Subsidiary or Unrestricted Subsidiary as provided in the foregoing sentence of this definition may not thereafter be designated or redesignated as a Restricted Subsidiary or an Unrestricted Subsidiary, as the case may be. 35 "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SECURITY" has the meaning set forth in section 2(l) of the Securities Act. "SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "SUBORDINATED DEBT" means any Indebtedness that is in any manner subordinated in right of payment or security in any respect to Indebtedness evidenced by the Notes. "SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "UNRESTRICTED SUBSIDIARY" means any Subsidiary which is designated as an Unrestricted Subsidiary on Schedule 5.4 attached hereto or is designated as such in writing by the Company to each of the holders of the Notes pursuant to the definition of "Restricted Subsidiary". "WHOLLY-OWNED RESTRICTED SUBSIDIARY" means, at any time, any Restricted Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Restricted Subsidiaries at such time. 36 EXHIBIT 1-A [FORM OF SERIES A NOTE] COHERENT, INC. 6.70% SERIES A SENIOR NOTE DUE MAY 18, 2006 No. [A-__] [Date] $[_______] PPN 192479 A* 4 FOR VALUE RECEIVED, the undersigned, COHERENT, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [_______________________], or registered assigns, the principal sum of [_________________________________] DOLLARS on May 18, 2006, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.70% per annum from the date hereof, payable semiannually, on the 18th day of November and May in each year, commencing with the November or May next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.70% or (ii) 2% over the rate of interest publicly announced by Bank of America from time to time in San Francisco, California as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal place of business of the Company in the State of California or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Series A Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated as of May 18, 1999 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreements. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. 37 This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. COHERENT, INC. By ---------------------------------- Name: Title: 38 EXHIBIT 1-B [FORM OF SERIES B NOTE] COHERENT, INC. 6.91% SERIES B SENIOR NOTE DUE MAY 18, 2006 No. [B-__] [Date] $[_______] PPN 192479 A@ 2 FOR VALUE RECEIVED, the undersigned, COHERENT, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [____________________], or registered assigns, the principal sum of [________________________________] DOLLARS on May 18, 2006, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.91% per annum from the date hereof, payable semiannually, on the 18th day of November and May in each year, commencing with the November or May next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.91% or (ii) 2% over the rate of interest publicly announced by Bank of America from time to time in San Francisco, California as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal place of business of the Company in the State of California or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Series B Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated as of May 18, 1999 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreements. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. 39 This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. COHERENT, INC. By ---------------------------------- Name: Title: 40 EXHIBIT 4.4(a) MATTERS TO BE COVERED IN OPINION OF COUNSEL TO THE COMPANY 1. The Company has been duly incorporated and is validly existing in good standing under the laws of the State of Delaware and is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary. 2. Each Restricted Subsidiary has been duly incorporated and is validly existing in good standing under the laws of its jurisdiction of incorporation and is duly licensed or qualified and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary. All of the outstanding shares of capital stock of each such Restricted Subsidiary have been duly issued, are fully paid and non-assessable and are owned of record by the Company, by one or more Restricted Subsidiary, or by the Company and one or more Restricted Subsidiaries. 3. The Company has the corporate power to execute and deliver the Agreement and the Other Agreements (the "AGREEMENTS"), to perform its obligations set forth in each of the Agreements and to issue and sell the Notes and to perform its obligations set forth therein. 4. The execution, delivery and performance of each of the Agreements and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and each of the Agreements and the Notes have been duly executed and delivered by the Company. 5. The Agreements and the Notes constitute the legally valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. 6. The Company's execution and delivery of, and performance of its obligations under the Agreements and the Notes do not and will not (i) violate the Company's Articles or Certificate of Incorporation or Bylaws, (ii) violate, breach or result in a default under, or result in the imposition of any Lien upon any property of the Company pursuant to, any existing obligation of or restriction on the Company under any other Material agreement, instrument or indenture listed on Schedule I hereto, (iii) breach or otherwise violate any existing obligation of or restriction on the Company under any order, judgment or decree of any California or Federal court or governmental authority binding on the Company listed on Schedule II hereto, or (iv) violate any California or Federal law or regulation. 7. No order, consent, permit or approval of any California or Federal governmental authority is required on the part of the Company to issue and sell the Notes or for the execution and delivery of, and performance of the Company's obligations under, the Agreements and the Notes. 8. To our knowledge, there is no action, suit or proceeding pending against or threatened against or affecting the Company or any Restricted Subsidiary before any court, governmental or regulatory authority or arbitrator, which seeks to affect the enforceability of the Agreements or the Notes or which could reasonably be expected to have a Material Adverse Effect. 41 9. Assuming the accuracy of (i) the Company's representations in the first sentence of Section 5.13 of the Agreements and (ii) your representations in Section 6.1 of the Agreements, it is not necessary in connection with the execution and delivery of the Notes under the circumstances contemplated by the Note Purchase Agreements to register the Notes under the Securities Act of 1933, as amended, or to qualify an indenture in respect thereof under the Trust Indenture Act of 1939, as amended. 10. Neither the extension of credit nor the use of proceeds provided in the Agreements if made in accordance with the terms thereof will violate Regulations T, U or X of the Board of Governors of the Federal Reserve System. 11. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. [Customary exceptions, assumptions and exclusions] 42 EXHIBIT 4.4(b) FORM OF OPINION OF GENERAL COUNSEL OF THE COMPANY [TO COME] 43 EXHIBIT 4.4(c) FORM OF OPINION OF SPECIAL COUNSEL FOR THE PURCHASERS [TO COME] 44 EX-21.1 3 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES The following table sets forth information as to Coherent's subsidiaries, all of which are included in the consolidated financial statements. Coherent owns 100% of the outstanding voting securities of such corporations except as noted below.
Jurisdiction of Name Incorporation - ---------------------------------------------------------------------------- Coherent FSC, Inc. Virgin Islands Coherent GmbH Germany Coherent (U.K.) Ltd. United Kingdom Coherent Japan, Inc. Japan Lambda Physik GmbH (1) Germany Lambda Physik U.S. (1) Massachusetts Lambda Physik Japan, K.K. (2) Japan 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 Coherent HK Limited Hong Kong Star Medical Technologies, Inc. United States
(1) Coherent owns 80% of the outstanding voting securities of these subsidiaries. (2) Coherent owns 76% of the outstanding voting securities of this subsidiary. 111 EX-23.1 4 EXHIBIT 23.1 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, 333-80265 and 2-96838 of Coherent, Inc. on Forms S-8 of our report dated November 1, 1999 appearing in this Annual Report on Form 10-K of Coherent, Inc. for the year ended October 2, 1999. DELOITTE & TOUCHE LLP San Jose, California December 10, 1999 112 EX-27 5 EXHIBIT 27
5 1,000 YEAR OCT-02-1999 SEP-27-1998 OCT-02-1999 38,279 30,637 99,595 4,592 97,902 317,573 165,630 75,676 495,468 122,654 74,745 0 0 240 277,065 495,468 468,869 468,869 248,203 248,203 202,589 0 3,755 16,230 4,389 11,841 0 0 0 11,841 0.49 0.48
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