Coherent-2009 accessible

Coherent-2009 accessible
COHR_AR2008_final.qxd:COHR_AR2007 2/5/09 1:17 PM Page 1
2008
Annual Report, Proxy Statement and Notice of Annual Meeting
Superior Reliability & Performance
COHR_AR2008_final.qxd:COHR_AR2007 2/6/09 2:06 PM Page 2
Dear Shareholders, Customers and Employees,
Fiscal 2008 was a dynamic year for Coherent with
several meaningful accomplishments, even when
viewed against the backdrop of the current macro­
economic environment.
Following our relisting in February 2008 on the
Nasdaq Global Select Market, we completed a stock
buyback for approximately 25% of our outstanding
shares at a total cost of $228.5 million. This invest­
ment notwithstanding, Coherent ended fiscal 2008
with more than $200 million in cash and cash
equivalents and virtually no debt. Our emphasis on
cash generation is always important, especially in
the current credit environment.
At the end of fiscal 2007, we announced a multi­
year plan to expand our adjusted EBITDA* margins
to 19­23% as we exit fiscal 2010. The plan was
built on the broader use of product platform
designs, reducing our operating footprint, material
cost savings, and the greater use of contract
manufacturers. The plan also assumed historical
revenue growth of approximately 8% per year.
Our optically­pumped semiconductor laser (OPSL)
technology is a perfect example of platform
efficiency. In 2008, we introduced two important
variations of the OPSL theme with our Genesis™
product line. The Genesis 577 laser is a highly
efficient and compact device that produces yellow
laser light, a notoriously difficult region of the
visible spectrum for conventional lasers, for use
in photocoagulation therapy. The Genesis 355,
the first OPS laser to produce ultraviolet output,
was introduced for use in bioinstrumentation
applications. We have continued our proliferation
of the OPSL architecture with the recent release
of the Genesis 532, which addresses needs in the
research and instrumentation markets. Another
example of platform efficiency is found in our
first fiber­based platform – the Talisker™, which
provides a unique combination of feature quality
and size for various micromachining processes.
Future versions will address a variety of applica­
tions in new and existing markets. We also
recently introduced the Highlight™ 1000F, a
cost­effective, energy­efficient, fiber­delivered
diode array for use in high­power materials
processing applications, including welding.
We made great strides in realigning our
operating footprint. During 2008, we announced
two major consolidation efforts involving our
Auburn, California and Munich, Germany facilities.
We elected to outsource the vast majority of our
optics manufacturing in Auburn to a domestic
manufacturer. The remaining functions in
Auburn were consolidated with existing Coherent
facilities in Portland, Oregon and Santa Clara,
California or transferred to other vendors.
* We define adjusted EBITDA as earnings before interest, taxes,
depreciation, amortization, stock compensation expenses and
other non­operating income and expense items.
COHR_AR2008_final.qxd:COHR_AR2007 2/5/09 1:17 PM Page 3
We are scheduled to vacate the Auburn facility
in March 2009. We expect to derive savings of
$3.5 to $4.5 million dollars per year from our
Auburn program beginning in April 2009.
Coherent also announced plans to merge our
excimer laser operation in Munich, Germany
into our existing excimer facility in Göttingen,
Germany. This transfer will be completed in
June 2009, leading to annual savings of $4.5 to
$5.5 million beginning in July 2009.
product mix, both of which are critical to the
attainment of our fiscal 2010 adjusted EBITDA
goals. In the meantime, we have taken steps
over the past few months to reduce program
spending and global headcount that not only
support our long term goals, but also reflect an
evolving revenue outlook. We are monitoring
the market closely and will continue to take
steps as necessary to preserve Coherent’s market
leadership as well as our financial model.
With these projects on their way to completion,
we have launched three additional efforts that
will further reduce our operating costs. We will
exit a leased facility in San Jose, California and
merge those operations into our Santa Clara,
California headquarters. Similarly, we will
relocate our direct diode systems business from
Saint Louis, Missouri to Santa Clara, California.
Lastly, a modest asset acquisition in December
2008 will enable us to improve the operating
efficiency of our semiconductor laser business.
The projected savings from all three programs is
$3.5­$4.5 million per year.
We thank you for your ongoing support.
The downturn in the global marketplace during
the closing months of 2008 has affected revenues
across the photonics industry, and we are not
immune. Feedback from commercial customers
paints a picture of uncertainty and caution for
fiscal 2009. With these factors as a backdrop,
it is difficult to project fiscal 2010 revenues and
John Ambroseo
President and CEO
Garry W. Rogerson
Chairman of the Board
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS March 11, 2009
TO OUR STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of COHERENT, INC., a Delaware corporation, will be held on
March 11, 2009 at 1:00 p.m., local time, at the Hyatt Regency San Francisco Airport, 1333 Bayshore Highway, Burlingame, CA 94010 for the
following purposes:
1. To elect seven directors to serve for the ensuing year and until their successors are duly elected (Proposal One);
2. To ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the
fiscal year ending October 3, 2009 (Proposal Two);
3. To approve the amended and restated Employee Stock Purchase Plan which increases by 600,000 the number of shares
reserved for issuance thereunder and makes certain other administrative changes (Proposal Three);
4. To approve the amended and restated 2001 Stock Plan to allow for restricted stock and RSU grants to qualify under Section
162(m) of the Internal Revenue Code and other administrative changes (Proposal Four); and
5. To transact such other business as may properly be brought before the meeting and any adjournment(s) thereof.
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.
Stockholders of record at the close of business on February 5, 2009 are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting. However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose or follow the
instructions on the enclosed proxy card to vote by telephone or via the Internet. Any stockholder of record attending the meeting may vote in person
even if he or she has returned a proxy. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish
to vote at the meeting, you must obtain a proxy issued in your name from that record holder.
Sincerely,
/s/ John R. Ambroseo
John R. Ambroseo
President and Chief Executive Officer
Santa Clara, California
February 9, 2009
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE STOCKHOLDER MEETING TO BE HELD ON MARCH 11, 2009 The proxy statement and annual report to stockholders are available at www.proxyvote.com.
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to complete, sign and date the enclosed proxy card as promptly
as possible and return it in the enclosed envelope or follow the instructions on the enclosed proxy card to vote by telephone or via the
Internet. Any stockholder attending the Annual Meeting may vote in person even if he or she returned a proxy card.
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COHERENT, INC. 5100 PATRICK HENRY DRIVE SANTA CLARA, CALIFORNIA 95054 PROXY STATEMENT INFORMATION CONCERNING SOLICITATION AND VOTING General
The enclosed Proxy is solicited on behalf of the Board of Directors of Coherent, Inc. for use at the Annual Meeting
of Stockholders (the “Annual Meeting”) to be held at the Hyatt Regency San Francisco Airport, 1333 Bayshore Highway,
Burlingame, CA 94010 on March 11, 2009 at 1:00 p.m., local time, and at any adjournment(s) thereof, for the purposes set
forth herein and in the accompanying Notice of Annual Meeting of Stockholders. Our telephone number is (408) 764-4000.
These proxy solicitation materials were first mailed on or about February 13, 2009 to all stockholders entitled to vote at
the Annual Meeting.
Record Date and Share Ownership
Stockholders of record at the close of business on February 5, 2009 (the “Record Date”) are entitled to notice of
and to vote at the meeting and at any adjournment(s) thereof. On the Record Date, 24,350,880 shares of our common
stock, $0.01 par value, were issued and outstanding.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use
(i) by delivering to us at our principal offices (Attention: Bret M. DiMarco, Corporate Secretary) a written notice of
revocation or a duly executed proxy bearing a later date, (ii) in the case of a stockholder who has voted by telephone or
through the Internet, by making a timely and valid telephone or Internet vote, as the case may be, or (iii) by attending the
meeting and voting in person. Please note, however, that if your shares are held of record by a broker, bank or other
nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder, and
you will need to provide a copy of such proxy at the meeting.
Attendance at the Annual Meeting
All stockholders of record as of the Record Date may attend the Annual Meeting. Please note that cameras,
recording devices and other electronic devices will not be permitted at the Annual Meeting. No items will be allowed into
the Annual Meeting that might pose a concern for the safety of those attending. Additionally, to attend the meeting you
will need to bring identification and proof sufficient to us that you were a stockholder of record as of the Record Date or
that you are a representative of a stockholder of record as of the Record Date for a stockholder of record that is not a
natural person. For directions to attend the Annual Meeting, please contact Investor Relations by telephone at (408) 7644110.
Voting and Costs of Solicitation
On all matters, other than the election of directors, each share has one vote. See “Election of Directors—Vote
Required” for a description of your cumulative voting rights with respect to the election of directors.
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If you are a stockholder of record as of the Record Date, you may vote in person at the Annual Meeting, vote by
proxy using the enclosed proxy card, vote by proxy over the telephone or vote by proxy via the Internet. Whether or not
you plan to attend the Annual Meeting, we urge you to vote by proxy to ensure your vote is counted. As stated above, you
may still attend the Annual Meeting and vote in person if you have already voted by proxy.
• To vote in person: Come to the Annual Meeting and we will give you a ballot at the time of voting. If you
have previously turned in a proxy card, please notify us at the Annual Meeting that you intend to cancel the
proxy and vote by ballot.
• To vote using the proxy card: Simply complete, sign and date the enclosed proxy card and return it promptly
in the envelope provided. If you return your signed proxy card to us before the Annual Meeting, the
designated proxies will vote your shares as you direct.
• To vote over the telephone: Dial toll-free 1-800-690-6903 using a touch-tone phone and follow the recorded
instructions. You will be asked to provide the control number from the enclosed proxy card. Your vote must
be received by 11:59 P.M. Eastern Time on March 10, 2009 to be counted.
• To vote on the Internet: go to www.proxyvote.com to complete an electronic proxy card. You will be asked to
provide the control number from the enclosed proxy card. Your vote must be received by 11:59 P.M. Eastern
Time on March 10, 2009 to be counted.
If you return a signed and dated proxy card without marking any voting directions, your shares will be voted:
• “For” the election of all seven (7) nominees for director set forth herein, provided that in the event cumulative
voting occurs, the proxy holders will cumulate votes using their judgment so as to ensure the election of as
many of the nominees set forth herein as possible;
• “For” the ratification of the appointment of Deloitte & Touche LLP as our independent registered public
accounting firm for the fiscal year ending October 3, 2009 as described in Proposal Two;
• “For” approval of the amended and restated Employee Stock Purchase Plan as described in Proposal Three;
and
• “For” approval of the amended and restated 2001 Stock Plan as described in Proposal Four.
If any other matter is properly presented at the Annual Meeting, your proxy holders (one of the individuals named
on your proxy card) will vote your shares in their discretion.
The cost of this solicitation will be borne by us. We may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding solicitation material to such beneficial owners.
In addition, proxies may be solicited by certain of our directors, officers and regular employees, without additional
compensation, personally or by telephone or facsimile.
Quorum; Abstentions; Broker Non-Votes
Our Bylaws provide that stockholders holding a majority of the shares of common stock issued and outstanding
and entitled to vote on the Record Date constitute a quorum at meetings of stockholders. Votes will be counted by the
inspector of election appointed for the Annual Meeting, who will separately count “For” and (with respect to proposals
other than the election of directors) “Against” votes, abstentions and broker non-votes. A “broker non-vote” occurs when
a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have
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discretionary voting power with respect to that proposal and has not received instructions with respect to that proposal
from the beneficial owner. Abstentions will be counted towards the vote total for each proposal, and will have the same
effect as “Against” votes. Because directors are elected by a plurality vote, abstentions in the election of directors have no
impact once a quorum exists. Broker non-votes have no effect and will not be counted towards the vote total for any
proposal, but will be counted for purposes of determining the presence or absence of a quorum for the transaction of
business.
If you hold shares in your name, and you sign and return a proxy card without giving specific voting instructions,
your shares will be voted as recommended by our Board on all matters and as the proxy holders may determine in their
discretion with respect to any other matters that properly come before the meeting.
Deadline for Receipt of Stockholder Proposals
Proposals of stockholders that are intended to be presented by such stockholders at the annual meeting of
stockholders for the 2009 fiscal year must be received by us no later than the close of business on the 45th day, nor earlier
than the close of business on the 75th day, prior to the one year anniversary of the date these proxy materials were first
mailed by us unless the annual meeting of stockholders is held prior to February 9, 2010 or after May 10, 2010, in which
case, the proposal must be received by us not earlier than the 120th day prior to the annual meeting and not later than the
later of the 90th day prior to the annual meeting and the tenth day following public announcement of the date the annual
meeting will be held and must otherwise be in compliance with applicable laws and regulations in order to be considered
for inclusion in the proxy statement and form of proxy relating to that meeting. Under the federal securities laws, for such
a matter to be included in the proxy materials for annual meeting of stockholders for the 2009 fiscal year, timely notice
must be delivered to us at our principal executive offices to the attention of Bret M. DiMarco, our Corporate Secretary, not
less than 120 days before the date of our proxy statement released to stockholders in connection with the previous year’s
annual meeting, which will be October 12, 2009. Stockholder proposals must otherwise comply with the requirements of
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). If a stockholder who has notified
us of his or her intention to present a proposal at an annual meeting does not appear to present his or her proposal at such
meeting, we need not present the proposal for vote at such meeting.
However, if a stockholder wishes only to recommend a candidate for consideration by the Governance and
Nominating Committee as a potential nominee for the Company’s Board of Directors, see the procedures discussed in
“Proposal One — Election of Directors — Board Meetings and Committees — Process for Recommending Candidates for
Election to the Board of Directors.”
The attached proxy card grants to the proxyholders discretionary authority to vote on any matter raised at the
Annual Meeting.
Delivery of Voting Materials to Stockholders Sharing an Address
To reduce the expense of delivering duplicate voting materials to our stockholders who may hold shares of
Coherent common stock in more than one stock account, we are delivering only one set of the proxy solicitation materials
to certain stockholders who share an address, unless otherwise requested. A separate proxy card is included in the voting
materials for each of these stockholders. We will promptly deliver, upon written or oral request, a separate copy of the
annual report or this proxy statement to a stockholder at a shared address to which a single copy of the documents was
delivered. To obtain an additional copy, you may write us at 5100 Patrick Henry Drive, Santa Clara, California 95054,
Attn: Investor Relations, or contact us by telephone at (408) 764-4000 and request to be connected to our Investor
Relations department. Similarly, if you share an address with another stockholder and have received multiple copies of our
proxy materials, you may contact us at the address or telephone number specified above to request that only a single copy
of these materials be delivered to your address in the future. Stockholders sharing a single address may revoke their
consent to receive a single copy of our proxy materials in the future at any time by contacting our distribution agent,
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Broadridge, either by calling toll-free at 1-800-542-1061, or by writing to Broadridge, Householding Department, 51
Mercedes Way, Edgewood, NY 11717. Broadridge will remove such stockholder from the Householding program within
30 days of receipt of such written notice, after which each such stockholder will receive an individual copy of our proxy
materials.
Further Information
We will provide without charge to each stockholder solicited by these proxy solicitation materials a copy of
Coherent’s annual report on Form 10-K for the fiscal year ended September 27, 2008 without exhibits and any
amendments thereto on Form 10-K/A upon request of such stockholder made in writing to Coherent, Inc., 5100
Patrick Henry Drive, Santa Clara, California 95054, Attn: Investor Relations. We will also furnish any exhibit to
the annual report on Form 10-K if specifically requested in writing. You can also access our Securities and
Exchange Commission (“SEC”) filings, including our annual reports on Form 10-K, and all amendments thereto
filed on Form 10 K/A, on the SEC website at www.sec.gov.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
STOCKHOLDER MEETING TO BE HELD ON MARCH 11, 2009
The proxy statement and annual report to stockholders are available at www.proxyvote.com.
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PROPOSAL ONE ELECTION OF DIRECTORS Nominees
Seven (7) members of our Board of Directors are to be elected at the Annual Meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for the nominees named below. Each nominee has
consented to be named a nominee in the proxy statement and to continue to serve as a director if elected. If any nominee
becomes unable or declines to serve as a director, if additional persons are nominated at the meeting or if stockholders are
entitled to cumulate votes, the proxy holders intend to vote all proxies received by them in such a manner (in accordance
with cumulative voting) as will ensure the election of as many of the nominees listed below as possible, and the specific
nominees to be voted for will be determined by the proxy holders.
We are not aware of any reason that any nominee will be unable or will decline to serve as a director. The term of
office of each person elected as a director will continue until the next Annual Meeting of Stockholders or until a successor
has been elected and qualified or until his or her earlier resignation or removal. There are no arrangements or
understandings between any director or executive officer and any other person pursuant to which he or she is or was to be
selected as a director or officer other than the agreement between the Company and Oliver Press Partners, LLP and certain
of its affiliates (collectively, “OPP”) as more fully described below..
The names of the nominees, all of whom are currently directors standing for re-election, and certain information
about them as of December 31, 2008, other than committee memberships, which are as of January 31, 2009, are set forth
below. Clifford Press was recommended to the Board of Directors by Oliver Press Partners, LLC, a stockholder of the
Company. All of the nominees have been recommended for nomination by a majority of the Board of Directors acting on
the recommendation of the Governance and Nominating Committee of the Board of Directors, which was approved by a
majority vote of the members of such committee. The committee consists solely of independent members of the Board of
Directors. There are no family relationships among directors or executive officers of Coherent.
Name
Age
Director
Since
Principal Occupation
John R. Ambroseo, PhD .................................................
47
2002
President and Chief Executive Officer
John H. Hart (1)(3) .........................................................
63
2000
Retired Sr. Vice President and Chief
Technical Officer of 3Com Corp.
Susan M. James (2)(3) ....................................................
62
2008
Consultant to Ernst & Young
Clifford Press (3) ............................................................
55
2008
Managing Member of Oliver Press
Partners, LLC
Garry W. Rogerson, PhD (1)(2)(3)(4) ............................
56
2004
Chairman of the Board of Coherent;
President and Chief Executive Officer of
Varian, Inc.
Lawrence Tomlinson (2)(4)............................................
68
2003
Retired Senior Vice President and Treasurer
of Hewlett-Packard Co.
Sandeep Vij (1)(3)(4)(5) .................................................
43
2004
Vice President of Strategic Markets &
Business Development of Cavium
Networks, Inc.
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(1)
(2)
(3)
(4)
(5)
Member of the Compensation and H.R. Committee.
Member of the Audit Committee.
Member of the Governance and Nominating Committee.
Member of the Special Committee.
Member of the Special Litigation Committee.
Except as set forth below, each of our directors has been engaged in his or her principal occupation set forth above
during the past five years. There is no family relationship between any of our directors or executive officers. The Board of
Directors has determined that, with the exception of Dr. Ambroseo, all of its current members are “independent directors”
as that term is defined in the marketplace rules of the Nasdaq Stock Market.
John R. Ambroseo. Dr. Ambroseo has served as our President and Chief Executive Officer as well as a member of
the Board of Directors since October 2002. Dr. Ambroseo served as our Chief Operating Officer from June 2001 through
September 2002. Dr. Ambroseo served as our Executive Vice President and as President and General Manager of the
Coherent Photonics Group from September 2000 to June 2001. From September 1997 to September 2000, Dr. Ambroseo
served as our Executive Vice President and as President and General Manager of the Coherent Laser Group. From March
1997 to September 1997, Dr. Ambroseo served as our Scientific Business Unit Manager. From August 1988, when
Dr. Ambroseo joined us, until March 1997, he served as a Sales Engineer, Product Marketing Manager, National Sales
Manager and Director of European Operations. Dr. Ambroseo received a Bachelor degree from SUNY-College at Purchase
and a PhD in Chemistry from the University of Pennsylvania.
John H. Hart. Mr. Hart was a Fellow at 3Com Corporation, a global provider of enterprise and small-business
networking solutions, from September 2000 until September 2001. In September of 2000, Mr. Hart retired as Senior Vice
President and Chief Technical Officer of 3Com Corporation, a position he had held since August 1996. From the time
Mr. Hart joined 3Com in September 1990 until July 1996, he was Vice President and Chief Technical Officer. Prior to
joining 3Com, Mr. Hart worked for Vitalink Communications Corporation for seven years, where his most recent position
was Vice President of Network Products. Mr. Hart serves on the boards of directors of Plantronics, Inc, a headset
communications company and PLX Technologies, Inc., an I/O interconnect developer.
Susan M. James. Ms. James originally joined Ernst & Young, a global leader in professional services, in 1975,
becoming a partner in 1987 and since June 2006, has been a consultant to Ernst & Young. During her tenure with Ernst &
Young, she has been the lead partner or partner-in-charge for the audit work for a significant number of technology
companies, including Intel Corporation, Sun Microsystems, Amazon.com, Autodesk and the Hewlett-Packard Corporation,
and for the Ernst & Young North America Global Account Network. She also served on the Ernst & Young Americas
Executive Board of Directors from January 2002 through June 2006. She is a certified public accountant and a member of
the American Institute of Certified Public Accountants. Ms. James also serves on the Board of Directors of the Tri-Valley
Animal Rescue, a non-profit that is dedicated to providing homes for homeless pets.
Clifford Press. Mr. Press has been a managing member of Oliver Press Partners, LLC, an investment advisory
firm, since March 2005. Prior to 1986 he was employed as an investment banker at Morgan Stanley & Co., Incorporated.
From 1986 to March 2003, Mr. Press was a General Partner of Hyde Park Holdings, Inc., a private equity investment firm
(“HPH”). High Voltage Engineering Corporation, an industrial holding concern and a portfolio company of HPH, of which
Mr. Press had been an officer and a director from 1989 to August 2004, filed petitions under Chapter 11 of the United
States Bankruptcy Code in March 2004 and February 2005. Since 2001, he has been a director of GM Network Ltd., a
private holding company providing Internet- based digital currency services. Mr. Press received his MA degree from
Oxford University and an MBA degree from Harvard Business School.
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Garry W. Rogerson. Dr. Rogerson has served as our Chairman of the Board since June 2007. Dr. Rogerson has
been President and Chief Executive Officer of Varian, Inc., a major supplier of scientific instruments and consumable
laboratory supplies, vacuum products and services, since 2002 and 2004, respectively. Dr. Rogerson served as Varian’s
Chief Operating Officer from 2002 to 2004, as Senior Vice President, Scientific Instruments from 2001 to 2002, and as
Vice President, Analytical Instruments from 1999 to 2001. Dr. Rogerson also serves on the board of directors of Varian.
Lawrence Tomlinson. Mr. Tomlinson retired from Hewlett-Packard Co., a global technology company, in June
2003. Prior to retiring from Hewlett- Packard Co., from 1993 to June 2003 Mr. Tomlinson served as its Treasurer, from
1996 to 2002 he was also a Vice President of Hewlett-Packard Co. and from 2002 to June 2003 was also a Senior Vice
President of Hewlett- Packard Co. Mr. Tomlinson is a member of the board of directors of Salesforce.com, Inc., a customer
relationship management service provider.
Sandeep Vij. Mr. Vij has held the position of Vice President of Strategic Markets and Business Development of
Cavium Networks, Inc., a leading provider of highly integrated semiconductor products since May 2008. Prior to that he
held the position of Vice President of Worldwide Marketing, Services and Support for Xilinx Inc., a digital programmable
logic device provider, from 2007 to April 2008. From 2001 to 2006, he held the position of Vice President of Worldwide
Marketing at Xilinx. From 1997 to 2001, he served as Vice President and General Manager of the General Products
Division at Xilinx. Mr. Vij joined Xilinx in 1996 as Director of FPGA Marketing.
On January 5, 2009, the Company entered into an amendment to its agreement with Oliver Press Partners, LLP and
certain of its affiliates (“OPP”). The agreement provides that the Board of Directors of the registrant will include Mr. Press
in the slate of directors for election at the annual meeting of the stockholders to be held in 2009 and that the signatories to
the agreement will not seek to call a special meeting or other actions relating to the election of directors for one year. In
addition, Mr. Press agreed to submit his resignation as a director if OPP ceases to hold at least 50% of the common stock
of the Company that OPP and its affiliates currently hold as a group. The settlement agreement includes certain standstill
restrictions that commenced upon the execution of the settlement agreement and will expire on the first anniversary of our
2009 annual meeting if Mr. Press is elected to our board of directors at the 2009 annual meeting, or at the final
adjournment of the 2009 annual meeting of stockholders if Mr. Press is not elected at our 2009 annual meeting. Under the
terms of the standstill restrictions, neither OPP nor any of its affiliates may, among other things, (i) submit or encourage
any other person or group to nominate directors for election to the registrant’s board of directors, (ii) submit any
stockholder proposals, (iii) call an annual or special meeting of stockholders, (iv) solicit proxies from stockholders of the
registrant, (v) change the composition of the board of directors. The standstill restrictions contain certain exceptions that,
among other things, permit OPP to seek to change the composition of our Board of Directors at the 2010 annual meeting
by submitting nominees for election and to solicit proxies in favor of such nominees for the 2010 annual meeting. In
addition, during the effective period of the standstill restrictions described above, OPP has agreed that it will cause any
shares of our common stock that it owns to be voted in accordance with the recommendation of our Board of Directors if
Mr. Press has approved and joined in any such recommendation.
Director Independence
The Board of Directors has determined that, with the exception of Dr. Ambroseo, all of its current members and all
of the nominees for director are “independent directors” as that term is defined in the marketplace rules of the Nasdaq
Stock Market.
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Board Meetings and Committees
The Board of Directors held a total of twenty (20) meetings during fiscal 2008. During fiscal 2008, the Board of
Directors had three standing committees: the Audit Committee; the Compensation and H.R. Committee; and the
Governance and Nominating Committee. In addition, in fiscal 2008, the Board of Directors had three additional
committees: the Special Committee, the Special Litigation Committee and the Ad Hoc Repurchase Committee. No
director serving during such fiscal year attended fewer than 75% of the aggregate of all meetings of the Board of Directors
and the committees of the Board of Directors upon which such director served, except that Mr. Cantoni attended two of the
three meetings of the Nominating and Governance Committee during fiscal 2008 while a member of the Board of
Directors.
Audit Committee
The Audit Committee, which has been established in accordance with Section 3(a)(58)(A) of the Exchange Act,
consists of directors James, Rogerson, and Tomlinson. The Audit Committee held thirteen (13) meetings during fiscal
2008, seven 7 of which were held prior to Ms. James joining the Board in March 2008. From October 2007 to
March 2008, Mr. Cantoni was a member of the Board of Directors and a member of the Audit Committee. All of the
members of the Audit Committee are “independent” as defined under rules promulgated by the SEC and qualify as
independent directors under the marketplace rules of the Nasdaq Stock Market for Audit Committee members. The Board
of Directors has determined that directors James, Rogerson and Tomlinson are “audit committee financial experts” as that
term is defined in Item 401(h) of Regulation S-K of the Securities Act of 1933, as amended. Among other things, the
Audit Committee has the sole authority for appointing and supervising our independent registered public accounting firm
and is primarily responsible for approving the services performed by our independent registered public accounting firm
and for reviewing and evaluating our accounting principles and our system of internal accounting controls. A copy of the
Audit Committee charter, including any updates thereto, is available on our website at www.coherent.com.
Compensation and H.R. Committee
During fiscal 2008, the Compensation and H.R. Committee of the Board of Directors consisted of directors Hart,
Rogerson and Vij. All of the members of the Compensation and H.R. Committee are “independent” as defined under the
marketplace rules of the Nasdaq Stock Market. The Compensation and H.R. Committee held ten (10) meetings during
fiscal 2008. The Compensation and H.R. Committee, among other things, reviews and approves our executive
compensation policies and programs, and grants stock options to our employees, including officers, pursuant to our stock
option plans. See “Executive Officers and Executive Compensation—Compensation Discussion and Analysis” and
“Director Compensation” below for a description of our processes and procedures for the consideration and determination
of executive and director compensation. A copy of the Compensation and H.R. Committee charter, including any updates
thereto, is available on our website at www.coherent.com.
Governance and Nominating Committee
The Governance and Nominating Committee currently consists of directors James, Hart, Press, Rogerson and Vij.
From October 2007 to March 2008, the committee consisted of directors Hart and Vij and former director Mr. Cantoni.
Ms. James joined the committee upon her election to the Board in March 2008. All of the members of the Governance and
Nominating Committee are “independent” as defined under the marketplace rules of the Nasdaq Stock Market. The
Governance and Nominating Committee held three (3) meetings during fiscal 2008. The Governance and Nominating
Committee, among other things, assists the Board of Directors by making recommendations to the Board of Directors on
matters concerning director nominations and elections, board committees and corporate governance. A copy of the
Governance and Nominating Committee charter, including any updates thereto, is available on our website at
www.coherent.com.
8
Attendance at Annual Meeting of Stockholders by Directors
All directors are encouraged, but not required to attend our annual meeting of stockholders. At our annual meeting
held March 19, 2008, all members of the Board of Directors attended. Ms. James, who was a candidate for election at the
meeting, also attended. Mr. Press, a candidate for election at the meeting, was unable to attend.
Process for Recommending Candidates for Election to the Board of Directors
The Governance and Nominating Committee will consider nominees recommended by stockholders. A
stockholder that desires to recommend a candidate for election to the Board of Directors must direct the recommendation
in writing to us at our principal offices (Attention: Bret M. DiMarco, Executive Vice President and General Counsel) and
must include the candidate’s name, age, home and business contact information, principal occupation or employment, the
number of shares beneficially owned by the nominee, whether any hedging transactions have been entered into by the
nominee or on his or her behalf, information regarding any arrangements or understandings between the nominee and the
stockholder nominating the nominee or any other persons relating to the nomination, a written statement by the nominee
acknowledging that the nominee will owe a fiduciary duty to the Company if elected, and any other information required
to be disclosed about the nominee if proxies were to be solicited to elect the nominee as a director. For a stockholder
recommendation to be considered by the Governance and Nominating Committee as a potential candidate at an annual
meeting, nominations must be received on or before the deadline for receipt of stockholder proposals for such meeting. In
the event a stockholder decides to nominate a candidate for director and solicits proxies for such candidate, the stockholder
will need to follow the rules set forth by the SEC and in our bylaws. See “Information Concerning Solicitation and
Voting—Deadline for Receipt of Stockholder Proposals.”
The Governance and Nominating Committee’s criteria and process for evaluating and identifying the candidates
that it approves as director nominees are as follows:
• the Governance and Nominating Committee regularly reviews the current composition and size of the Board
of Directors;
• the Governance and Nominating Committee reviews the qualifications of any candidates who have been
properly recommended by a stockholder, as well as those candidates who have been identified by
management, individual members of the Board of Directors or, if the Governance and Nominating Committee
determines, a search firm. Such review may, in the Governance and Nominating Committee’s discretion,
include a review solely of information provided to the Governance and Nominating Committee or may also
include discussions with persons familiar with the candidate, an interview with the candidate or other actions
that the Governance and Nominating Committee deems proper;
• the Governance and Nominating Committee evaluates the performance of the Board of Directors as a whole
and evaluates the performance and qualifications of individual members of the Board of Directors eligible for
re-election at the annual meeting of stockholders;
• the Governance and Nominating Committee considers the suitability of each candidate, including the current
members of the Board of Directors, in light of the current size and composition of the Board of Directors.
Except as may be required by rules promulgated by the Nasdaq Stock Market or the SEC, it is the current
belief of the Governance and Nominating Committee that there are no specific, minimum qualifications that
must be met by any candidate for the Board of Directors, nor are there specific qualities or skills that are
necessary for one or more of the members of the Board of Directors to possess. In evaluating the
qualifications of the candidates, the Governance and Nominating Committee considers many factors,
including, issues of character, judgment, independence, age, expertise, diversity of experience, length of
service, other commitments and the like. The Governance and Nominating Committee evaluates such factors,
9
among others, and does not assign any particular weighting or priority to any of these factors. The
Governance and Nominating Committee considers each individual candidate in the context of the current
perceived needs of the Board of Directors as a whole. While the Governance and Nominating Committee has
not established specific minimum qualifications for director candidates, the Governance and Nominating
Committee believes that candidates and nominees must reflect a Board of Directors that is comprised of
directors who (i) are predominantly independent, (ii) are of high integrity, (iii) have qualifications that will
increase the overall effectiveness of the Board of Directors, and (iv) meet other requirements as may be
required by applicable rules, such as financial literacy or financial expertise with respect to audit committee
members;
• in evaluating and identifying candidates, the Governance and Nominating Committee has the authority to
retain and terminate any third party search firm that is used to identify director candidates and has the authority
to approve the fees and retention terms of any search firm; and
• after such review and consideration, the Governance and Nominating Committee recommends the slate of
director nominees to the full Board of Directors for its approval.
The Governance and Nominating Committee will endeavor to notify, or cause to be notified, all director
candidates, including those recommended by a stockholder, of its decision as to whether to nominate such individual for
election to the Board of Directors.
Stockholder Communication with the Board of Directors
We believe that management speaks for Coherent. Any stockholder may contact any of our directors by writing to
them by mail c/o Bret M. DiMarco, Executive Vice President and General Counsel, at our principal executive offices, the
address of which appears on the cover of this proxy statement.
Any stockholder may report to us any complaints regarding accounting, internal accounting controls, or auditing
matters. Any stockholder who wishes to so contact us should send such complaints to the Audit Committee c/o Bret M.
DiMarco, Executive Vice President and General Counsel, at our principal executive offices, the address of which appears
on the cover of this proxy statement.
Any stockholder communications that the Board of Directors is to receive will first go to our General Counsel,
who will log the date of receipt of the communication as well as the identity and contact information of the correspondent
in our stockholder communications log.
Our General Counsel will review, summarize and, if appropriate, investigate the complaint under the direction of
the appropriate committee of the Board of Directors in a timely manner. In the case of accounting or auditing related
matters, a member of the Audit Committee, or the Audit Committee as a whole, will then review the summary of the
communication, the results of the investigation, if any, and, if appropriate, the draft response. The summary and response
will be in the form of a memo, which will become part of the stockholder communications log that the General Counsel
maintains with respect to all stockholder communications.
Director Compensation
During fiscal 2008, we paid our non-employee directors an annual retainer (depending upon position) and per
meeting fees for service on the Board of Directors. In fiscal 2008, the annual retainer amounts for non-employee directors
were as follows:
10
• Chairman of the Board: $41,000
• Lead independent director: $33,000
• Chairman of the Audit Committee: $33,000
• Member of the Board: $25,000
Additionally, non-employee members of the Board of Directors received $2,000 per board meeting attended, plus
$1,000 per committee meeting attended, except that the Chairman of the Audit Committee received $3,000 per meeting of
the Audit Committee attended, and the Chairmen of the Compensation and H.R. Committee and the Governance and
Nominating Committee, respectively, received $2,000 per meeting of the Compensation and H.R. Committee and the
Governance and Nominating Committee attended. As discussed above, each director serving on the Special Committee
and/or the Special Litigation Committee earned $4,000 per month for service thereon. There was no additional
compensation paid to directors for serving on the Ad Hoc Repurchase Committee, which was formed for the purpose of
decision-making with regards to our announced stock buy-back. Additionally, since we had a Chairman of the Board who
was an independent director, no member of the Board of Directors held the position of Lead independent director in fiscal
2008. For fiscal 2009, members of the Board of Directors will receive cash compensation from annual retainers, with no
per meeting fees. See “Compensation Discussion and Analysis.”
The chart below summarizes the gross cash amounts earned by non-employee directors for service during fiscal
2008 on the Board and its committees (all amounts in dollars):
Name John H. Hart ......................................................
Susan James ......................................................
Clifford Press ....................................................
Garry W. Rogerson ...........................................
Lawrence Tomlinson.........................................
Sandeep Vij.......................................................
Former Director
Charles W. Cantoni ...........................................
Annual Board
and
Chairperson
service
including per
Board meeting
attended (1)
Audit
Committee (1)
Compensation
and H.R.
Committee (1)
Nominating and
Governance
Committee (1)
Special
Litigation
Special
Committee Committee
Total
61,000
32,500(2)
34,500(2)
81,000
73,000
65,000
—
6,000
—
12,000
39,000
—
20,000
—
—
9,000
—
10,000
3,000
1,000
—
—
—
6,000
—
—
—
12,000
12,000
12,000
—
—
—
—
—
60,000
84,000
39,500
34,500
114,000
124,000
141,000
28,500(3)
6,000
—
1,000
—
—
35,500
(1) Includes the annual retainer, where applicable, as well as per meeting fees. For Mr. Tomlinson, this includes his retainer as Chairperson of the
Audit Committee.
(2) Includes pro rated amount for service as a director after joining in March 2008.
(3) Includes pro rated amount for service as a director before retiring in March 2008.
11
The chart below summarizes the amounts earned by non-employee directors for service (including both Board and,
where applicable, committee service) during fiscal 2008:
Name
John H. Hart .....................................................................................................................
Susan James .....................................................................................................................
Clifford Press....................................................................................................................
Garry W. Rogerson ..........................................................................................................
Lawrence Tomlinson........................................................................................................
Sandeep Vij ......................................................................................................................
Former Director
Charles W. Cantoni ..........................................................................................................
Fees Paid
in
Cash ($)
Stock
Awards
($)(1)(2)
Option
Awards
($)(1)(2)
Total ($)
84,000
39,500
34,500
114,000
124,000
141,000
33,071
9,795
9,795
33,071
33,071
33,071
81,038
26,847
26,847
50,318
50,318
50,318
198,109
76,142
71,142
197,389
207,389
224,389
35,500
23,276(4)
— (5)
58,776
(1) These amounts do not reflect compensation actually received. Rather, these amounts represent the aggregate expense recognized
by the Company for financial statement reporting purposes in fiscal year 2008, in accordance with FAS 123(R), for restricted stock
units and stock options which were granted in fiscal year 2008 and prior to fiscal year 2008 under the Company’s Director Stock
Plan. The assumptions used to calculate the value of these stock units and stock options are set forth in Note 12. “Employee Stock
Option and Benefit Plans” of the Notes to the Consolidated Financial Statements in our annual report on Form 10-K for the year
ended September 27, 2008.
(2) The directors’ aggregate holdings of restricted stock units as of the end of fiscal year 2008 were as follows (the vesting for which
is 100% on March 29, 2009 for 2,000 shares (for Dr. Rogerson and Messrs. Hart, Tomlinson and Vij) and 100% on March 11,
2010 for 2,000 shares to the extent such individual is a member of the Board at such time):
John H. Hart ...................................................................................................................................
Susan James....................................................................................................................................
Clifford Press..................................................................................................................................
Garry W. Rogerson.........................................................................................................................
Lawrence Tomlinson......................................................................................................................
Sandeep Vij ....................................................................................................................................
4,000 shares
2,000 shares
2,000 shares
4,000 shares
4,000 shares
4,000 shares
(3) The directors’ aggregate holdings of stock option awards (both vested and unvested) as of the end of fiscal year 2008 were as
follows:
John H. Hart ......................................................................................................................
Susan James.......................................................................................................................
Clifford Press.....................................................................................................................
Garry W. Rogerson............................................................................................................
Lawrence Tomlinson .........................................................................................................
Sandeep Vij .......................................................................................................................
52,500 shares
24,000 shares
24,000 shares
53,000 shares
44,800 shares
54,000 shares
(4) Mr. Cantoni did not receive a restricted stock unit grant in fiscal 2008, and his 5,000 share RSU grant and an option grant for 5,000
shares expired unexercised following his retirement.
(5) This director had options for which the expense was accelerated in fiscal 2006 as provided under FAS123(R) and the Director
Option Plan pursuant to which he was eligible to retire. At retirement, the options fully vested. All expense related to the options
was recognized prior to fiscal 2007.
12
Restricted Stock Units
Granted in
Fiscal 2008 (#)
Name
John H. Hart ....................................................................................................................
Susan James ....................................................................................................................
Clifford Press...................................................................................................................
Garry W. Rogerson .........................................................................................................
Lawrence Tomlinson.......................................................................................................
Sandeep Vij .....................................................................................................................
2,000
2,000
2,000
2,000
2,000
2,000
Stock Options
Granted in
Fiscal 2008 (# shares)
6,000
24,000
24,000
6,000
6,000
6,000
Our 1998 Directors’ Stock Plan was adopted by the Board of Directors on November 24, 1998 and was approved
by the stockholders on March 17, 1999. The 1998 Directors’ Stock Plan was amended on March 23, 2003, and was further
amended on March 30, 2006, when the 1998 Directors’ Stock Plan was renamed the 1998 Director Stock Plan (the “1998
Director Plan”). As of September 30, 2007, 150,000 shares were reserved for issuance thereunder. Under the terms of the
1998 Director Plan, the number of shares reserved for issuance thereunder is increased each year by the number of shares
necessary to restore the total number of shares reserved to 150,000 shares.
As of September 27, 2008, the 1998 Director Plan provided for the automatic and non-discretionary grant of a nonstatutory stock option to purchase 24,000 shares of the Company’s common stock to each non-employee director on the
date on which such person becomes a director. Thereafter, each non-employee director will be automatically granted a
non-statutory stock option to purchase 6,000 shares of common stock on the date of and immediately following each
Annual Meeting of Stockholders at which such non-employee director is reelected to serve on the Board of Directors, if, on
such date, he or she has served on the Board of Directors for at least three months. Such plan provides that the exercise
price must be equal to the fair market value of the common stock on the date of grant of the options.
Additionally, as of September 27, 2008, the 1998 Director Plan provides for the automatic and non-discretionary
grant of 2,000 shares of restricted stock units (“RSUs”) to each non-employee director on the date on which such person
becomes a director. Thereafter, each non-employee director will be automatically granted 2,000 shares of RSUs on the date
of and immediately following each Annual Meeting of Stockholders at which such non-employee director is reelected to
serve on the Board of Directors, if, on such date, he or she has served on the Board of Directors for at least three months.
The 1998 Director Plan provides that with respect to any options held by a director who retires after at least eight
years of service on the Board, such director will fully vest in and have the right to exercise his or her option as to both
vested and unvested shares as of such date. The option will remain exercisable for the lesser of (i) two (2) years following
the date of such director’s retirement or (ii) the expiration of the option’s original term.
As of September 27, 2008, 188,700 shares had been issued on exercise under the 1998 Director Plan. There were
no options exercised by non-employee directors during fiscal 2008.
Vote Required
Every stockholder voting for the election of directors may cumulate such stockholder’s votes and give one
candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the
stockholder’s shares are entitled. Alternatively, a stockholder may distribute his or her votes on the same principle among
as many candidates as the stockholder thinks fit, provided that votes cannot be cast for more than seven (7) candidates.
However, no stockholder will be entitled to cumulate votes for a candidate unless (i) such candidate’s name has been
properly placed in nomination for election at the Annual Meeting prior to the voting and (ii) the stockholder, or any other
stockholder, has given notice at the meeting prior to the voting of the intention to cumulate the stockholder’s votes. If
13
cumulative voting occurs at the meeting and you do not specify how to distribute your votes, your proxy holders (the
individuals named on your proxy card) will cumulate votes in such a manner as will ensure the election of as many of the
nominees listed above as possible, and the specific nominees to be voted for will be determined by the proxy holders.
If a quorum is present, the seven (7) nominees receiving the highest number of votes will be elected to the Board
of Directors. See “Information Concerning Solicitation and Voting—Quorum; Abstentions; Broker Non-Votes.”
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE SEVEN NOMINEES PRESENTED HEREIN. 14
PROPOSAL TWO RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors has selected Deloitte & Touche LLP, an independent registered
public accounting firm, to audit our financial statements for the fiscal year ending October 3, 2009, and recommends that
stockholders vote for ratification of such appointment. Deloitte & Touche LLP has audited our financial statements since
the fiscal year ended September 25, 1976. Although ratification by stockholders is not required by law, the Audit
Committee has determined that it is desirable to request ratification of this selection by the stockholders as a matter of
good corporate practice. Notwithstanding its selection, the Audit Committee, in its discretion, may appoint a new
independent registered public accounting firm at any time during the year if the Audit Committee believes that such a
change would be in the best interest of Coherent and its stockholders. If the stockholders do not ratify the appointment of
Deloitte & Touche LLP, the Audit Committee may reconsider its selection. The Audit Committee selected Deloitte &
Touche LLP to audit our financial statements for the fiscal year ended September 27, 2008, which was ratified by our
stockholders.
Representatives of Deloitte & Touche LLP are expected to be present at the meeting and will be afforded the
opportunity to make a statement if they desire to do so. The representatives of Deloitte & Touche LLP are also expected to
be available to respond to appropriate questions.
Principal Accounting Fees and Services
The following table sets forth fees for services Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, “Deloitte”) provided during fiscal years 2008 and 2007:
2008
Audit fees (1) .............................................................................................................................................. $ 4,753,342
Audit-related fees .......................................................................................................................................
—
Tax fees ......................................................................................................................................................
—
All other fees (2).........................................................................................................................................
34,300
Total ....................................................................................................................................................... $ 4,787,642
2007
$ 3,271,370 —
—
2,000 $ 3,273,370 (1) Represents fees for professional services provided in connection with the integrated audit of our annual financial statements and
internal control over financial reporting and review of our quarterly financial statements, advice on accounting matters that arose
during the audit and audit services provided in connection with other statutory or regulatory filings. Includes approximately
$1,885,000 and $980,000 incurred during fiscal 2008 and 2007, respectively, for additional services related primarily to the
restatement of our consolidated financial statements for the fiscal years 1995 through 2005.
(2) Represents the annual subscription for access to the Deloitte Accounting Research Tool, which is a searchable on-line accounting
database ($2,000) and for fiscal 2008, project assistance.
Pre-Approval of Audit and Non-Audit Services
The Audit Committee has determined that the provision of non-audit services by Deloitte is compatible with
maintaining Deloitte’s independence. In accordance with its charter, the Audit Committee approves in advance all audit
and non-audit services to be provided by Deloitte. In other cases, the Chairman of the Audit Committee has the delegated
authority from the Committee to pre-approve certain additional services, and such pre-approvals are communicated to the
full Committee at its next meeting. During fiscal year 2008, 100% of the services were pre-approved by the Audit
Committee in accordance with this policy.
15
Vote Required
The affirmative vote of a majority of the votes cast will be required to ratify the selection of Deloitte & Touche
LLP as our independent registered public accounting firm for the fiscal year ending October 3, 2009.
THE AUDIT COMMITTEE UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING OCTOBER 3, 2009.
16
PROPOSAL THREE
APPROVAL OF THE AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN
We are asking stockholders to approve the amendment and restatement of the Employee Stock Purchase Plan (the
“Purchase Plan”). The Purchase Plan was initially adopted in 1980 and has been amended in 1983, 1989, 1993 and 1999
to increase the number of shares reserved for issuance thereunder (the “Existing Plan”). The Board has determined that it
is in the best interests of the Company and its stockholders to amend and restate the Purchase Plan: (i) to authorize
additional shares of our common stock for purchase under the Purchase Plan and (ii) to make certain administrative
changes to be consistent with best drafting practices. The Board has authorized an increase to the number of shares
reserved for issuance thereunder by an additional 600,000 shares to an aggregate of 6,925,000 shares of our common stock
reserved for purchase under the Purchase Plan, subject to stockholder approval. As of December 31, 2008, only 70,324
shares remained available for issuance under the Existing Plan. The Board expects that with the 600,000 share increase,
the number of shares reserved for issuance under the Purchase Plan will be sufficient to operate the plan between two to
three years without having to request additional shares. The Board will periodically review actual share consumption
under the Purchase Plan and may make an additional request for shares under the Purchase Plan earlier or later than this
period as needed. If the stockholders approve the Purchase Plan, it will replace the version of the Existing Plan. If
stockholders do not approve the amended and restated Purchase Plan, we will continue to use the current version of the
Existing Plan.
Vote Required; Recommendation of Board of Directors
If a quorum is present, the affirmative vote of a majority of the votes cast will be required to approve the
amendment and restatement of the Purchase Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE
ADOPTION OF THE AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN AND THE
NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE PURCHASE PLAN.
Description of the Employee Stock Purchase Plan
The following is a summary of the principal features of the Purchase Plan and its operation. The summary is
qualified in its entirety by reference to the Purchase Plan as set forth in Appendix A.
General
The Purchase Plan was adopted by the Compensation Committee of the Board in January 2009, subject to
stockholder approval at the Annual Meeting. The purpose of the Purchase Plan is to provide employees of the Company
and its subsidiaries with an opportunity to purchase shares of our common stock through payroll deductions.
Administration
The Board or a committee appointed by the Board (in either case, the “Administrator”) administers the Purchase
Plan. The administration, interpretation or application of the Purchase Plan by the Administrator will be final, conclusive
and binding upon all participants. Members of Board or its committee who are employees may participate in the Purchase
Plan.
17
Eligibility
Each of our employees or the employees of our subsidiaries who is customarily employed with us or one of our
subsidiaries for at least twenty hours per week is eligible to participate in the Purchase Plan; except that no employee will
be granted an option under the Purchase Plan to the extent that (i) immediately after the grant, such employee would own
5% or more of the total combined voting power or value of the Company or (ii) his or her rights to purchase stock under
all of our employee stock purchase plans accrues at a rate which exceeds $25,000 worth of stock (determined at the fair
market value of the shares at the time such option is granted) for each calendar year.
Offering Period
The Purchase Plan is implemented through two offering periods during each fiscal year, each of six months
duration, commencing on or about May 1 and November 1 of each year. To participate in the Purchase Plan, an eligible
employee must complete a subscription agreement provided by the Company authorizing payroll deductions and filing it
with the Company’s payroll office prior to the applicable offering date. Payroll deductions may not exceed 10% of a
participant’s base pay which he or she received on a given payday nor be less than a $10 deduction per payday. At the
beginning of each six month offering period, each participant automatically is granted an option to purchase shares of our
common stock through such participant’s accumulated payroll deductions. Unless a participant withdraws from the
Purchase Plan, the option will be automatically exercised at the end of the offering period, and the maximum number of
full shares will be purchased at the applicable amount of the accumulated payroll deductions in his or her account.
Purchase Price
Shares of our common stock may be purchased under the Purchase Plan at a purchase price equal to 85% of the
lesser of the fair market value of our common stock on (i) the first day of the offering period, or (ii) the last day of the
offering period. The fair market value of our Common Stock on any relevant date will be determined by the Board in good
faith.
Payroll Deductions
The purchase price of the shares is accumulated by payroll deductions throughout each offering period. The
payroll deductions made by a participant will be credited to his or her account under the Purchase Plan. A participant may
not make any additional payments into such account. The maximum number of full shares of our common stock that a
participant may purchase in each offering period will be determined by dividing the total amount of payroll deductions
withheld from the participant’s compensation during that offering period by the purchase price.
A participant may lower but not increase the rate of his or her payroll deductions during an offering period by
filing a new subscription agreement. The change in rate will be effective within 15 days following the Company’s receipt
of the new authorization.
Withdrawal
During the offering period, a participant may discontinue all, but not less than all, of the payroll deductions
credited to his or her account at any time prior to the end of an applicable offering period by giving written notice to the
Company. All the participant’s payroll deductions credited to his or her account will be paid promptly after receipt of
withdrawal and the option will terminated, and no further payroll deductions will be made during the applicable offering
period.
18
In the event an employee fails to remain continuously employed by the Company or any subsidiary for at least 20
hours per week during a given offering period, he or she will be deemed to have elected to withdraw from the Purchase
Plan and the payroll deductions credited to his or her account will be returned and the option terminated.
Termination of Employment
Upon termination of a participant’s employment prior to the end of an offering period for any reason, including
retirement or death, he or she will be deemed to have elected to withdraw from the Purchase Plan and the payroll
deductions credited to the participant’s account will be returned to him or her or, in the case of death, to the person or
persons entitled thereto as provided in the Purchase Plan, and such participant’s option will automatically be terminated.
Changes in Capitalization
If any option under the Purchase Plan is exercised after any stock dividend, stock split, spin-off, recapitalization,
merger, consolidation, exchange of shares or the like, occurring after such option was granted that reduces, increases or
otherwise changes the shares outstanding immediately prior to such event, then the number of shares to which such option
shall be applicable and the option price for such shares shall be appropriately adjusted by the Company.
Amendment and Termination of the Plan
The Board may at any time terminate or amend the Purchase Plan, provided that certain amendments may require
stockholder approval. No such termination can affect options previously granted, nor may any amendment make any
change in any option previously granted which adversely affects the rights of any participant.
Participation in Plan Benefits
Participation in the Purchase Plan is voluntary and is dependent on each eligible employee’s election to participate
and his or her determination as to the level of payroll deductions. Accordingly, future purchases under the Purchase Plan
are not determinable. Non-employee directors are not eligible to participate in the Purchase Plan. No purchases have been
made under the amended and restated Purchase Plan since its adoption by the Board in January 2009. For illustrative
purposes, the following table sets forth (i) the number of shares of our Common Stock that were purchased during the last
fiscal year under the Existing Plan, (ii) the average price per share paid for such shares, and (iii) the fair market value at the
date of purchase.
Name of Individual or Group
Number of
Shares Purchased
John R. Ambroseo ....................................................................
879
Helene Simonet ........................................................................
879
Bret DiMarco............................................................................
879
Luis Spinelli .............................................................................
775
Ron Victor ................................................................................
—
All executive officers, as a group .............................................
3,412
All directors who are not executive officers, as a group ..........
—
All employees who are not executive officers as a group ........ 150,800
Average Per
Share Purchase
Price ($)
21.505
21.505
21.505
21.505
—
21.505
—
21.505
Fair Market
Value at Date of
Purchase ($)
25.30 25.30
25.30
25.30
—
25.30
—
25.30 Certain Federal Income Tax Information
The following brief summary of the effect of federal income taxation upon the participant and us with respect to
the shares purchased under the Purchase Plan does not purport to be complete, and does not discuss the tax consequences
of a participant’s death or the income tax laws of any state or foreign country in which the participant may reside.
19
The Purchase Plan, and the right of participants to make purchases thereunder, is intended to qualify under the
provisions of Sections 421 and 423 of the Internal Revenue Code of 1986, as amended (the “Code”). Under these
provisions, no income will be taxable to a participant until the shares purchased under the Purchase Plan are sold or
otherwise disposed of. Upon sale or other disposition of the shares, the participant will generally be subject to tax in an
amount that depends upon the holding period. If the shares are sold or otherwise disposed of more than two years from the
first day of the applicable offering period and one year from the applicable date of purchase, the participant will recognize
ordinary income measured as the lesser of (a) the excess of the fair market value of the shares at the time of such sale or
disposition over the purchase price and (b) an amount equal to 15% of the fair market value of the shares as of the first day
of the applicable offering period. Any additional gain will be treated as long-term capital gain. If the shares are sold or
otherwise disposed of before the expiration of these holding periods, the participant will recognize ordinary income
generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the
purchase price. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss,
depending on how long the shares have been held from the date of purchase. The Company generally is not entitled to a
deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income
recognized by participants upon a sale or disposition of shares prior to the expiration of the holding periods described
above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON
PARTICIPANTS AND US UNDER THE PURCHASE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND
DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
PARTICIPANT MAY RESIDE.
20
PROPOSAL FOUR
APPROVAL OF THE AMENDED AND RESTATED 2001 STOCK PLAN
We are asking stockholders to approve an amendment and restatement of the 2001 Stock Plan (the “Stock Plan”).
The Stock Plan was adopted by the Board of Directors in November 2001 and approved by stockholders at the 2002
Annual Meeting. The Stock Plan was initially amended and restated on March 25, 2004 and further amended February 22,
2008. The Board has adopted this most recent amendment and restatement of the Stock Plan. If the stockholders approve
this Stock Plan, it will replace the version of the Stock Plan approved by stockholders at our 2008 Annual Meeting. If
stockholders do not approve the amended and restated Stock Plan, we will continue to use the version of the Stock Plan
approved by stockholders at the 2008 Annual Meeting.
The Stock Plan is structured to allow the Board of Directors to create equity incentives in order to assist the
Company in attracting, retaining and motivating the best available personnel for the successful conduct of the Company’s
business. The Company believes that linking compensation to corporate performance motivates employees and
consultants to improve stockholder value. The Company has, therefore, consistently included equity incentives as a
significant component of compensation for its employees and consultants. With the demand for highly skilled employees
and consultants at an all time high, especially in the technology industries, management believes it is critical to the
Company’s success to maintain competitive compensation programs. The Board believes that the approval of the Stock
Plan would be in the best interests of the Company and its stockholders.
Summary of Material Changes Made in the Stock Plan
Below is a summary of some of the material differences between the amended and restated Stock Plan and the
Existing Plan. This summary is qualified in its entirety by reference to the Stock Plan itself set forth in Appendix B.
• The Stock Plan has been drafted to include limitations to the number of shares that may be granted in a given
fiscal year though individual equity incentives. Additionally, specific performance criteria have been added to
the Stock Plan so that the Administrator (as defined herein) may establish performance objectives upon
achievement of which certain awards will vest or be issued, which in turn will allow the Company to receive
income tax deductions under Section 162(m) of the Code.
• The Stock Plan has been revised to provide that a stock appreciation right (“SAR”) may not have an exercise
price below 100% of the fair market value of the underlying shares on the grant date. Further, the exercise
price for the shares to be issued pursuant to a SAR that has already been granted may not be changed without
the consent of our stockholders. This prohibition includes, without limitation, a repricing of the SAR as well
as a SAR exchange program whereby a participant agrees to cancel an existing SAR in exchange for a stock
option, a SAR or other equity awards granted under the Stock Plan.
Required Vote
If a quorum is present, the affirmative vote of a majority of the votes cast will be required to approve the
amendment to the Stock Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE COMPANY’S AMENDED AND RESTATED 2001 STOCK PLAN The following is a summary of the material features of the Stock Plan and its operation. This summary is qualified
in its entirety by reference to the Stock Plan itself set forth in Appendix B.
21
Summary of the 2001 Stock Plan
General. The Stock Plan provides for the grant of equity awards to employees (including officers) and
consultants. Options granted under the Stock Plan may either be “incentive stock options” as defined in Section 422 of the
Code, or nonstatutory stock options, as determined by the Board.
Purpose. The general purposes of the Stock Plan are to attract and retain the best available personnel for positions
of substantial responsibility, to provide additional incentive to the employees and consultants of the Company and to
promote the success of the Company’s business.
Administration. The Stock Plan will be administered by the Board or a committee (“Committee”) designated by
the Board (in either case, the “Administrator”).
Eligibility. The Stock Plan provides that nonstatutory stock options, restricted stock, performance shares,
performance units, SARs and deferred stock units may be granted to employees (including officers) and consultants of the
Company and any parent or subsidiary. Incentive stock options may be granted only to employees. The Administrator
will determine which eligible persons will be granted awards.
Shares Available under the Stock Plan. A total maximum aggregate of 6,300,000 of our shares are available for
issuance under the Stock Plan; provided, however, that in no event will more than 30% of the shares issuable under the
Stock Plan be granted pursuant to awards with an exercise price or purchase price that is less than 100% of the fair market
value on the date of grant. As of December 31, 2008, 2,640,897 shares were subject to outstanding awards under the Stock
Plan and 2,604,947 shares remained available for any new options to be granted in the future.
If an award expires or becomes exercisable without being exercised in full, or, with respect to restricted stock,
performance shares, performance units or deferred stock units, is forfeited back to or repurchased by the Company, the
unpurchased shares (or forfeited or repurchased shares) which were subject to awards will become available for future
grant under the Stock Plan (unless the Stock Plan has terminated). With respect to SARs, only shares actually issued
pursuant to a SAR will cease to be available under the Stock Plan. Shares actually issued under the Stock Plan will not be
returned to the Stock Plan, except that if restricted stock, performance shares, performance units or deferred stock units are
repurchased by the Company at their original price or forfeited to the Company, such shares will become available for
future grant under the Stock Plan. To the extent that an award under the Stock Plan is paid out in cash, rather than shares,
such cash payment will not result in reduction of the shares available for issuance under the Stock Plan.
Prohibition on Repricings and Option or SAR Exchanges. The exercise price for the shares to be issued pursuant
to an option or SAR that has already been granted may not be changed without the consent of our stockholders. This
prohibition includes, without limitation, a repricing of the option or SAR as well as an option or SAR exchange program
whereby the holder of such award agrees to cancel his or her existing option or SAR in exchange for an option, SAR or
other award to be granted in the future with an exercise price equal to the fair market value of the shares subject to such
award on the date of grant.
Grant Limitation. The Stock Plan provides that no employee or consultant will be granted options and SARs to
purchase more than 500,000 shares in any fiscal year of the Company, except that a participant may also be granted
options and SARs covering up to an additional 500,000 shares in connection with his or her initial service.
Option Exercise Price. The exercise price of options granted under the Stock Plan is determined by the
Administrator and must not be less than 100% of the fair market value of the Company’s common stock (“Common
Stock”) at the time of grant. Options granted under the Stock Plan expire as determined by the Administrator, but in no
event later than 10 years from date of grant. No option may be exercised by any person after its expiration. Incentive
stock options granted to stockholders owning more than 10% of the voting stock of the Company must have an exercise
22
price per share no less than 110% of the fair market value at the time of grant and the term of such option may be no more
than 5 years from the date of grant. The fair market value of the Common Stock is generally determined with reference to
the closing sale price for the Common Stock (or the closing bid if no sales were reported) on the last market trading day
prior to the date the option is granted.
Exercise of Options. Options become exercisable at such times as are determined by the Administrator and are set
forth in the individual option agreements. Generally, options granted to newly hired and existing employees vest as to
33% per year over a three year period. An option is exercised by giving written notice to the Company specifying the
number of full shares of Common Stock to be purchased and tendering payment of the purchase price. The method of
payment of the exercise price for the shares purchased upon exercise of an option will be determined by the Administrator.
The Stock Plan permits payment to be made by cash, check, other shares of Common Stock (with some restrictions),
broker-assisted cashless exercise, any other form of consideration permitted by applicable law, or any combination thereof.
Exercise Price and Other Terms of Stock Appreciation Rights. The Administrator, subject to the provisions of the
Stock Plan, will have complete discretion to determine the terms and conditions of SARs granted under the Stock Plan;
provided that no SAR may have a term of more than 10 years from the date of grant and that the exercise price of a SAR
may not have an exercise price below 100% of the fair market value of the Common Stock on the grant date. No SAR can
be exercised by any person after its expiration.
Payment of Stock Appreciation Right Amount. Upon exercise of a SAR, the holder of the SAR will be entitled to
receive payment from us in an amount determined by multiplying (i) the difference between the fair market value of a
share on the date of exercise over the exercise price by (ii) the number of shares with respect to which the SAR is
exercised.
Payment upon Exercise of Stock Appreciation Right. At the discretion of the Administrator, payment to the holder
of a SAR may be in cash, shares of our Common Stock or a combination thereof. In the event that payment to the holder
of a SAR is settled in cash, the shares available for issuance under the Stock Plan may not be diminished as a result of the
settlement.
Stock Appreciation Right Agreement. Each SAR grant is required to be evidenced by an agreement that is required
to specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the
Administrator, in its sole discretion, will determine.
Buyout of Options and SARs. The Administrator may at any time offer to buy out for a payment in cash or shares
of our Common Stock an option or a SAR previously granted based on such terms and conditions as the Administrator
may establish and communicate to the holder of the option or SAR at the time that such offer is made.
Termination of Employment. The Stock Plan gives the Administrator the authority to vary the terms of the
individual option and SAR agreements. However, generally, if a participant ceases to be an employee or consultant for
any reason other than death or disability, then the participant will generally have the right to exercise his or her outstanding
options for 90 days, or SARs for 3 months, after the date of termination, but only to the extent that the participant was
entitled to exercise such option or SAR at the date of such termination. If such termination is due to death or disability, the
participant (or the participant’s legal representative) will have the right to exercise an existing unexercised option or SAR
at any time within 12 months following the termination date, but only to the extent that the participant was entitled to
exercise such option or SAR at the date of such termination. In no event will an option or SAR be exercisable beyond its
term.
Grant of Restricted Stock. Restricted stock awards may be granted to our employees (including officers) or
consultants, at any time and from time to time as may be determined by the Administrator, in its sole discretion. The
Administrator will have complete discretion to determine (i) the number of shares subject to a restricted stock award
23
granted to any participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely
on continued provision of services but may include a performance-based component, upon which is conditioned the grant
or vesting of restricted stock. Restricted stock will be granted in the form of units/rights to acquire shares of our Common
Stock. Each such unit/right will be the equivalent of one share of Common Stock for purposes of determining the number
of shares subject to an award. Until the shares are issued, no right to vote or receive dividends or any other rights as a
stockholder exist with respect to the units/rights to acquire shares.
Restricted Stock Award Agreement. Each restricted stock grant is required be evidenced by an agreement that is
required to specify the purchase price (if any) and such other terms and conditions as the Administrator, in its sole
discretion, will determine; provided, however, that if the restricted stock grant has a purchase price, such purchase price
must be paid no more than 10 years following the date of grant.
Grant of Performance Shares. Performance shares may be granted to our employees or consultants at any time
and from time to time as may be determined by the Administrator, in its sole discretion. The Administrator will have
complete discretion to determine (i) the number of shares of our Common Stock subject to a performance share award
granted to any employee or consultant and (ii) the conditions that must be satisfied, which typically will be based
principally or solely on achievement of performance milestones but may include a service-based component, upon which is
conditioned the grant or vesting of performance shares. Performance shares will be granted in the form of units/rights to
acquire shares of our Common Stock. Each such unit/right will be the equivalent of one share of Common Stock for
purposes of determining the number of shares subject to a performance share award.
Performance Share Award Agreement. Each performance share grant is required be evidenced by an agreement
that is required to specify such other terms and conditions as the Administrator, in its sole discretion, may determine.
Restricted Stock and Performance Share Limitations. No participant will be granted, in any fiscal year of the
Company, more than 500,000 shares in the aggregate of the following: (i) restricted stock or (ii) performance shares;
provided, however, that such limit will be 500,000 shares in connection with a participant’s initial service.
Grant of Performance Units. Performance units are similar to performance shares, except that they must be settled
in a cash equivalent to the fair market value of the underlying shares of our Common Stock, determined as of the vesting
date. The shares available for issuance under the Stock Plan may not be diminished as a result of the settlement of a
performance unit.
Performance Unit Award Agreement. Each performance unit grant is required be evidenced by an agreement that
is required specify such terms and conditions as the Administrator, in its sole discretion, may determine.
Performance Unit Limitation. No participant will receive performance units, in any fiscal year of the Company,
with respect to more than 500,000 shares, provided, however, that such limit will be 500,000 in connection with the
participant’s initial service.
Deferred Stock Units. Deferred stock units will consist of a restricted stock, performance share or performance
unit award that the Administrator, in its sole discretion permits to be paid out in installments or on a deferred basis, in
accordance with rules and procedures established by the Administrator.
Code Section 162(m) Performance Restrictions. For purposes of qualifying grants of restricted stock, performance
shares or performance units as “performance-based compensation” under Code Section 162(m), the Administrator, in its
discretion, may set restrictions based upon the achievement of performance goals. The performance goals will be set by
the Administrator on or before the latest date permissible to enable the award grants to qualify as “performance-based
compensation” under Section 162(m) of the Code. In granting awards which are intended to qualify under Section 162(m)
of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or
24
appropriate to ensure qualification of the award under Section 162(m) of the Code (e.g., in determining the performance
goals).
Performance Goals. The granting and/or the vesting of awards of options, restricted stock, performance shares
and performance units may be made subject to the attainment of performance goals relating to one or more business
criteria within the meaning of Section 162(m) of the Code and may provide for a targeted level or levels of achievement
including: (i) cash flow (including operating cash flow or free cash flow), (ii) revenue (on an absolute basis or adjusted for
currency effects), (iii) gross margin or as a percentage of revenue, (iv) operating expenses or operating expenses as a
percentage of revenue, (v) earnings (which may include earnings before interest and taxes, earnings before taxes and net
earnings), (vi) earnings per share, (viii) stock price, (ix) return on equity, (x) total stockholder return, (xi) growth in
stockholder value relative to the moving average of the S&P 500 Index or another index, (xii) return on capital,
(xiii) return on assets or net assets, (xiv) return on investment, (xv) economic value added, (xvi) operating profit or net
operating profit, (xvii) operating margin, (xix) market share, (xx) contract awards or backlog, (xxi) overhead or other
expense reduction, (xxii) credit rating, (xxvi) objective customer indicators, (xxvii) new product invention or innovation,
(xxviii) attainment of research and development milestones, (xxix) improvements in productivity, (xxx) attainment of
objective operating goals, and (xxxi) objective employee metrics. The objective performance criteria may be applied to
either the Company as a whole, or except with respect to stockholder return metrics, to a region, business unit, affiliate or
business segment, and measured either on an absolute basis or relative to a pre-established target, to a previous period’s
results or to a designated comparison group, and, with respect to financial metrics, which may be determined in accordance
with United States Generally Accepted Accounting Principles (“GAAP”), in accordance with accounting principles
established by the International Accounting Standards Board (“IASB Principles”), or which may be adjusted when
established to exclude any items otherwise includable under GAAP or under IASB Principles
Non-Transferability of Awards. Unless determined otherwise by the Administrator, an award granted under the
Stock Plan may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will
or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient, only by the recipient. If
the Administrator makes an award granted under the Stock Plan transferable, such award will contain such additional terms
and conditions as the Administrator deems appropriate.
Leaves of Absence. Unless the Administrator provides otherwise or as otherwise required by applicable laws,
vesting of awards granted under the Stock Plan will cease commencing on the first day of any unpaid leave of absence and
will only recommence upon return to active service.
Adjustments upon Change in Capitalization. The number of shares covered by each outstanding award, the shares
issuable under the Stock Plan, and price per share of Common Stock covered by each outstanding award and the Code
Section 162(m) annual share limits will be proportionately adjusted for any increase or decrease in the number of issued
shares resulting from a change in the Company’s capitalization, such as a stock split, reverse stock split, stock dividend,
combination, reclassification or other similar change in the capital structure of the Company effected without the receipt of
consideration.
Adjustments upon Liquidation or Dissolution. In the event of a liquidation or dissolution, the Administrator is
required to notify each participant as soon as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide that each participant will have the right to exercise all of his or her options or
SARs, including those not otherwise exercisable, until the date 10 days prior to the consummation of the liquidation or
dissolution. In addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable
to any award will lapse 100% and that any award vesting will accelerate 100%, provided the proposed dissolution or
liquidation takes place at the time and in the manner contemplated. To the extent that an award has not been previously
exercised (with respect to options and SARs) or vested (with respect to other awards), an award will terminate immediately
prior to the consummation of a proposed liquidation or dissolution.
25
Transfer of Control.
Options and SARs. In the event of a merger with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding option or SAR may be assumed or an equivalent option or SAR substituted by the
successor corporation or any parent or subsidiary of the successor corporation. If such options or SARs are not assumed,
the participant will be notified that the option or SAR will be fully exercisable for 15 days from the date of such notice,
and the option or SAR will terminate upon the expiration of such period.
Restricted Stock, Performance Shares, Performance Units and Deferred Stock Units. In the event of a merger with
or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding restricted stock,
performance share, performance unit and deferred stock unit award may be assumed or an equivalent restricted stock,
performance share, performance unit and deferred stock unit award substituted by the successor corporation or any parent
or subsidiary of the successor corporation. If such restricted stock, performance share, performance unit and deferred
stock unit award are not assumed, the participant will fully vest in such awards including as to shares of Common Stock
(or with respect to performance units, the cash equivalent thereof) which would not otherwise be vested.
Amendment or Termination of the Stock Plan. The Administrator may amend, alter, suspend or terminate the
Stock Plan or any part thereof from time to time, except that stockholder approval will be required for any amendment to
the Stock Plan to the extent required by any applicable laws. No amendment, alteration, suspension or termination of the
Stock Plan may impair the rights of any participant without their written consent. In any event, the Stock Plan will
terminate 10 years from its original adoption by the Board.
Number of Awards Granted to Employees and Consultants
Subject to the annual numerical limits, the number of awards that an employee or consultant may receive under the
Stock Plan is determined at the discretion of the Administrator and therefore cannot be determined in advance. The
following table sets forth (i) the aggregate number of shares of common stock subject to options and SARs granted under
the Existing Plan during fiscal year 2008, (ii) the average per share exercise price of such options and (iii) the aggregate
number of shares granted subject to restricted stock, performance shares, performance units and deferred stock units.
Name of Individual or Group
John Ambroseo......................................................................
Helene Simonet .....................................................................
Bret DiMarco.........................................................................
Luis Spinelli ..........................................................................
Ronald Victor ........................................................................
All executive officers, as a group ..........................................
All directors who are not executive officers, as a group .......
All employees who are not executive officers, as a group ....
Number of
Options and
SARs Granted
250,000
100,000
50,000
15,000
—
415,000
72,000
364,500
Average Per
Share Exercise
Price
$
$
$
$
$
$
$
32.95
32.95
32.95
32.95
—
32.95
27.93
32.8919
Shares of
Restricted Stock,
Performance
Shares,
Performance
Units and DSUs
Granted
45,000
25,000
20,000
10,000
—
100,000
12,000
150,150
Federal Income Tax Information
Nonstatutory Stock Options. No taxable income is reportable when a nonstatutory stock option with an exercise
price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise,
the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise
date) of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an
option exercise by an employee of the Company is subject to tax withholding by the Company. Any additional gain or loss
recognized upon any later disposition of the shares would be capital gain or loss.
26
Incentive Stock Options. No taxable income is reportable when an incentive stock option is granted or exercised
(except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory stock options).
If the participant exercises the option and then later sells or otherwise disposes of the shares more than 2 years after the
grant date and more than 1 year after the exercise date, the difference between the sale price and the exercise price will be
taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares
before the end of the 2 or 1 year holding periods described above, he or she generally will have ordinary income at the time
of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise
price of the option.
Stock Appreciation Rights. No taxable income is reportable when a stock appreciation right with an exercise price
equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the
participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of
any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain
or loss.
Restricted Stock, Performance Units and Performance Shares. A participant generally will not have taxable
income at the time an Award of restricted stock, performance shares or performance units are granted. Instead, he or she
will recognize ordinary income in the first taxable year in which his or her interest in the shares underlying the Award
becomes either (i) freely transferable, or (ii) no longer subject to substantial risk of forfeiture. However, the recipient of a
restricted stock award may elect to recognize income at the time he or she receives the award in an amount equal to the fair
market value of the shares underlying the award (less any cash paid for the shares) on the date the award is granted.
Tax Effect for the Company. The Company generally will be entitled to a tax deduction in connection with an
award under the Stock Plan in an amount equal to the ordinary income realized by a participant and at the time the
participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the
deductibility of compensation paid to the Company’s Chief Executive Officer and to each of its 4 most highly
compensated executive officers. Under Code Section 162(m), the annual compensation paid to any of these specified
executives will be deductible only to the extent that it does not exceed $1,000,000. However, the Company can preserve
the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These
conditions include stockholder approval of the Stock Plan, setting limits on the number of awards that any individual may
receive and for awards other than certain stock options, establishing performance criteria that must be met before the award
actually will vest or be paid. The Stock Plan has been designed to permit the Administrator to grant awards that qualify as
performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting the Company to
continue to receive a federal income tax deduction in connection with such awards.
Section 409A. Section 409A of the Code, which was added by the American Jobs Creation Act of 2004, provides
certain new requirements on non-qualified deferred compensation arrangements. These include new requirements with
respect to an individual’s election to defer compensation and the individual’s selection of the timing and form of
distribution of the deferred compensation. Section 409A also generally provides that distributions must be made on or
following the occurrence of certain events (e.g., the individual’s separation from service, a predetermined date, or the
individual’s death). Section 409A imposes restrictions on an individual’s ability to change his or her distribution timing or
form after the compensation has been deferred. For certain individuals who are officers, subject to certain exceptions,
Section 409A requires that such individual’s distribution commence no earlier than six months after such officer’s
separation from service.
Awards granted under the Stock Plan with a deferral feature will be subject to the requirements of Section 409A.
If an award is subject to and fails to satisfy the requirements of Section 409A, the recipient of that award may recognize
ordinary income on the amounts deferred under the award, to the extent vested, which may be prior to when the
compensation is actually or constructively received. Also, if an award that is subject to Section 409A fails to comply with
27
Section 409A’s provisions, Section 409A imposes an additional 20% federal income tax on compensation recognized as
ordinary income, as well as interest on such deferred compensation. In addition, certain states such as California have
adopted similar provisions.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO AWARDS UNDER THE STOCK
PLAN AND DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE SHOULD BE MADE TO THE
APPLICABLE PROVISIONS OF THE INTERNAL REVENUE CODE. IN ADDITION, THIS SUMMARY DOES
NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
EMPLOYEE OR CONSULTANT MAY RESIDE.
28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of September 30, 2008, certain information with respect to the beneficial
ownership of common stock by (i) any person (including any “group” as that term is used in Section 13(d)(3) of the
Exchange Act known by us to be the beneficial owner of more than 5% of our voting securities, (ii) each director and each
nominee for director, (iii) each of the executive officers named in the Summary Compensation Table appearing herein, and
(iv) all executive officers and directors as a group, based on information available to the Company as of filing this proxy
statement. We do not know of any arrangements, including any pledge by any person of our securities, the operation of
which may at a subsequent date result in a change of control. Unless otherwise indicated, the address of each stockholder
in the table below is c/o Coherent, Inc., 5100 Patrick Henry Drive, Santa Clara, California 95054.
Name and Address
Number of Shares
Oliver Press Partners, LLC (2) .......................................................................................................
152 West 57th Street
New York, New York 10019
Dimensional Fund Advisors (2) .....................................................................................................
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Eagle Asset Management, Inc.(2) ..................................................................................................
880 Carillon Parkway
St. Petersburg, FL 33716
Wells Fargo Capital Management (2) ............................................................................................
525 Market Street, 10th Floor
San Francisco, CA 94105
John R. Ambroseo, PhD (3) ...........................................................................................................
Helene Simonet (4).........................................................................................................................
Luis Spinelli (5)..............................................................................................................................
Bret M. DiMarco (6) ......................................................................................................................
Ronald A. Victor (7).......................................................................................................................
John H. Hart (8)..............................................................................................................................
Susan James (9)..............................................................................................................................
Clifford Press (10)..........................................................................................................................
Garry W. Rogerson, PhD (11)........................................................................................................
Lawrence Tomlinson (12) ..............................................................................................................
Sandeep Vij (13).............................................................................................................................
All directors and executive officers as a group (11 persons)(14) ...................................................
*
(1)
Percent of
Total (1)
2,581,097
10.67%
2,066,651
8.54%
1,905,149
7.88%
1,293,061
5.35%
911,005
303,618
72,402
35,607
47,585
51,000
—
2,581,097
48,000
42,000
51,600
4,143,914
3.64%
*
*
*
*
*
*
10.67%
*
*
*
16.21%
Represents less than 1%.
Based upon 24,191,115 shares of Coherent common stock outstanding as of September 30, 2008. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to the
securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, each
share of Coherent common stock subject to options held by that person that are currently exercisable or will be exercisable
within 60 days of September 30, 2008 and all shares of restricted stock which are vested on September 30, 2008, are deemed
outstanding. For Dr. Ambroseo, Ms. Simonet, Messrs. Spinelli, Victor and DiMarco, no shares of performance-based restricted
29
(2) (3)
(4)
(5) (6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
stock or restricted stock units are included. In addition, such shares, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
Based on the most recent Schedule 13D (or amendments thereto) filed by such person with the SEC prior to the date of filing this
proxy statement and a review of a shareholder listing report provided by a third party provider. For Oliver Press Partners, LLC,
the Company notes that the 13 D/A filed by Oliver Press Partners, LLC on January 10, 2008 was a joint filing and included
shares held by the individuals and entities set forth in the filing. See also footnote 10 below.
Includes 849,500 shares issuable upon exercise of options held by Dr. Ambroseo which were exercisable or would become
exercisable within 60 days of September 30, 2008.
Includes 290,000 shares issuable upon exercise of options held by Ms. Simonet which were currently exercisable or would
become exercisable within 60 days of September 30, 2008.
Includes 69,500 shares issuable upon exercise of options held by Mr. Spinelli which were exercisable or would become
exercisable within 60 days of September 30, 2008.
Includes 35,000 shares issuable upon exercise of options held by Mr. DiMarco which were exercisable or would become
exercisable within 60 days of September 30, 2008.
Includes 41,000 shares issuable upon exercise of options held by Mr. Victor which were exercisable or would become
exercisable within 60 days of September 30, 2008.
Includes 46,500 shares issuable upon exercise of options held by Mr. Hart which were exercisable or would become exercisable
within 60 days of September 30, 2008.
Ms. James was elected to the Board of Directors in March 2008 and, accordingly, has no options which were exercisable or
would become exercisable within 60 days of September 30, 2008.
Mr. Press was elected to the Board of Directors in March 2008 and, accordingly, has no options which were exercisable or would
become exercisable within 60 days of September 30, 2008. Mr. Press is also a (i) Managing Member of Oliver Press
Investors, LLC, a Delaware limited liability company and the general partner of each of Davenport Partners, L.P., a Delaware
limited partnership (“Davenport”), JE Partners, a Bermuda partnership (“JE”), and Oliver Press Master Fund LP, a Cayman
limited partnership (“Master Fund”; and, together with Davenport and JE, the “Partnerships”), and (ii) Managing Member of
Oliver Press Partners, LLC, a Delaware limited liability company and the investment advisor to each of the Partnerships. The
Partnerships own the securities reflected herein, all of which are subject to the shared voting and investment authority of
Mr. Press, among others. Mr. Press’ interest in the securities reflected herein is limited to the extent of his pecuniary interest in
the Partnerships, if any and he disclaims beneficial ownership thereof.
Includes 47,000 shares issuable upon exercise of options held by Dr. Rogerson which were exercisable or would become
exercisable within 60 days of September 30, 2008.
Includes 38,800 shares issuable upon exercise of options held by Mr. Tomlinson which were exercisable or would become
exercisable within 60 days of September 30, 2008.
Includes 48,000 shares issuable upon exercise of options held by Mr. Vij which were exercisable or would become exercisable
within 60 days of September 30, 2008.
Includes an aggregate of 1,465,300 options which were exercisable or would become exercisable within 60 days of
September 30, 2008.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and
changes in ownership with the SEC. Such officers, directors and ten-percent stockholders are also required by SEC rules to
furnish us with copies of all forms that they file pursuant to Section 16(a). Based solely on our review of the copies of such
forms received by us, and on written representations from certain reporting persons that no other reports were required for
such persons, we believe that, during fiscal 2008, our officers, directors and greater than ten percent stockholders complied
with all applicable Section 16(a) filing requirements, except that Oliver Press Partners LLC filed its Form 3 in August
2008 and it was originally due in March 2008.
30
EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION Executive Officers
The name, age, position and a brief account of the business experience of our chief executive officer and each of
our other executive officers as of January 5, 2008 are set forth below:
Name
Age
Office Held
John R. Ambroseo, PhD...........................................................
47
President and Chief Executive Officer
Helene Simonet ........................................................................
56
Executive Vice President and Chief Financial Officer
Luis Spinelli .............................................................................
61
Executive Vice President and Chief Technology
Officer
Bret M. DiMarco ......................................................................
40
Executive Vice President, General Counsel and
Corporate Secretary
Please see “Directors” above for Dr. Ambroseo’s biographical information.
Helene Simonet. Ms. Simonet has served as our Executive Vice President and Chief Financial Officer since April
2002. Ms. Simonet served as Vice President of Finance of our former Medical Group and Vice President of Finance,
Photonics Division from December 1999 to April 2002. Prior to joining Coherent, she spent over twenty years in senior
finance positions at Raychem Corporation’s Division and Corporate organizations, including Vice President of Finance of
the Raynet Corporation. Ms. Simonet has both Master’s and Bachelor degrees from the University of Leuven, Belgium.
Luis Spinelli. Mr. Spinelli has served as our Executive Vice President and Chief Technology Officer since
February 2004. Mr. Spinelli joined the Company in May 1985 and has since held various engineering and managerial
positions, including Vice President, Advanced Research from April 2000 to September 2002 and Vice President, Corporate
Research from September 2002 to February 2004. Mr. Spinelli has led the Advanced Research Unit from its inception in
1998, whose charter is to identify and evaluate new and emerging technologies of interest for us across a range of
disciplines in the laser field. Mr. Spinelli holds a degree in Electrical Engineering from the University of Buenos Aires,
Argentina with post-graduate work at the Massachusetts Institute of Technology.
Bret M. DiMarco. Mr. DiMarco has served as our Executive Vice President and General Counsel since June 2006
and our Corporate Secretary since February 2007. From February 2003 until May 2006, Mr. DiMarco was a member and
from October 1995 until January 2003 was an associate at Wilson Sonsini Goodrich & Rosati, P.C., a law firm.
Mr. DiMarco received a Bachelor degree from the University of California at Irvine and a Juris Doctorate degree from the
Law Center at the University of Southern California. He is also an adjunct professor of law at the University of California
Hastings College of the Law, teaching corporate law and mergers & acquisitions.
Compensation Discussion and Analysis
Our Executive Compensation Philosophy
Our executive compensation programs are designed to provide strong alignment between executive pay and
performance and to focus executives on making policies and decisions that enhance Coherent’s stockholder value over
31
time. As we explain further below, the Compensation and H.R. Committee is highly focused on having a significant
portion of our executive officers’ compensation tied to achieving certain performance goals. Accordingly, our objectives
are to:
• Ensure that the executive team has clear goals and accountability with respect to our financial performance;
• Attract, motivate and retain talented executives who are responsible for the success of our company by
maintaining a total compensation program that is competitive with the prevailing practices in our industry;
• Provide market levels of pay for meeting target performance expectations, with above market pay for
performance above target and below market pay for performance below target;
• Be mindful in our design of an executive compensation structure of both our historical practices, as well as the
evolving practices in our industry as well as the broader high technology industry;
• Promote our culture of integrity by properly rewarding appropriate risk taking, while not promoting excessive
risk taking;
• Benchmark pay practices including and beyond the photonics industry to recognize that we face competitors
ranging from smaller to larger enterprises in the broader high technology market; and
• Prudently utilize discretion to make awards that differ from the defined pay structure, as warranted, to
recognize exceptional circumstances and performance.
Throughout this Proxy Statement, our chief executive officer and chief financial officer during fiscal 2008, as well
as the other individuals who are included in the Fiscal 2008 Summary Compensation Table, are referred to as our “Named
Executive Officers.”
Compensation and H.R. Committee Operations and Decision Making
The committee held ten (10) meetings in fiscal 2008. Typically, the committee has considered Named Executive
Officer base salary and other compensation during March or April of each fiscal year, but beginning in fiscal 2009, will be
reviewing such compensation during the first fiscal quarter.
Role and Authority of Our Compensation and H.R. Committee
During fiscal 2008, the Compensation and H.R. Committee of the Board of Directors consisted of Messrs. Hart
(Chair) and Vij and Dr. Rogerson. Each of these individuals qualifies as (i) an “independent director” under the
requirements of The NASDAQ Stock Market, (ii) a “non-employee director” under Rule 16b-3 of the Securities Exchange
Act of 1934 (the “1934 Act”), (iii) an “outside director” under Section 162(m) of the Code and (iv) an “independent
outside director” as that term is defined by RiskMetrics Group, formerly Institutional Shareholder Services.
The Compensation and H.R. Committee is responsible for ensuring that our executive compensation programs are
effectively designed, implemented and administered. In particular, the committee reviews the corporate goals and
objectives and approves the compensation for our Named Executive Officers. The compensation includes base salary and
incentive non-equity and equity compensation as well as executive benefits and perquisites. The committee has sole
authority delegated to it by the Board to make equity grants to our Named Executive Officers.
32
Our Compensation and H.R. Committee has adopted a charter, a copy of which may be found on our website at
“www.coherent.com”—“Company”—“Corporate Governance.” The committee reviews its charter annually and, where
appropriate, revises it accordingly.
The committee may meet with or without management present, at its discretion. The committee regularly conducts
an executive session without management present. The objective of these sessions is to enable the committee to discuss
compensation issues without those who will be affected by the decisions in attendance.
Role of Executive Officers in Compensation Decisions
The Compensation and H.R. Committee regularly meets with Dr. Ambroseo, our chief executive officer, to obtain
recommendations with respect to the compensation programs, practices and packages for our Named Executive Officers
other than Dr. Ambroseo. Additionally, Ms. Simonet, our executive vice president and chief financial officer, and
Mr. DiMarco, our executive vice president and general counsel are regularly invited to meetings of the committee or
otherwise asked to assist the committee. During fiscal 2008, Mr. Victor, our former executive vice president, human
resources also regularly attended the committee’s meetings. The assistance of these individuals includes providing
financial information and analysis for the committee and its compensation consultants, taking minutes of the meeting or
providing legal advice, the development of compensation proposals for consideration, and providing insights regarding our
employees (executive and otherwise) and the business context for the committee’s decisions. Named Executive Officers
will attend portions of committee meetings when requested, but will leave the meetings as appropriate when matters which
will potentially affect them personally are discussed. From time to time, outside legal counsel attends committee meetings.
The Compensation and H.R. Committee makes decisions regarding Dr. Ambroseo’s compensation without him present.
Role of Compensation Consultants
In fiscal 2008, the Compensation and H.R. Committee engaged Farient Advisors (“Farient”) as its compensation
consultants. Farient was retained to comprehensively review and analyze our executive compensation program and to
make recommendations for fiscal 2008 compensation. Farient serves at the discretion of the committee and does no other
work for the Company unless it was expressly authorized by the committee. Since their retention, Farient has not done any
work for the Company other than its work with the committee. The committee believes that it is critical for its
compensation consultant to meet with management, especially our chief executive officer to obtain their perspectives on
the context for decision-making and impact of compensation recommendations.
The Board of Directors also determined that a separate consultant was needed for Board-related compensation to
avoid any perceived conflict of interest for the committee’s advisor, Farient. Mr. DiMarco, our general counsel and
corporate secretary, on behalf, and at the direction, of the Board, retained Compensia, Inc. (“Compensia”) to provide a
comprehensive review on compensation for membership on the Board and its committees. Following a recommendation
from Compensia, during fiscal 2008, the Board determined the compensation to be paid for service on special committees,
including the Special Committee and the Special Litigation Committee. Additionally, during fiscal 2008, Compensia
provided recommendations to the Board with regards to its non-equity compensation, which was adopted by the Board in
September, 2008 and effective in fiscal 2009.
The table below illustrates director compensation for fiscal 2009:
Position
Annual Retainer(1)
Board Member ..............................................................................................
Board Chair...................................................................................................
Audit Committee Chair.................................................................................
Compensation and H.R. Comm. Chair .........................................................
Governance & Nominating Comm. Chair ....................................................
33
$40,000
$16,000
$34,000
$16,000
$10,750
Position
Annual Retainer(1)
Audit Committee member (non-Chair).........................................................
Compensation and H.R. Committee member (non-Chair)...........................
Governance and Nominating Committee member (non-Chair) ...................
(1)
$12,500
$8,500
$6,500
The annual retainer is paid quarterly in equal installments.
Additionally, Coherent participates in and maintains a subscription to the Radford Executive Compensation
Survey. This survey provides benchmark data and overall practices reports to assist the Company with regards to
employees generally. Such data includes executive compensation data and is presented from time to time to the committee
at its request.
Pay Positioning Strategy and Benchmarking of Compensation
Coherent has striven to position the midpoint of its target compensation ranges near the 50th percentile of its peers,
resulting in targeted total compensation that is competitive within our labor market for performance that meets the
objectives established by the committee. An individual’s actual salary, non-equity incentive compensation opportunity and
equity compensation may fall below or above the target position based on the individual’s experience, seniority, skills,
knowledge, performance and contributions. These factors are weighed individually by the committee in its judgment, and
no one factor takes precedence over others nor is any formula used in making these decisions. The chief executive officer’s
review of the performance of his direct reports is carefully considered by the committee in making individual pay
decisions. Actual realized pay will be higher or lower than the targeted amounts for each individual based primarily on
Company performance.
In analyzing our executive compensation program relative to this target market positioning, the committee
reviewed information provided by its independent compensation consultant, which includes an analysis of data from peer
companies’ proxy filings with respect to similarly situated individuals at the peer companies and from multiple
compensation survey sources, including a broad cross-section of technology companies of similar size to Coherent from
the Radford Executive Compensation Survey and survey data provided by Salary.com. For pay decisions made in fiscal
2008, Farient recommended that the committee approve modifications to the group of peer companies for conducting
compensation analyses from proxies to better reflect the Company’s size, strategy and business. For fiscal 2008, the peer
companies were Adaptec Inc., Altera Corporation, Axcelis Technologies, Inc., Cirrus Logic, Inc., Cymer Inc., Cypress
Semiconductor, Integrated Device Technology, FEI Company, JDS Uniphase, Lam Research, Linear Technology,
Newport Corporation, Novellus Systems, Plantronics Inc., PMC-Sierra, Inc. and Trimble Navigation Limited.
The committee reviews and updates, if necessary, the peer group used for proxy analyses annually to ensure that
the comparisons are meaningful. Several factors are considered in selecting the peer group, the most important of which
are:
• Industry (primarily companies in the Electronic Equipment and Semiconductor sub-industry classifications
defined by the Global Industry Classification Standard (GICS) system);
• Revenue level (as a proxy for complexity) (primarily companies with between $200 million and $2 billion in
revenues); and
• Geographic location (technology markets, primarily in the Bay Area).
The committee’s perspective is that companies that meet these criteria are the most likely competitors for
executive talent in our labor markets.
34
For fiscal 2009, Farient recommended that the committee modify the group of peer companies for conducting
compensation analyses based on the factors above to better reflect the Company’s size, strategy and business. Following
these recommendations, the committee removed Adaptec, Inc., Cirrus Logic, Inc., Cypress Semiconductor Corp., Lam
Research Corp. and Novellus Systems, Inc. and added FLIR Systems, Inc. and GSI Group, Inc. to the peer group for fiscal
2009. The committee also was mindful and took into consideration the recent policy update by RiskMetrics with regards to
the formulation and use of peer groups and the relative size of peers, although the peer group selected is not confined to the
Global Industrial Classification System (GICS) code for Coherent.
Components of Compensation
The principal components of Coherent’s executive officer compensation and employment arrangements during
fiscal 2008 included:
•
Base salary;
•
Variable cash incentive payments;
•
Long-term equity awards through time-based stock options;
•
Long-term equity awards through time-based restricted stock units;
•
Long-term equity incentive awards through performance-based restricted stock units;
•
Change of control protection through participation in our Change of Control Plan;
•
Retirement savings matching benefits provided under a 401(k) plan and under a deferred compensation plan;
•
Executive perquisites; and
•
Benefit programs generally available to other employees.
These components were selected because the committee believes that a combination of salary, incentive pay,
benefits and perquisites is necessary to help us attract and retain the executive talent on which Coherent’s success depends
and in recognition of some of the benefits which have historically been available to executives at the Company. The
variable components are structured to allow the committee to reward performance throughout the fiscal year and to provide
an incentive for executives to appropriately balance their focus on short-term and long-term strategic goals. The fixed
components, including salary, benefits and perquisites, are structured to provide a minimum level of security for our
executives relative to their day-to-day spending needs and long-term needs for income and are intended to be competitive
with the levels of base income that each executive could receive from similar employment at other companies. The
committee believes that, when taken together, these components are effective in achieving the objectives of our
compensation program and philosophy and are reasonable relative to our strategy of managing total compensation near the
50th percentile of market practices.
The committee annually reviews the entire compensation program with the assistance of Farient, its independent
compensation consultant. The committee reviews change in control protections every two years upon renewal of the plan.
However, the Compensation and H.R. Committee may at any time review one or more components as necessary or
appropriate to ensure such components remain competitive and appropriately designed to reward performance. In setting
compensation levels for a particular Named Executive Officer, the committee considers both individual (as described
above) and corporate factors.
35
As a result of the Company’s historical equity grant review, the committee did not make any equity grants to the
Named Executive Officers during fiscal 2007. During fiscal 2008, the committee made three types of grants to the Named
Executive Officers: (a) an option grant to address missed cycle grants in fiscal 2007, (b) a grant of time-based restricted
stock units and (c) as part of the committee’s focus on tying a significant portion of the Named Executive Officers’
compensation to performance criteria, performance- based restricted stock units which will vest (assuming achievement of
the performance metrics) in November, 2010 (as discussed more fully below).
Base Salary and Variable Non-Equity Incentive Compensation
Base Salary
Coherent provides base salary to its Named Executive Officers and other employees to compensate them for
services rendered on a day-to-day basis during the fiscal year. The Compensation and H.R. Committee reviewed
information provided by its independent compensation consultant with respect to similarly situated individuals at the peer
companies to assist it in determining base salary for each Named Executive Officer. In addition, the committee considers
each individual’s experience, skills, knowledge and responsibility. In reviewing each Named Executive Officer other than
the chief executive officer, the committee also considers such individual’s performance review provided by the chief
executive officer. With respect to the chief executive officer, the committee additionally considers the performance of
Coherent as a whole.
During Coherent’s voluntary internal review of its historical equity grants, the Compensation and H.R. Committee
determined not to consider changes to the compensation of the Named Executive Officers until that review was completed.
Accordingly, in the fourth quarter of fiscal 2007, following the announcement of the completion of the Special
Committee’s internal review, the Compensation and H.R. Committee asked Farient to review executive officer
compensation. Farient noted that Mr. DiMarco’s base salary was below the 50th percentile of the peer group and
recommended to the committee that it increase his annual base salary from $250,000 to $300,000, which put his base
salary slightly below the 50th percentile, but brought his overall direct cash compensation (including incentive-based cash
compensation) to approximately the 50th percentile. The Compensation and H.R. Committee approved that
recommendation and Mr. DiMarco’s salary increase was effective in the first quarter of fiscal 2008.
In the third quarter of fiscal 2008, the committee again reviewed the base salaries of the Named Executive
Officers. Farient provided an extensive overview and analysis of the benchmarked data and comparative results for the
base salaries of our Named Executive Officers. In reviewing the base salaries of the Named Executive Officers, the
Compensation and H.R. Committee determined that increases were appropriate for Dr. Ambroseo, Ms. Simonet and
Mr. Spinelli. Given the adjustment made to Mr. DiMarco’s salary during the fourth quarter of the prior fiscal year, the
committee determined that he was compensated at the 50th percentile and, therefore, no further adjustment was needed at
that time. Additionally, given that Mr. Victor had previously announced his retirement effective in January 2009, no
adjustment to base salary was warranted. The following table illustrates the base salary adjustments (rounded) approved by
the committee during the third fiscal quarter of 2008:
Name
Prior Salary
Increase
New Salary
John Ambroseo....................................................................................................................
Helene Simonet ...................................................................................................................
Luis Spinelli ........................................................................................................................
$ 548,000
$ 352,000
$ 251,000
$32,000 or 6%
$18,000 or 5%
$5,000 or 2%
$ 580,000
$ 370,000
$ 256,000
During the first quarter of fiscal 2009, upon management’s recommendation, the committee determined not to
increase salaries for fiscal 2009. Prior to making this determination the committee discussed management’s
recommendation with Farient, which agreed with the recommendation.
36
Variable Non-Equity Incentive Compensation
To focus each executive officer on the importance of the performance of Coherent, a substantial portion of each
individual’s potential short-term compensation is in the form of variable incentive pay that is tied to achieving goals
established by the Compensation and H.R. Committee. In fiscal 2008, Coherent maintained one incentive cash program
under which executive officers were eligible to receive bonuses: the 2008 Variable Compensation Plan (“2008 VCP”). In
the first quarter of fiscal 2008, the Compensation and H.R. Committee amended the Company’s Productivity Incentive
Plan (“PIP”) to remove executive officers (including the Named Executive Officers) from being eligible participants for
awards under PIP. Going forward, the committee felt that PIP was not a material part of compensation for the Named
Executive Officers and that it would be administratively more effective to have the variable cash incentive compensation
for Named Executive Officers under a single plan.
2008 VCP
The 2008 VCP was designed to promote the growth and profitability of Coherent. It provided incentive
compensation opportunity in line with targeted market rates to our Named Executive Officers who are critical to the
successful development and attainment of the Company’s business objectives. Under the 2008 VCP, participants were
eligible to receive quarterly bonuses if specific performance goals set by the committee at the beginning of the year were
achieved. The Compensation and H.R. Committee established these goals when it adopted the 2008 VCP during the first
quarter of fiscal 2008. In setting the performance goals, the Compensation and H.R. Committee assessed the anticipated
difficulty and relevant importance to the success of Coherent of achieving the performance goals.
The actual awards (if any) payable for each quarter varied depending on the extent to which actual performance
met, exceeded or fell short of the goals approved by the committee. The 2008 VCP established goals tied to achieving
varying levels of quarterly revenue and pre-tax profit goals. The committee determined that the targeted goals for the 2008
VCP would be (i) at least 80% of the budgeted quarterly revenue set forth in the Company operating plan and (ii) at least
80% of the Company’s budgeted profit before taxes, as adjusted for extraordinary items, such as the fiscal impact of stock
option expensing under FASB 123(R), stock investigation costs and litigation related thereto, impairment or restructuring
charges, and the impact of significant acquisitions (the “PBIT Target”). Therefore, to have a minimum payout under the
2008 VCP, the Company would have to meet or exceed, on a quarterly basis, 80% of (i) budgeted revenue and (ii) the
PBIT Target, both as measured against the Board- approved Company operating plan. Assuming each of the thresholds
were met, the amount each participant received could fluctuate between 0% (for less than 80% of the PBIT Target) and
200% (for 120% or higher achievement of the PBIT Target) of the targeted amount for each quarter as follows:
PBIT Target Achievement
Payout Modifier
Less than 80% .......................................................................................................
80%........................................................................................................................
85%........................................................................................................................
90%........................................................................................................................
95%........................................................................................................................
100%......................................................................................................................
105%......................................................................................................................
110%......................................................................................................................
115%......................................................................................................................
120%......................................................................................................................
0%
50%
62.5%
75%
87.5%
100%
125%
150%
175%
200%
If Coherent failed to meet at least 80% of the goal for each of the targets for a particular quarter, the participant
would not receive any bonus for that particular quarter. As noted above, the committee set these performance goals to
37
focus the management team on increasing the performance of the Company through meeting quarterly revenue targets and
maximizing pretax profits. The committee and Farient chose to focus on revenue growth and pretax profits so that the
executive management was incentivized to deliver the type of growth which benefits our stockholders, namely increasing
sales and profitability. The specific goals used to determine 2008 VCP awards in each quarter included detailed
information on the Company’s cost structure and business plans and are therefore considered confidential business
information, the disclosure of which could result in competitive harm. Based on a review of past performance goals and the
goals for fiscal 2008, the committee believes that the goals were reasonably difficult to achieve, as demonstrated by the
fact that the Company did not achieve all of the targets set by the committee for fiscal 2008, resulting in a payout less than
the targeted amount. Additionally, in approving the 2008 Variable Compensation Plan in the first quarter of fiscal 2008,
the committee, upon recommendation of Farient, determined that the amount each participant may receive can fluctuate
between 0 and 200% of the targeted amount. The committee determined to, as compared to the fiscal 2007 Variable
Compensation Plan, increase the cap from 150% to 200% and to decrease the achievement threshold from 90% to 80% to
reflect the volatile nature of quarterly performance results in technology companies and to be consistent with peer pay
practices.
The table below describes for each Named Executive Officer under the 2008 Variable Compensation Plan (i) the
target percentage of base salary, (ii) the potential award range as a percentage of base salary, and (iii) the actual award
earned for fiscal 2008.
Named Executive Officer
John Ambroseo.......................................................................
Helene Simonet ......................................................................
Bret DiMarco..........................................................................
Luis Spinelli ...........................................................................
Ron Victor ..............................................................................
Target
Percentage
of Base Salary
100%
70%
50%
50%
50%
Payout
Percentage
Range of Base
Salary
0-200%
0-200%
0-200%
0-200%
0-200%
Actual
Award (1)
$
$
$
$
$
534,621
239,649
143,275
120,635
114,567
Actual Award
Percentage of
Base
Salary (2)(3)
94.8%
66.4%
47.8% 47.6% 47.8%
(1) Reflects amounts earned during fiscal year 2008.
(2) This reflects the aggregate quarterly bonuses earned by the Named Executive Officers for fiscal year 2008 under the 2008 Variable
Compensation Plan.
(3) As seen in the plan-based award table below, no payments were made for the fourth fiscal quarter under the 2008 Variable
Compensation Plan as the Company did not achieve the minimum performance requirements.
Long-Term, Equity-Based Incentive Awards
Equity-based awards are made to our employees, including the Named Executive Officers, under Coherent’s 2001
Stock Plan. The goal of our equity-based award program is to provide employees and executives the perspective of an
owner with a stake in the success of Coherent, thus further increasing alignment with our stockholders. Coherent’s longterm incentive program may include the grant of stock options, time-based restricted stock and/or incentive-based
restricted stock.
When making its compensation decisions, the committee reviews the comprehensive compensation overview
prepared by Farient which reflects potential realizable value under current short and long term compensation arrangements
for the Named Executive Officer.
Fiscal 2008 Awards
During several meetings over the first and second quarters of fiscal 2008, the committee met with Farient to
discuss the design of an appropriate long-term, equity based incentive award program. The committee determined to base
38
the program largely on restricted stock units, given the option grants made to certain employees (including certain Named
Executive Officers) during the first quarter of fiscal 2008. In particular, during the second quarter of fiscal 2008, the
committee determined to have a 50-50 split between time-based and performance-based restricted stock units in its grants
to Named Executive Officers, with the performance-based grants having a multiplier dependent upon achieving
performance goals. In reviewing and determining the performance goals to utilize in the grants, the committee focused on
two elements: the publicly announced adjusted EBITDA as a percentage of sales goals and a minimum gross revenue
achievement. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and certain other
non-operating income and expense items and other items, such as the fiscal impact of stock option expensing under
FASB 123(R), stock investigation costs and litigation related thereto, impairment or restructuring charges, and the impact
of significant acquisitions.
The committee strongly believed that at least half of the long-term equity-based awards to the Named Executive
Officers should be tied through cliff vesting to these announced goals, so that the individuals who can significantly impact
the Company’s performance are incentivized to achieve or exceed these targets. The vesting of the performance-based
grants vary from 0-300% of the base-line performance grants and achievement will be measured in the first quarter of
fiscal 2011—the adjusted EBITDA and the revenue threshold are both measured against the full fiscal year 2010 results.
The performance targets are structured so that the grant recipients, including the Named Executive Officers, are strongly
incentivized to take the necessary operational steps to drive adjusted EBITDA improvement. The measurement for the
performance grants is for adjusted EBITDA for the entire fiscal year 2010, rather than the announced adjusted EBITDA
goals which are measured for exiting fiscal year 2010 to measure the recipient’s entire year’s performance. The revenue
threshold selected represents a dollar amount which would be the highest annual revenue ever achieved by the Company.
Given the current economic conditions, it is unlikely the Company will be able to achieve this revenue threshold. By way
of illustration, in the case that the Company met its adjusted EBITDA goals, but did not achieve the revenue threshold,
none of the performance-based restricted stock units would vest. The committee continues to believe that these targets are
difficult to achieve, especially given the included required minimum revenue threshold. The time-based grants vest in three
equal annual installments from the date of grant. The specific goals used to determine the achievement of the performance
vesting requirements include detailed information on the Company’s cost structure and business plans and are therefore
deemed confidential business information, the disclosure of which could result in competitive harm.
The following table reflects the grants and ranges for the Named Executive Officers for the time and
performance-based restricted stock unit grants during fiscal 2008:
Restricted Stock Unit Grants to Named Executive Officer During Fiscal 2008:
Named Executive Officer
Time-Based RSU
Grants
John Ambroseo.........................................................................
Helene Simonet ........................................................................
Bret DiMarco............................................................................
Luis Spinelli .............................................................................
22,500
12,500
10,000
5,000
Potential Range for Performance-Based RSU
Grants,
depending upon achieving performance metrics
0-67,500
0-37,500
0-30,000
0-15,000
In the first quarter of fiscal 2008, upon the recommendation of Farient, the committee granted stock options to
certain employees, including certain of the Named Executive Officers. These grants were made following the conclusion
of the voluntary stock option review and in recognition of the fact that no long-term incentive compensation was provided
during fiscal 2007. Stock options were selected as the equity vehicle for grant since they create an incentive to enhance
stockholder value, help to retain valuable talent through vesting provisions, and were available for grant during the period
that the Company was not current in its reporting obligations. Grants to selected individuals, including Dr. Ambroseo,
39
Ms. Simonet, and Mr. DiMarco included both a market-based portion tied to competitive pay practices and an above
market portion provided to recognize the extraordinary contributions of these individuals during the stock option review
process and to encourage their retention. These grants featured a shorter vesting period than our traditional grants
(18 months rather than three years) to recognize that the grants would have been made at the beginning of the year rather
than after year end absent the stock option review process.
Performance Outcomes of Prior Awards
During the third quarter of fiscal 2006, the Compensation and H.R. Committee adopted a performance-based
restricted stock program for certain employees of the Company, including the Named Executive Officers. The restricted
stock grants were subject to annual vesting over three years depending upon the achievement of performance
measurements tied to Coherent’s internal metrics for revenue growth of a range of approximately 5-12% and adjusted
EBITDA of approximately 16-20% as a percentage of sales. The committee felt that a three year goal of revenue and
adjusted EBITDA as a percentage of sales improvements were the correct goals for incentivizing the management team.
The committee set these goals so that they were challenging to achieve. The vesting of the restricted stock was variable, so
that the number of shares earned could range from 0% to 125% of the grant target for fiscal 2006 and 0% to 200% of the
grant target for fiscal 2007 and fiscal 2008. In addition, the aggregate shares of restricted stock were to be awarded on a
staggered basis as follows: 25% in 2006, 35% in 2007 and 40% in 2008. Given the variability, the range of the aggregate
number of shares of restricted stock which could be earned by the Company’s Named Executive Officers over the three
year period was as follows: Dr. Ambroseo—0-52,562 shares; Ms. Simonet—0-24,468 shares; Mr. Spinelli—0-10,875
shares; Mr. Victor—0-6,706 shares and Mr. DiMarco—0-5,981 shares. Based on the revenue growth and adjusted
EBITDA percentage for fiscal 2007 and 2008, no shares under the program vested in fiscal 2008 or fiscal 2009.
Remedial Actions Related to the Historical Equity Grant Investigation
During the second quarter of fiscal 2008, the committee reviewed a series of option grants which were due to
expire unexercised due to the Company not being current with respect to its voluntary stock option review. Options
representing an aggregate of 416,075 shares were due to expire in April 2008, of which 387,500 were held by
Dr. Ambroseo, Ms. Simonet and Messrs. Spinelli and Victor. None of the foregoing grants had incorrect original grant
dates. The committee determined to extend the expiration date for such grants by fifteen months, which was approximately
equivalent to the period during which such option holders were prohibited from exercising their options.
During the third quarter of fiscal 2008, the committee reviewed the Internal Revenue Code Section 409A
(“Section 409A”) liability faced by Mr. Spinelli related to his exercise in calendar year 2006 of a misdated option grant.
Mr. Spinelli is the only Named Executive Officer who had any potential Section 409A liability related to the exercise of
misdated options. The committee approved the Company reimbursing Mr. Spinelli for his tax obligations (approximately
$54,000) under Section 409A as a result of his exercise. Further, in June 2008, the committee authorized the Company to
amend two of Mr. Spinelli’s stock options (the “Spinelli Options”) to increase the exercise prices of such options: an
option to purchase 5,058 shares of Coherent common stock was amended to increase the exercise price from $19.77 to
$24.90, and an option to purchase 14,942 shares of Company common stock was amended to increase the exercise price
from $19.77 to $24.90. Because the Spinelli Options were originally granted with a per share exercise price less than the
fair market value of a share of Company common stock on the date of grant, such options may be subject to adverse tax
consequences under Section 409A of the Internal Revenue Code of 1986, as amended. The Internal Revenue Service
promulgated special transition rules to protect taxpayers from the adverse tax consequences of Section 409A by permitting
certain holders of discounted options to amend such option to increase the exercise price to the fair market value of the
common stock on such options’ original grant date, so long as such amendment occurs by December 31, 2008. Therefore,
the committee authorized the amendments to the Spinelli Options described above to avoid adverse tax consequences
under Section 409A to Mr. Spinelli. In addition, in order to compensate Mr. Spinelli for the loss of the built-in value
associated with increasing the exercise prices of the Spinelli Options, the committee authorized a cash payment to
Mr. Spinelli of $107,730, which equals approximately 105% of the built-in loss of value of the Spinelli Options. Such
payment was made on the Company’s first payroll date in calendar 2009, less applicable withholdings.
40
The Compensation and H.R. Committee has reviewed the number of option grants which expired unexercised held
by Dr. Ambroseo, Ms. Simonet and Messrs. Spinelli and Victor. At this time, the committee has not reached a conclusion
as to whether or not any remedial payments or actions will be taken with regards to such grants or, to the extent remedial
payments or actions are taken, how the value of such expired options should be measured.
Employee Stock Option Tender Offer
In April 2008, the Company initiated a tender offer related to certain discount options held by non-executive
employees discovered during our voluntary review of our historical stock option practices. Discount options are options
with an exercise price that is less than the fair market value of the shares underlying the option at the time of grant. The
discounted options included in this offer were certain options which vested after December 31, 2004. During the tender
offer period, non-executive employees had the ability to amend the exercise price per share for eligible options to the fair
market value of the underlying option as of the measurement date of that option, and receive a cash payment for the
difference between the discounted share price and the amended share price. This amendment was designed to allow
holders of discount options to avoid certain adverse tax consequences associated with discount options. The offer expired
on May 9, 2008.
Equity Award Practices
Our broad-based employee stock option program is designed to promote long-term retention and recognize
individual performance. Participation is driven by the annual review process. Guidelines are based on competitive market
practice for grants for new hires, promotions, and ongoing performance-related grants. Typically, an employee may be
offered an option or restricted stock grant upon beginning employment and may be eligible for periodic grants thereafter.
The size of grants (and eligibility for the same) is influenced by the prevailing guidelines and the individual’s performance
or particular requirements at the time of hire. Employees, including the Named Executive Officers, are also eligible to
participate in our Employee Stock Purchase Plan.
Stock Grant Process
During the first quarter of fiscal 2008, following the recommendation of the Special Committee, the Board of
Directors approved a number of refinements to our stock grant processes. Beginning in fiscal 2008, the committee process
for granting equity awards is as follows:
• The Compensation and H.R. Committee has the authority to make equity grants to both executive officers and
other service providers;
• The Compensation and H.R. Committee will make grants in open trading window periods with grants effective
on the date of such meeting, or, if due to exigent circumstances they meet in a closed window period, the grant
will be effective 45 days thereafter;
• The Compensation and H.R. Committee has delegated authority to the equity grant committee, consisting of
our chief executive officer and our chief financial officer, to meet on the second Friday of any particular
month (only if such date is in an open trading window) to make equity grants consistent with previously
approved guidelines to non-executive officer service providers; and
• Neither committee may grant equity awards by written consent.
During fiscal 2008 equity grants were only made by the Compensation and H.R. Committee.
41
Stock Grant Policies
The Board of Directors and/or the Compensation and H.R. Committee annually considers a “burn rate” which the
annual grants of equity awards under the 2001 Stock Plan will not exceed. “Burn rate” is the potential dilution of common
shares outstanding if all new equity grants are vested and/or exercised, expressed as a percentage of common shares
outstanding.
Due to the historical stock option investigation no burn rate target was set for fiscal 2007. Only two non-executive
officers received option grants during fiscal 2007 and, therefore, the fiscal year “burn rate” was only 0.11%.
In fiscal 2008, the Compensation and H.R. Committee granted an aggregate of 1,029,650 shares subject to options,
and time-based and performance-based (at 100% target) restricted stock units representing 3.26% of Coherent’s
outstanding common stock as of February 28, 2008 (excluding automatic grants to directors under the Director Option
Plan). Given the limited grants made in fiscal 2007, the committee, upon recommendation of Farient, believed that the
increase to the annual burn rate was warranted. Since those grants, Coherent has also completed a large stock repurchase so
that the outstanding shares of Coherent were reduced to 24,191,115 as of September 27, 2008. The committee has
approved a burn rate of 3.3% for fiscal 2009. With the assistance of Farient, the committee has reviewed this burn rate
relative to peer practices and guidance from RiskMetrics and found that the total dilution was consistent with the median of
peer practices and complied with the RiskMetrics guidelines.
In general, we issue only nonqualified stock options to employees and executives, although we have issued
incentive stock options in the past. In the last few years, we have typically granted options subject to either two or three
year vesting, with an equal tranche vesting on each of the applicable calendar anniversaries following the grant date. These
grants typically have a life of six years. As noted above, in the grants made in the first quarter of fiscal 2008 which vest
over 18 months due to the delay in granting, the committee determined that in order to have an immediate significant
retention impact, the grants were made with half of the shares vesting in each of April 2008 and April 2009 subject to
continued service through such dates.
Deferred Compensation
Executive officers are eligible to participate in our 401(k) Retirement Plan on the same terms as all other U.S.
employees. Our 401(k) Retirement Plan is a tax-qualified plan and therefore is subject to certain Internal Revenue Code
limitations on the dollar amounts of deferrals and Company contributions that can be made to plan accounts. These
limitations apply to our more highly- compensated employees (including the Named Executive Officers).
Coherent maintains a Deferred Compensation Plan for executive management personnel and certain former
members of the board of directors. Formerly a number of non-executive employees were eligible to participate in the plan.
The purpose of the Deferred Compensation Plan is to permit eligible participants the option to defer receipt of
compensation pursuant to the terms of the plan. The Deferred Compensation Plan permits participants to contribute, on a
pre-tax basis, up to 75% of their base salary earnings, up to 100% of their bonus pay and commissions and up to 100% of
directors’ annual retainer earned in the upcoming plan year. Plan participants may invest deferrals in a variety of different
deemed investment options. To preserve the tax-deferred status of deferred compensation plans, the IRS requires that the
available investment alternatives be “deemed investments.” Participants do not have an ownership interest in the funds
they select; the funds are only used to measure the gains or losses that are attributed to the participant’s deferral account
over time. The participant’s deferrals and earnings are reflected on Coherent’s financial statements and remain,
respectively, a general asset and unfunded liability of the Company. Participants have the status of unsecured creditors of
Coherent with respect to the payment of plan benefits. Separate distribution elections are made by the plan participant for
each plan year and include lump sum payment, annual installments and future year scheduled in-service withdrawals.
42
At our discretion, we may provide for contributions in excess of the Internal Revenue Code limit to qualified
401(k) plans to be made to the non-qualified deferred compensation plan. The calculation for this non-qualified plan
contribution is 6% of eligible compensation (as defined by the 401(k) qualified plan) less the 401(k) qualified plan match
limit. In fiscal year 2008, a contribution was made to the non-qualified deferred compensation plan for certain Named
Executive Officers for plan year 2007. These amounts are reflected in both the Summary Compensation Table under
“Other Compensation” and in the “Non-Qualified Deferred Compensation Table” below.
The committee considers the Deferred Compensation Plan to be a reasonable and appropriate program because it
allows the Named Executive Officers and members of the Board to accumulate retirement benefits at a rate, relative to
their overall income, that is comparable to the rate that other employees are able to accumulate retirement benefits, and
promotes executive officer retention by offering a deferred compensation plan that is comparable to and competitive with
what is offered by our peer group of companies.
Change in Control and Severance Plan
We have adopted the Change in Control and Severance Plan (the “change in control plan”) which provides certain
benefits in the event of a change in control of Coherent for certain employees, including each of our Named Executive
Officers. Benefits are provided under this plan if there is a tender offer or merger resulting in Coherent being acquired by
another company or entity and within two years thereafter the executive’s employment is subsequently terminated without
cause or is voluntarily terminated following a constructive termination. The committee and our Board of Directors believe
that the prospect of such a change in control would likely result in our executive officers facing personal uncertainties and
distractions as to how a change in control might affect them. The committee believes that including our Named Executive
Officers in the plan allows them to focus solely on the best interests of our stockholders in the event of a possible,
threatened or pending change in control, and encourages them to remain with Coherent despite the possibility that a change
in control might affect them adversely. This change in control plan therefore serves as an important retention tool to ensure
that personal uncertainties do not dilute our executive’s complete focus on promoting stockholder value. The change in
control plan was amended in fiscal 2009 for Section 409A-related matters and other administrative matters. In calendar
year 2009 the change in control plan will come up for review and potential renewal by the committee.
With respect to our chief executive officer, Dr. Ambroseo, the change in control plan provides that in the event
that plan benefits plus any other benefits considered parachute payments under the Internal Revenue Code, equal or exceed
3.54 times his “base amount” (as determined under Internal Revenue Code Section 280G), he will receive an additional
payment sufficient to fully offset the impact of any excise tax under 280G. The committee believes that the level of
benefits provided under the plan is reasonable and not excessive. See “Change in Control Arrangements” for more details
on this plan.
Executive perquisites and Other Personal Benefits
The committee also provides our executive officers with the following perquisites and other personal benefits:
automobile benefit and capped executive medical reimbursement. The committee has determined, with advice from
Farient, that the use of a company-leased vehicle and a medical reimbursement benefit are reasonable in the context of the
overall compensation levels of our Named Executive Officers, are consistent with a number of other peer companies, have
been historical components of compensation for executive officers at the Company and serve as further retention tools.
The Company has historically maintained a vehicle program whereby executive officers were eligible to receive
either (a) a monthly automobile allowance or (b) have the auto allowance apply as amortization against the purchase price
of a vehicle purchased and owned by the Company over such period of time for the amortized value of the automobile to
reach 20% of the original value of the car, not to exceed four years (“amortized method”). During the fourth quarter of
fiscal 2008, the committee revised the administration of the program so that executive officers are instead eligible to
receive either (a) a monthly automobile allowance or (b) a leased vehicle with up to an aggregate purchase price as
43
follows: (i) $95,000 for the chief executive officer and (ii) $75,000 for other executive officers. For those individuals
utilizing the automobile allowance alternative, the auto allowance amount is set annually utilizing a prescribed formula.
The administration of the leased alternative under the program is through a third party financing agency and, when the
leased vehicle alternative is selected, the Company pays the monthly lease for such vehicle. Executive officers are either
reimbursed for or provided gas, oil, maintenance and insurance for vehicles leased under this program by the Company.
Participants in the auto program incur annual imputed income on the personal use of any vehicles under the program,
including fuel and miles, as determined using the Internal Revenue Service Code rules.
During fiscal 2008, prior to the change in policy highlighted in the prior paragraph, for vehicles purchased and
owned by the Company, the executive officer was required to either (a) purchase such vehicle from the Company for the
unamortized amount any time or (b) return the car for sale by the Company and reimburse the Company for the difference
between the value of the car from such sale and the amortized balance at the time the car is returned to the Company. The
executive officer also incurred imputed income on the positive difference, if any, between the amortized value of the car
after four years and its fair market value (as determined by Kelly Blue Book trade in value in “good condition”). Once
purchased from the Company, the vehicle was owned by the executive officer. In addition, in the event of the termination
of the employment of the executive officer, the executive officer would have to purchase the vehicle at the then-current
amortized value and incur the imputed income highlighted above. Executive officers were eligible to elect a new vehicle
under the amortized method whenever a car was purchased from the Company. The executive officer’s taxable income was
affected by the value of the vehicle at initial purchase (e.g., the higher the value of the car, the higher imputed income
amount to the individual). Additionally, if the amortized value was not scheduled to reach 20% of the purchase price after
four years, then the individual would have to have a set amount withheld from his or her paycheck to allow the
amortization to reach 20% of the purchase price within four years, but the amortized value would be higher in the event
that a new car was chosen prior to four years, with a resulting higher imputed income.
Each Named Executive Officer also receives up to $5,000 per calendar year of reimbursement for uninsured
medical expenses with the Company also paying such executive’s taxes on the amount of the benefit.
Tax and Accounting Considerations
The Company’s compensation programs are affected by each of the following:
• Accounting for Stock-Based Compensation—The Company accounts for stock-based compensation in
accordance with the requirements of FASB Statement 123(R). The Company also takes into consideration
FASB Statement 123(R) and other generally accepted accounting principles in determining changes to policies
and practices for its stock-based compensation programs.
• Section 162(m) of the Internal Revenue Code—This section limits the deductibility of compensation for our
chief executive officer and our four other most highly compensated named executive officers unless the
compensation is less than $1 million during any fiscal year or is “performance-based” under Section 162(m).
Our 2001 Stock Plan is designed so that option grants thereunder are fully tax-deductible and one of the
proposals for consideration by our stockholders this year is to extend such tax deductibility to grants of
restricted stock and restricted stock units. Cash compensation and, historically, restricted stock awards are not
granted under plans which have been so designed. We may from time to time pay compensation to our
executive officers that may not be deductible when, for example, we believe that such compensation is
appropriate and in the best interests of the stockholders after taking various factors into consideration,
including business conditions and the performance of such executive officer.
• Section 409A of the Internal Revenue Code—Section 409A imposes additional significant taxes in the event
that an executive officer, director or service provider received “deferred compensation” that does not satisfy
the requirements of Section 409A. We believe that we have designed and operated any plans to appropriately
comply with Section 409A.
44
Compensation Committee Interlocks and Insider Participation
During fiscal 2008, the Compensation and H.R. Committee of the Board of Directors consisted of Messrs. Hart
(Chair) and Vij and Dr. Rogerson. None of the members of the Compensation and H.R. Committee has been or is an
officer or employee of Coherent. None of our executive officers serves on the board of directors or compensation
committee of a company that has an executive officer that serves on our Board of Directors or Compensation and H.R.
Committee. No member of our Board of Directors is an executive officer of a company in which one of our executive
officers serves as a member of the board of directors or compensation committee of that company.
Compensation and H.R. Committee Report
The Compensation and H.R. Committee of the Board has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation and H.R. Committee recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in the proxy and to be incorporated by reference into the Company’s annual report on Form 10-K.
Respectively submitted by
THE COMPENSATION AND H.R.
COMMITTEE
John Hart, Chair
Garry Rogerson
Sandeep Vij
45
Fiscal 2008 Summary Compensation Table
The table below presents information concerning the total compensation of Coherent’s Named Executive Officers
for the fiscal years ended September 27, 2008 and September 29, 2007.
Since no equity awards were granted to Named Executive Officers in fiscal 2007 other than the performance-based
awards which vested in November 2006 as a result of fiscal 2006 performance, non-equity-based compensation accounted
for all of the total compensation of the Named Executive Officers earned during fiscal 2007. The performance-based
restricted stock units granted to Named Executive Officers described elsewhere are not reflected in the summary
compensation table, as the single vesting date (and achievement determination) is not until fiscal 2011.
Fiscal
Year
Salary ($)
(a)
(b)
(c)
(e)
(f)
(g)
John Ambroseo,...............................................
Chief Executive Officer and President
Helene Simonet, ..............................................
Executive Vice President and Chief
Financial Officer
Bret DiMarco,..................................................
Executive Vice President and General
Counsel .......................................................
Luis Spinelli, ...................................................
Executive Vice President and Chief
Technology Officer
Former Employees
Ronald Victor, .................................................
Executive Vice President, Human
Resources
2008
2007
2008
2007
561,312
547,773
359,334
351,719
246,003
280,064
118,392
115,647
1,666,688
1,261,297
663,063
493,108
534,621
372,329
239,649
171,933
80,676 (3)
97,564 (3)
62,142 (4)
53,577 (4)
3,089,300
2,559,027
1,442,581
1,185,984
2008
2007
298,076
250,077
57,116
6,294
315,114
67,579
143,275
142,271
38,607 (5)
13,487 (5)
852,188
479,708
2008
2007
252,862
250,759
46,182
45,419
116,615
203,860
120,635
90,677
137,041 (6)
63,447 (6)
673,335
654,162
2008
2007
239,886
239,983
15,862
37,399
36,116
163,660
114,567
86,815
96,314 (7)
53,312 (7)
450,768
581,169
Name and Principal Position
Option
Awards
($)(1)
Non-Equity
Incentive Plan
All Other
Compensation Compensation
($)
($)(2)
Stock
Awards
($)(1)
(i)
Total ($)
(j)
(1) Reflects the dollar amount recognized for financial statement reporting purposes (disregarding an estimate of forfeitures related to
service-based vesting conditions) for fiscal 2008 in accordance with FAS 123(R), and includes grants made in fiscal 2008 and
prior. For fiscal 2007, no awards were made and therefore the amounts for fiscal 2007 only include amounts awarded or granted
prior to fiscal 2007. The amounts for stock awards includes both performance-based and time-based vesting restricted stock
awards to the extent such awards had FAS123(R) calculated value. The assumptions used in the valuation of these awards are set
forth in Note 12. “Employee Stock Option and Benefit Plans” of the Financial Statements in the annual report on Form 10-K.
These amounts do not correspond to the actual value that will be recognized by the Named Executive Officers, for example as of
January 9, 2009, none of the option awards granted in fiscal 2008 are in the money as of January 26, 2009.
(2) Reflects the dollar amounts earned under the Variable Compensation Plan (VCP) during fiscal 2008 and fiscal 2007.
(3) For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,501) and deferred
compensation plan ($19,356), (b) payment for buy-out of earned vacation ($21,685), (c) debt forgiveness (see “Certain
Relationships and Related Person Transactions – Related Person Transactions – Certain Transactions”) ($10,200), (d) from the use
of a Company- owned and maintained automobile (“Car Allowance”) ($8,539) and (e) reimbursed pursuant to executive medical
reimbursement ($5,463). For fiscal year 2007, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,500)
and deferred compensation plan ($37,139), (b) reflecting imputed income to Dr. Ambroseo from the sale of a Company car under
the terms of the Company’s auto policy described above, (c) for debt forgiveness (see “Related Person Transactions” below),
(d) from the use of a Company-owned and maintained automobile (“Car Allowance”) and (e) reimbursed pursuant to executive
medical reimbursement.
(4) For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,800) and deferred
compensation plan ($7,591), (b) payment for buy-out of earned vacation ($17,255), (c) Car Allowance ($14,267) and
46
(d) reimbursed pursuant to executive medical reimbursement ($5,775). For fiscal year 2007, includes amounts (a) contributed by
us under the Company’s 401(k) plan ($12,100) and deferred compensation plan ($14,898), (b) Car Allowance and (c) reimbursed
pursuant to executive medical reimbursement.
(5) For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($17,691), (b) Car Allowance
($15,835) and (c) reimbursed pursuant to executive medical reimbursement ($4,447). For fiscal year 2007, includes amounts
(a) contributed by us under the Company’s 401(k) plan ($3,462), (b) Car Allowance and (c) reimbursed pursuant to executive
medical reimbursement.
(6) For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,520) and deferred
compensation plan ($1,533), (b) payment for buy-out of earned vacation ($13,612), (c) Car Allowance ($19,621), (d) reflecting
imputed income to Mr. Spinelli from the sale of a Company car under the terms of the Company’s auto policy ($25,867),
(e) earned under our patent award program where Mr. Spinelli was an inventor ($5,048), (f) reimbursement for tax obligations
arising under Section 409A as a result of exercise of stock options with an exercise price less than fair market value as of the
options grant date (these grants were made to Mr. Spinelli prior to him becoming an executive officer) ($54,223) and
(g) reimbursed pursuant to executive medical reimbursement ($8,494). For fiscal year 2007, includes amounts (a) contributed by
us under the Company’s 401(k) plan ($13,467) and deferred compensation plan, (b) paid to Mr. Spinelli for buy-out of earned
vacation, (c) Car Allowance, (d) earned under our patent award program ($15,647) where Mr. Spinelli was an inventor and
(e) reimbursed pursuant to executive medical reimbursement.
(7) For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,500) and deferred
compensation plan ($893), (b) paid to Mr. Victor for buy-out of earned vacation ($11,533), (c) Car Allowance ($22,183),
(d) reflecting imputed income to Mr. Victor from the sale of a Company car under the terms of the Company’s former auto policy
($37,305) and (e) reimbursed pursuant to executive medical reimbursement ($7,495). For fiscal year 2007, includes amounts
(a) contributed by us under the Company’s 401(k) plan ($13,378), (b) paid to Mr. Victor for buy-out of earned vacation, (c) Car
Allowance and (d) reimbursed pursuant to executive medical reimbursement.
Grants of Plan-Based Awards in Fiscal 2008
Except as set forth in the footnotes, the following table shows all plan-based non-equity incentive awards granted
to our Named Executive Officers during fiscal year 2008.
47
Grants of Plan-Based Awards
Name
Type
John Ambroseo .........
Helene Simonet.........
Bret DiMarco ............
Luis Spinelli ..............
Former Employee
Ronald A. Victor.......
(1) (2) (3) Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
Grant
Date
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Threshold
Target
Maximum
($)
($)
($)
Actual
Payouts
Under
NonEquity
Incentive
Plan
Awards
($)
10/3/2007
2/22/2008
2/22/2008
Estimated Future Payouts
Under Equity Incentive
Plan Awards
Threshold
Target
Maximum
(#)
(#)
(#)
0(3)
22,500
All Other
Stock
Awards: #
of
Securities
Underlying
Options
(#)
All Other
Option
Awards: #
of
Securities
Underlying
Options
(#)
Exercise
or
Base
Price
of
Option
Awards
($)
250,000
$32.95
$2,087,000
—(2)
$646,088
100,000
$32.95
$834,800
—(2)
$358,938
50,000
$32.95
$417,400
—(2)
$287,150
15,000
$32.95
$125,220
—(2)
$143,575
67,500
22,500
0(3)
0(3)
0(3)
0(3)
0(3)
136,901
136,901
145,002
145,002
563,805
273,801
273,801
290,004
290,004
1,127,610
125,209
202,407
207,005
0
534,621
10/3/2007
2/22/2008
2/22/2008
0(3)
12,500
37,500
12,500
0(3)
0(3)
0(3)
0(3)
0(3)
61,516
61,516
64,748
64,748
252,529
123,032
123,032
129,497
129,497
505,057
56,263
90,951
92,435
0
239,649
10/3/2007
2/22/2008
2/22/2008
0(3)
10,000
30,000
10,000
0(3)
0(3)
0(3)
0(3)
0(3)
37,500
37,500
37,500
37,500
149,999
75,000
75,000
75,000
75,000
299,998
Grant
Date
Fair
Value
($)(1)
34,297
55,443
53,535
0
143,275
10/3/2007
2/22/2008
2/22/2008
0(3)
5,000
15,000
5,000
0(3)
0(3)
0(3)
0(3)
0(3)
31,320
31,320
32,001
32,001
126,641
62,639
62,639
64,002
64,002
253,282
28,645
46,306
45,684
0
120,635
0(3)
0(3)
0(3)
0(3)
0(3)
29,986
29,986
29,986
29,986
119,943
59,972
59,972
59,972
59,972
239,886
27,425
44,334
42,808
0
114,567
Reflects the dollar amount recognized for financial statement reporting purposes (disregarding an estimate of forfeitures related to service-based vesting conditions) for fiscal 2008 in accordance with
FAS 123(R), and includes grants made in fiscal 2008. The amounts for stock awards includes both performance-based and time-based vesting restricted stock awards to the extent such awards had
FAS123(R) calculated value. The assumptions used in the valuation of these awards are set forth in Note 12. “Employee Stock Option and Benefit Plans” of the Financial Statements in the annual report
on Form 10-K. These amounts do not correspond to the actual value that will be recognized by the Named Executive Officers, for example as of January 9, 2009, none of the option awards granted in
fiscal year 2008 are in the money.
The performance based restricted stock grants are subject to annual vesting over three years depending upon the achievement of performance measurements tied to the Company’s internal metrics for
revenue growth and EBITDA percentage and is variable, so that the number of shares earned ranged from 0% to 125% of the grant target for fiscal 2006 and range from 0% to 200% of the grant target
for fiscal 2007 and fiscal 2008. For fiscal 2008 and 2007, the Company determined that the metrics have not been met, and that no shares were earned.
Failure to meet a minimum level of performance will result in no vesting of the performance restricted stock units (PRSU) and no bonus paid out under the 2008 Variable Compensation Plan.
Option Exercises and Stock Vested at 2008 Fiscal Year-End
The table below sets forth certain information for each Named Executive Officer regarding the exercise of options
and the vesting of stock awards during the year ended September 27, 2008, including the aggregate value realized upon
such exercise or vesting.
48
Option Awards
Number of
Shares
Acquired
on Exercise (#)
Name
(a)
John Ambroseo....................................................................................
Helene Simonet ...................................................................................
Bret DiMarco.......................................................................................
Luis Spinelli ........................................................................................
Ronald Victor ......................................................................................
(b)
13,000
50,000
—
25,000
55,000
Stock Awards
Number of
Shares
Acquired
Value
on
Realized
Vesting (#)
on Vesting ($)
Value
Realized
on
Exercise ($)
$
$
$
$
(c)
215,860
849,707
—
260,848
702,800
(d)
20,000
8,000
—
3,000
2,700
$
$
$
$
(e)
582,800 233,120 —
87,420
78,678
Outstanding Equity Awards at Fiscal 2008 Year-End
The following table presents information concerning unexercised options and stock that has not yet vested for each
Named Executive Officer outstanding as of September 27, 2008.
Name
Grant
Date
Number of
Securities
Underlying
Options (#)
Exercisable
Option Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Option
Unexercisable
Exercise
(2)
Price(1)
22,500
$
787,275
22,500
$0
12,500
$
437,375
12,500
$0
10,000
$
349,900
10,000
$0
5,000
$
174,950
5,000
$0
—
$32.95 $35.01
$33.71
$26.41
$30.92
$30.92
—
—
—
—
$35.01
$33.71
$30.92
$30.92
3/30/2012
4/7/2011
4/24/2008
4/25/2008
—
—
—
—
125,000
90,000
90,000
3,786
146,214
137,000
6,468
50,000
35,000
25,000
3,786
66,214
10,000
96,766
3,234
25,000
10,000
125,000
—
—
—
—
—
—
50,000
—
—
—
—
—
—
—
25,000
—
Luis Spinelli .......................
10/3/2007
3/30/2006
4/7/2005
3/25/2004
5/2/2002
5/2/2002
7,500
10,000
12,000
35,000
1,766
3,234
7,500
—
—
—
—
Ronald Victor .....................
3/30/2006
4/7/2005
5/2/2002
5/2/2002
10,000
11,000
3,234
16,766
Helene Simonet ..................
Bret DiMarco......................
Equity incentive
plan awards:
Market or
payout value of
unearned
shares, units or
other rights
that have not
vested
($)(3)
10/3/2013
3/30/2012
4/7/2011
3/25/2010
3/25/2010
4/4/2009
4/25/2008
10/3/2013
3/30/2012
4/7/2011
3/25/2010
3/25/2010
4/4/2009
4/25/2008
4/25/2008
10/3/2013
6/7/2012
10/3/2013
3/30/2012
4/7/2011
3/25/2010
4/25/2008
4/25/2008
10/3/2007
3/30/2006
4/7/2005
3/25/2004
3/25/2004
4/4/2003
5/2/2002
10/3/2007
3/30/2006
4/7/2005
3/25/2004
3/25/2004
4/4/2003
5/2/2002
5/2/2002
10/3/2007
6/7/2006
John Ambroseo...................
Option
Expiration
Date
Stock Awards
Number of
Shares or
Market Value
Units of Stock
of Shares or
That Have
Units of Stock
That Have
Not
Vested
Not Vested
#
($)
Equity incentive
plan awards:
Number of
unearned
shares, units or
other rights
that have not
vested
(#)(3)
$32.95
$35.01
$33.71
$26.41
$26.41
$19.77
$30.92
$32.95
$35.01
$33.71
$26.41
$26.41
$19.77
$30.92
$30.92
$32.95
$33.30
(1) The exercise prices indicated are the prices originally recorded by the Company at grant and have not been adjusted to reflect any new measurement date as a result
of the Company’s historical stock option review. Only the grants dated April 25, 2002 in the table had a new measurement date determined for accounting
purposes, which had a lower closing price by $0.16. No changes to the exercise price of these April 25, 2002 grants have been made.
(2) These shares vest on April 15, 2009.
49
(3) This column does not include the third tranche of restricted stock awards which are subject to the achievement of certain performance metrics, which did not
ultimately vest in November 2008. Market Value is determined by multiplying the number of shares by $34.99, the closing price of the Company’s common stock
on September 26, 2008, the last trading date of the fiscal year. As noted above, the performance-based restricted stock units vest in November 2011 in an amount
which is 0-300% of the targeted amount reflected in the table. Given the current economic conditions, it is unlikely that the Company will meet the threshold for
achievement and the payout value is, therefore, reflected as $0 in the table.
Fiscal 2008 Non-Qualified Deferred Compensation
The following table presents information regarding the non-qualified deferred compensation activity for each
Named Executive Officer during fiscal 2008:
Name
John Ambroseo.......................................................
Helene Simonet
Bret DiMarco..........................................................
Luis Spinelli ...........................................................
Ronald Victor(5) ....................................................
Executive
Contributions
in
Last FY
($)(1)
Registrant
Contributions
in
Last FY
($)(2)
$ 471,840
$
$
— (4) $
$ 41,407
$
$
— (4) $
$ 10,898
$ 124,892
$
$
— (4) $
$ 181,082
$
$
— (4) $
19,075
—
7,481
—
N/A
1,511
—
880
—
Aggregate
Aggregate
Earnings in Last Withdrawals/
FY
Distributions
($)
($)
Aggregate
Balance of Last
FYE
($)(3)
$
$
$
$
$
$
$
$
$
$ 3,373,592 $ 1,097,976
$
696,078
$
148,168
$
9,883
$
397,354
$
455,390
$
755,336
$
181,343
(431,141)
(149,604)
(107,209)
(31,669)
(1,015)
(31,330)
(35,697)
(88,714)
(34,919)
$
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
(1) Amounts in this column consist of salary and/or bonus earned during fiscal 2008, which is also reported in the Summary
Compensation Table
(2) Amounts reflect Company contribution payments in excess of the Internal Revenue Code Sections 401(a)(17) and 402(g) qualified
plan limits made to the non-qualified “Deferred Compensation Plan” for plan year 2007 made in fiscal year 2008. Amounts
reported in this column are also reported in the “All Other Compensation” column of the Summary Compensation Table.
(3) The deferred compensation in a participant’s account is fully vested and is credited with positive or negative investment results
based on the plan investment options selected by the participant.
(4) Amounts represent account balances and earnings from the Supplementary Retirement Plan (SRP) which was suspended.
(5) Mr. Victor retired from the Company in January 2009.
Potential Payments upon Termination or Change of Control
The following table shows the potential payments and benefits that Coherent (or its successor) would be obligated
to make or provide upon termination of employment of each our Named Executive Officers pursuant to the terms of the
Change of Control Severance Plan. Other than this plan, there are no other employment agreements or other contractual
obligations triggered upon a change of control. For purposes of this table, it is assumed that each Named Executive
Officer’s employment terminated at the close of business on September 26, 2008 (the last business day before the end of
our fiscal year end on September 27, 2008). The amounts reported below do not include the nonqualified deferred
compensation distributions that would be made to the Named Executive Officers following a termination of employment
(for those amounts and descriptions, see the prior table). These payments are conditioned upon the execution of a form
release of claims by the Named Executive Officer in favor of Coherent. There can be no assurance that a triggering event
would produce the same or similar results as those estimated below if such event occurs on any other date or at any other
price, of if any other assumption used to estimate potential payments and benefits is not correct. Due to the number of
factors that affect the nature and amount of any potential payments or benefits, any actual payments and benefits may be
different.
50
Named Executive Officer
Multiplier for
Base Salary and
Bonus
John Ambroseo..............................................
2.99X
Helene Simonet .............................................
2X
Bret DiMarco.................................................
2X
Luis Spinelli ..................................................
2X
Former Employee
Ronald Victor ................................................
2X
Nature of
Benefit
Termination
for Cause
Salary Severance
Bonus Severance
Equity Compensation Acceleration (1)
Tax Gross Up (2)
Health Insurance (3)
Total Benefit
Salary Severance
Bonus Severance
Equity Compensation Acceleration (1)
Health Insurance (3)
Total Benefit
Salary Severance
Bonus Severance
Equity Compensation Acceleration (1)
Health Insurance (3)
Total Benefit
Salary Severance
Bonus Severance
Equity Compensation Acceleration(1)
Health Insurance (3)
Total Benefit
—
—
—
—
—
Salary Severance
Bonus Severance
Equity Compensation Acceleration (1)
Health Insurance (3)
Total Benefit
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Any Other
Termination
$1,734,200
$1,734,200
$3,404,100
$2,992,847
$ 67,062
$9,932,409
$ 740,000
$ 518,000
$1,851,500
$ 31,283
$3,140,783
$ 600,000
$ 300,000
$1,459,050
$ 44,708
$2,403,758
$ 512,000
$ 256,000
$ 715,100
$ 44,708
$1,527,808
$ 480,000
$ 240,000
—
$ 31,283
$ 752,283
(1) Equity Compensation Acceleration is the value of the in-the-money value of unvested stock options, time-based restricted stock
units and performance-based restricted stock units, in each case as of September 26, 2008 at the closing stock price on that date
($34.99). The value of accelerated stock options are thus calculated by multiplying the number of unvested shares subject to
acceleration by the difference between the exercise price and the closing stock price on September 26, 2008; the value of
accelerated restricted stock is calculated by multiplying the number of unvested shares subject to acceleration by the closing stock
price on September 26, 2008. This assumes immediate release and vesting of the performance-based restricted stock units at the
maximum, or 300% of target, achievement. The amounts reflected for Equity Compensation Acceleration do not reflect any
applicable taxes, just gross proceeds. Since the table assumes a triggering event on September 26, 2008, only those stock option
and restricted stock/RSU grants prior to that date are included in the table. Additionally, the third tranche of the performance-based
restricted stock granted in 2006, but which was to vest in November 2008 is not included in this table as that tranche did not vest
as the performance metrics were not achieved.
(2) Estimated reimbursement (by way of a tax “gross-up”) for a 20% excise tax that would be due under Section 4999 of the Internal
Revenue Code of 1986 on a portion of the amounts reported.
(3) Health Insurance is an estimate of the cost of covering the individual and his covered dependents for three years, in the case of the
chief executive officer and for two years for the other Named Executive Officers.
The change in control plan provides for the payment of specified compensation and benefits upon certain
terminations of the employment of the participants following a change in control of the Company. The Board has evaluated
the economic and social impact of an acquisition or other change of control on its key employees. The Board recognizes
that the potential of such an acquisition or change of control can be a distraction to its key employees and can cause them
to consider alternative employment opportunities. The Board has determined that it is in the best interests of Coherent and
its stockholders to assure that Coherent will have the continued dedication and objectivity of its key employees. The Board
51
believes that the change of control plan will enhance the ability of our key employees to assist the Board in objectively
evaluating potential acquisitions or other changes of control.
Furthermore, the Board believes a change of control plan aids us in attracting and retaining the highly qualified,
high performing individuals who are essential to its success. The plan’s assurance of fair treatment will ensure that key
employees will be able to maintain productivity, objectivity and focus during the period of significant uncertainty that is
inherent in an acquisition or other change of control. A change in control of Coherent is defined under the change of
control plan as an occurrence of a business combination, an acquisition by any person directly or indirectly of fifty percent
or more of the combined voting power of Coherent’s common stock or a change in the composition of the Board of
Directors where less than fifty percent are incumbent directors.
The change of control plan provides that if within 24 months after a change in control the Company terminates the
executive’s employment other than by reason of his death, disability, retirement or for cause, or the executive officer
terminates his employment for “good reason,” the executive will receive a lump sum severance payment equal to 2.99 (in
the case of Dr. Ambroseo) or 2.0 (in the case of Ms. Simonet and Messrs. Spinelli and DiMarco) times the executive’s
annual base salary and annual bonus (assuming achievement of all performance requirements thereof). “Good reason” is
defined in each Agreement as any of the following that occurs after a change in control of the Company: certain reductions
in compensation; certain material changes in employee benefits and perquisites; a change in the site of employment;
reduction in the executive’s duties and responsibilities; the Company’s failure to obtain the written assumption by its
successor of the obligations set forth in the Agreement; attempted termination of employment on grounds insufficient to
constitute a basis of termination for cause under the terms of the change of control plan; or the Company’s breach of any of
the provisions of the change of control plan. Under the terms of the plan, the executives will also have acceleration of all
vesting conditions for equity grants and health care for the executive (and his or her covered family members) will be
provided on the same terms for two years and, in the case of Dr. Ambroseo, three years. Further, Dr. Ambroseo will
receive a gross-up for any Internal Revenue Code section 280G (“280G”) excise taxes to the extent that the severance
benefits are more than 20% over the limit imposed by 280G (i.e., more than 3.59x the “base amount” as defined by
Section 280G). If the benefits are less than 20% over the limit, the benefits will be reduced to the extent necessary so that
no 280G excise tax is triggered. To the extent 280G is triggered as a result of the severance benefits for the other executive
participants, such payments will either be paid in full or reduced so that the executive receives the maximum severance
benefit without triggering 280G.
52
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of September 27, 2008 about the Company’s equity
compensation plans under which shares of our common stock may be issued to employees, consultants or
members of our Board of Directors:
(a)
Number of
securities to
be
issued upon
exercise of
outstanding
options,
warrants and
rights
Plan
category
Equity compensation plans approved by security holders ..................... 3,155,752 (1)
Equity compensation plans not approved by security holders ...............
—
Total .................................................................................................. 3,155,752
(b)
Weightedaverage
exercise price of
outstanding
options,
warrants and
rights
$
$
27.67
—
27.67
(c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
3,457,686 (2)(3) —
3,457,686 (1) This number does not include any options which may be assumed by Coherent through mergers or acquisitions,
however, Coherent does have the authority, if necessary, to reserve additional shares of Coherent common stock
under these plans to the extent necessary for assuming such options.
(2) This number of shares includes 224,536 shares of Coherent common stock reserved for future issuance under the
Employee Stock Purchase Plan, 177,000 shares reserved for future issuance under the 1998 Director Plan and
3,056,150 shares reserved for future issuance under the 2001 Stock Plan.
(3) The 1998 Director Plan provides for annual increases to the number of shares available for issuance under the 1998
Director Plan so that the total number of shares reserved is not less than 150,000 shares.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Review, Approval or Ratification of Related Person Transactions
In accordance with the charter for the Audit Committee of the Board of Directors, the members of the
Audit Committee, all of whom are independent directors, review and approve in advance any proposed related
person transactions. Additionally, from time to time the Board of Directors may directly consider these
transactions. For purposes of these procedures, the individuals and entities that are considered “related
persons” include:
• Any of our directors, nominees for director and executive officers;
• Any person known to be the beneficial owner of five percent or more of our common stock (a
“5% Stockholder”); and
• Any immediate family member, as defined in Item 404(a) of Regulation S-K, of a director,
nominee for director, executive officer and 5% Stockholder. We will report all such material
related person transactions under applicable accounting rules, federal securities laws and SEC
rules and regulations.
53
Related Person Transactions
Certain Transactions
The following table sets forth information with respect to the one executive officer of the Company
who was indebted to us during Fiscal 2008.
New Loans
During 2008
Name
John Ambroseo ............
(1) –
Interest Rates
8.00%
Maturity Date(s)
2/15/08
Largest Amount
Outstanding
During Fiscal
2008
$
10,000(1)
Balance at the
End of Fiscal
2008
$
0
This loan was granted to Dr. Ambroseo in February 1998, prior to the effective date of Section 402 of
the Sarbanes-Oxley Act of 2002, and matured in February 2008.
The promissory note was full recourse. Ten percent of the original principal balance of this loan was
forgiven each year during the life of the loan, as Dr. Ambroseo was employed by us during the life of the
loan. This loan was related to a promotion. The interest on the loan was deducted from payments under the
Company’s annual Variable Compensation Plans. In the event that no payments were made under such plans
for a particular period, then interest on the promissory note was forgiven for such period. Such amounts are
reflected in the Summary Compensation Table under “Other Compensation.” The original amount of the
promissory note was $100,000.
In April 2008 the Compensation and HR Committee approved the adoption of a Retention Agreement
for Mr. Victor (the “Victor Agreement”). The Agreement provided, among other things, that Mr. Victor will
provide service to the Company as our Executive Vice President, Human Resources through the period
ending January 2, 2009 and that Mr. Victor will receive a single lump sum payment of $250,000 after
providing the Company with a full release. Mr. Victor provided the release and received the payment in
January 2009.
See above under “Proposal One – Election of Directors – Nominees” for a discussion of the
agreement between the Company and OPP.
Other Matters
We have entered into indemnification agreements with each of our executive officers and directors.
Such indemnification agreements require us to indemnify these individuals to the fullest extent permitted by
law. We also intend to execute these agreements with our future directors and officers.
54
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee is responsible for overseeing our accounting and financial reporting processes
and audits of our financial statements. As set forth in its charter, the Audit Committee acts only in an
oversight capacity and relies on the work and assurances of both management, which has primary
responsibilities for our financial statements and reports, as well as the independent registered public
accounting firm that is responsible for expressing an opinion on the conformity of our audited financial
statements to generally accepted accounting principles.
The Audit Committee met thirteen (13) times either in person or by telephone during fiscal 2008. In
the course of these meetings, the Audit Committee met with management, the internal auditors and our
independent auditors and reviewed the results of the internal and external audit examinations, evaluations of
our internal controls and the overall quality of our financial reporting.
The Audit Committee believes that a candid, substantive and focused dialogue with the internal
auditors and the independent registered public accounting firm is fundamental to the Audit Committee’s
oversight responsibilities. To support this belief, the Audit Committee periodically meets separately with the
internal auditors and the independent auditors, without management present. In the course of its discussions
in these meetings, the Audit Committee asked a number of questions intended to bring to light any areas of
potential concern related to our financial reporting and internal controls. These questions include:
• Are there any significant accounting judgments, estimates or adjustments made by management
in preparing the financial statements that would have been made differently had the auditors
themselves prepared and been responsible for the financial statements?
• Based on the auditors’ experience, and their knowledge of our business, do our financial
statements fairly present to investors, with clarity and completeness, our financial position and
performance for the reporting period in accordance with generally accepted accounting principles
and SEC disclosure requirements?
• Based on the auditors’ experience, and their knowledge of our business, have we implemented
internal controls and internal audit procedures that are appropriate for our business?
The Audit Committee approved the engagement of Deloitte & Touche LLP as our independent
registered public accounting firm for fiscal 2008 and reviewed with the internal auditors and independent
registered public accounting firm their respective overall audit scope and plans. In approving Deloitte &
Touche LLP, the Audit Committee considered the qualifications of Deloitte & Touche LLP and discussed
with Deloitte & Touche LLP their independence, including a review of the audit and non-audit services
provided by them to us. The Audit Committee also discussed with Deloitte & Touche LLP the matters
required to be discussed by Statement on Auditing Standards No. 61, as amended, (AICPA, Professional
Standards, Vol. 1 AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule
3200T, and it received the written disclosures and the letter from Deloitte & Touche LLP required by the
applicable requirements of the Public Company Accounting Oversight Board regarding Deloitte & Touche
LLP’s communications with Audit Committee concerning independence and has discussed Deloitte & Touche
LLP’s independence with Deloitte & Touche LLP.
55
Management has reviewed the audited financial statements for fiscal 2008 with the Audit Committee,
including a discussion of the quality and acceptability of the financial reporting, the reasonableness of
significant accounting judgments and estimates and the clarity of disclosures in the financial statements. In
connection with this review and discussion, the Audit Committee asked a number of follow-up questions of
management and the independent registered public accounting firm to help give the Audit Committee comfort
in connection with its review.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to
the Board of Directors (and the Board of Directors has approved) that the audited financial statements be
included in the annual report on Form 10-K for the fiscal year ended September 27, 2008, for filing with the
SEC.
Respectively submitted by
THE AUDIT COMMITTEE
Lawrence Tomlinson, Chair
Susan James
Garry Rogerson
56
OTHER MATTERS
We know of no other matters to be submitted to the meeting. If any other matters properly come
before the meeting, it is the intention of the persons named in the enclosed form Proxy to vote the shares they
represent as the Board of Directors may recommend.
BY ORDER OF THE BOARD OF DIRECTORS
Dated: February 9, 2008
/s/ John R. Ambroseo
John R. Ambroseo
President and Chief Executive Officer
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Appendix A
COHERENT, INC.
EMPLOYEE STOCK PURCHASE PLAN
Amended and restated as of the date of obtaining stockholder approval in 2009
The following constitutes the provisions of the Employee Stock Purchase Plan (herein called the
“Plan”) of Coherent, Inc. (herein called the “Company”).
1. Purpose. The purpose of the Plan is to provide employees of the Company and its subsidiaries
with an opportunity to purchase Common Stock of the Company through payroll deductions. It is the
intention of the Company to have the Plan qualify as an “Employee Stock Purchase Plan” under Section 423
of the Internal Revenue Code of 1986. The provisions of the Plan shall, accordingly, be construed so as to
extend and limit participation in a manner consistent with the requirements of that Section of the Code.
2. Definitions.
(a) “Base pay” or “base salary” means regular straight-time earnings and commissions,
excluding payments for overtime, shift premiums, incentive compensation, bonuses and any other special
payments.
(b) “Employee” means any person, including an officer, who is customarily employed for at
least twenty (20) hours per week by the Company or its subsidiaries (50% or more of whose voting shares are
owned directly or indirectly by the Company).
3. Eligibility.
(a) Any employee as defined in paragraph 2 who shall be employed by the Company on the
date his participation in the Plan is effective shall be eligible to participate in the Plan, subject to limitations
imposed by Section 423(b) of the Internal Revenue Code of 1986.
(b) Any provisions of the Plan to the contrary notwithstanding, no employee shall be granted
an option under the Plan (i) if, immediately after the grant, such employee would own shares and/or hold
outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting
power or value of the Company, or (ii) which permits his rights to purchase shares under all employee stock
purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds Twenty Five Thousand
Dollars ($25,000) for each calendar year in which such stock option is outstanding at any time, where the
value of the option is calculated as the fair market value of the shares (determined at the time such option is
granted).
4. Offering Dates. The Plan shall be implemented by two Offerings during each fiscal year, each of
six months duration, with Offering I commencing on or about May 1 of each year and Offering II
commencing on or about November 1 of each year.
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5. Participation.
(a) An eligible employee may become a participant in the Plan by completing a subscription
agreement authorizing payroll deduction on the form provided by the Company and filing it with the
Company's payroll office prior to the applicable offering date.
(b) Payroll deductions for a participant shall commence on the first payroll following the
commencement offering date and shall end on the termination date of the offering to which such authorization
is applicable, unless sooner terminated by the participant as provided in paragraph 10.
6. Payroll Deductions.
(a) At the time a participant files his subscription agreement, he shall elect to have payroll
deductions made on each payday during the offering period. The amount of payroll deductions elected to be
made shall not be greater than ten percent (10%) of the base pay which he received on such payday nor less
than a $10 deduction per payday.
(b) All payroll deductions made by a participant shall be credited to his account under the
Plan. A participant may not make any additional payments into such account.
(c) A participant may discontinue his participation in the Plan as provided in paragraph 10, or
may lower, but not increase, the rate of his payroll deductions (within the limitations set forth in subparagraph
(a) above) during the offering by completing or filing with the Company a new authorization for payroll
deduction. The change in rate shall be effective within fifteen (15) days following the Company's receipt of
the new authorization.
7. Grant of Option.
(a) At the beginning of each six month offering period, each eligible employee participating
in the Plan shall be granted an option to purchase (at the per share option price) up to a number of shares of
the Company’s Common Stock purchasable by each employee’s accumulated payroll deductions (not to
exceed ten percent (10%) of his base salary) divided by eighty-five percent (85%) of the fair market value of a
share of the Company’s Common Stock at the beginning of said offering period, subject to the limitations set
forth in Section 3(b) and 12 hereof. Fair market value of a share of the Company’s Common Stock shall be
determined as provided in Section 7(b) herein.
(b) The option price per share of such shares shall be the lower of: (i) 85% of the fair market
value of a share of the Common Stock of the Company at the commencement of the six month offering
period; or (ii) 85% of the fair market value of a share of the Common Stock of the Company at the time the
option is exercised at the termination of the six month offering period. The fair market value of the
Company’s Common Stock on said dates shall be determined by the Company’s Board of Directors in the
exercise of their discretion in good faith.
8. Exercise of Option. Unless a participant withdraws from the Plan as provided in paragraph 10,
his option for the purchase of shares will be exercised automatically at the end of the offering period, and the
maximum number of full shares subject to option will be purchased for him at the applicable option price with
the applicable amount of the accumulated payroll deductions in his account. During his lifetime, a
participant’s option to purchase shares hereunder is exercisable only by him.
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9. Delivery. As promptly as practicable after the termination of each Offering, the Company shall
arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon
exercise of his option. Any cash remaining to the credit of a participant’s account under the Plan after a
purchase by him of shares at the termination of each offering period, or which is insufficient to purchase a full
share of Common Stock of the Company, shall be returned to said participant.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the payroll deductions credited to his
account under the Plan for one or both Offerings at any time prior to the end of the applicable offering period
by giving written notice to the Company. All of the participant’s payroll deductions credited to his account for
the Offering or Offerings from which he has withdrawn will be paid to him promptly after receipt of his
notice of withdrawal and his option for the current period under the Offering or Offerings will be
automatically terminated, and no further payroll deductions for the purchase of shares under the Offering or
Offerings withdrawn from will be made during the applicable offering period.
(b) Upon termination of the participant's employment prior to the end of an offering period
for any reason, including retirement or death, the payroll deductions credited to his account will be returned to
him or, in the case of his death, to the person or persons entitled thereto under paragraph 14, and his option
will be automatically terminated.
(c) In the event an employee fails to remain in the continuous employ of the Company for at
least twenty (20) hours per week during the offering period in which the employee is a participant, he will be
deemed to have elected to withdraw from the Plan and the payroll deductions credited to his account will be
returned to him and his option terminated.
(d) A participant's withdrawal from one of the two Offerings will not have any effect upon his
eligibility to participate in the other Offering or any succeeding Offering or in any similar plan which may
hereafter be adopted by the Company.
11. No Interest. To the extent that a participant's payroll deductions exceed that amount required to
purchase shares subject to option at the end of an offering period, he shall be refunded such excess amount
with no interest paid on said refundable amount.
12. Stock.
(a) The maximum number of shares of the Company's Common Stock which shall be made
available for sale under the Plan shall be 6,925,000 shares, subject to adjustment upon changes in
capitalization of the Company as provided in paragraph 18. The shares to be sold to participants under the
Plan may, at the election of the Company, be either treasury shares or shares authorized but unissued. If the
total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) hereof at
the beginning of an offering period exceeds the number of shares then available under the Plan (after
deduction of all shares for which options have been exercised or are then outstanding), the Company shall
make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall
be practicable and as it shall determine to be equitable. In such event, the Company shall give written notice
of such reduction of the number of shares subject to the option to each employee affected thereby and shall
similarly reduce the rate of payroll deductions, if necessary.
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(b) The participant will have no interest or voting right in shares covered by his option until
such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be registered in the name of the
participant.
13. Administration. The Plan shall be administered by the Board of Directors of the Company or a
committee appointed by the Board. The administration, interpretation or application of the Plan by the Board
or its committee shall be final, conclusive and binding upon all participants. Members of the Committee who
are eligible employees are permitted to participate in the Plan.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who is to receive any shares
and cash, if any, from the participant’s account under the Plan in the event of such participant’s death
subsequent to the end of the offering period but prior to delivery to him of such shares and cash. In addition, a
participant may file a written designation of a beneficiary who is to receive any cash from the participant’s
account under the Plan in the event of such participant’s death prior to the end of an offering period.
(b) Such designation of beneficiary may be changed by the participant at any time by written
notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under
the Plan who is living at the time of such participant’s death, the Company shall deliver such shares and/or
cash to the executor or administrator of the estate of the participant, or if no such executor or administrator
has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such
shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no
spouse, dependent or relative is known to the Company, then to such other person as the Company may
designate.
15. Transferability. Neither payroll deductions credited a participant’s account nor any rights with
regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in
paragraph 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition
shall be without effect, except that the Company may treat such act as an election to withdraw funds in
accordance with paragraph 10.
16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be
used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such
payroll deductions.
17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of
account will be given to participating employees promptly following the stock purchase date, which
statements will set forth the total amount of payroll deductions, the amount applicable to each of the two
Offerings, the per share purchase price, the number of shares purchased and the remaining cash balance, if
any.
18. Changes in Capitalization. If any option under this Plan is exercised subsequent to any stock
dividend, stock split, spin-off, recapitalization, merger, consolidation, exchange of shares or the like,
occurring after such option was granted, as a result of which shares of any class shall be issued in respect of
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the outstanding shares, or shares shall be changed into the same, whether a different number of the same or
another class or classes, the number of shares to which such option shall be applicable and the option price for
such shares shall be appropriately adjusted by the Company.
19. Amendment or Termination. The Board of Directors of the Company may at any time
terminate or amend the Plan. No such termination can affect options previously granted, nor may an
amendment make any change in any option theretofore granted which adversely affects the rights of any
participant, nor may an amendment be made without prior approval of the shareholders of the Company if
such amendment would:
(a) Increase the number of shares that may be issued under the plan;
(b) Permit payroll deductions at an aggregate rate in excess of ten percent (10%) of the
participant's base salary;
(c) Change the designation of the employees (or class of employees) eligible for participation
in the Plan; or
(d) Materially increase the benefits which may accrue to participants under the Plan.
20. Notices. All notices or other communications by a participant to the Company under or in
connection with the Plan shall be deemed to have been duly given when received in the form specified by the
Company at the location or by the person, designated by the Company for the receipt thereof.
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Appendix B
COHERENT, INC.
2001 STOCK PLAN
Amended and restated as of the date of obtaining stockholder approval in 2009
1.
Purposes of the Plan. The purposes of this 2001 Stock Plan are:
• to attract and retain the best available personnel for positions of substantial
responsibility,
• to provide additional incentive to Employees, Directors and Consultants, and
• to promote the success of the Company’s business by motivating the Employees and
Consultants to superior performance.
Awards granted under the Plan may be Incentive Stock Options, Nonstatutory Stock Options,
Restricted Stock, Stock Appreciation Rights, Performance Shares, Performance Units or Deferred Stock
Units, as determined by the Administrator at the time of grant.
2.
Definitions. As used herein, the following definitions shall apply:
(a)
“Administrator” means the Board or any Committee as shall be administering the
Plan, in accordance with Section 4 of the Plan.
(b)
“Applicable Laws” means the requirements relating to the administration of equity
compensation plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any
stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
(c)
“Award” means, individually or collectively, a grant under the Plan of Options,
Restricted Stock, Stock Appreciation Rights, Performance Shares, Performance Units or Deferred Stock
Units.
(d)
“Award Agreement” means the written or electronic agreement setting forth the terms
and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the
terms and conditions of the Plan.
(e)
“Awarded Stock” means the Common Stock subject to an Award.
(f)
“Board” means the Board of Directors of the Company.
(g)
“Code” means the Internal Revenue Code of 1986, as amended.
(h)
“Committee” means a committee of one or more Directors appointed by the Board in
accordance with Section 4 of the Plan, which shall consist solely of Independent Directors who are not
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eligible to receive stock option grants or Restricted Stock under the Plan or such other committee delegated
authority as set forth in Section 4(c) of the Plan.
(i)
“Common Stock” means the common stock of the Company, or in the case of
Performance Units, the cash equivalent thereof.
(j)
“Company” means Coherent, Inc., a Delaware corporation.
(k)
“Consultant” means any natural person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services to such entity.
(l)
“Deferred Stock Unit” means a deferred stock unit Award granted to a Service
Provider pursuant to Section 13.
(m)
“Director” means a member of the Board.
(n)
“Disability” means total and permanent disability as defined in Section 22(e)(3) of
the Code.
(o)
“Employee” means any person, including Officers and Directors, employed by the
Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be treated as an
Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of
Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option
held by the Participant shall cease to be treated as an Incentive Stock Option and shall be treated for tax
purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the
Company shall be sufficient to constitute “employment” by the Company.
(p)
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
(q)
“Fair Market Value” means, as of any date, the value of Common Stock determined
as follows:
(i)
If the Common Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq Global Market, the Nasdaq Global Select
Market or the Nasdaq Capital Market, its Fair Market Value shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading
day prior to the time of determination, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable or shall be such other value determined in good faith by the Administrator;
(ii)
If the Common Stock is regularly quoted by a recognized securities dealer
but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean
between the high bid and low asked prices for the Common Stock on the last market trading day prior to the
day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems
reliable or shall be such other value determined in good faith by the Administrator; or
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(iii)
In the absence of an established market for the Common Stock, the Fair
Market Value shall be determined in good faith by the Administrator.
(r)
“Incentive Stock Option” means an Option intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(s)
“Independent Director” means a Director of the Company who is not also an
Employee of the Company and who qualifies as an “outside director” within the meaning of Code
Section 162(m) and a “non-employee director” within the meaning of Section 16(b) of the Exchange Act and
Applicable Laws.
(t)
“Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive
Stock Option.
(u)
“Notice of Grant” means a written or electronic notice evidencing certain terms and
conditions of an individual Award. The Notice of Grant is part of the Award Agreement.
(v)
“Officer” means a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(w)
“Option” means a stock option granted pursuant to the Plan.
(x)
“Option Agreement” means an agreement between the Company and a Participant
evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the
terms and conditions of the Plan.
(y)
“Parent” means a “parent corporation,” whether now or hereafter existing, as defined
in Section 424(e) of the Code.
(z)
“Participant” means the holder of an outstanding Award granted under the Plan.
(aa)
“Performance Goals” means the goal(s) (or combined goal(s)) determined by the
Administrator (in its discretion) to be applicable to a Participant with respect to an Award. As determined by
the Administrator, the performance measures for any performance period will be any one or more of the
following objective performance criteria, applied to either the Company as a whole or, except with respect to
stockholder return metrics, to a region, business unit, affiliate or business segment, and measured either on an
absolute basis or relative to a pre-established target, to a previous period's results or to a designated
comparison group, and, with respect to financial metrics, which may be determined in accordance with United
States Generally Accepted Accounting Principles ("GAAP"), in accordance with accounting principles
established by the International Accounting Standards Board (“IASB Principles”) or which may be adjusted
when established to exclude any items otherwise includable under GAAP or under IASB Principles: (i) cash
flow (including operating cash flow or free cash flow), (ii) revenue (on an absolute basis or adjusted for
currency effects), (iii) gross margin or as a percentage of revenue, (iv) operating expenses or operating
expenses as a percentage of revenue, (v) earnings (which may include earnings before interest and taxes,
earnings before taxes and net earnings), (vi) earnings per share, (viii) stock price, (ix) return on equity,
(x) total stockholder return, (xi) growth in stockholder value relative to the moving average of the S&P 500
Index or another index, (xii) return on capital, (xiii) return on assets or net assets, (xiv) return on investment,
(xv) economic value added, (xvi) operating profit or net operating profit, (xvii) operating margin, (xix) market
share, (xx) contract awards or backlog, (xxi) overhead or other expense reduction, (xxii) credit rating, (xxvi)
65
objective customer indicators, (xxvii) new product invention or innovation, (xxviii) attainment of research and
development milestones, (xxix) improvements in productivity, (xxx) attainment of objective operating goals,
and (xxxi) objective employee metrics.
(bb)
“Performance Share” means a performance share Award granted to a Service
Provider pursuant to Section 11.
(cc)
“Performance Unit” a performance unit Award granted to a Service Provider
pursuant to Section 12.
(dd)
“Plan” means this Coherent, Inc. 2001 Stock Plan.
(ee)
“Restricted Stock” means shares of Common Stock granted pursuant to Section 10 of
the Plan.
(ff)
“Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3,
as in effect when discretion is being exercised with respect to the Plan.
(gg)
“Stock Appreciation Right” or “SAR” means an Award, granted alone or in
connection with a related Option, that pursuant to Section 9 is designated as an SAR.
(hh)
“Section 16(b)” means Section 16(b) of the Exchange Act.
(ii)
“Service Provider” means an Employee or Consultant.
(jj)
“Share” means a share of the Common Stock, as adjusted in accordance with
Section 16 of the Plan.
(kk)
“Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as
defined in Section 424(f) of the Code.
3.
Stock Subject to the Plan. Subject to the provisions of Section 16 of the Plan, the maximum
aggregate number of Shares that may be issued under the Plan is 6,300,000 Shares; provided, however, that in
no event shall more than 30% of the Shares issuable under the Plan be granted pursuant to Awards with an
exercise price or purchase price that is less than 100% of Fair Market Value on the date of grant.
Notwithstanding the foregoing, no Options shall be granted with an exercise price less than Fair Market Value
on the date of grant. The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Award expires or becomes unexercisable without having been exercised in full, or, with respect
to Restricted Stock, Performance Shares, Performance Units or Deferred Stock Units, is forfeited back to or
repurchased by the Company, the unpurchased Shares (or for Awards other than Options and SARs, the
forfeited or repurchased shares) which were subject thereto shall become available for future grant or sale
under the Plan (unless the Plan has terminated). With respect to SARs, only shares actually issued pursuant to
an SAR shall cease to be available under the Plan; all remaining shares under SARs, shall remain available for
future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been
issued under the Plan under any Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if Shares of Restricted Stock, Performance Shares, Performance
Units or Deferred Stock Units are repurchased by the Company at their original purchase price or are forfeited
to the Company, such Shares shall become available for future grant under the Plan. To the extent an Award
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under the Plan is paid out in cash rather than stock, such cash payment shall not result in reducing the number
of Shares available for issuance under the Plan.
4.
Administration of the Plan.
(a)
Procedure.
(i)
Section 162(m). To the extent that the Administrator determines it to be
desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of
Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more Independent
Directors.
(ii)
Rule 16b-3. To the extent that the Administrator determines it to be
desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iii)
Other Administration. Other than as provided above or in Section 4(c) of the
Plan, the Plan shall be administered by (A) the Board or (B) a Committee of one or more Independent
Directors with the ability to obtain the advice of independent counsel, which committee shall be constituted to
satisfy Applicable Laws.
(b)
Powers of the Administrator. Subject to the provisions of the Plan, including,
without limitation Section 8(b)(iii), and in the case of a Committee, subject to the specific duties delegated by
the Board to such Committee, the Administrator shall have the authority, in its discretion:
(i)
to determine the Fair Market Value;
(ii)
to select the Service Providers to whom Awards may be granted hereunder;
(iii)
Award granted hereunder;
(iv)
to determine the number of shares of Common Stock to be covered by each
to approve forms of agreement for use under the Plan;
(v)
to determine the terms and conditions, not inconsistent with the terms of the
Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise
price, the time or times when Options or SARs may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture or repurchase restrictions, and any restriction or
limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such
factors as the Administrator, in its sole discretion, shall determine;
(vi)
to construe and interpret the terms of the Plan and Awards granted pursuant
to the Plan;
(vii)
to prescribe, amend and rescind rules and regulations relating to the Plan,
including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax
treatment under foreign tax laws;
67
(viii)
to modify or amend each Award (subject to Section 18(c) of the Plan),
including the discretionary authority to extend the post-termination exercisability period of Options or SARs
longer than is otherwise provided for in the Plan;
(ix)
to allow Participants to satisfy withholding tax obligations by electing to
have the Company withhold from the Shares or cash to be issued upon exercise or vesting of an Award that
number of Shares or cash having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of any Shares to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares or cash withheld for this purpose
shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;
(x)
to authorize any person to execute on behalf of the Company any instrument
required to effect the grant of an Award previously granted by the Administrator;
(xi)
administering the Plan.
to make all other determinations deemed necessary or advisable for
(c)
Delegation. The Board may delegate responsibility for administering the Plan,
including with respect to designated classes of Employees and Consultants, to different committees consisting
of one or more Directors subject to such limitations as the Board deems appropriate. To the extent consistent
with applicable law, the Board or the Compensation and H.R. Committee may authorize one or more officers
of the Company to grant Awards to designated classes of Employees and Consultants, within limits
specifically prescribed by the Board or the Compensation and H.R. Committee; provided, however, that no
such officer shall have or obtain authority to grant Awards to himself or herself.
(d)
Effect of Administrator’s Decision. The Administrator’s decisions, determinations
and interpretations shall be final and binding on all Participants.
5.
Eligibility. Restricted Stock, Performance Shares, Performance Units, Stock Appreciation
Rights, Deferred Stock Units and Nonstatutory Stock Options may be granted to Service Providers. Incentive
Stock Options may be granted only to Employees.
6.
Limitations.
(a)
ISO $100,000 Rule. Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such
designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of
the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory
Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the
order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.
(b)
No Rights as a Service Provider. Neither the Plan nor any Award shall confer upon a
Participant any right with respect to continuing their relationship as a Service Provider, nor shall they interfere
in any way with the right of the Participant or the right of the Company or its Parent or Subsidiaries to
terminate such relationship at any time, with or without cause.
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(c)
162(m) Limitation.
(i)
Option and SAR Annual Share Limit. No Participant shall be granted, in any
Company fiscal year (“Fiscal Year”), Options and Stock Appreciation Rights to purchase more than 500,000
Shares; provided, however, that such limit shall be 500,000 Shares in connection with the Participant’s initial
service.
(ii)
Restricted Stock and Performance Share Annual Limit. No Participant shall
be granted, in any Fiscal Year, more than 500,000 Shares in the aggregate of the following: (i) Restricted
Stock or (ii) Performance Shares; provided, however, that such limit shall be 500,000 Shares in connection
with the Participant’s initial service.
(iii)
Performance Units Annual Limit. No Participant shall receive Performance
Units, in any Fiscal Year, with respect to more than 500,000 shares, provided, however, that such limit shall
be 500,000 shares in connection with the Participant’s initial service.
(iv)
Section 162(m) Performance Restrictions. For purposes of qualifying grants
of Restricted Stock, Performance Shares or Performance Units as “performance-based compensation” under
Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the
achievement of Performance Goals. The Performance Goals shall be set by the Administrator on or before
the latest date permissible to enable the Restricted Stock, Performance Shares or Performance Units to qualify
as “performance-based compensation” under Section 162(m) of the Code. In granting Restricted Stock,
Performance Shares or Performance Units which are intended to qualify under Section 162(m) of the Code,
the Administrator shall follow any procedures determined by it from time to time to be necessary or
appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the
Performance Goals).
(v)
Cancellations. If an Award is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction described in Section 16(c)), the
cancelled Award will be counted against the limits set forth in subsections (i) and (ii) above.
(vi)
Changes in Capitalization. The foregoing 162(m) limitations shall be
adjusted proportionately in connection with any change in the Company’s capitalization as described in
Section 16(a).
7.
Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall
continue in effect for a term of ten (10) years unless terminated earlier under Section 18 of the Plan.
8.
Stock Options.
(a)
Term of Options. The term of each Option shall be ten (10) years from the date of
grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an
Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns
stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of
the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from
the date of grant or such shorter term as may be provided in the Option Agreement.
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(b)
Option Exercise Price and Consideration.
(i)
Exercise Price. The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:
In the case of an Incentive Stock Option:
(A)
granted to an Employee who, at the time the Incentive Stock Option
is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of
the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B)
granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market
Value per Share on the date of grant.
(ii)
In the case of a Nonstatutory Stock Option, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant
(iii)
The exercise price for the Shares to be issued pursuant to an already granted
Option may not be changed without the consent of the Company’s shareholders. This shall include, without
limitation, a repricing of the Option as well as an option exchange program whereby the Participant agrees to
cancel an existing Option in exchange for an Option to be granted in the future with an exercise price equal to
the Fair Market Value of the Shares on the date of grant.
(c)
Waiting Period and Exercise Dates. At the time an Option is granted, the
Administrator shall fix the period within which the Option may be exercised and shall determine any
conditions that must be satisfied before the Option may be exercised.
(d)
Form of Consideration. The Administrator shall determine the acceptable form of
consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock
Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such
consideration, to the extent permitted by Applicable Laws, may consist entirely of:
(i)
cash;
(ii)
check;
(iii)
other Shares which have a Fair Market Value on the date of surrender equal
to the aggregate exercise price of the Shares as to which said Option shall be exercised;
(iv)
broker-assisted cashless exercise;
(v)
any combination of the foregoing methods of payment; or such other
consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws;
or
(vi)
such other consideration and method of payment for the issuance of Shares to
the extent permitted by Applicable Laws.
70
(e)
Exercise of Option.
(i)
Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions
as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised
for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of
exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and
(ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of
any consideration and method of payment authorized by the Administrator and permitted by the Option
Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the
Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the
Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Awarded Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the Shares are issued, except as
provided in Section 16 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(f)
Termination of Relationship as Service Provider. If a Participant ceases to be Service
Provider, other than upon the Participant’s death or Disability, the Participant may exercise his or her Option
within such period of time as is specified in the Option Agreement to the extent that the Option is vested on
the date of termination (but in no event later than the expiration of the term of such Option as set forth in the
Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain
exercisable for ninety (90) days following the Participant’s termination. If, on the date of termination, the
Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(g)
Disability of Participant. If a Participant ceases to be a Service Provider as a result of
the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is
specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no
event later than the expiration of the term of such Option as set forth in the Option Agreement). In the
absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Participant’s termination. If, on the date of termination, the Participant is not vested as
to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Participant does not exercise his or her Option within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
(h)
Death of Participant. If a Participant dies while a Service Provider, the Option may
be exercised within such period of time as is specified in the Option Agreement (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant), by the Participant’s estate or by a
71
person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the
Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Participant’s termination. If, at the time of
death, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion
of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or
administrator of the Participant’s estate or, if none, by the person(s) entitled to exercise the Option under the
Participant’s will or the laws of descent or distribution. If the Option is not so exercised within the time
specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
(i)
Buyout Provisions. The Administrator may at any time offer to buy out for a
payment in cash or Shares an Option previously granted based on such terms and conditions as the
Administrator shall establish and communicate to the Participant at the time that such offer is made.
9.
Stock Appreciation Rights.
(a)
Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be
granted to Service Providers at any time and from time to time as shall be determined by the Administrator, in
its sole discretion. Subject to Section 6(c) hereof, the Administrator shall have complete discretion to
determine the number of SARs granted to any Participant.
(b)
Exercise Price and other Terms. The Administrator, subject to the provisions of the
Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the Plan;
provided, however, that no SAR may have a term of more than ten (10) years from the date of grant;
provided, further that SARs may not have an exercise price below 100% of the Fair Market Value of the
underlying shares on the grant date. The exercise price for the Shares or cash to be issued pursuant to an
already granted SAR may not be changed without the consent of the Company’s shareholders. This shall
include, without limitation, a repricing of the SAR as well as an SAR exchange program whereby the
Participant agrees to cancel an existing SAR in exchange for an Option, SAR or other Award.
(c)
Payment of SAR Amount. Upon exercise of a SAR, a Participant shall be entitled to
receive payment from the Company in an amount determined by multiplying:
(i)
The difference between the Fair Market Value of a Share on the date of
exercise over the exercise price; times
(ii)
the number of Shares with respect to which the SAR is exercised.
(d)
Payment upon Exercise of SAR. At the discretion of the Administrator, payment for
a SAR may be in cash, Shares or a combination thereof.
(e)
SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that
shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and
conditions as the Administrator, in its sole discretion, shall determine.
(f)
Expiration of SARs. A SAR granted under the Plan shall expire upon the date
determined by the Administrator, in its sole discretion, and set forth in the Award Agreement.
(g)
Termination of Relationship as a Service Provider. If a Participant ceases to be a
Service Provider, other than upon the Participant’s death or Disability, the Participant may exercise his or her
72
Stock Appreciation Right within such period of time as is specified in the Stock Appreciation Right
Agreement to the extent that the Stock Appreciation Right is vested and exercisable on the date of termination
(but in no event later than the expiration of the term of such Stock Appreciation Right as set forth in the Stock
Appreciation Right Agreement). In the absence of a specified time in the Stock Appreciation Right
Agreement, the Stock Appreciation Right shall remain exercisable for three (3) months following the
Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire
Stock Appreciation Right, the Shares covered by the unvested portion of the Stock Appreciation Right shall
revert to the Plan. If, after termination, the Participant does not exercise his or her Stock Appreciation Right
within the time specified by the Administrator, the Stock Appreciation Right shall terminate, and the Shares
covered by such Stock Appreciation Right shall revert to the Plan.
Notwithstanding the above, in the event of a Participant’s change in status from Consultant,
Employee or Director to Employee, Consultant or Director, a Participant’s status as a Service Provider shall
continue notwithstanding the change in status.
(h)
Disability of Participant. If a Participant ceases to be a Service Provider as a result of
the Participant’s Disability, the Participant may exercise his or her Stock Appreciation Right within such
period of time as is specified in the Stock Appreciation Right Agreement to the extent the Stock Appreciation
Right is vested and exercisable on the date of termination (but in no event later than the expiration of the term
of such Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement). In the absence of
a specified time in the Stock Appreciation Right Agreement, the Stock Appreciation Right shall remain
exercisable for twelve (12) months following the Participant’s termination. If, on the date of termination, the
Participant is not vested as to his or her entire Stock Appreciation Right, the Shares covered by the unvested
portion of the Stock Appreciation Right shall revert to the Plan. If, after termination, the Participant does not
exercise his or her Stock Appreciation Right within the time specified herein, the Stock Appreciation Right
shall terminate, and the Shares covered by such Stock Appreciation Right shall revert to the Plan.
(i)
Death of Participant. If a Participant dies while a Service Provider, the Stock
Appreciation Right may be exercised within such period of time as is specified in the Stock Appreciation
Right Agreement (but in no event later than the expiration of the term of such Stock Appreciation Right as set
forth in the Notice of Grant), by the Participant’s estate or by a person who acquires the right to exercise the
Stock Appreciation Right by bequest or inheritance, but only to the extent that the Stock Appreciation Right is
vested and exercisable on the date of death. In the absence of a specified time in the Stock Appreciation
Right Agreement, the Stock Appreciation Right shall remain exercisable for twelve (12) months following the
Participant’s termination. If, at the time of death, the Participant is not vested as to his or her entire Stock
Appreciation Right, the Shares covered by the unvested portion of the Stock Appreciation Right shall
immediately revert to the Plan. The Stock Appreciation Right may be exercised by the executor or
administrator of the Participant’s estate or, if none, by the person(s) entitled to exercise the Stock
Appreciation Right under the Participant’s will or the laws of descent or distribution. If the Stock
Appreciation Right is not so exercised within the time specified herein, the Stock Appreciation Right shall
terminate, and the Shares covered by such Stock Appreciation Right shall revert to the Plan.
(j)
Buyout Provisions. The Administrator may at any time offer to buy out for a
payment in cash or Shares a Stock Appreciation Right previously granted based on such terms and conditions
as the Administrator shall establish and communicate to the Participant at the time that such offer is made.
10.
Restricted Stock.
73
(a)
Grant of Restricted Stock. Subject to the terms and conditions of the Plan, Restricted
Stock may be granted to Service Providers at any time and from time to time as shall be determined by the
Administrator, in its sole discretion. Subject to Section 6(c) hereof, the Administrator shall have complete
discretion to determine (i) the number of Shares subject to a Restricted Stock award granted to any
Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on
continued provision of services but may include a performance-based component, upon which is conditioned
the grant or vesting of Restricted Stock. Restricted Stock may be granted either in the form of Shares or
units/rights to acquire Shares. Each such unit/right shall be the equivalent of one Share of Common Stock for
purposes of determining the number of Shares subject to an Award. Until the Shares are issued, no right to
vote or receive dividends or any other rights as a stockholder shall exist with respect to the units/rights to
acquire Shares.
(b)
Other Terms. The Administrator, subject to the provisions of the Plan, shall have
complete discretion to determine the terms and conditions of Restricted Stock granted under the Plan.
Restricted Stock grants shall be subject to the terms, conditions, and restrictions determined by the
Administrator at the time the Restricted Stock is awarded. The Administrator may require the recipient to
sign a Restricted Stock Award agreement as a condition of the award. Any certificates representing the
Shares of stock awarded shall bear such legends as shall be determined by the Administrator.
(c)
Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced
by an agreement that shall specify the purchase price (if any) and such other terms and conditions as the
Administrator, in its sole discretion, shall determine; provided; however, that if the Restricted Stock grant has
a purchase price, such purchase price must be paid no more than ten (10) years following the date of grant.
11.
Performance Shares.
(a)
Grant of Performance Shares. Subject to the terms and conditions of the Plan,
Performance Shares may be granted to Service Providers at any time and from time to time as shall be
determined by the Administrator, in its sole discretion. Subject to Section 6(c) hereof, the Administrator shall
have complete discretion to determine (i) the number of Shares subject to a Performance Share award granted
to any Participant, and (ii) the conditions that must be satisfied, which typically will be based principally or
solely on achievement of performance milestones but may include a service-based component, upon which is
conditioned the grant or vesting of Performance Shares. Performance Shares may be granted either in the
form of Shares or units/rights to acquire Shares. Each such unit/right shall be the equivalent of one Share of
Common Stock for purposes of determining the number of Shares subject to an Award. Until the Shares are
issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the
units/rights to acquire Shares.
(b)
Other Terms. The Administrator, subject to the provisions of the Plan, shall have
complete discretion to determine the terms and conditions of Performance Shares granted under the Plan.
Performance Share grants shall be subject to the terms, conditions, and restrictions determined by the
Administrator at the time the stock is awarded, which may include such performance-based milestones as are
determined appropriate by the Administrator. The Administrator may require the recipient to sign a
Performance Shares agreement as a condition of the award. Any certificates representing the Shares of stock
awarded shall bear such legends as shall be determined by the Administrator.
(c)
Performance Share Award Agreement. Each Performance Share grant shall be
evidenced by an agreement that shall specify such other terms and conditions as the Administrator, in its sole
discretion, shall determine.
74
12.
Performance Units.
(a)
Grant of Performance Units. Performance Units are similar to Performance Shares,
except that they shall be settled in a cash equivalent to the Fair Market Value of the underlying Shares,
determined as of the vesting date. Subject to the terms and conditions of the Plan, Performance Units may be
granted to Service Providers at any time and from time to time as shall be determined by the Administrator, in
its sole discretion. Subject to Section 6(c) hereof, the Administrator shall have complete discretion to
determine (i) the number of Shares subject to a Performance Unit award granted to any Participant, and
(ii) the conditions that must be satisfied, which typically will be based principally or solely on achievement of
performance milestones but may include a service-based component, upon which is conditioned the grant or
vesting of Performance Units. Performance Units shall be granted in the form of units/rights. Each such
unit/right shall be the cash equivalent of one Share of Common Stock. No right to vote or receive dividends
or any other rights as a stockholder shall exist with respect to Performance Units or the cash payable
thereunder.
(b)
Other Terms. The Administrator, subject to the provisions of the Plan, shall have
complete discretion to determine the terms and conditions of Performance Units granted under the Plan.
Performance Unit grants shall be subject to the terms, conditions, and restrictions determined by the
Administrator at the time the Performance Unit is awarded, which may include such performance-based
milestones as are determined appropriate by the Administrator. The Administrator may require the recipient
to sign a Performance Unit agreement as a condition of the award.
(c)
Performance Unit Award Agreement. Each Performance Unit grant shall be
evidenced by an agreement that shall specify such terms and conditions as the Administrator, in its sole
discretion, shall determine.
13.
Deferred Stock Units.
(a)
Description. Deferred Stock Units shall consist of a Restricted Stock, Performance
Share or Performance Unit Award that the Administrator, in its sole discretion permits to be paid out in
installments or on a deferred basis, in accordance with rules and procedures established by the Administrator.
(b)
162(m) Limits. Deferred Stock Units shall be subject to the annual 162(m) limits
applicable to the underlying Restricted Stock, Performance Share or Performance Unit Award as set forth in
Section 6(c) hereof.
14.
Non-Transferability of Awards. Unless determined otherwise by the Administrator, an
Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than
by will or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient,
only by the recipient. If the Administrator makes an Award transferable, such Award shall contain such
additional terms and conditions as the Administrator deems appropriate.
15.
Leaves of Absence. Unless the Administrator provides otherwise or as otherwise required by
Applicable Laws, vesting of Awards granted hereunder shall cease commencing on the first day of any unpaid
leave of absence and shall only recommence upon return to active service.
16.
Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.
75
(a)
Changes in Capitalization. Subject to any required action by the stockholders of the
Company, the number of shares of Common Stock covered by each outstanding Award, the number of shares
of Common Stock which have been authorized for issuance under the Plan but as to which no Awards have
yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well
as the price per share of Common Stock covered by each such outstanding Award and the 162(m) annual
share issuance limits under Section 6(c) shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not be deemed to have been
“effected without receipt of consideration.” Such adjustment shall be made by the Compensation Committee,
whose determination in that respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number
or price of shares of Common Stock subject to an Award.
(b)
Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of
the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date
of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the
right to exercise his or her Option or SAR until ten (10) days prior to such transaction as to all of the Awarded
Stock covered thereby, including Shares as to which the Award would not otherwise be exercisable. In
addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable to
any Award shall lapse 100%, and that any Award vesting shall accelerate 100%, provided the proposed
dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised (with respect to Options and SARs) or vested (with respect to other Awards), an
Award will terminate immediately prior to the consummation of such proposed action.
(c)
Merger or Asset Sale.
(i)
Stock Options and SARs. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option
and SAR shall be assumed or an equivalent option or SAR substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option or SAR, the Participant shall fully vest in and have the right to exercise
the Option or SAR as to all of the Awarded Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option or SAR becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall notify the Participant in writing
or electronically that the Option or SAR shall be fully vested and exercisable for a period of fifteen (15) days
from the date of such notice, and the Option or SAR shall terminate upon the expiration of such period. For
the purposes of this paragraph, the Option or SAR shall be considered assumed if, following the merger or
sale of assets, the option or stock appreciation right confers the right to purchase or receive, for each Share of
Awarded Stock subject to the Option or SAR immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the transaction (and if holders were
offered a choice of consideration, the type of consideration chosen by the holders of a majority of the
outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent
of the successor corporation, provide for the consideration to be received upon the exercise of the Option or
76
SAR, for each Share of Awarded Stock subject to the Option or SAR, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(ii)
Restricted Stock, Performance Shares, Performance Units and Deferred
Stock Units. In the event of a merger of the Company with or into another corporation, or the sale of
substantially all of the assets of the Company, each outstanding Restricted Stock, Performance Share,
Performance Unit and Deferred Stock Unit award shall be assumed or an equivalent Restricted Stock,
Performance Share, Performance Unit and Deferred Stock Unit award substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation
refuses to assume or substitute for the Restricted Stock, Performance Share, Performance Unit or Deferred
Stock Unit award, the Participant shall fully vest in the Restricted Stock, Performance Share, Performance
Unit or Deferred Stock Unit including as to Shares (or with respect to Performance Units, the cash equivalent
thereof) which would not otherwise be vested. For the purposes of this paragraph, a Restricted Stock,
Performance Share, Performance Unit and Deferred Stock Unit award shall be considered assumed if,
following the merger or sale of assets, the award confers the right to purchase or receive, for each Share (or
with respect to Performance Units, the cash equivalent thereof) subject to the Award immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the
merger or sale of assets by holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the
merger or sale of assets is not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for the consideration to be
received, for each Share and each unit/right to acquire a Share subject to the Award, to be solely common
stock of the successor corporation or its Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
17.
Date of Grant. The date of grant of an Award shall be, for all purposes, the date on which the
Administrator makes the determination granting such Award, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each recipient within a reasonable time after
the date of such grant.
18.
Amendment and Termination of the Plan.
(a)
terminate the Plan.
Amendment and Termination. The Board may at any time amend, alter, suspend or
(b)
Shareholder Approval. The Company shall obtain shareholder approval of any Plan
amendment to the extent necessary and desirable to comply with Applicable Laws.
(c)
Effect of Amendment or Termination. No amendment, alteration, suspension or
termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between
the Participant and the Administrator, which agreement must be in writing and signed by the Participant and
the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers
granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
77
19.
Conditions Upon Issuance of Shares.
(a)
Legal Compliance. Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of the Award or the issuance and delivery of such Shares (or with respect to Performance
Units, the cash equivalent thereof) shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b)
Investment Representations. As a condition to the exercise or receipt of an Award,
the Company may require the person exercising or receiving such Award to represent and warrant at the time
of any such exercise or receipt that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
20.
Inability to Obtain Authority. The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to
the lawful issuance and sale of any Shares hereunder (or with respect to Performance Units, the cash
equivalent thereof), shall relieve the Company of any liability in respect of the failure to issue or sell such
Shares (or with respect to Performance Units, the cash equivalent thereof) as to which such requisite authority
shall not have been obtained.
21.
Reservation of Shares. The Company, during the term of this Plan, will at all times reserve
and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.
22.
Shareholder Approval. The 2004 amendment to the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the amendment is adopted by the
Board. Such shareholder approval shall be obtained in the manner and to the degree required under
Applicable Laws.
23.
Section 409A Compliance. Awards granted hereunder are intended to comply with the
requirements of Section 409A of the Code to the extent Section 409A of the Code applies to such Awards and
the terms of the Plan and any Award granted under the Plan shall be interpreted, operated and administered in
a manner consistent with this intention to the extent the Administrator deems necessary or advisable in its sole
discretion. Notwithstanding any other provision in the Plan, the Administrator, to the extent it unilaterally
deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to amend or
modify the Plan and any Award granted under the Plan so that the Award qualifies for exemption from or
complies with Section 409A of the Code; provided, however, that the Company makes no representation that
the Awards granted under the Plan shall be exempt from or comply with Section 409A of the Code and makes
no undertaking to preclude Section 409A of the Code from applying to Awards granted under the Plan.
78
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
(Mar k One)
�
�
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 27, 2008
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number : 001-33962
COHERENT, INC.
Delawar e
(State or other jurisdiction of incorporation or organization)
5100 Patr ick Henr y Dr ive, Santa Clar a, Califor nia
(Address of principal executive offices) 94-1622541
(I.R.S. Employer
Identification No.)
95054
(Zip Code)
Registrant’s telephone number, including area code: (408) 764-4000
Securities registered pursuant to Section 12(b) of the Act:
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on which r egister ed
Title of each class
Common Stock, $0.01 par value
(including associated Common Stock Purchase
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The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes � No �
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes � No �
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
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requirements for the past 90 days. Yes � 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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
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As of November 10, 2008, 24,337,561 shares of common stock were outstanding. The aggregate market value of the voting shares (based on the
closing price reported on the NASDAQ Global Select Market on March 29, 2008) of Coherent, Inc., held by nonaffiliates was $387,073,039. 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.
DOCUMENT INCORPORATED BY REFERENCE
The information contained herein includes information from both our annual report on Form 10-K filed with the Securities and Exchange Commission on
November 25, 2008 and amendment no. 1 to our annual report on Form 10-K filed with the Securities and Exchange Commission on January 26, 2009.
(This page intentionally left blank.)
This Annual Report contains forward-looking statements. These forward-looking statements include, without limitation,
statements regarding our future:
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net sales;
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bookings;
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results of operations;
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gross profits;
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access to new markets;
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research and development projects and expenses;
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selling, general and administrative expenses;
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optimization of financial returns;
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warranty reserves;
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legal proceedings;
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claims against third parties for infringement of our proprietary rights;
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claims by third parties against us for infringement of their proprietary rights;
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liquidity and sufficiency of existing cash, cash equivalents and short-term investments for near-term requirements;
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increased adoption of lasers;
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success or impact of new product offerings;
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future demand for our products and laser technology;
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maintenance of customer relationships and the development of new relationships;
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capital spending as a percentage of net sales;
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development and acquisition of new technology and market share;
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write-downs for excess or obsolete inventory;
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adoption of/use of lasers in the manufacture of solar cells;
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development of highly-differentiated products;
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operational efficiencies;
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competitors and competitive pressures;
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capital spending as a percentage of net sales;
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growth of applications for our products, new product introductions and increase of market share;
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obtaining components and materials in a timely manner;
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identifying alternative sources of supply for components;
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a chieving adequate manufacturing yields;
• the impact of recent acquisitions;
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leveraging of power and energy management products into our next generation products;
• compliance with environmental regulations;
• enhancement of our market position;
• focus on organizational efficiency;
• impact on laser industry;
• participation in the bio-agent detection market;
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leveraging of our technology portfolio and application engineering; •
optimization of our leadership position in existing markets; •
maintenance of collaborative customer and industry relationships;
• enhancement of our market position through our existing technology, as well as developing new technologies;
• emphasis on supply chain management;
• use of financial market instruments;
• simplifications of our foreign legal structure and reduction of our presence in certain countries;
• growth rates in the scientific market;
• footprint consolidation efforts, including the expected savings therefrom and timing thereof; and
• focus on long-term improvement of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as
a percentage of net sales.
In addition, we include forward-looking statements under the “Our Strategy” and “Future Trends” headings set forth below in
“Business” and under the “Bookings” heading set forth below in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
You can identify these and other forward-looking statements by the use of the words such as “may,” “will,” “could,”
“would,” “should,” “expects,” “plans,” “anticipates,” “estimates,” “intends,” “potential,” “projected,” “continue,” or the negative of
such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any
of the foregoing statements.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various
factors, including those set forth below in “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and under the heading “Risk Factors.” All forward-looking statements included in this document are based on information
available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or
circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated events.
PART I
ITEM 1. BUSINESS
GENERAL
Business Over view
Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2008, 2007 and 2006 ended on September 27,
September 29, and September 30, respectively, and are referred to in this annual report as fiscal 2008, fiscal 2007 and fiscal 2006 for
convenience. Fiscal years 2008, 2007 and 2006 all included 52 weeks.
We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific
research applications. We design, manufacture and market lasers, precision optics and related accessories for a diverse group of
customers. Since inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary
businesses, technologies, intellectual property, manufacturing processes and product offerings.
We are organized into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and
Systems (“SLS”). This segmentation reflects the go-to-market strategies for various products and markets. While both segments
deliver cost-effective photonics solutions, CLC focuses on higher volume products that are offered in set configurations. The product
architectures are designed for easy exchange at the point of use such that substantially all product service and repairs are based upon
advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include OEM components and instrumentation and
materials processing. SLS develops and manufactures configurable, advanced-performance products largely serving the
microelectronics and scientific research markets. The size and complexity of many of the SLS products require service to be
performed at the customer site by factory-trained field service engineers.
Income (loss) from operations is the measure of profit and loss that our chief operating decision maker (“CODM”) uses to
assess performance and make decisions. Income (loss) from operations represents the sales less the cost of sales and direct operating
expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do
not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These
unallocated costs include stock- based compensation and corporate functions (certain advanced research and development,
management, finance, legal and human resources) and are included in Corporate and other. Management does not consider unallocated
Corporate and other costs in its measurement of segment performance.
We were originally incorporated in California on May 26, 1966 and reincorporated in Delaware on October 1, 1990.
Additional information about Coherent, Inc. (referred to herein as the Company, we, our, or Coherent) is available on our
web site at www.coherent.com. We make available, free of charge on our web site, access to our annual report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable
after we file or furnish them electronically with the Securities and Exchange Commission (“SEC”). Information contained on our web
site is not part of this annual report or our other filings with the SEC.
INDUSTRY BACKGROUND
The word “laser” is an acronym for “light amplification by stimulated emission of radiation.” A laser emits an intense beam
of light with some unique and highly useful properties. Most important, a laser is orders of magnitude brighter than any lamp. This
means that the beam can be focused to a very small and intense spot, useful for applications requiring very high power densities
including cutting and other materials processing procedures. The laser’s high spatial resolution is also useful for microscopic imaging
and inspection applications. Laser light can be monochromatic—all the beam energy is confined to a narrow wavelength band. Some
lasers also produce highly polarized outputs while other lasers have unique phase properties that can be used to create ultrafast
output—a series of pulses with pulse durations as short as tens of femtoseconds (i.e., 10-15 seconds).
There are many types of lasers and one way of classifying them is by the material used to create the lasing action. This can be
in the form of a gas, liquid, semiconductor or solid-state crystal. We manufacture all of these types of lasers. Lasers can also be
classified by their output wavelength: ultraviolet, visible, infrared or wavelength tunable. We also manufacture all of these laser types.
There are also many options in terms of pulsed output versus continuous wave, pulse duration, output power, beam dimensions, etc. In
fact, each application has its specific requirements in terms of laser performance. The broad technical depth at Coherent enables us to
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offer a diverse product line characterized by lasers targeted at growth opportunities and key applications. In all cases, we aim to be the
supplier of choice by offering a high-value combination of superior technical performance and high reliability.
Photonics has taken its place alongside electronics as a critical enabling technology for the twenty-first century.
Photonics-based solutions are entrenched in broad industries that include industrial automation, textile processing, microelectronics,
flat panel displays and medical diagnostics, with adoption continuing in ever more diverse applications. Growth in these applications
stems from two sources. First, there are many applications where the laser is displacing conventional technology because it can do the
job faster, better or more economically. Second, there are new applications where the laser is the enabling tool that makes the work
possible (e.g. the production of sub 50 micron microvias).
Key laser applications include: micro and nanotechnologies; solar cell production; semiconductor inspection;
microlithography; measurement, test and repair of electronic circuits; medical and biotechnology; industrial process and quality
control; materials processing; imaging and printing; graphic arts display; and, research and development. For example, ultraviolet
(“UV”) lasers are enabling the trend towards miniaturization, which is a driver of innovation and growth in many markets. The short
wavelength of lasers that emit light in the UV spectral region make it possible to produce extremely small structures-with maximum
precision—consistent with the latest state-of-the-art technology.
OUR STRATEGY
We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are
based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:
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Lever age our technology por tfolio and application engineer ing to lead the pr olifer ation of photonics into br oader
mar kets—We will continue to identify opportunities in which our technology portfolio and application engineering can
be used to offer innovative solutions and gain access to new markets.
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Optimize our leader ship position in existing mar kets—There are a number of markets where we have historically
been at the forefront of technological development and product deployment and from which we have derived a
substantial portion of our revenues. We plan to optimize our financial returns from these markets.
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Maintain and develop additional str ong collabor ative customer and industr y r elationships—We believe that the
Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to
further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones
with customers who are industry leaders and work together with these customers to design and develop innovative
product systems and solutions as they develop new technologies.
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Develop and acquir e new technologies and mar ket shar e—We will continue to enhance our market position through
our existing technologies and develop new technologies through our internal research and development efforts, as well as
through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and
product offerings.
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Focus on long-ter m impr ovement of adjusted EBITDA expr essed as a per centage of net sales—We define adjusted
EBITDA as earnings before interest, taxes, depreciation, amortization, stock compensation expenses and certain other
non-operating income and expense items.
APPLICATIONS
Our products address a broad range of applications that we group into the following markets: Microelectronics, Materials
Processing, OEM Components and Instrumentation and Scientific Research and Government Programs. Effective the first quarter of
fiscal 2008, we combined the former Graphic Arts and Display market applications into the OEM Components and Instrumentation
market applications. Prior period market application information reflects this combination.
Micr oelectr onics
Nowhere is the trend towards miniaturization more prevalent than in the Microelectronics market where portable music,
video and wireless communications technology are driving advances in integrated circuits, power management, and displays. In
response to market demands and expectations, semiconductor manufacturers are continually seeking to improve their process and
design technologies in order to manufacture smaller, more powerful and more reliable devices with a lower cost per function. New
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laser applications and new laser technologies in existing applications are in high demand to deliver higher resolution and higher
precision at lower manufacturing cost.
We support four major markets in the microelectronics industry: (1) semiconductor front-end manufacturing,
(2) semiconductor assembly, testing and advanced packaging, (3) flat panel display manufacturing, and (4) solar cell production and
other emerging processes.
Micr oelectr onics—semiconductor fr ont-end manufactur ing
The term “front-end manufacturing” refers to the production of semiconductor devices which occurs prior to packaging.
Photomask manufacturing
Semiconductors are created with a process called microlithography, which relies on a high-resolution photomask most often
made of quartz and chrome. The mask, which is conceptually similar to a negative in photography, is used in lithography systems to
make numerous copies of the pattern image on semiconductor wafers. Our Innova ® Sabre™ ion lasers, Innova FReD ion lasers,
NovaTex™ excimer lasers, and Rega™ ultrafast lasers are all used in the fabrication, inspection and repair of these masks.
Semiconductor inspection, metrology, testing and wafer yield management
As semiconductor device geometries decrease in size, devices become increasingly susceptible to smaller defects during each
phase of the manufacturing process and these defects can negatively impact yield. One of the semiconductor industry’s responses to
the increasing vulnerability of semiconductor devices to smaller defects has been to use defect detection and inspection techniques that
are closely linked to the manufacturing process. For example, automated laser-based inspection systems are now used to detect and
locate defects as small as 0.01 micron, which may not be observable by conventional optical microscopes.
Detecting the presence of defects is only the first step in preventing their recurrence. After detection, defects must be
examined in order to identify their size, shape and the process step in which the defect occurred. This examination is called defect
classification. Identification of the sources of defects in the lengthy and complex semiconductor manufacturing process has become
essential for maintaining high yield production. Semiconductor manufacturing has become an around-the-clock operation and it is
important for products used for inspection, measurement and testing to be reliable and to have long lifetimes.
Our Azure™, Paladin™, Vitesse™, Verdi™, Sapphire, and Innova iLine lasers are used to detect and characterize defects in
semiconductor chips. Our Innova iLine argon laser is used to inspect patterned wafers and our Vector laser is used to repair defects
that may occur in the photomask or semiconductor device.
The semiconductor fabrication process typically creates numerous patterned layers on each wafer device. Laser-based
systems have been developed to measure the characteristics of metal or opaque layers in order to determine the functionality and
conformance of these devices. Our Vitesse™ laser generates an ultrafast laser pulse that produces a localized temperature rise in the
materials, which generates a sound wave, a portion of which is reflected back to the surface. By measuring the returning echoes with a
second laser pulse, the system can detect layer thickness, adhesion and composition.
Micr oelectr onics—semiconductor assembly, testing and advanced packaging
Wafer scribing and singulation
After a wafer is patterned, there are then a host of other processes, referred to as back-end processing, which finally result in
a packaged encapsulated silicon chip. Ultimately, these chips are then assembled into finished products. The advent of high-speed
logic and high-memory content devices has caused chip manufacturers to look for alternative technologies to improve performance
and lower process costs. In terms of materials, this search includes new types of wafers based on low-k dielectrics and thinner silicon.
Our Avia ™ and Prisma ™ lasers are providing economic methods of cutting and scribing these wafers while delivering higher yields
than traditional mechanical methods. Our Diamond™ carbon dioxide (“CO2”) lasers are used for singulating packages and printed
circuit boards into individual components for final assembly.
Microvia drilling
These same trends are also driving integration and miniaturization, blurring the traditional lines between formerly discrete
applications such as assembly and PCB fabrication. Lasers are playing several enabling roles in this integration and miniaturization.
For instance, lasers are now the only economically practical method for drilling microvias in chip assemblies and in both rigid and
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flexible printed circuit boards. These microvias are tiny interconnects that are essential for enabling high-density circuitry commonly
used in mobile handsets and advanced computing systems. Our AVIA™ and Diamond™ lasers are the lasers of choice in this
application. The ability of these lasers to operate at very high repetition rates translates into faster drilling speeds and increased
throughput in Microvia processing applications.
Other applications are arising as well. For instance, the high density of the latest circuit boards is reaching the limits of
conventional technologies, causing wider adoption of laser direct-write methods. Our Paladin™ laser is used for this application. Our
lasers are also being increasingly used to trim (selectively cut) components in order to finely adjust their performance. Our Vector ™
and Prisma ™ lasers are used for this purpose.
Micr oelectr onics—flat panel display manufactur ing
The high-volume consumer market is driving the production of flat panel displays (“FPD”) in applications such as digital
cameras, personal digital assistants (“PDAs”), mobile telephones, car navigation systems, laptop computers and television monitors.
There are several types of established and emerging FPDs based on quite different technologies, including plasma (“PDP”), liquid
crystal (“LCD”) and organic polymers (“OLED”). Lasers have found applications in each of these technologies given that the laser
provides higher process speed, better yield, lower cost and/or superior display brightness and resolution.
Excimer Laser Annealing (“ELA”) and Sequential Lateral Solidification
Several display types require a high-density pattern of silicon Thin Film Transistors (“TFTs”). If this silicon is
polycrystalline, the performance is greatly enhanced. In the past, these polysilicon layers could only be produced on expensive thermal
glass at high temperatures. However, excimer-based processes, such as ELA and sequential lateral solidification, have allowed highvolume production of low-temperature polysilicon (“LTPS”) on conventional glass substrates. Our excimer lasers provide an
invaluable solution for both ELA and sequential lateral solidification because they are the only industrial-grade excimers with the high
pulse energy these methods require. The current state-of-the-art product for this application is our Lambda SX-C™ laser.
Our AVIA™ and Diamond™ lasers are also used in other production processes for FPDs. These processes include drilling,
cutting, patterning, marking and yield improvement.
Micr oelectr onics—solar cell pr oduction and other emer ging pr ocesses
Numerous areas of microelectronics can be grouped as “emerging technologies.” Some of these are transitioning to volume
production in the present timeframe while others are more forward-looking.
The recent growth and interest in solar cell technology is driving the adoption of laser technology in the manufacturing of
solar cells as today’s higher fuel costs have led to heightened interest in solar panels. Crystalline solar cell production capacity has
been rapidly ramping up in the United States, Germany, Japan, Taiwan & China. Our lasers, such as Avia™, Paladin and Prisma™,
are already being used in the production of solar panels for cell isolation and transparent conductive oxide (“TCO”) scribing purposes.
Mater ials Pr ocessing
Lasers are widely accepted today as part of many important industrial manufacturing applications including cutting, welding,
joining, drilling, perforating, and marking of metals and nonmetals. We supply high-power lasers for metal processing as well as low­
to-medium power lasers for nonmetals processing, precision micromachining and laser marking.
Light manufacturing and cutting
This area includes such applications as the cutting and joining of plastics using both our Diamond™ CO2 lasers and FAP
Systems semiconductor lasers; the cutting, perforating and scoring of paper and packaging materials; and various cutting and
patterning applications in the textile industry. In the specific area of textiles and clothing, our Diamond™ lasers service older
applications, such as cutting complex shapes in leather for footwear, as well as newer applications such as creating detailed fade
patterns on designer denims.
At the opposite end of the size and wavelength spectrum, our AVIA™ and Matrix™ ultraviolet lasers are now being used
extensively for machining a wide range of materials (and in a wide range of industries) including glass and plastics. These technically
important materials are laser processed to produce medical devices, micro-electromechanical systems (“MEMS”), flat panel display,
semiconductor manufacturing, and to aid in rapid prototyping for a variety of end markets including automotive manufacturing.
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Laser marking and coding
Laser marking and coding are generally considered part of the precision materials processing applications market for which
we remain a leading supplier. One such area where applications are growing rapidly is the displacement of ink-jet coding due to both
aesthetic and environmental pressures. The optimum choice of laser depends on the material being marked, whether it is a surface
mark (engraved) or a sub-surface mark, and the specific economics of the application. We provide lasers for all-important marking
applications. In fiscal 2007, we released Matrix™, a new product line of reliable, compact and low-cost diode pumped solid state
lasers. These lasers provide lower cost of ownership for marking in high volume manufacturing.
Heavy manufacturing
In April 2007, we acquired Nuvonyx, Inc., a technology leader in high-power laser diode components, arrays, and industrial
laser systems for materials processing and defense applications. Nuvonyx produces high power arrays with powers in excess of 50
Kilowatts through its proprietary cooling and stacking technologies. The industrial laser systems are used for cladding and hardening
of metals, joining materials, and other materials processing applications. Other near-term applications include welding of plastics and
direct metal welding. In fiscal 2007, we released HighLight™, a new line of direct diode systems for metal processing.
Excimer-based processes
The unique properties of excimer lasers have enabled a diverse range of material transformation applications. Examples
include drilling and ablating materials to create stents and disposable drug delivery catheters for the medical marketplace. Frequently,
our excimer lasers are also used to mark these same products. Other materials processing applications for our excimer lasers include
stripping thin wires in disk drives, cleaning bare semiconductor wafers and writing fiber Bragg gratings for optical
telecommunications and sensing purposes.
OEM Components and Instr umentation
Instrumentation is one of our more mature commercial applications. Representative applications within this market include
flow cytometry, confocal microscopy, high-throughput screening for pharmaceutical discovery, genomic and proteomic analyses,
Raman spectroscopy forensics, veterinary science and bio-threat detection. Specifically, our Sapphire™, Compass™ and CUBE™
lasers are used in several bio-instrumentation applications including confocal microscopy, DNA sequencing, flow cytometry and drug
discovery. In the medical area, our High Power OPS lasers are enabling a new range of wavelengths for treatment of a number of
retinal conditions and our Excimer lasers are the standard used by the majority of companies practicing vision correction. We also
support the laser- based instrumentation market with a range of laser-related components, including diode lasers for optical pumping.
Some of our OEM component business includes sales to other, less integrated laser manufacturers participating in OEM markets such
as materials processing, scientific, and medical.
F low cytometry
Flow cytometry is a laser-based micro-fluorescence technique for analyzing single cells or populations of cells in a
heterogeneous mixture, including blood samples. Its numerous applications include cell biology, immunology, reproductive biology,
oncology and infectious disease such as Acquired Immune Deficiency Syndrome (“AIDS”). The recent design trend in flow cytometry
is toward more compact, powerful and reliable instruments. As a result, our Sapphire™, Compass™ and CUBE™ lasers are among
the leading solid-state solutions in the current generation of cutting-edge instrumentation.
DNA sequencing
Laser-based instrumentation revolutionized DNA sequencing, providing automation and data acquisition rates that would be
impossible by any other method. This technology played a key role in the human genome project. This area continues to be a dynamic
area as researchers track and analyze specific genes responsible for various diseases. Our Sapphire™, Compass™ and CUBE™ lasers
were developed to address the needs of this market.
Drug Discovery—Genomics and Proteomics
High-speed automation is also essential to the growth of genomics and proteomics, which now enable drug discovery to
proceed at very high throughput rates. Over a million compounds can now be screened in weeks instead of years. A challenge to
manufacturers of analytical devices is to produce instruments of increasing complexity and capability, while at the same time
minimizing their size. This is particularly important where several instruments may be deployed in a single location for parallel
processing. Our Sapphire, Compass and CUBE lasers are used in instrument techniques such as micro-array scanning, lab-on-a-chip
and fluorescence correlation spectroscopy.
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Bio-agent detection
A number of laser-based techniques for point source and standoff detection of pathogens or other bio-toxins are being
explored in the government and private sectors. Systems of this type could be deployed to guard military facilities, major sporting
events or other large gatherings of citizens, as well as vital infrastructure components, such as subways, airports or industrial hubs.
Based on initial trial and evaluation, we are well positioned to address such applications.
F orensics
Lasers have been used in criminal forensics for a number of decades. Applications include latent fingerprint detection and
trace evidence illumination and identification. In the past, laser usage was often limited to forensics labs due to the physical size and
complexities of the lasers. Portable models seldom generated enough output for use in high ambient light conditions or for large- scale
sweeps of the crime scene. However, now due to recent advances in optical output versus physical size, forensic scientists have the
capability to bring an unprecedented level of latent fingerprint and trace evidence detection directly to the crime scene. Our compact
solid-state Tracer™ laser system, based on optically pumped semiconductor (“OPS”) technology, directly addresses the needs of
large-scale criminal investigation organizations by providing a superior combination of high brightness and portability to bear on the
most difficult forensic analysis.
Medical OEM
We sell a variety of components and lasers to medical laser companies in end-user applications such as ophthalmology,
aesthetic, surgical, therapeutic and dentistry. Innova™ ion laser tubes and our GEM series CO2 lasers are widely used in ophthalmic,
aesthetic and surgical markets. Additionally, our Compass™ and Sapphire™ series of lasers are used in the retinal scanning market in
diagnostic imaging systems as well as new ground breaking in-vivo imaging applications.
Our fiscal 2005 acquisition of TuiLaser, a recognized leader of high-reliability excimer lasers for Lasik and PRK refractive
surgery methods with the ExiStar™ excimer laser platform has given us a leading position in this important excimer application
market.
The unique ability of our OPS laser technology to match a wavelength to an application has led to the development of a highpower yellow (577nm) laser for use in the treatment of Age Related Macular Degeneration. The 577nm wavelength was designed to
match the peak in absorption of oxygenated hemoglobin thereby allowing treatment to occur at a lower power level, and thus reducing
stress and heat-load placed on the eye with traditional green (530nm) based solid state lasers. This technology is finding traction with
both Medical OEM’s and Ophthalmologists.
Graphic Arts and Display
Historically, the printing industry has depended upon silver-halide films and chemicals to engrave printing plates. This
chemical engraving process requires several time-consuming steps. In recent years, we have worked closely with professionals in the
printing industry to design semiconductor and diode-pumped lasers for alternative “computer-to-plate” processes. As a result, our
Compass™ lasers and some of our high-power semiconductor lasers are now widely used for computer-to-plate printing, an
environmentally friendly process that saves production time by writing directly to plates. These applications benefit from the high
slope efficiency and high-temperature performance that characterize our semiconductor lasers.
There are numerous other applications in the graphic arts and display markets where our lasers are now playing key roles. For
instance, in the area of printing, our Diamond™ K and G series lasers are used in the engraving of Anilox rollers for flexo-plate and
screen-printing and our CUBE™ violet lasers are used in the imaging of offset plates for computer-to-plate printing.
In another component of this market, our Innova™ ion lasers are used to write data on master disks that are used to massproduce compact discs and digital videodiscs for consumer use.
Scientific Resear ch and Gover nment Pr ogr ams
We are widely recognized as a technology innovator and the scientific market has historically provided an ideal “test market”
for our leading-edge innovations. These have included ultrafast lasers, diode-pumped solid-state lasers, continuous-wave (“CW”)
systems, excimer lasers and water-cooled gas lasers. Many of the innovations and products pioneered in the scientific marketplace
have gone onto become commercial successes for both our OEM customers and us.
Our installed base of scientific lasers includes tens of thousands of lasers. Not surprisingly, these lasers are used in a wide
range of applications spanning virtually every branch of science and engineering. These applications include biology (multiphoton and
confocal microscopy), physics (atomic and molecular spectroscopy, atom cooling, non-linear optics, X-ray generation, solid- state and
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semiconductor studies), chemistry (quantum control, time-resolved and Raman spectroscopy) and engineering (material processing,
remote sensing and metrology).
Multi-Photon Excitation (“MPE”) microscopy
MPE microscopy is an imaging method used mainly by biologists to create optical microscopy images of cells and subcellular structures and processes. Importantly, MPE can image live samples without damaging these samples, thus enabling the
interplay of physiology and structure to be studied at the cellular level. Related to confocal microscopy, MPE can only be performed
using the unique properties of an ultrafast laser. Because many MPE researchers have limited laser expertise, we now support this
market with our Chameleon™ tunable ultrafast laser, which is a hands-free easy to use closed-box laser.
Ultrafast research
Ultrafast lasers generate pulses as short as few tens of femtoseconds (10-15 seconds). These types of lasers allow chemical
reactions and other processes to be studied at high temporal resolution. Because of this very short pulse duration, ultrafast lasers also
deliver very high peak power, which can be used to generate many exotic effects. Some of these effects are now finding their way into
mainstream applications. An example of this is the use of ultrafast pulses for cold micromachining. Our Mira titanium: sapphire (Ti:S)
modelocked laser, RegA™ Ti:S high-repetition rate regenerative amplifier, and Mira-OPO synchronously pumped optical parametric
oscillator are all examples of ultrafast laser systems used for research applications. Our Legend™ Ti:S regenerative amplifier, Libra ™
integrated amplifier and Hidra ™ multipass amplifier, are other examples of ultrafast lasers that support these leading-edge
applications by producing Gigawatt-level peak powers.
Optical pumping
Several of the lasers that we supply to the research market require optical pumping. That is to say, they require another laser
as their power source, as opposed to power from an electrical outlet. Examples include our Mira™, RegA™, Legend™ and MBR™
lasers. Our diode-pumped Verdi™ and Evolution™ lasers have established themselves as benchmarks in reliability as the pump source
for these lasers. Some of our customers are also performing research on new types of lasers and new laser materials. These
investigational laser setups often require optical pumping at green wavelengths and the Verdi™ is one of the leading pump sources
here as well.
Spectr oscopy
Spectroscopy is a scientific field in which processes or materials are studied as a function of wavelength. Many types of
spectroscopy require a tunable laser source. Our MBR CW™ tunable laser provides unsurpassed resolution and stability for highresolution spectroscopy applications, while our Mira™, Mira-OPO™ and Chameleon™ lasers are among the leading sources for
spectroscopy in the ultrafast domain.
Infr ar ed and far -infr ar ed r esear ch
We also support a wide range of research applications in the infrared (“IR”) and far-infrared (“FIR”) domains with both
standard and custom waveguide CO2 lasers and far-infrared lasers. Research applications for these products include sensing,
communications, military programs and terahertz (“THz”) generation. An example of a standard FIR product is our SIFIR-50, a THz
laser system.
FUTURE TRENDS
Micr oelectr onics
After several years of process development, lasers are now used in mass production applications because these laser-based
fabrication and testing methods are faster, deliver superior end products, increase yields, and /or cut production costs. Moreover, we
anticipate this trend to continue, driven primarily by the increasing sophistication of consumer electronic goods and their convergence
via the internet, resulting in increasing demand for more bandwidth and memory. Although this market is cyclical in nature, and will
be affected by the current economic climate, we believe that the future will see an increased adoption of solid-state, CO2 and excimer
lasers, as all these lasers enable both next-generation performance improvements and reduced process costs. In particular, we expect
future demands in the advanced packaging market to steadily shift towards the use of ultraviolet laser-based tools, as these are the only
commercial technologies capable of providing the high spatial resolution critical for next-generation chip-scale and wafer-level
packages. Lasers have emerged as an essential technology in the manufacturing of solar cells. We expect that this trend will continue
over the next few years as solar cell manufacturing capacity increases.
7
Mater ials pr ocessing
The market for low to medium power lasers used in industrial material processing is uncertain in the immediate future;
however they represent a cost-effective manufacturing solution for cutting, joining, marking and engraving of non-metal materials.
These include marking/coding, flat bed cutting, engraving, as well as the production of capital equipment for apparel and leather
goods manufacturing. Several factors are enabling us to gain market share in the materials process market. First, we have developed
an expanded portfolio of lasers with a broad spectrum of wavelengths, enabling optimum marking solutions for virtually every metal
and non-metal material type. At the same time, the reliability of these products has been achieved at even higher levels, lowering the
cost of ownership.
The acquisition of Nuvonyx in April 2007 provided us an entry into the high-power materials processing market. Combined
with our capability in laser diode bars, this acquisition represents both a vertically integrated and more cost effective approach than
many applications currently served by fiber lasers.
OEM components and instr umentation
The instrumentation market is seeing a gradual migration from the use of mature laser technologies, such as water-cooled ion
lasers, to new technologies, primarily based on solid-state and semiconductors. Using our unique portfolio of solid-state and
semiconductor lasers, and our patented OPS technology, we are able to both assist and stimulate this transition as well as to be the
technology of choice for developing applications such as security and clinical diagnostics. These applications are likely to require an
increased number of lasers; however, the majority of these activities are still in the research and development stage and we expect only
moderate impacts on the laser industry in fiscal 2009, with increases expected in future years. Nevertheless, we anticipate greater
future opportunities in microscopy, flow cytometry, lab-on-a-chip, in-vivo medical imaging and DNA sequencing based on our
product enhancements and evolving market developments. Our newer laser technologies are the basis of a number of clinical
procedures. The area of Photocoagulation where the OPS yellow lasers are being used as the wavelength is particularly suitable for the
treatment of blood vessels. In Aesthetic laser surgery, we are an OEM supplier of CO2 lasers to the major manufacturers of Aesthetic
equipment used in the latest procedures for skin enhancement
Scientific r esear ch and gover nment pr ogr ams
The scientific market has been relatively stable in the present unpredictable economic environment. We expect modest
growth rates in the scientific research market for fiscal 2009, with applications in ultrashort pulses and in bio-research being the
drivers of this anticipated expansion. We anticipate an increasingly competitive market in which we expect to both retain and improve
our market share through new product development and maintain our service commitment to this area.
PRODUCTS
We design, manufacture and market lasers, precision optics and related accessories for a diverse group of customers. The
following table shows selected products together with their applications, the markets they serve and the technologies upon which they
are based.
Mar ket Application
Microelectronics
Application
Pr oducts
Photomask manufacturing
Semiconductor inspection and
metrology
Trimming and repair
8
SabreFreD
Innova
NovaTex
RegA
Vitesse
Compass Series
Paladin
Verdi
AZURE, Indigo
Sapphire
Innova iLine
Vector
Technology
Frequency doubled
Ion
Excimer
Ultrafast
Ultrafast
DPSS
DPSS
DPSS
DPSS
OPS
Ion
DPSS
Mar ket Application
Application
Pr oducts
Advanced packaging and
interconnects
Flat panel display (TFT annealing)
Solar Cells
Materials processing
OEM components and
instrumentation
Marking, engraving, cutting and
drilling
Cladding, heat treating and welding
Rapid prototyping
Confocal microscopy
Flow cytometry/cell sorting
DNA sequencing
Drug discovery
Bio-agent detection
Forensics
Laser Doppler velocimetry
Medical (OEM)
Graphic Arts
Display
Scientific research and government
programs
Multi-photon excitation microscopy
Optical pumping for Ultrafast and
CW Tunable lasers
9
Technology
Avia
Diamond
FAP family
Paladin
Vector
Prisma
LSX-C
Avia
Diamond
Avia
Prisma
Paladin
FAP family
Diamond
Prisma, Matrix
Excistar
Avia
HighLight
Avia, Matrix
Sapphire
Compass
CUBE
Innova family
Compass
Sapphire
CUBE
Compass
Sapphire
CUBE
Innova family
Compass
Sapphire
CUBE
Compass, Avia
CUBE
TracER
Verdi
Innova family
Existar,COMPexPro
Diode bars
Compass
Sapphire
Gem
Innova family
Single emitter diodes
Fiber coupled diodes
Diode bars
Compass series
CUBE
Diamond K & G series
High Power OPS
Innova family
Mira, Chameleon
DPSS
CO2
Semiconductor
DPSS
DPSS
DPSS
Excimer
DPSS
CO2
DPSS
DPSS
DPSS
Semiconductor
CO2
DPSS
Excimer
DPSS
Semiconductor
DPSS
OPS
DPSS
Laser Diode Module
Ion
DPSS
OPS
Laser Diode Module
DPSS
OPS
Laser Diode Module
Ion
DPSS
OPS
Laser Diode Module
DPSS
Laser Diode Module
OPS
DPSS
Ion
Excimer
Semiconductor
DPSS
OPS
CO2
Ion
Semiconductor
Semiconductor
Semiconductor
DPSS
Laser Diode Module
CO2
HOPS
Ion
Ultrafast
Verdi, Evolution
DPSS
Mar ket Application
Application
Pr oducts
Pollution analysis
Interferometry and holography
Spectroscopy
Ablation and pulse laser deposition
Photochemistry
Material processing research
Laser diagnostics and measurement
COMPexPro
Verdi
Innova family
Chameleon
Indigo
Mira, RegA, OPO
Legend, OPO
MBR, MBD
Innova family
Excistar, Xantos
COMPexPro
Legend, Libra
Libra
COMPexPro
Modemaster
Fieldmaster
Labmaster
Technology
Excimer
DPSS
Ion
Ultrafast
DPSS
Ultrafast
Ultrafast
CW Tunable
Ion
Excimer
Excimer
Ultrafast
Ultrafast
Excimer
Diagnostics
Diagnostics
Diagnostics
In addition to products we provide, we invest routinely in the core technologies needed to create substantial differentiation
for our products in the marketplace. Our semiconductor and crystal facilities all maintain an external customer base providing
value-added solutions. We direct significant engineering efforts to producing unique solutions targeted for internal consumption.
These investments, once integrated into our broader product portfolio provide our customers with uniquely differentiated solutions and
the opportunity to substantially enhance the performance, reliability and capability of the products we offer.
Semiconductor lasers
Semiconductor lasers use the same principles as more conventional types of lasers but miniaturize the entire assembly into a
monolithic structure using semiconductor wafer fabrication processes. The advantages of this type of laser include smaller size, longer
life, enhanced reliability and greater efficiency. We manufacture a wide range of semiconductor laser products with wavelengths
ranging from 650nm to 1000nm and output powers ranging from less than 1 W for individual emitters to 80 W for bars, to several
hundred watts for stacked bars. These products are available in various forms of complexity including the following: bar diodes on
heat sinks, fiber-coupled single emitters and bars, stacked bars and fully integrated modules and microprocessor-controlled units that
contain power supplies and active coolers. Our infrared semiconductor lasers, which are manufactured from proprietary materials
grown in our facility in Tampere, Finland, differ from most other lasers in that they contain no aluminum in the active region. This
provides our lasers with longer lifetimes and the ability to operate at broader temperature ranges.
Our semiconductor lasers are also used in machine-processing applications such as soldering connections on printed circuit
boards and welding flat panel displays and in medical applications for the treatment of the wet “classical” form of age-related macular
degeneration and hair removal. They are also used as the pump laser in DPSS laser systems that are manufactured by us and several of
our competitors.
Optically Pumped Semiconductor Lasers (OPS)
Our OPS laser platform is based on a semiconductor chip that is energized or pumped by a semiconductor laser rather than by
electricity. This enables the development and production of a new and versatile class of semiconductor lasers. A wide range of
wavelengths can be achieved by varying the materials used in this device and doubling the frequency of the laser beam. The OPS is a
compact, rugged, high power, single-mode laser. Our frequency doubled blue OPS lasers are all solid-state, continuous-wave devices
that are particularly well suited to a wide range of applications including the bio-instrumentation and graphic art markets. In 2008, the
range of applications has been extended to retinal photocoagulation where we have developed a laser which will operate in the yellow,
particularly suitable for some therapies and also to such areas as entertainment lighting and forensic detection. We also introduced an
ultraviolet version of the OPS platform called the Genesis™, which was developed for the bio-instrumentation market. Future versions
of the Genesis will scale in power and operate at other wavelengths to support customers in the instrumentation, microelectronics and
scientific markets.
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F iber lasers
In 2008 we launched the first of our products which are based on Fiber laser technology, the Talisker. This is an industrial
ultrafast laser system which incorporates fiber laser technologies as a key part of the laser design. The Talisker is a new laser platform
based on a Fiber oscillator and Crystal amplifier and illustrative of our strategy of developing and incorporating fiber lasers where
they can generate unique and cost effective performance. We expect the Talisker platform will lead to a series of new ultrafast lasers
for a number of commercial markets including microelectronics and medical.
Diode-pumped solid-state lasers
DPSS lasers use semiconductor lasers to pump a crystal to produce a laser beam. By changing the energy, optical
components and the types of crystals used in the laser, different wavelengths and types of laser light can be produced.
The efficiency, reliability, longevity and relatively low cost of DPSS lasers make them ideally suited for a wide range of
OEM and end-user applications, particularly those requiring 24-hour operations. Our DPSS systems are compact and self-contained
sealed units. Unlike conventional tools and other lasers, our DPSS lasers require minimal maintenance since they do not have internal
controls or components that require adjusting and cleaning to maintain consistency. They are also less affected by environmental
changes in temperature and humidity, which can alter alignment and inhibit performance in many systems.
We manufacture a variety of types of DPSS lasers for different applications including semiconductor inspection; advanced
packaging and interconnects; repair, test and measurement; computer-to-plate printing; writing data to master disks; entertainment;
photo finishing: marking, welding, engraving, cutting and drilling; drug discovery; forensics; laser Doppler velocimetry; bio-agent
detection; medical; rapid prototyping; DNA sequencing; flow cytometry; laser pumping and spectroscopy.
SALES AND MARKETING
We market our products domestically through a direct sales force. Our foreign sales are made principally to customers in
Europe, Japan and other Asia-Pacific countries. We sell internationally through direct sales personnel located in Japan, South Korea,
the United Kingdom, Germany, Italy, Austria, France, Belgium, the Netherlands and the People’s Republic of China, as well as
through independent representatives in other parts of the world. Foreign sales accounted for 68% of our total net sales in fiscal 2008,
fiscal 2007 and fiscal 2006. Sales made to independent representatives and distributors are generally priced in U.S. dollars. A large
portion of foreign sales that we make directly to customers are 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 and
import controls and political instability. Our products are broadly distributed and no one customer accounted for more than 10% of
total net sales during fiscal 2008, 2007 or 2006.
We maintain a customer support and field service staff in major markets within the United States, Europe, Japan and other
Asia-Pacific countries. This organization works closely with customers, customer groups and independent representatives in servicing
equipment, training customers to use our products and exploring additional applications of our technologies.
We typically provide parts and service warranties on our lasers, laser-based systems, optical and laser components and related
accessories and services. Warranties on some of our products and services may be shorter or longer than one year. The weighted
average warranty period covered is nearly 15 months. Warranty reserves, as reflected on our consolidated balance sheets, have
generally been sufficient to cover product warranty repair and replacement costs.
RESEARCH AND DEVELOPMENT
We are committed to the development of new products, as well as the improvement and refinement of existing products,
including better cost-of-ownership. Our development efforts are focused on designing and developing products, services and solutions
that anticipate customers’ changing needs and emerging technological trends. Our efforts are also focused on identifying the areas
where we believe we can make valuable contributions. Research and development expenditures for fiscal 2008 were $74.3 million, or
12.4% of net sales compared to $74.6 million, or 12.4% of net sales for fiscal 2007, and $73.1 million, or 12.5% of net sales for fiscal
2006. We work closely with customers, both individually and through our sponsored seminars, to develop products to meet customer
application and performance needs. In addition, we are working with leading research and educational institutions to develop new
photonics-based solutions.
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MANUFACTURING
Strategies
One of our core manufacturing strategies is to tightly control our supply of key parts, components, assemblies and
outsourcing partners. We believe this is essential to maintain high quality products and enable rapid development and deployment of
new products and technologies.
Committed to quality and customer satisfaction, we design and produce many of our own components and sub-assemblies in
order to retain quality control. We provide customers with 24-hour technical expertise and quality that is ISO certified at our principal
manufacturing sites. In June 2003, we transferred our printed circuit board manufacturing activities in Auburn, California, to a global
electronics contract manufacturer in Asia. We also completed the restructuring of our CO2 operations, resulting in the consolidation of
all CO2 manufacturing operations at our Bloomfield, Connecticut location. In fiscal 2004, Lambda Physik consolidated the
manufacturing operations of its German subsidiary into its Göttingen facility. In February 2007, we completed the transfer of
production of laser power supplies from Auburn, California to a global electronics contract manufacturer with operations in North
America, Asia and Europe. In January 2008 we announced the outsourcing of one of our laser product lines to a contract manufacturer
located in Asia and in April 2008, we announced the outsourcing of our laser optics manufacturing to an optics manufacturer located
in North America. This outsourcing is expected to be completed by the end of the second quarter of fiscal 2009. The supply from these
strategic contract manufacturers is covered by long term supply agreement contracts. During fiscal 2008, we consolidated our German
DPSS manufacturing into our Lübeck, Germany site. The transfer was completed in the fourth quarter of fiscal 2008. On October 13,
2008, we announced the consolidation of the remainder of our Munich facility into our Göttingen site. The transfer is scheduled for
completion by the end of our third quarter of fiscal 2009.
We have designed and implemented proprietary manufacturing tools, equipment and techniques in an effort to provide
products that differentiate us from our competitors. These proprietary manufacturing techniques are utilized in a number of our
product lines including both ion and CO2 laser production, optics fabrication, optics coating and assembly operations, as well as the
wafer growth for our semiconductor laser product family.
Raw materials or sub-components required in the manufacturing process are generally available from several sources.
However, we currently purchase several key components and materials, including exotic materials and crystals, used in the
manufacture of our products from sole source or limited source suppliers. We rely on our own production and design capability to
manufacture and specify certain strategic components, crystals, optics and optical systems, semiconductor lasers, lasers and
laser-based systems.
For a discussion of the importance to our business of, and the risks attendant to raw materials sourcing, see “Risk Factors—
We depend on sole source or limited source suppliers, both internal and external, for some of our key components and materials,
including exotic materials and crystals, in our products, which make us susceptible to supply shortages or price fluctuations that could
adversely affect our business” in Item 1A, which is incorporated herein by reference.
Operations
Our products are manufactured at sites in Santa Clara, San Jose and Auburn, California; Portland, Oregon; East Hanover,
New Jersey; Bloomfield, Connecticut; St. Louis, Missouri; Lübeck, Germany; Göttingen, Germany; Glasgow, Scotland; Munich,
Germany; and Tampere, Finland. Our ion lasers, a portion our DPSS lasers, semiconductor lasers, and ultrafast scientific lasers are
manufactured in Santa Clara and San Jose, California and Glasgow, Scotland. Our CO2 lasers are manufactured in Bloomfield,
Connecticut. Our laser instrumentation products and test and measurement equipment are manufactured in Portland, Oregon. We
manufacture exotic crystals in East Hanover, New Jersey. We make DPSS lasers at our Santa Clara and Lübeck facilities. Our facility
in Tampere, Finland grows the aluminum-free materials that are incorporated into our semiconductor lasers. We make a range of
advanced solid-state lasers used in developing applications including scientific research and semiconductor test equipment in
Glasgow, Scotland. Our excimer laser products are manufactured in Göttingen and Munich, Germany. In April 2008, we announced
the plan to close the Auburn facility by the end of the second quarter of fiscal 2009 and are on track to meet this schedule. In October
2008, we announced a plan to transfer the excimer medical product family from the Munich location to Gottingen and close the
Munich facility by the end of the third quarter of fiscal 2009.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. As of September 27, 2008, we held approximately 462 U.S. and foreign patents, which expire from 2009
through 2026 (depending on the payment of maintenance fees) and we have approximately 103 additional pending patent applications
that have been filed. The issued patents cover various products in all of the major markets that we serve.
12
For a discussion of the importance to our business of, and the risks attendant to intellectual property rights, see “Risk
Factors—Risks Associated with Our Industry, Our Business and Market Conditions” ‘We may not be able to protect our proprietary
technology, which could adversely affect our competitive advantage’ and ‘We may, in the future, initiate claims or litigation against
third parties or be subject to claims or litigation from third parties for infringement of our proprietary rights to protect these rights or
determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly
litigation and the diversion of our technical and management personnel. Adverse resolution of litigation may harm our operating
results or financial condition’ in Item 1A, which is incorporated herein by reference.
COMPETITION
Competition in the various photonics markets in which we provide products is very intense. We compete against a number of
companies including Newport Corporation; GSI Group, Inc., which includes the former business of Excel Technology, Inc.; JDS
Uniphase Corporation; Rofin-Sinar Technologies, Inc., Trumpf GmbH, IPG Photonics Corporation, and Cymer, Inc., as well as other
smaller companies. We compete globally based on our broad product offering, reliability, cost, and performance advantages for the
widest range of commercial and scientific research applications. Other considerations by our customers include warranty, global
service and support and distribution.
BACKLOG
At fiscal 2008 year-end, our backlog of orders scheduled for shipment (generally within one year) was $183.5 million
compared to $188.4 million at fiscal 2007 and $199.1 million at fiscal 2006 year-ends. Orders used to compute backlog are generally
cancelable without substantial penalties. Historically, the rate of cancellation experienced by us has not been significant.
EMPLOYEES
As of fiscal 2008 year-end, we had 2,149 employees. Approximately 356 of our employees are involved in research and
development; 1,238 of our employees are involved in operations, manufacturing, service and quality assurance; and 555 of our
employees are involved in sales, marketing, finance, legal and other administrative functions. Our success will depend in large part
upon our ability to attract and retain employees. We face competition in this regard from other companies, research and academic
institutions, government entities and other organizations. We consider our relations with our employees to be good.
ACQUISITIONS
We consummated no acquisitions in fiscal 2008.
In April 2007, we acquired Nuvonyx, a technology leader in high-power laser diode components, arrays, and industrial laser
systems for materials processing and defense applications for approximately $14.0 million in cash, net of acquisition costs of
$0.3 million. Nuvonyx produces high power arrays with powers in excess of 50 Kilowatts through its proprietary cooling and stacking
technologies. The industrial laser systems are used for cladding and hardening of metals, joining materials, and other materials
processing applications. Other near-term applications include welding of plastics and direct metal welding.
On November 10, 2005, we acquired the assets of privately held Iolon, Inc. of San Jose, California for approximately
$4.9 million in cash. Iolon designs and manufactures optical components including widely tunable lasers and filters. We intend to
utilize the acquired technology in our core portfolio, especially for products in the instrumentation and display markets.
RESTRUCTURINGS AND CONSOLIDATION
On April 16, 2008, we announced that we entered into an agreement to sell certain assets of our Auburn Optics
manufacturing operation to Research Electro- Optics, Inc. (“REO”), a privately held optics manufacturing and technology company.
We also entered into a strategic supply agreement with REO. REO will provide optical manufacturing capabilities for us, including
fabrication and coating of optical components. The transition of the optics manufacturing assets from Auburn to REO is expected to
be completed no later than the end of the second quarter of fiscal 2009.
During fiscal 2008, we consolidated our German DPSS manufacturing into our Lübeck, Germany site. The transfer was
completed in the fourth quarter of fiscal 2008. On October 13, 2008, we announced the consolidation of the remainder of our Munich
facility into our Göttingen site. The transfer is scheduled for completion by the end of our third quarter of fiscal 2009.
Coupled with our planned exit from our Auburn, California facility, we expect the annual benefits from these two footprint
moves will be $8-10 million with the full run-rate savings beginning in July 2009.
13
There were no new restructuring activities initiated during fiscal 2007.
In the first quarter of fiscal 2006, we completed the merger of our wholly owned Lambda Physik Co., Ltd. subsidiary into our
Coherent Japan, Inc. subsidiary, with Coherent Japan, Inc. continuing as the surviving corporation. Coherent Japan, Inc. is a wholly
owned subsidiary of Coherent.
In the second quarter of fiscal 2006, we completed the merger of our wholly owned Bavarian Photonics GmbH subsidiary
into our wholly owned TuiLaser AG subsidiary and then merged the TuiLaser AG subsidiary into our wholly owned Coherent GmbH
subsidiary (formerly known as Lambda Physik).
GOVERNMENT REGULATION
Environmental regulation
Our operations are subject to various federal, state and local environmental protection regulations governing the use, storage,
handling and disposal of hazardous materials, chemicals, various radioactive materials and certain waste products. In the United
States, we are subject to the federal regulation and control of the Environmental Protection Agency. Comparable authorities are
involved in other countries. We believe that compliance with federal, state and local environmental protection regulations will not
have a material adverse effect on our capital expenditures, earnings and competitive and financial position.
Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the
standards required by federal and state laws and regulations, we cannot completely eliminate the risk of accidental contamination or
injury from these materials. In the event of such an accident involving such materials, we could be liable for damages and such
liability could exceed the amount of our liability insurance coverage and the resources of our business.
We may face potentially increasing complexity in our product designs and procurement operations as we adjust to
requirements relating to the materials composition of our products that apply to specified electronics products put on the market in the
European Union as of July 1, 2006 (Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive). We could
face significant costs and liabilities in connection with product take-back legislation. The European Union has finalized the Waste
Electrical and Electronic Equipment Directive, which make producers of electrical goods financially responsible for specified
collection, recycling, treatment and disposal of past and future covered products.
We further discuss the impact of environmental regulation under “Risk Factors—Compliance or the failure to comply with
current and future environmental regulations could cause us significant expense.”
SEGMENT INFORMATION
We are organized into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and
Systems (“SLS”). This segmentation reflects the go-to-market strategies for various products and markets. While both segments work
to deliver cost-effective photonics solutions, CLC focuses on higher volume products that are offered in set configurations. The
product architectures are designed for easy exchange at the point of use such that product service and repairs are based upon advanced
replacement and depot (i.e., factory) repair. CLC’s primary markets include OEM components and instrumentation and materials
processing. SLS develops and manufacturers configurable, advanced-performance products largely serving the microelectronics and
scientific research markets. The size and complexity of many of the SLS products require service to be performed at the customer site
by factory-trained field service engineers. We have identified CLC and SLS as operating segments for which discrete financial
information was available. Both units have engineering, marketing, product business management and product line management.
Financial information relating to segment operations for fiscal years 2008, 2007 and 2006, is set forth in Note 16, “Segment
and Geographic Information” of our Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information relating to foreign and domestic operations for fiscal years 2008, 2007 and 2006, is set forth in
Note 16, “Segment and Geographic Information” of our Notes to Consolidated Financial Statements.
14
ITEM 1A. RISK FACTORS
BUSINESS ENVIRONMENT AND INDUSTRY TRENDS
Risks Associated with Our Industry, Our Business and Market Conditions
Our oper ating r esults, including net sales and adjusted EBITDA per centage, and our stock pr ice have var ied in the
past, and our futur e oper ating r esults will continue to be subject to quar ter ly and annual fluctuations based upon numer ous
factor s, including those listed in this section and thr oughout this annual r epor t. Our stock pr ice will continue to be subject to
daily var iations as well. In addition, our futur e oper ating r esults and stock pr ice may not follow any past tr ends or meet our
guidance and expectations.
Our net sales and operating results, such as adjusted EBITDA percentage and costs, and our stock price may vary
significantly from quarter to quarter and from year to year in the future. In particular we typically experience seasonality in our first
fiscal quarter, resulting in lower net sales. We believe a number of factors, many of which are outside of our control, could cause these
variations and make them difficult to predict, including:
• general economic uncertainties in the macroeconomic and local economies facing us, our customers and the markets we
serve;
• access to applicable credit markets by our customers and their end customers;
• fluctuations in demand for, and sales of, our products or prolonged downturns in the industries that we serve;
• the ability of our suppliers, both internal and external, to produce and deliver components and parts, including sole or
limited source components, in a timely manner, in the quantity and quality desired and at the prices we have budgeted;
• timing or cancellation of customer orders and shipment scheduling;
•
fluctuations in our product mix;
• foreign currency fluctuations;
• commodity pricing, including increases in oil prices;
• introductions of new products and product enhancements by our competitors, entry of new competitors into our markets,
pricing pressures and other competitive factors;
•
our ability to develop, introduce, manufacture and ship new and enhanced products in a timely manner without defects;
• delay of achievement of our footprint consolidation effort;
• the rate of market acceptance of our new products;
• the ability of our customers to pay for our products;
• delays or reductions in customer purchases of our products in anticipation of the introduction of new and enhanced
products by us or our competitors;
•
maintenance of supply relating to products sold to the government on terms which we would prefer not to accept;
•
our ability to control expenses;
• the level of capital spending of our customers;
• potential excess and/or obsolescence of our inventory;
• costs and timing of adhering to current and developing governmental regulations and reviews relating to our products
and business;
• stockholder litigation related to our internal investigation of our practices related to historical stock option grants and the
related restatement of our consolidated financial statements;
• reevaluation of recovery of goodwill and intangible assets in the event that our stock price declines;
15
•
costs related to acquisitions of technology or businesses; and
•
distraction of management related to acquisition or divestment activities.
In addition, we often recognize a substantial portion of our sales in the last month of the quarter. Our expenses for any given
quarter are typically based on expected sales and if sales are below expectations in any given quarter, the adverse impact of the
shortfall on our operating results may be magnified by our inability to adjust spending quickly enough to compensate for the shortfall.
We also base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our
forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products.
Accordingly, variations in timing of sales, particularly for our higher priced, higher margin products, can cause significant fluctuations
in quarterly operating results.
Due to these and other factors, we believe that quarter-to-quarter and year-to-year comparisons of our historical operating
results may not be meaningful. You should not rely on our results for any quarter or year as an indication of our future performance.
Our operating results in future quarters and years may be below public market analysts’ or investors’ expectations, which would likely
cause the price of our stock to fall. In addition, over the past several years, the stock market has experienced extreme price and volume
fluctuations that have affected the stock prices of many technology companies. There has not always been a direct correlation between
this volatility and the performance of particular companies subject to these stock price fluctuations. Further, over the last few months,
equity markets around the world have significantly fluctuated across most sectors. These factors, as well as general economic and
political conditions or investors’ concerns regarding the credibility of corporate financial statements, may have a material adverse
affect on the market price of our stock in the future.
We ar e exposed to r isks associated with wor ldwide economic conditions and r elated uncer tainties.
Increased concerns about credit markets, consumer confidence, economic conditions, volatile corporate profits and reduced
capital spending could negatively impact demand for our products. In particular, it is difficult to develop and implement strategy,
sustainable business models and efficient operations, as well as effectively manage supply chain relationships in the face of such
conditions. Our business could also be impacted by international conflicts, terrorist and military activity, civil unrest and pandemic
illness which could cause a slowdown in customer orders or cause customer order cancellations. In addition, political and social
turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and
abroad. Unstable economic, political and social conditions make it difficult for our customers, our suppliers and us to accurately
forecast and plan future business activities. If such conditions persist, our business, financial condition and results of operations could
suffer.
Our cash and cash equivalents and shor t-ter m investments ar e managed thr ough var ious banks ar ound the wor ld and the
cur r ent capital and cr edit mar ket conditions ar e extr emely volatile, putting pr essur e on the ability of banks to pr ovide ser vice
levels and in some cases to fail, both of which would likely have an adver se affect on our ability to timely access funds.
The capital and credit markets have been experiencing extreme volatility and disruption. In recent months, the volatility and
disruption have reached unprecedented levels. In some cases, the markets have exerted downward pressure on stock prices and credit
capacity for certain issuers, as well as pressured the solvency of some financial institutions. These financial institutions, including
banks, have had difficulty timely performing regular services and in some cases have failed or otherwise been largely taken over by
governments. We maintain our cash, cash equivalents and short-term investments with a number of financial institutions around the
world. Should some or all of these financial institutions fail or otherwise be unable to timely perform requested services, we would
likely have a limited ability to quickly access our cash deposited with such institutions. If we are unable to quickly access such funds,
we may need to increase our use of our existing credit lines or access more expensive credit, if available. If we are unable to access
our cash or if we access existing or additional credit or are unable to access additional credit, it could have a negative impact on our
operations, including our reported net income.
If our goodwill or intangible assets become impair ed, we may be r equir ed to r ecor d a significant char ge to ear nings.
Under accounting principles generally accepted in the United States, we review our intangible assets for impairment when
events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for
impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our
goodwill or other intangible assets may not be recoverable include declines in our stock price and market capitalization or future cash
flows projections. We may be required to record a significant charge to earnings in our financial statements during the period in which
any impairment of our goodwill or other intangible assets is determined.
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We depend on sole sour ce or limited sour ce supplier s, both inter nal and exter nal, for some of our key components and
mater ials, including exotic mater ials and cr ystals, in our pr oducts, which make us susceptible to supply shor tages or pr ice
fluctuations that could adver sely affect our business.
We currently purchase several key components and materials used in the manufacture of our products from sole source or
limited source suppliers, both internal and external. Some of these suppliers are relatively small private companies that may
discontinue their operations at any time. We typically purchase our components and materials through purchase orders or agreed upon
terms and conditions and we do not have guaranteed supply arrangement with many of these suppliers. We may fail to obtain these
supplies in a timely manner in the future. We may experience difficulty identifying alternative sources of supply for certain
components used in our products. We would experience further delays while identifying, evaluating and testing the products of these
potential alternative suppliers. Furthermore, financial or other difficulties faced by these suppliers or significant changes in demand
for these components or materials could limit their availability. Additionally, we are in the process of managing multiple projects
moving certain suppliers internally to different locations. Any interruption or delay in the supply of any of these components or
materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable
amount of time, or our failure to properly manage these moves, would impair our ability to meet scheduled product deliveries to our
customers and could cause customers to cancel orders.
We have historically relied exclusively on our own production capability to manufacture certain strategic components, optics
and optical systems (which has recently been outsourced to a third party and is in the process of transitioning), crystals, semiconductor
lasers, lasers and laser-based systems. Because we manufacture, package and test these components, products and systems at our own
facilities, and such components, products and systems are not readily available from other sources, any interruption in manufacturing
would adversely affect our business. In addition, our failure to achieve adequate manufacturing yields of these items at our
manufacturing facilities may materially and adversely affect our operating results and financial condition.
Our futur e success depends on our ability to incr ease our sales volumes and decr ease our costs to offset anticipated declines in
the aver age selling pr ices (“ASPs”) of our pr oducts and, if we ar e unable to r ealize gr eater sales volumes and lower costs, our
oper ating r esults may suffer .
Our future success depends on the continued growth of the markets for lasers, laser systems, precision optics and related
accessories, as well as our ability to identify, in advance, emerging markets for laser-based systems. We cannot assure you that we
will be able to successfully identify, on a timely basis, new high-growth markets in the future. Moreover, we cannot assure you that
new markets will develop for our products or our customers’ products, or that our technology or pricing will enable such markets to
develop. Future demand for our products is uncertain and will depend to a great degree on continued technological development and
the introduction of new or enhanced products. If this does not continue, sales of our products may decline and our business will be
harmed.
We have historically been the industry’s high quality supplier of laser systems. We have, in the past, experienced decreases in
the ASPs of some of our products. We anticipate that as competing products become more widely available, the ASPs of our products
may decrease. If we are unable to offset the anticipated decrease in our ASPs by increasing our sales volumes, our net sales will
decline. In addition, to maintain our gross margins, we must continue to reduce the cost of manufacturing our products while
maintaining their high quality. From time to time, our products, like many complex technological products, may fail in greater
frequency than anticipated. This can lead to further charges, which can result in higher costs, lower gross margins and lower operating
results. Furthermore, as average ASPs of our current products decline, we must develop and introduce new products and product
enhancements with higher margins. If we cannot maintain our gross margins, our operating results could be seriously harmed,
particularly if the ASPs of our products decrease significantly.
Our futur e success depends on our ability to develop and successfully intr oduce new and enhanced pr oducts that meet the
needs of our customer s.
Our current products address a broad range of commercial and scientific research applications in the photonics markets. We
cannot assure you that the market for these applications will continue to generate significant or consistent demand for our products.
Demand for our products could be significantly diminished by disrupting technologies or products that replace them or render them
obsolete. Furthermore, the new and enhanced products generally continue to be smaller in size and have lower ASPs, and therefore,
we have to sell more units to maintain revenue levels.
During fiscal years 2008, 2007 and 2006, our research and development expenses have been in the range of 12% to 13% of
net sales. Our future success depends on our ability to anticipate our customers’ needs and develop products that address those needs.
Introduction of new products and product enhancements will require that we effectively transfer production processes from research
and development to manufacturing and coordinate our efforts with those of our suppliers to achieve volume production rapidly. If we
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fail to transfer production processes effectively, develop product enhancements or introduce new products in sufficient quantities to
meet the needs of our customers as scheduled, our net sales may be reduced and our business may be harmed.
We face r isks associated with our for eign sales that could har m our financial condition and r esults of oper ations.
For fiscal years 2008, 2007, and 2006, 68% of our net sales were derived from customers outside of the United States. We
anticipate that foreign sales will continue to account for a significant portion of our revenues in the foreseeable future. A global
economic slowdown could have a negative effect on various foreign markets in which we operate. Such a slowdown may cause us to
reduce our presence in certain countries, which may negatively affect the overall level of business in such countries. The majority of
our foreign sales occur through our foreign sales subsidiaries and the remainder of our foreign sales result from exports to foreign
distributors, resellers and customers. Our foreign operations and sales are subject to a number of risks, including:
•
longer accounts receivable collection periods;
•
the impact of recessions and other economic conditions in economies outside the United States;
•
unexpected changes in regulatory requirements;
•
certification requirements;
•
environmental regulations;
•
reduced protection for intellectual property rights in some countries;
•
potentially adverse tax consequences;
•
political and economic instability; and
•
preference for locally produced products.
We are also subject to the risks of fluctuating foreign exchange rates, which could materially adversely affect the sales price
of our products in foreign markets, as well as the costs and expenses of our foreign subsidiaries. While we use forward exchange
contracts and other risk management techniques to hedge our foreign currency exposure, we remain exposed to the economic risks of
foreign currency fluctuations.
We may not be able to pr otect our pr opr ietar y technology which could adver sely affect our competitive advantage.
Maintenance of intellectual property rights and the protection thereof is important to our business. We rely on a combination
of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We
cannot assure you that our patent applications will be approved, that any patents that may be issued will protect our intellectual
property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or
competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
We may, in the futur e, initiate claims or litigation against thir d par ties or be subject to claims or litigation fr om thir d par ties
for infr ingement of our pr opr ietar y r ights to pr otect these r ights or to deter mine the scope and validity of our pr opr ietar y
r ights or the pr opr ietar y r ights of competitor s. These claims could r esult in costly litigation and the diver sion of our technical
and management per sonnel. Adver se r esolution of litigation may har m our oper ating r esults or financial condition.
In recent years, there has been significant litigation in the United States involving patents and other intellectual property
rights. From time to time, like many other technology companies, we have received communications from other parties asserting the
existence of patent rights, copyrights, trademark rights or other intellectual property rights which such third parties believe may cover
certain of our products, processes, technologies or information. In the future, we may be a party to litigation to protect our intellectual
property or as a result of an alleged infringement of others’ intellectual property. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential
intellectual property litigation could also force us to do one or more of the following:
•
stop manufacturing, selling or using our products that use the infringed intellectual property;
18
•
obtain from the owner of the infringed intellectual propertyright a license to sell or use the relevant technology, although
such license may not be available on reasonable terms, or at all; or
•
redesign the products that use the technology.
If we are forced to take any of these actions, our business may be seriously harmed. We do not have insurance to cover
potential claims of this type.
We ar e exposed to lawsuits in the nor mal cour se of business which could have a mater ial adver se effect on our business,
oper ating r esults, or financial condition.
We are exposed to lawsuits in the normal course of our business, including product liability claims, if personal injury, death
or commercial losses occur from the use of our products. While we typically maintain customary levels of business insurance,
including directors’ and officers’ policies, litigation can be expensive, lengthy, and disruptive to normal business operations, including
the potential impact of indemnification obligations for individuals named in any such lawsuits. We may not, however, be able to
secure insurance coverage on terms acceptable to us in the future. Moreover, the results of complex legal proceedings are difficult to
predict. An unfavorable resolution of a particular lawsuit, including a recall or redesign of products if ultimately determined to be
defective, could have a material adverse effect on our business, operating results, or financial condition.
We depend on skilled per sonnel to oper ate our business effectively in a r apidly changing mar ket, and if we ar e unable to r etain
existing or hir e additional per sonnel when needed, our ability to develop and sell our pr oducts could be har med.
Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be
successful in the future. Recruiting and retaining highly skilled personnel in certain functions continues to be difficult. At certain
locations where we operate, the cost of living is extremely high and it may be difficult to retain key employees and management at a
reasonable cost. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future
needs. Our failure to attract additional employees and retain our existing employees could adversely affect our growth and our
business.
Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing,
manufacturing and support personnel, any of whom may leave, which could harm our business and our results of operations.
The long sales cycles for our pr oducts may cause us to incur significant expenses without offsetting r evenues.
Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically
expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a
lengthy initial sales cycle. While our customers are evaluating our products and before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to customize our products to the customer’s needs. We may
also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior
to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long
sales cycles may cause us to incur significant expenses without ever receiving revenue to offset such expenses.
The mar kets in which we sell our pr oducts ar e intensely competitive and incr eased competition could cause r educed sales
levels, r educed gr oss mar gins or the loss of mar ket shar e.
Competition in the various photonics markets in which we provide products is very intense. We compete against a number of
large public and private companies, including Newport Corporation; GSI Group, Inc., which includes the former business of Excel
Technology, Inc.; JDS Uniphase Corporation; Rofin-Sinar Technologies, Inc.; Trumpf GmbH; IPG Photonics Corporation; and
Cymer, Inc., as well as other smaller companies. Some of our competitors are large companies that have significant financial,
technical, marketing and other resources. These competitors may be able to devote greater resources than we can to the development,
promotion, sale and support of their products. Some of our competitors are much better positioned than we are to acquire other
companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our
competitors a strategic advantage. Any business combinations or mergers among our competitors, forming larger competitors with
greater resources, could result in increased competition, price reductions, reduced margins or loss of market share, any of which could
materially and adversely affect our business, results of operations and financial condition.
Additional competitors may enter the market and we are likely to compete with new companies in the future. We may
encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these
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competitors or customers which determine to develop and produce products for their own use which are competitive to our products.
As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins and loss of
market share. For example, in markets where there are a limited number of customers, such as the microelectronics market,
competition is particularly intense.
Some of our laser systems ar e complex in design and may contain defects that ar e not detected until deployed by our
customer s, which could incr ease our costs and r educe our r evenues.
Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers,
laser products and systems involves a highly complex and precise process. As a result of the technological complexity of our products,
changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could
result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that
we do not achieve and maintain our projected yields or product reliability, our business, operating results, financial condition and
customer relationships would be adversely affected. We provide warranties on certain of our product sales, and allowances for
estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of
failure rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on
historical warranty costs for each product line. If actual return rates and/or repair and replacement costs differ significantly from our
estimates, adjustments to cost of sales may be required in future periods.
Our customers may discover defects in our products after the products have been fully deployed and operated under peak
stress conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. As a
result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix defects or
other problems, we could experience, among other things:
•
loss of customers;
•
increased costs of product returns and warranty expenses;
•
damage to our brand reputation;
•
failure to attract new customers or achieve market acceptance;
•
diversion of development and engineering resources; and
•
legal actions by our customers and/or their end users.
The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results
of operations.
If we fail to accur ately for ecast component and mater ial r equir ements for our pr oducts, we could incur additional costs and
incur significant delays in shipments, which could r esult in loss of customer s.
We use rolling forecasts based on anticipated product orders and material requirements planning systems to determine our
product requirements. It is very important that we accurately predict both the demand for our products and the lead times required to
obtain the necessary components and materials. We depend on our suppliers for most of our product components and materials. Lead
times for components and materials that we order vary significantly and depend on factors including the specific supplier
requirements, the size of the order, contract terms and current market demand for components. For substantial increases in our sales
levels, some of our suppliers may need at least six months lead-time. If we overestimate our component and material requirements, we
may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may
have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would
negatively impact our net sales, business or operating results.
Our incr eased r eliance on contr act manufactur ing and other outsour cing may adver sely impact our financial r esults and
oper ations due to our decr eased contr ol over the per for mance and timing of cer tain aspects of our manufactur ing.
Our manufacturing strategy includes partnering with contract manufacturers to outsource non-core subassemblies and less
complex turnkey products, including some performed at international sites located in Asia and Eastern Europe. Additionally, we are in
the process of outsourcing the manufacture of certain of our optics components to a third party. Our ability to resume internal
manufacturing operations for certain products and components in a timely manner may be eliminated. The cost, quality, performance
and availability of contract manufacturing operations are and will be essential to the successful production and sale of many of our
products. Our financial condition or results of operation could be adversely impacted if any contract manufacturer is unable for any
reason, including as a result of the impact of current worldwide economic conditions, to meet our cost, quality, performance, and
20
availability standards. We may not be able to provide contract manufacturers with product volumes that are high enough to achieve
sufficient cost savings. If shipments fall below forecasted levels, we may incur increased costs or be required to take ownership of the
inventory. Also, our ability to control the quality of products produced by contract manufacturers may be limited and quality issues
may not be resolved in a timely manner, which could adversely impact our financial condition or results of operations.
If we fail to effectively manage our footpr int consolidation effor t, our business could be disr upted, which could har m our
oper ating r esults.
We have previously announced our intent to reduce our global operating footprint, including the closing of our Auburn,
California and Munich, Germany operations. If we are not able to effectively transition the business activities from one site to another
it could have an adverse impact on our results of operations.
If we fail to manage our gr owth or , alter natively, our spending dur ing downtur ns, effectively, our business could be disr upted,
which could har m our oper ating r esults.
Our ability to successfully offer our products and implement our business plan in evolving markets requires an effective
planning and management process. In economic downturns, we must effectively manage our spending and operations to ensure our
position during the downturn as well as for future opportunity when the economy improves. The failure to effectively manage our
spending and operations could disrupt our business and harm our operating results. The growth in sales, combined with the challenges
of managing geographically-dispersed operations, has placed a significant strain on our management systems and resources, and our
anticipated growth in future operations could continue to place such a strain. The failure to effectively manage our growth could
disrupt our business and harm our operating results.
Histor ically, acquisitions have been an impor tant element of our str ategy. However , we may not find suitable acquisition
candidates in the futur e and we may not be able to successfully integr ate and manage acquir ed businesses. Any acquisitions we
make could disr upt our business and har m our financial condition.
We have in the past made strategic acquisitions of other corporations and entities, including asset purchases, and we continue
to evaluate potential strategic acquisitions of complementary companies, products and technologies. In the event of any future
acquisitions, we could:
• issue stock that would dilute our current stockholders’ percentage ownership;
•
pay cash;
•
incur debt;
• assume liabilities; or
•
incur expenses related to in-process research and development, impairment of goodwill and amortization.
Acquisitions also involve numerous risks, including:
• problems combining the acquired operations, technologies or products;
• an inability to realize expected operating efficiencies or product integration benefits;
• difficulties in coordinating geographically separated organizations, systems and facilities;
• writing off goodwill or other intangible assets;
• unanticipated costs or liabilities, including the costs associated with improving the internal controls of the acquired
company;
• diversion of management’s attention from our core businesses;
• adverse effects on existing business relationships with suppliers and customers;
21
• potential loss of key employees, particularly those of the purchased organizations;
• incurring unforeseen obligations or liabilities in connection with acquisitions; and
• the failure to complete acquisitions even after signing definitive agreements which, among other things, would result in
the expensing of potentially significant professional fees and other charges in the period in which the acquisition or
negotiations are terminated.
We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future or achieve the anticipated benefits of such transactions, which may harm our business.
We use standar d labor ator y and manufactur ing mater ials that could be consider ed hazar dous and we could be liable for any
damage or liability r esulting fr om accidental envir onmental contamination or injur y.
Although most of our products do not incorporate hazardous or toxic materials and chemicals, some of the gases used in our
excimer lasers and some of the liquid dyes used in some of our scientific laser products are highly toxic. In addition, our operations
involve the use of standard laboratory and manufacturing materials that could be considered hazardous. Also, if a facility fire were to
occur at our Tampere, Finland site and were to spread to a reactor used to grow semiconductor wafers, it could release highly toxic
emissions. We believe that our safety procedures for handling and disposing of such materials comply with all federal, state and
offshore regulations and standards. However, the risk of accidental environmental contamination or injury from such materials cannot
be entirely eliminated. In the event of such an accident involving such materials, we could be liable for damages and such liability
could exceed the amount of our liability insurance coverage and the resources of our business.
Compliance or the failur e to comply with cur r ent and futur e envir onmental r egulations could cause us significant expense.
We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge
and disposal of hazardous chemicals used during our manufacturing process or requiring design changes or recycling of products we
manufacture. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of
production or a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our ability to expand
our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental
regulations, including expenses associated with the recall of any non-compliant product and the management of historical waste.
From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and
enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include,
for example, the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (“RoHS”)
and the Waste Electrical and Electronic Equipment Directive (“WEEE”) enacted in the European Union which regulate the use of
certain hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. This
and similar legislation that has been or is in the process of being enacted in Japan, China, Korea and various states of the United States
may require us to re-design our products to ensure compliance with the applicable standards, for example by requiring the use of
different types of materials. These redesigns or alternative materials may detrimentally impact the performance of our products, add
greater testing lead-times for product introductions or have other similar effects. We believe we comply with all such legislation where
our products are sold and we will continue to monitor these laws and the regulations being adopted under them to determine our
responsibilities. In addition, we are monitoring legislation relating to the reduction of carbon emissions from industrial operations to
determine whether we may be required to incur any additional material costs or expenses associated with our operations. We are not
currently aware of any such material costs or expenses. Our failure to comply with any of the foregoing regulatory requirements or
contractual obligations could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and
could jeopardize our ability to conduct business in the United States and foreign countries.
If our facilities or those of our supplier s and contr act manufactur er s wer e to exper ience catastr ophic loss, our oper ations
would be ser iously har med.
Our facilities and those of our suppliers and contract manufacturers could be subject to a catastrophic loss from fire, flood,
earthquake, work stoppages, acts of war, energy shortages, other natural disasters or terrorist activity. A substantial portion of our
research and development activities, manufacturing, our corporate headquarters and other critical business operations are located near
major earthquake faults in Santa Clara, California, an area with a history of seismic events. Any such loss at any of our facilities could
disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. While we
have obtained insurance to cover most potential losses, after reviewing the costs and limitations associated with earthquake insurance,
we have decided not to procure such insurance. We believe that this decision is consistent with decisions reached by numerous other
companies located nearby. We cannot assure you that our existing insurance coverage will be adequate against all other possible
losses.
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Pr ovisions of our char ter documents, Delawar e law, our Common Shar es Rights Plan, and our Change-of-Contr ol Sever ance
Plan may have anti-takeover effects that could pr event or delay a change in contr ol.
Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition or make
removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for our
common stock at a premium over the market price. These provisions include:
• the ability of our board of directors to alter our bylaws without stockholder approval;
• limiting the ability of stockholders to call special meetings; and
• establishing advance notice requirements for nominations for election to our board of directors or for proposing matters
that can be acted on by stockholders at stockholder meetings.
We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware
corporation from engaging in a merger, asset or stock sale or other transaction with an interested stockholder for a period of three
years following the date such person became an interested stockholder, unless prior approval of our board of directors is obtained or as
otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with
us without obtaining the prior approval of our board of directors, which may cause the market price of our common stock to decline.
In addition, we have adopted a change of control severance plan, which provides for the payment of a cash severance benefit to each
eligible employee based on the employee’s position. If a change of control occurs, our successor or acquirer will be required to
assume and agree to perform all of our obligations under the change of control severance plan.
Our common shares rights agreement permits the holders of rights to purchase shares of our common stock to exercise the
stock purchase rights following an acquisition of or merger by us with another corporation or entity, following a sale of 50% or more
of our consolidated assets or earning power, or the acquisition by an individual or entity of 20% or more of our common stock. Our
successor or acquirer is required to assume all of our obligations and duties under the common shares rights agreement, including in
certain circumstances the issuance of shares of its capital stock upon exercise of the stock purchase rights. The existence of our
common shares rights agreement may have the effect of delaying, deferring or preventing a change of control and, as a consequence,
may discourage potential acquirers from making tender offers for our shares.
Changes in tax r ates, tax liabilities or tax accounting r ules could affect futur e r esults.
As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. Significant
judgment is required to determine worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of
earnings in countries with differing tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax
laws. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service (“IRS”) and other
tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no
assurance that any final determination will not be materially different than the treatment reflected in our historical income tax
provisions and accruals, which could materially and adversely affect our operating results and financial condition.
We could incur tax liabilities under Section 409A of the Inter nal Revenue Code and other tax penalties
As a result of our investigation into our historical stock option granting practices, we have determined that a number of our
outstanding stock option awards were granted at exercise prices below the fair market value of our stock on the appropriate accounting
measurement date. The primary adverse tax consequence is that the re-measured options vesting after December 31, 2004, or options
that are materially modified after October 3, 2004, are potentially subject to option holder excise tax under Section 409A of the
Internal Revenue Code (and, as applicable, similar excise taxes under state law or foreign law). Option holders who hold options
which are determined to have been granted with exercise prices below the fair market value of the underlying shares of common stock
on the appropriate measurement date would be subject to taxes, penalties and interest under Section 409A if no action is taken to cure
the options from exposure under Section 409A before December 31, 2008. We took action in fiscal year 2008 to cure certain options
from exposure under Section 409A. There can be no assurance that such action cured all potential circumstances in which
Section 409A would apply. Should it be found that excise taxes under Section 409A apply to option holders subsequent to our ability
to cure the options from exposure to Section 409A, and we decide to reimburse option holders for such taxes, our results of operations
may be materially adversely affected.
23
Also as a result of our investigation into our historical stock option granting practices, we have determined that certain
payroll taxes, interest and penalties apply under various sections of the Internal Revenue Code, various state tax statutes, and tax
statutes in various foreign jurisdictions. We have reviewed these potential liabilities and accrued the estimated probable amount of the
liability. There can be no assurance that Coherent’s accruals covered all potential circumstances in which additional payroll taxes,
interest and penalties would apply. Should it be found that additional payroll taxes, interest and penalties would apply, our results of
operations may be materially adversely affected.
Compliance with changing r egulation of cor por ate gover nance and public disclosur e may cr eate uncer tainty r egar ding
compliance matter s.
Federal securities laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations such as
Nasdaq and the NYSE, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and
disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose
civil and criminal penalties for companies and their chief executive officers, chief financial officers and directors for securities law
violations. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our
corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s
attention from business operations. Changing laws, regulations and standards relating to corporate governance and public disclosure
may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying
interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high
standards of ethics, corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal
requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management
time and attention from revenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations
and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our
reputation may also be harmed.
Gover nmental r egulations affecting the impor t or expor t of pr oducts could negatively affect our r evenues.
The United States and various foreign governments have imposed controls, export license requirements and restrictions on
the import or export of some technologies, especially encryption technology. In addition, from time to time, governmental agencies
have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private
encryption keys. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain
required import or export approval for our products, could harm our international and domestic sales and adversely affect our
revenues.
We may exper ience difficulties with our enter pr ise r esour ce planning (“ERP”) system and other IT systems. System failur e or
malfunctioning may r esult in disr uption of oper ations and the inability to pr ocess tr ansactions, and this could adver sely affect
our ability to timely or accur ately pr ovide our financial r esults.
System failure or malfunctioning could disrupt our ability to timely and accurately process and report key components of our
results of operations, financial position and cash flows. Any disruptions or difficulties that may occur in connection with our ERP
system or other systems could also adversely affect our ability to complete important business processes such as the evaluation of our
internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. If we encounter unforeseen
problems with regard to our ERP system or other systems, our business and resulting financial reporting could be adversely affected.
Our mar ket is unpr edictable and char acter ized by r apid technological changes and evolving standar ds, and, if we fail to
addr ess changing mar ket conditions, our business and oper ating r esults will be har med.
The photonics industry is characterized by extensive research and development, rapid technological change, frequent new
product introductions, changes in customer requirements and evolving industry standards. Because this market is subject to rapid
change, it is difficult to predict its potential size or future growth rate. Our success in generating revenues in this market will depend
on, among other things:
•
maintaining and enhancing our relationships with our customers;
•
the education of potential end-user customers about the benefits of lasers, laser systems and precision optics; and
•
our ability to accurately predict and develop our products to meet industry standards.
24
For our fiscal years 2008, 2007 and 2006, our research and development costs were $74.3 million (12.4% of net sales),
$74.6 million (12.4% of net sales) and $73.1 million (12.5% of net sales), respectively. We cannot assure you that our expenditures for
research and development will result in the introduction of new products or, if such products are introduced, that those products will
achieve sufficient market acceptance. Our failure to address rapid technological changes in our markets could adversely affect our
business and results of operations.
Continued volatility in the semiconductor manufactur ing industr y could adver sely affect our business, financial condition and
r esults of oper ations.
Our net sales depend in part on the demand for our products by semiconductor equipment companies. The semiconductor
market has historically been characterized by sudden and severe cyclical variations in product supply and demand, which have often
severely affected the demand for semiconductor manufacturing equipment, including laser-based tools and systems. The timing,
severity and duration of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. The
continuing uncertainty in this market severely limits our ability to predict our business prospects or financial results in this market.
During industry downturns, our revenues from this market may decline suddenly and significantly. Our ability to rapidly and
effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near
term and by our need to continue our investment in next-generation product technology and to support and service our products. In
addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to this market, we may
incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the
semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur,
we must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand that may be
extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be
harmed.
We have been named as a nominal par ty to a consolidated shar eholder der ivative lawsuit r elating to our histor ical stock
option pr actices, and we may be named in additional lawsuits in the futur e. In addition, a number of our cur r ent and for mer
dir ector s and officer s wer e also named in this lawsuit. This litigation could become time consuming and expensive and could
r esult in the payment of significant judgments and settlements, which could have a mater ial adver se effect on our financial
condition and r esults of oper ations.
In connection with our historical stock option practices and resulting restatement, three derivative actions were filed against
certain of our current and former directors and officers purporting to assert claims on the Company’s behalf, which were consolidated
into a single action. Please see Part II, Item 1 “Legal Proceedings.” There may be additional lawsuits of this nature filed in the future.
We cannot predict the outcome of these lawsuits, nor can we predict the amount of time and expense that will be required to resolve
these lawsuits. If these lawsuits become time consuming and expensive, or if there are unfavorable outcomes in any of these cases,
there could be a material adverse effect on our business, financial condition and results of operations.
Our insurance coverage will not cover our total liabilities and expenses in these lawsuits, in part because we have a
significant retention on certain aspects of the coverage. In addition, subject to certain limitations, we are obligated to indemnify our
current and former directors, officers and employees in connection with the investigation of our historical stock option practices and
the related litigation. We currently hold insurance policies for the benefit of our directors and officers, although our insurance
coverage may not be sufficient in some or all of these matters. Furthermore, the insurers may seek to deny or limit coverage in some
or all of these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations.
Failur e to maintain effective inter nal contr ols may cause us to delay filing our per iodic r epor ts with the SEC and adver sely
affect our stock pr ice.
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include
a report of management on internal control over financial reporting in their annual reports on Form 10-K that contain an assessment by
management of the effectiveness of the Company’s internal control over financial reporting. In addition, our independent registered
public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Although we
review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, our failure to
maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace due to a
loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
25
ITEM 2. PROPERTIES
Our corporate headquarters is located in Santa Clara, California. At fiscal 2008 year end, our primary locations were as
follows (all square footage is approximate) (unless otherwise indicated, each property is utilized jointly by our two segments):
Descr iption
Santa Clara, CA .......................
Santa Clara, CA(3) ..................
San Jose, CA(1)(3) ..................
Auburn, CA(1)(3) ....................
Bloomfield, CT(1) ...................
East Hanover, NJ(1) ................
Bridgeton, MO(1) ....................
Portland, OR(1) .......................
Portland, OR(1) .......................
Tampere, Finland(1)(3) ...........
Dieburg, Germany ...................
Göttingen, Germany(2)............
Lübeck, Germany(1)................
Lübeck, Germany(1)................
Munich, Germany(2)(3)...........
Tokyo, Japan ...........................
Yokohama, Japan ....................
Glasgow, Scotland(2) ..............
Use
Ter m
8.5 acres of land, 200,000 square foot
building
90,120 square foot building
55,968 square foot building
80,000 square foot building
64,945 square-foot building
30,000 square foot building
20,176 square foot building
33,040 square foot building
41,250 square foot building
Corporate headquarters,
manufacturing, R&D
Office, manufacturing
Office, manufacturing
Office, manufacturing
Office, manufacturing
Office, manufacturing
Office, manufacturing
Office, manufacturing
Office, manufacturing
5 acres of land, 40,970 square foot
building
31,306 square foot building
7.6 acres of land, several buildings
totaling 119,500 square feet
38,815 square foot building
31,115 square foot building
Office, manufacturing
Leased through April 2015
Leased through February 2009
Month to month lease
Lease expiring in April 2013
Leased through October 2011
Leased through September 2009
Leased through January 2009
Leased through December 2018, will
occupy in January 2009
Owned
Office
Office, manufacturing
Leased through December 2012
Owned
Office, manufacturing
Office, manufacturing
Leased through December 2010
Leased through December 2011 with
option to purchase building
Leased through December 2010
Leased through April 2009
Leased through October 2010
Owned
58,449 square-foot building
17,602 square foot building
5,813 square-foot building
2 acres of land, 30,000 square foot
building
Office, manufacturing
Office
Office
Office, manufacturing
(1)
This facility is utilized primarily by our CLC operating segment.
(2)
This facility is utilized primarily by our SLS operating segment.
(3)
Portions of this property are not fully utilized.
Owned
We maintain other sales and service offices under varying leases expiring from 2009 through 2019 in the United States,
Japan, Korea, China, Germany, France, Italy, the United Kingdom and the Netherlands.
We consider our facilities to be both suitable and adequate to provide for current and near term requirements.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment
or intellectual property claims, including, but not limited to, the matters described below. The outcome of any such matters is currently
not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our
consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect our results in
the period in which they occur.
Der ivative Lawsuits
Between February 15, 2007 and March 2, 2007, three purported shareholder derivative lawsuits were filed in the United
States District Court for the Northern District of California against certain of our current and former officers and directors. We are
named as a nominal defendant. The complaints generally allege that the defendants breached their fiduciary duties and violated the
securities laws in connection with the granting of stock options, the accounting treatment for such grants, the issuance of allegedly
misleading public statements and stock sales by certain of the individual defendants. On May 29, 2007, these lawsuits were
26
consolidated under the caption In re Coherent, Inc. Shareholder Derivative Litigation, Lead Case No. C-07-0955-JF (N.D. Cal.). On
June 25, 2007, plaintiffs filed an amended consolidated complaint. The consolidated complaint asserts causes of action for alleged
violations of federal securities laws, violations of California securities laws, breaches of fiduciary duty and/or aiding and abetting
breaches of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, insider
selling and misappropriation of information. The consolidated complaint seeks, among other relief, disgorgement and damages in an
unspecified amount, an accounting, rescission of allegedly improper stock option grants, punitive damages and attorneys’ fees and
costs. To date, we have been paying the defense costs of the individual defendants.
In addition, our Board of Directors has appointed a Special Litigation Committee (“SLC”) comprised of independent director
Sandeep Vij to investigate and evaluate the claims asserted in the derivative litigation and to determine what action(s) should be taken
with respect to the derivative litigation. The SLC has retained legal counsel to assist it. The SLC’s investigation is ongoing.
SEC Inquir y
In 2006, the Company was advised that the San Francisco District Office of the Securities and Exchange Commission was
conducting an informal inquiry relating to the Company’s past granting of stock options. In July 2008 the Company was formally
notified by the Securities and Exchange Commission that its investigation had been terminated and that it will not recommend any
enforcement action.
Income Tax Audits
The IRS is conducting an audit of our 2003 and 2004 tax returns. The IRS has issued a number of Notices of Proposed
Adjustments (“NOPAs”) to these returns. Among other items, the IRS has challenged our research and development credits and our
extraterritorial income (“ETI”) exclusion. We have agreed to the various adjustments proposed by the IRS and we believe that we
have adequately provided for these exposures and any other items identified by the IRS as a result of the audit of these tax years. As
part of its audit of our 2003 and 2004 tax years, the IRS has requested information related to our stock option investigation and we
will comply with this request and address any issues that are raised in a timely manner. The IRS has also indicated that it may consider
an audit of our 2005 and 2006 tax returns.
The IRS is also auditing the research and development credits generated in the years 1999 through 2001 and carried forward
to future tax years. We received a NOPA from the IRS in October 2008 to decrease the amount of research and development credits
generated in years 2000 and 2001. We will respond to this NOPA and intend to dispute the adjustment with the IRS through the
appeals process available to us. While we believe that we have adequately provided for any adjustments related to these credits that
may be determined under the IRS appeals process, there exists the possibility of a material adverse impact on our results of operations
in the event that this issue is resolved unfavorably to us.
The German tax authorities are conducting an audit of our subsidiary in Göttingen and its affiliates for the tax years 1999
through 2005. We believe that we have adequately provided for any adjustments that may be proposed by the German tax authorities.
Other Matter s
As previously disclosed, the Company’s proposed acquisition of Excel Technology, Inc. (“Excel”) was the subject of a
prohibition decision issued by the German Federal Cartel Office (“FCO”) in October 2006. While the agreement under which the
Company was to acquire Excel was terminated, the Company is currently appealing the FCO’s prohibition order to the appellate court
in Germany. Subsequent to the appeal being filed, Excel was acquired by GSI Group, Inc. That acquisition has not terminated the
appeal which is still pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
27
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the NASDAQ Global Market under the symbol “COHR.” Our common stock was de-listed
on December 19, 2007 and traded on the over-the-counter market on the Pink Sheets under the symbol “COHR.PK.” until it was relisted on the Nasdaq Global Select Market on February 14, 2008. The following table sets forth the high and low sales prices for each
quarterly period during the past two fiscal years as reported on the Nasdaq Global Select Market, its predecessor, the Nasdaq National
Market or the over-the-counter market.
Fiscal
2008
First quarter .....................................................................................
Second quarter.................................................................................
Third quarter....................................................................................
Fourth quarter ..................................................................................
2007
High
Low
High
Low
$33.38
$29.05
$34.15
$38.50
$24.61
$22.10
$27.36
$29.08
$36.95
$32.01
$32.64
$32.89
$30.20
$28.84
$28.92
$27.15
The number of stockholders of record as of November 10, 2008 was 1,238. No cash dividends have been declared or paid
since Coherent was founded and we have no present intention to declare or pay cash dividends.
In February 2008, the Board of Directors authorized the Company to repurchase up to $225 million of its common stock
through a modified “Dutch Auction” tender offer and an additional $25 million of its common stock, following the completion or
termination of the tender offer, under its stock repurchase program, terminating no later than February 11, 2009. On March 17, 2008,
we completed our tender offer, repurchased and retired 7,972,313 shares of outstanding common stock for a total of $228.2 million.
The repurchases were accounted for as a reduction in additional paid in capital.
In September 2005, our Board of Directors authorized a share repurchase program of up to 1.5 million shares of our common
stock. The repurchase program was to remain in effect through September 30, 2007, unless earlier terminated or completed. The
program was suspended during the first quarter of fiscal 2007 due to our internal stock option investigation and was terminated
effective September 30, 2007.
28
COMPANY STOCK PRICE PERFORMANCE
The following graph shows a five-year comparison of cumulative total stockholder return, calculated on a dividend
reinvestment basis and based on a $100 investment, from September 27, 2003 through September 27, 2008 comparing the return on
our common stock with the Standard & Poors 500 Stock Index, the Standard and Poors Electronic Equipment and Instruments Index
and the Standard and Poors Small Cap 600 Stock Index. No dividends have been declared or paid on our common stock during such
period. The stock price performance shown on the following graph is not necessarily indicative of future price performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG COHERENT, INC.,
THE S&P 500 INDEX, THE S&P 500 ELECTRONICS EQUIPMENT& INSTRUMENTS INDEX AND THE S&P SMALL
CAP 600 INDEX
Company / Index
Coherent, Inc...................................................................
S&P 500 Index................................................................
S&P 500 Electronic Equipment & Instruments Index ....
S&P SmallCap 600 Index ...............................................
Base
Per iod
9/27/03
100
100
100
100
10/2/04
107.11
115.50
115.23
128.07
INDEXED RETURNS
Year s Ending
10/1/05
9/30/06
9/29/07
120.30
127.71
135.21
152.15
142.40
141.49
146.77
163.04
131.80
164.75
168.13
187.38
9/27/08
143.76
128.56
143.90
161.49
The information contained above under the caption “Company Stock Price Performance” shall not be deemed to be
“soliciting material” or to be “filed” with the SEC, nor will such information be incorporated by reference into any future SEC filing
except to the extent that we specifically incorporate it by reference into such filing.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction
with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated
Financial Statements and Notes to Consolidated Financial Statements.
We derived the selected consolidated financial data as of fiscal 2008 and 2007 year-end and for fiscal 2008, 2007 and 2006
from our audited consolidated financial statements, and accompanying notes, contained in this annual report. The consolidated
statements of operations data for fiscal 2005 and 2004 and the consolidated balance sheet data as of fiscal 2006, 2005 and 2004 year­
end are derived from our consolidated financial statements which are not included in this report.
29
Consolidated financial data
Net sales............................................................................
Gross profit .......................................................................
Net income........................................................................
Net income per share(6):
Basic .............................................................................
Diluted ..........................................................................
Shares used in computation(6):
Basic .............................................................................
Diluted ..........................................................................
Total assets........................................................................
Long-term obligations.......................................................
Other long-term liabilities.................................................
Minority interest in subsidiaries........................................
Stockholders’ equity .........................................................
Fiscal
2008(1)
Fiscal
Fiscal
Fiscal
2007(2)
2006(3)
2005(4)
(in thousands, except per shar e data)
Fiscal
2004(5)
$599,262
$251,906
$23,403
$601,153
$250,008
$15,951
$584,652
$256,113
$45,394
$516,252
$217,693
$38,414
$494,954
$207,769
$16,951
$0.85
$0.83
$0.51
$0.50
$1.47
$1.44
$1.25
$1.23
$0.56
$0.55
27,505
28,054
$806,383
$15
$94,606
$—
$598,435
31,398
32,024
$947,600
$21
$47,848
$—
$770,986
30,973
31,567
$1,082,524
$201,023
$37,419
$—
$717,504
30,756
31,224
$800,830
$—
$48,734
$—
$639,670
30,179
30,494
$760,668
$14,215
$46,542
$5,402
$588,704
(1) Includes $5.5 million in after-tax costs related to our stock option investigation and litigation, restructuring expenses of
$3.9 million after-tax related to the exit of our Auburn, California facility, the consolidation of our German DPSS
manufacturing into one location in Germany and headcount reductions due to the evolving global economic situation, and a
tax charge of $1.4 million in connection with a dividend from one of our European subsidiaries
(2)
Includes a $12.6 million loss on our sale of our Auburn campus in Auburn, California, $7.0 million in after-tax costs related
to our stock option investigation and litigation, a $2.6 million after-tax charge to write off unamortized capitalized deferred
issuance costs associated with our repayment of our convertible subordinated notes, a charge of $2.2 million for IPR&D
related to our purchase of Nuvonyx, $0.2 million after-tax costs related to the termination of the Excel merger agreement, a
$3.6 million capital gain on the sale of our Condensa building in Santa Clara, California, and a $0.7 million after-tax gain
from the sale of substantially all of the net assets of our Coherent Imaging Optics Limited (CIOL) subsidiary to CVI Laser.
(3) Includes a $11.7 million tax benefit primarily resulting from the consolidation of two wholly owned Japanese entities in
which the income of one of the Japanese subsidiaries and a portion of the income of its German parent that were previously
treated as permanently reinvested were deemed distributed to the U.S. and the income and the associated tax credits were
reported for U.S. tax purposes, a $3.5 million after-tax charge for acquisition related costs from the terminated merger
agreement with Excel, an additional $1.5 million after tax in purchase price and related legal and other fees associated with
the acquisition of the remaining interest of our Lambda Physik subsidiary, $0.6 million after-tax Excel pre-merger integration
related costs, a facility closure charge of $0.4 million after tax and an after tax IPR&D charge of $0.4 million associated with
the purchase of the assets of Iolon in the first quarter of fiscal 2006.
(4) Includes a $4.1 million after-tax charge related to excess inventories as a result of the accelerated decommissioning of
lithography lasers in Lambda Physik, a $2.7 million (net of minority interest of $0.1 million) after-tax charge associated with
our decision to discontinue future product development and investments in the semiconductor lithography market within our
Lambda Physik operations and a charge of $1.6 million for IPR&D related to our purchase of TuiLaser. Fiscal 2005 also
includes tax benefits of $1.4 million for increased use of export tax incentives and research and development (“R&D”) tax
credits, $9.6 million for the reversal of a deferred tax valuation allowance related to our Lambda Physik operations and
$0.5 million related to federal tax law changes enacted during fiscal 2005.
(5)
Fiscal 2004 included 53 weeks, whereas all other fiscal years presented included 52 weeks. Includes $3.9 million of net sales
from Picometrix, which was consolidated under Financial Accounting Standards Board Interpretation No. 46R; additionally,
Picometrix’s net income of $0.5 million was eliminated through minority interest. Fiscal 2004 also includes a $0.6 million
after-tax gain on the sale of certain technology and a $2.0 million after-tax recovery on the sale of a previously impaired note
receivable.
(6) See Note 2, “Significant Accounting Policies” in our Notes to Consolidated Financial Statements for an explanation of the
determination of the number of shares used in computing net income (loss) per share.
30
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with
our Consolidated Financial Statements and related notes included in Item 8, “Financial Statements and Supplementary Data” in this
annual report. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward looking statements as a result of certain factors, including but not limited to
those discussed in “Risk Factors” and elsewhere in this annual report. Please see the discussion of forward looking statements at the
beginning of this annual report under “Special Note Regarding Forward Looking Statements.”
KEY PERFORMANCE INDICATORS
The following is a summary of some of the quantitative performance indicators (as defined below) used to assess our results
of operations and financial condition:
2008
Bookings .........................................................................................................................
Net Sales—Commercial Lasers and Components ..........................................................
Net Sales—Specialty Lasers and Systems ......................................................................
Gross Profit as a Percentage of Net Sales—Commercial Lasers and Components ........
Gross Profit as a Percentage of Net Sales—Specialty Lasers and Systems ....................
Research and Development as a Percentage of Net Sales...............................................
Income Before Income Taxes .........................................................................................
Cash Provided by Operating Activities...........................................................................
Days Sales Outstanding in Receivables ..........................................................................
Days Sales Outstanding in Inventories ...........................................................................
Capital Spending as a Percentage of Net Sales ...............................................................
Fiscal
2007
(Dollar s in thousands)
$594,049
$285,239
$313,923
41.8%
42.8%
12.4%
$37,287
$68,362
58.0
72.4
3.8%
$591,039
$290,017
$309,467
43.3%
40.6%
12.4%
$28,923
$66,619
61.3
67.6
3.6%
2006
$583,790
$272,068
$311,058
43.3%
44.9%
12.5%
$46,181
$78,782
68.6
62.5
3.0%
Definitions and analysis of these performance indicators are as follows:
Bookings
Bookings represent orders expected to be shipped within 12 months and services to be provided pursuant to service contracts.
While we generally have not experienced a significant rate of cancellation, bookings are generally cancelable by our customers
without substantial penalty and, therefore, we can not assure all bookings will be converted to net sales.
Fiscal 2008 bookings increased 0.5% from fiscal 2007. Increases in fiscal 2008 bookings, compared to fiscal 2007, in the
microelectronics and scientific and government programs markets were partially offset by decreases in the OEM components and
material processing markets. Fiscal 2007 bookings increased 1.2% from fiscal 2006. Increases in fiscal 2007 bookings, compared to
fiscal 2006, in the OEM components and material processing markets were partially offset by decreases in the microelectronics and
scientific and government programs markets.
Microelectronics
Over the past year, our microelectronics business has performed well, with an increase of 9% from fiscal 2007. Our
sustainability is partly due to the fact that our products are used to manufacture devices such as I-Phones®, HDTV’s and solar cells, all
of which have enjoyed strong consumer demand. We have also benefitted from our ability to provide lasers with superior reliability
and performance into a broad array of applications. However, the ongoing credit crisis and resulting impact on macroeconomic
conditions is impacting our customers in two ways: consumer spending on high-end electronics is declining and commercial end users
are having difficulty funding expansion through the credit markets. We expect these factors will lead our customers to maintain a very
conservative posture which will result in orders being closely linked to end user deliveries and inventories being minimized. We
cannot predict when an economic recovery will begin. In the meantime, we will remain focused on customer alignment, continue to
develop highly-differentiated products albeit on evolving timelines and continue to drive operational efficiency.
Orders from semiconductor capital equipment (“semi cap”) applications in the fourth quarter of fiscal 2008 were flat
compared to the third quarter of fiscal 2008, with the ratio of new system orders also advancing from the third quarter of fiscal 2008.
31
While these are positive developments, the semi cap outlook seems to weaken with each passing week. Recent design wins may
provide us with some insulation, but this market is expected to struggle in fiscal 2009.
Bookings for lasers used in advanced packaging were down significantly in the fourth quarter of fiscal 2008 from the
preceding quarter as global demand for smart phones eased. Credit issues have been particularly troublesome to commercial end
customers in this submarket given their relatively thin operating margins and high capital needs. We expect our customers to be very
focused on cash preservation during this downturn.
Orders for flat panel display manufacturing slowed following a very strong third quarter of fiscal 2008 and were roughly
balanced between new systems and service. The most significant development is that the new system orders were for organic light
emitting diode (“OLED”) production tools. This suggests that excimer laser annealing (“ELA”) is currently winning against other
schemes such as solid-phase crystallization (“SPC”). We expect future investments in capacity expansion will be dependent on a
recovery in consumer spending.
Bookings for solar cell manufacturing remained strong in the fourth quarter of fiscal 2008. We are delighted by this trend, but
must caution that the dual effect of lower energy prices and tight credit may slow investments for small, developing accounts.
Nonetheless, higher conversion efficiencies and manufacturing yields are pushing down the breakeven point for solar power versus
fossil fuels. In addition, recent initiatives and ballot measures reinforce that governments and individuals remain committed to clean,
renewable energy. We maintain a positive outlook on this opportunity.
Scientific and Government Programs
For fiscal 2008, orders were up 13% compared to fiscal 2007. We believe these growth rates are outpacing the overall
scientific market and reflect the strength of our updated product portfolio. Based on historical trends, we believe the scientific research
market should be less susceptible to the pressures facing industrial markets. As a perceived safe haven, it is likely to garner more
attention from competitors seeking to support their top line. Product differentiation, sustainability and service support are critical
competitive factors.
Fourth quarter fiscal 2008 bookings benefitted from record orders for the Micra™ and Mantis™ single-box ultrafast seed
lasers and very strong ultrafast amplifier demand. Chameleon™ orders slowed from previous highs, but we anticipate increased
adoption via the introduction of the Chameleon™ Vision™. Launched in August 2008, the Vision™ is designed to provide brighter
images and deeper penetration in multiphoton microscopy. The Vision™ uses pre-compensation technology to counteract dispersion
effects and ensure minimum pulse length at the biological sample being imaged. The Vision™ is the most compact, powerful (2.5W)
and widely tunable (680-1080 nm) system available. It can also compensate for the widest range of microscope dispersion (up to
47,000 fs2). The Vision™ closes one of the few remaining gaps in our scientific product lineup.
OEM Components and Instrumentation
For fiscal 2008, orders decreased 8% compared to fiscal 2007. When adjusted for the sale of the imaging optics business in
September 2007, orders increased slightly from the prior year.
Orders in the fourth quarter of fiscal 2008 were slower than anticipated as customers tried to gauge the impact of
macroeconomic events upon their businesses. In very general terms, the instrumentation and components segment is composed of
customers in analytical instrumentation and medical therapeutics. Instrumentation encompasses applications such as DNA sequencing
and flow cytometry, which are generally covered by insurance. As such, they usually sustain sales well through broader economic
downturns. We anticipate that instrumentation customers will change their ordering patterns to smaller, more frequent purchases rather
than annual or semi-annual orders as a means to more tightly control inventory. Therapeutic applications include skin resurfacing, hair
removal and refractive and non-refractive ophthalmic procedures, which are partially dependent upon discretionary spending. A
cautionary view suggests this submarket would trend with the macroeconomy, although some of our customers have expressed more
solid outlooks particularly in refractive surgery.
Instrumentation orders in the fourth quarter of fiscal 2008 were up significantly compared to the third quarter of fiscal 2008,
bolstered by strong bookings for the Genesis™ UV OPS laser. New products based on the Genesis™ platform, which will provide
power scaling as well as other wavelengths, are being readied for market release in January 2009.
Although orders for medical OEM lasers in the fourth quarter of fiscal 2008 were seasonally down, we continue to build a
solid beachhead for OPS lasers in non-refractive ophthalmology. The drivers for OPS adoption are the availability of unique
wavelengths, optical efficiency and package size.
32
Materials Processing
Materials processing orders decreased 13% from fiscal 2007. In the fourth quarter of fiscal 2008, a customer pushed out
approximately $3.3 million of deliveries and was unable to provide new call-off dates. In accordance with our internal policies, these
orders were shifted to unscheduled backlog, thereby decreasing bookings for the quarter and the year by the same amount. As a result,
new bookings for the quarter were $19.7 million.
The top-level bookings do not accurately portray the underlying market dynamics. Several applications including marking
and engraving for product security, traceability and serialization have held up as have high-power markets in cladding, heat treating
and welding. The two application areas that have shown weakness are textile manufacturing and converting, presumably due to greater
dependence on consumer spending and credit facilities.
Net Sales
Net sales include sales of lasers, precision optics, related accessories and service contracts. Net sales for fiscal 2008
decreased 0.3% from fiscal 2007. Net sales for fiscal 2007 increased 2.8% from fiscal 2006. For a more complete description of the
reasons for changes in net sales refer to the “Results of Operations” section below.
Gr oss Pr ofit as a Per centage of Net Sales
Gross profit as a percentage of net sales (“gross profit percentage”) is calculated as gross profit for the period divided by net
sales for the period. Gross profit percentage for CLC decreased to 41.8% in fiscal 2008 but remained flat at 43.3% in fiscal 2007 from
fiscal 2006. Gross profit percentage for SLS increased to 42.8% in fiscal 2008 from 40.6% in fiscal 2007, but decreased from 44.9%
in fiscal 2006 to 40.6% in fiscal 2007. For a more complete description of the reasons for changes in gross profit refer to the “Results
of Operations” section below.
Resear ch and Development as a Per centage of Net Sales
Research and development as a percentage of net sales (“R&D percentage”) is calculated as research and development
expense for the period divided by net sales for the period. Management considers R&D percentage to be an important indicator in
managing our business as investing in new technologies is a key to future growth. R&D percentage remained flat at 12.4% in fiscal
2008 from fiscal 2007 and decreased slightly in fiscal 2007 to 12.4% from 12.5% in fiscal 2006. For a more complete description of
the reasons for changes in R&D percentage refer to the “Results of Operations” section below.
Net Cash Pr ovided by Oper ating Activities
Net cash provided by operating activities shown on our Consolidated Statements of Cash Flows primarily represents the
excess of cash collected from billings to our customers and other receipts over cash paid to our vendors for expenses and inventory
purchases to run our business. This amount represents cash generated by current operations to pay for equipment, technology, and
other investing activities, to repay debt, fund acquisitions, repurchase our common stock and for other financing purposes. We believe
this is an important performance indicator because cash generation over the long term is essential to maintaining a healthy business
and providing funds to help fuel growth. We believe generating positive cash from operations is an indication that our products are
achieving a high level of customer satisfaction and we are appropriately monitoring our expenses, inventory levels and cash collection
efforts. For a more complete description of the reasons for changes in Net Cash Provided by Operating Activities refer to the
“Liquidity and Capital Resources” section below.
Days Sales Outstanding in Receivables
We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the period divided by net sales
during the period and then multiplied by the number of days in the period, using 360 days for years. DSO in receivables indicates how
well we are managing our collection of receivables, with lower DSO in receivables resulting in more cash flow available. The more
money we have tied up in receivables, the less money we have available for research and development, acquisitions, expansions,
marketing and other activities to grow our business. Our DSO in receivables for fiscal 2008 decreased 3.3 days from fiscal 2007 to
58.0 days. The decrease in DSO in receivables is primarily due to improvements in collections in the U.S. and Asia.
33
Days Sales Outstanding in Inventor ies
We calculate DSO in inventories as net inventories at the end of the period divided by net sales of the period and then
multiplied by the number of days in the period, using 360 days for years. This indicates how well we are managing our inventory
levels, with lower DSO in inventories resulting in more cash flow available. The more money we have tied up in inventory, the less
money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business.
Our DSO in inventories for fiscal 2008 increased 4.8 days from fiscal 2007 to 72.4 days. The deterioration in DSO in inventories is
primarily due to inventory increases in preparation for product outsourcing and manufacturing consolidation, lower revenues in the
fourth quarter of fiscal 2008 and the sale of substantially all of the assets of Coherent Imaging Optics Limited (“CIOL”) in the fourth
quarter of fiscal 2007, partially offset by the impact of foreign exchange rates (1.9 days).
Capital Spending as a Per centage of Net Sales
Capital spending as a percentage of net sales (“capital spending percentage”) is calculated as capital expenditures for the
period divided by net sales for the period. Capital spending percentage indicates the extent to which we are expanding or improving
our operations, including investments in technology. Management monitors capital spending levels as this assists management in
measuring our cash flows, net of capital expenditures. Our capital spending percentage increased from 3.6% in fiscal 2007 to 3.8% in
fiscal 2008 and increased from 3.0% in fiscal 2006 to 3.6% in fiscal 2007. The fiscal 2008 and fiscal 2007 increases were primarily
due to building improvements, information technology expenditures and purchases of production-related assets. We anticipate that
capital spending for fiscal 2009 will be approximately 4.0% of net sales.
SIGNIFICANT EVENTS
On June 3, 2003, we initiated a tender offer to purchase the 5,250,000 (39.62%) outstanding shares of our Lambda Physik
subsidiary owned by other shareholders (the minority interest) for approximately $10.50 per share. Through the end of fiscal 2004, we
purchased a total of 4,588,500 outstanding shares for approximately $49.0 million, resulting in a total ownership percentage of
95.01% (inclusive of shares previously owned). During the second quarter of fiscal 2005, we acquired the remaining
661,500 outstanding shares (“remaining interest”) for approximately $11.8 million, resulting in our full ownership of Lambda Physik.
In the fourth quarter of fiscal 2006, we accrued an additional $2.5 million in purchase price and related legal and other fees associated
with the acquisition of the remaining interest.
In September 2005, our Board of Directors authorized a share repurchase program of up to 1.5 million shares of our common
stock. Under the terms of the repurchase program, purchases may be made from time to time in both the open market and in private
transactions, as conditions warrant. During fiscal 2006, we purchased and cancelled a total of 721,942 shares of our common stock for
approximately $22.3 million. The program was suspended during the first quarter of fiscal 2007 due to our internal stock option
investigation and expired on September 30, 2007.
On February 21, 2006, we entered into a definitive agreement to acquire Excel Technology, Inc. (“Excel”), a manufacturer of
photonics-based solutions, consisting of laser systems and electro-optical components, primarily for industrial, commercial, and
scientific applications. The acquisition was to be an all-cash transaction at a price of $30.00 per share of Excel common stock, for a
total approximate offer value of $376 million before fees and transaction costs. The completion of the acquisition was subject to
customary closing conditions, including regulatory approvals. On October 25, 2006 we received a prohibition order from the German
Federal Cartel Office (FCO) regarding our proposed acquisition. The acquisition had previously been approved by antitrust authorities
in the United States. None of the multiple remedy proposals offered by Coherent to the FCO addressing the overlap in the low-power
carbon-dioxide laser market were satisfactory to the FCO. On November 1, 2006, we received notice from Excel that it was
terminating the merger agreement. As a result, our fiscal 2006 results include a pre-tax charge of $5.9 million for previously
capitalized costs related to the proposed Excel acquisition.
On March 10, 2006 we issued $200.0 million of 2.75% convertible subordinated notes due March 2011. The notes were
unsecured and subordinate to all existing and future senior debt. The maturity date for these notes was March 1, 2011, unless earlier
redeemed or converted. Interest on the notes was payable in cash semi-annually in arrears on March 1 and September 1 of each year.
On December 15, 2006, we received a letter from U.S. Bank National Association stating that we were in default on our
convertible notes as a result of our failure to file our annual report for fiscal 2006 with the SEC. We did not cure the default within
60 days. On August 17, 2007, we received a letter from U.S. Bank National Association declaring the principal amount and accrued
and unpaid interest, plus additional interest under the notes, to be immediately due and payable. The amount due and payable under
the convertible notes including interest was $202,984,067, which we paid on August 21, 2007.
In April 2007, we acquired Nuvonyx, Inc., a technology leader in high-power laser diode components, arrays, and industrial
laser systems for materials processing and defense applications for approximately $14.0 million in cash, net of acquisition costs of
34
$0.3 million. Nuvonyx produces high power arrays with powers in excess of 50 Kilowatts through its proprietary cooling and stacking
technologies. The industrial laser systems are used for cladding and hardening of metals, joining materials, and other materials
processing applications.
In September 2007, we sold substantially all of the net assets of our U.K. subsidiary, Coherent Imaging Optics Limited
(CIOL), to CVI Laser (CVI) for $6.5 million, resulting in an after-tax gain on the sale of $0.7 million. In September 2007, we sold our
Condensa building in Santa Clara, California for approximately $24.8 million, resulting in a capital gain of approximately $3.6 million
in the fourth quarter of fiscal 2007. In September 2007, we also sold our Auburn campus in Auburn, California, for approximately
$9.8 million, resulting in a loss of approximately $12.6 million in the fourth quarter of fiscal 2007. We have not recognized any tax
benefit on the net loss of $9.0 million generated by the Condensa and Auburn transactions since it is not considered realizable. See
Note 15 “Income Taxes” in the notes to the Consolidated Financial Statements.
On February 12, 2008, the Company announced that the Board of Directors had authorized the Company to repurchase up to
$225 million of its common stock through a modified “Dutch Auction” tender offer and an additional $25 million of its common
stock, following the completion or termination of the tender offer, under its stock repurchase program, terminating no later than
February 11, 2009. On March 17, 2008, we completed our tender offer and repurchased and retired 7,972,313 shares of outstanding
common stock at a price of $28.50 per share for a total of $228.2 million, including expenses. Such repurchases were accounted for as
a reduction in additional paid in capital.
Effective March 31, 2008, we entered into a $40 million unsecured revolving credit account with Union Bank of California,
which expires on March 31, 2010. Our Union Bank of California agreement is subject to covenants related to financial ratios and
tangible net worth.
On April 16, 2008, we announced that we entered into an agreement to sell certain assets of our Auburn Optics
manufacturing operation to Research Electro- Optics, Inc. (“REO”), a privately held optics manufacturing and technology company.
We also entered into a strategic supply agreement with REO. REO will provide optical manufacturing capabilities for us, including
fabrication and coating of optical components. The transition of the optics manufacturing assets from Auburn to REO is expected to
be completed no later than the end of the second quarter of fiscal 2009. During the third and fourth quarters of fiscal 2008, we
recorded $1.7 million and $2.0 million, respectively, of costs related to the transition.
In April 2008, we initiated a tender offer related to certain discount options discovered during our voluntary review of our
historical stock option practices. Discount options are options with an exercise price that is less than the fair market value of the shares
underlying the option at the time of grant. The discounted options included in this offer were certain options which vested after
December 31, 2004. During the tender offer period, employees had the ability to amend the exercise price per share for eligible
options to the fair market value of the underlying option as of the measurement date of that option, and receive a cash payment for the
difference between the discounted share price and the amended share price. This amendment was designed to allow holders of
discount options to avoid certain adverse tax consequences associated with discount options. The offer expired on May 9, 2008. There
were approximately 0.5 million options amended. The incremental stock compensation expense resulting from the offer was
$0.4 million which was recognized immediately as all eligible options were fully vested.
On June 30, 2008 we sold our interest in LTB Lasertechnik in Berlin GmbH, a German company for approximately
$1.0 million, resulting in a gain of approximately $1.0 million which is reported in other income in the fourth quarter of fiscal 2008.
On July 10, 2008, the SEC formally notified us that its investigation of our historical stock option granting practices has been
terminated and that it will not recommend any enforcement action.
35
RESULTS OF OPERATIONS—FISCAL 2008, 2007 AND 2006
Fiscal 2008, 2007 and 2006 all included 52 weeks.
Consolidated Summary
The following table sets forth, for the years indicated, the percentage of total net sales represented by the line items reflected
in our consolidated statement of operations:
Fiscal
2008
2007
2006
(As a per centage of net sales)
100.0% 100.0% 100.0%
58.0% 58.4% 56.2%
42.0% 41.6% 43.8%
Net sales ...........................................................................................................................................
Cost of sales .....................................................................................................................................
Gr oss pr ofit......................................................................................................................................
Oper ating expenses:
Research and development............................................................................................................
In-process research and development ...........................................................................................
Selling, general and administrative ...............................................................................................
Restructuring and other charges (recoveries)................................................................................
Acquisition-related expenses ........................................................................................................
Amortization of intangible assets..................................................................................................
Total operating expenses...........................................................................................................
Income fr om oper ations .................................................................................................................
Other income (expense):
Interest and dividend income ........................................................................................................
Interest expense.............................................................................................................................
Other—net ....................................................................................................................................
Total other income, net .............................................................................................................
Income befor e income taxes ...........................................................................................................
Provision for income taxes................................................................................................................
Net income .......................................................................................................................................
12.4%
—%
24.5%
—%
—%
1.4%
38.3%
3.7%
12.4%
0.4%
25.6%
—%
—%
1.4%
39.8%
1.8%
12.5%
0.1%
22.7%
—%
1.0%
1.6%
37.9%
5.9%
1.8%
—%
0.7%
2.5%
6.2%
2.3%
3.9%
3.8%
(1.8)%
1.0%
3.0%
4.8%
2.1%
2.7%
2.6%
(0.8)%
0.2%
2.0%
7.9%
0.1%
7.8%
Refer to Item 6 “Selected Financial Data” for a description of significant events that impacted the results of operations for
fiscal years 2008, 2007 and 2006.
Net Sales
Mar ket Application
The following table sets forth, for the periods indicated, the amount of net sales and their relative percentages of total net
sales by market application (dollars in thousands):
Consolidated:
Microelectronics ............................................
OEM components and instrumentation..........
Materials processing ......................................
Scientific and government programs .............
Total...........................................................
Fiscal 2008
Per centage
of total
Amount
net sales
Fiscal 2007
Per centage
of total
Amount
net sales
Fiscal 2006
Per centage
of total
Amount
net sales
$206,256
173,835
94,171
125,000
$599,262
$210,765
174,115
95,415
120,858
$601,153
$219,250
174,024
76,862
114,516
$584,652
34.4%
29.0%
15.7%
20.9%
100.0%
35.0%
29.0%
15.9%
20.1%
100.0%
37.5%
29.8%
13.1%
19.6%
100.0%
During fiscal 2008, net sales decreased by $1.9 million, or less than 1%, compared to fiscal 2007, including an increase of
$22.1 million due to the impact of foreign currency exchange rates. The decrease was a result of decreased sales volumes in the
microelectronics, materials processing and OEM components and instrumentation markets, partially offset by increases in the
scientific and government programs market. Microelectronics sales decreased $4.5 million, or 2%, primarily due to lower sales in the
flat panel display market and lower sales for semiconductor applications, partially offset by higher sales in advanced packaging and
36
solar applications. The decrease in the materials processing market of $1.2 million, or 1%, during fiscal 2008 was primarily due to
lower sales in textile processing applications partially offset by higher commercial laser shipments for marking applications. The
decrease in the OEM components and instrumentation market of $0.3 million during fiscal 2008 was primarily due to the sale of
substantially all of the assets of CIOL in the fourth quarter of fiscal 2007, partially offset by higher sales for medical and
bioinstrumentation applications, including revenues contributed by Nuvonyx (acquired in April 2007). Scientific and government
program sales increased $4.1 million, or 3%, due to higher demand for pumping, measuring and advanced research applications used
by university and government research groups.
During fiscal 2007, net sales increased by $16.5 million, or 3%, compared to fiscal 2006, including an increase of
$8.5 million due to the impact of foreign currency exchange rates. The increase was a result of increased sales volumes in the
materials processing, scientific and government programs and OEM components and instrumentation markets, partially offset by
decreases in the microelectronics market. Material processing revenues increased $18.6 million, or 24%, due to higher commercial
laser shipments for non-metal cutting and marking applications. Scientific and government program sales increased $6.3 million, or
6%, due to higher demand for pumping, measuring and advanced research applications used by university and government research
groups. The increase in the OEM components and instrumentation market of $0.1 million during fiscal 2007 was primarily due to
higher sales for medical and bioinstrumentation applications, including $3.4 million in revenues contributed by Nuvonyx, acquired in
the third quarter of fiscal 2007 offset by decreases in graphic arts and display sales due to lower individually addressable
semiconductor bar shipments for reprographics applications. Microelectronics sales decreased $8.5 million, or 4%, primarily due to
lower sales in the flat panel display market and via drilling applications.
In fiscal 2008, 2007 and 2006, no customers accounted for greater than 10% of net sales.
Segments
The following table sets forth, for the periods indicated, the amount of net sales and their relative percentages of total net
sales by segment (dollars in thousands):
Consolidated:
Commercial Lasers and Components (CLC) .....
Specialty Lasers and Systems (SLS)..................
Corporate and other............................................
Total...............................................................
Fiscal 2008
Per centage
of total
Amount
net sales
Fiscal 2007
Per centage
of total
Amount
net sales
Fiscal 2006
Per centage
of total
Amount
net sales
$285,239
313,923
100
$599,262
$290,017
309,467
1,669
$601,153
$272,068
311,058
1,526
$584,652
47.6%
52.4%
—%
100.0%
48.2%
51.5%
0.3%
100.0%
46.5%
53.2%
0.3%
100.0%
Net sales for fiscal 2008 decreased $1.9 million, or less than 1%, compared to fiscal 2007, with decreases of $4.8 million, or
2%, in our CLC segment, decreases of $1.6 million in Corporate and other and increases of $4.5 million, or 1%, in our SLS segment.
Net sales for fiscal 2007 increased $16.5 million, or 3%, compared to fiscal 2006, with increases of $17.9 million, or 7%, in our CLC
segment and decreases of $1.6 million, or 1%, in our SLS segment.
The decrease in our CLC segment sales from fiscal 2007 to fiscal 2008 was primarily due to the sale of substantially all of the
assets of CIOL in the fourth quarter of fiscal 2007 and lower semiconductor and graphic arts and display application sales partially
offset by increased military application sales, including revenues contributed by Nuvonyx (acquired in April 2007) and higher sales
for direct writing, lightshow and bioinstrumentation applications. The increase in our CLC segment sales from fiscal 2006 to fiscal
2007 was primarily due to increased bioinstrumentation and medical sales in the OEM components and instrumentation market, higher
service revenue, higher sales for laser-direct imaging applications, semiconductor wafer inspection, marking and cutting applications
and higher thermal imaging sales as well as the effect of revenues contributed by Nuvonyx, partially offset by lower sales for
reprographic applications.
The increase in our SLS segment sales from fiscal 2007 to fiscal 2008 was primarily due to higher sales for solar, medical
and micro-machining applications. The decrease in our SLS segment sales from fiscal 2006 to fiscal 2007 was primarily due to
decreases in the microelectronics market for via drilling applications and lower flat panel display application sales partially offset by
increased scientific market sales.
Corporate and other sales decreased $1.6 million due to non-recurring royalty revenue from Luna Innovations, Inc. in the first
quarter of fiscal 2007.
37
Gross Profit
Consolidated
Our gross profit rate increased by 0.4% to 42.0% in fiscal 2008 from 41.6% in fiscal 2007. The increase in the gross profit
rate was primarily due to improved product mix (2.3%) with higher volumes of medical applications sales, the sale of substantially all
of the assets of CIOL in the fourth quarter of fiscal 2007 and improved yields and lower warranty costs (0.3%), partially offset by
higher other costs due to higher inventory provisions and increased costs for freight and duty (1.3%), the impact of fiscal 2008
restructuring activities (0.7%) and higher installation costs (0.2%) for excimer and scientific products.
Our gross profit rate decreased by 2.2% to 41.6% in fiscal 2007 from 43.8% in fiscal 2006. The decrease in the gross profit
rate was primarily due to less favorable product mix (2.7%) in the microelectronics market, including lower flat panel revenue as well
as lower individually addressable bar (“IAB”) business in the graphic arts and display market. The gross profit rate was also affected
by higher warranty and installation costs (0.6%), partially offset by improved yields (1.1%) and lower stock-based compensation
expense under SFAS 123(R) (0.1%).
Our gross profit rate has been and will continue to be affected by a variety of factors including market mix, manufacturing
efficiencies, excess and obsolete inventory write-downs, warranty costs, pricing by competitors or suppliers, new product
introductions, production volume, customization and reconfiguration of systems, commodity prices and foreign currency fluctuations.
Commer cial Laser s and Components
Our gross profit rate decreased by 1.5% to 41.8% in fiscal 2008 from 43.3% in fiscal 2007. The decrease in gross profit rate
was primarily due to higher other costs due to higher inventory provisions and increased costs for freight and duty (1.9%) and the
impact of fiscal 2008 restructuring activities (1.2%), partially offset by favorable product cost (0.6%) primarily due to the impact of
the sale of substantially all of the assets of CIOL in the fourth quarter of fiscal 2007 and improved yields and lower warranty costs
(1.0%).
Our gross profit rate remained at 43.3% for fiscal 2007 and 2006. Less favorable product mix (1.8%) including lower IAB
shipments to the graphic arts and display market as well as lower margin Nuvonyx business and higher warranty costs (1.0%) were
offset by improved yields (2.4%) and lower other costs (0.4%) primarily due to lower inventory provisions.
Specialty Laser s and Systems
Our gross profit rate increased by 2.2% to 42.8% in fiscal 2008 from 40.6% in fiscal 2007. The increase in the gross profit
rate was primarily due to more favorable product mix (3.4%) within the microelectronics and medical markets, including a large
customer order cancellation fee at high margins in the third quarter of fiscal 2008 (0.4%) coupled with improved manufacturing
efficiencies and lower scrap and rework costs (0.3%), partially offset by higher other costs due to higher inventory provisions and
increased costs for freight and duty (0.9%), higher installation costs (0.3%) for excimer and scientific products and higher warranty
costs (0.3%).
Our gross profit rate decreased by 4.3% to 40.6% in fiscal 2007 from 44.9% in fiscal 2006. The decrease in the gross profit
rate was primarily due to less favorable product mix (3.3%) in the microelectronics market, including lower flat panel revenue as well
as less favorable margin in the scientific market, higher other costs primarily from increased costs for freight and higher inventory
provisions (0.3%), higher scrap (0.3%) and higher installation costs for custom business (0.4%) in the scientific market.
38
Operating Expenses
Amount
Research and development ..............................
In-process research and development ..............
Selling, general and administrative..................
Restructuring and other charges (recoveries)...
Acquisition-related expenses ...........................
Amortization of intangible assets.....................
Total operating expenses..................................
2008
Per centage
of total
net sales
$74,287
—
146,376
—
—
8,651
$229,314
12.4%
—%
24.5%
—%
—%
1.4%
38.3%
Fiscal
2007
Per centage
of total
Amount
net sales
(Dollar s in thousands)
$74,590
2,200
153,697
(74)
322
8,152
$238,887
12.4%
0.4%
25.6%
—%
—%
1.4%
39.8%
Amount
$73,051
690
132,545
97
5,857
9,207
$221,447
2006
Per centage
of total
net sales
12.5%
0.1%
22.7%
—%
1.0%
1.6%
37.9%
Resear ch and development
Fiscal 2008 research and development (“R&D”) expenses decreased $0.3 million, or 0.4%, from fiscal 2007. The decrease
was primarily due to lower spending on greening (compliance with environmental-related regulations, primarily in Europe and the
People’s Republic of China), semiconductor and other projects ($2.3 million) and lower expense for deferred compensation plan
liabilities ($0.7 million), partially offset by the impact of foreign currency exchange rates ($2.7 million). On a segment basis, CLC
project spending increased $1.9 million, including the impact of foreign currency exchange rates and higher spending due to the
acquisition of Nuvonyx. SLS project spending, including the impact of foreign currency exchange rates, increased $1.1 million.
Corporate and Other spending decreased $3.3 million.
Fiscal 2007 R&D expenses increased $1.5 million, or 2%, from fiscal 2006. The increase was primarily due to higher
headcount related spending ($2.2 million) and higher project spending for tooling and supplies ($1.1 million), partially offset by
higher net reimbursements from customers for development projects ($0.7 million), lower consulting spending for projects
($0.5 million) and $0.4 million lower stock-based compensation under SFAS 123(R). On a segment basis, CLC project spending
increased $5.5 million and SLS project spending decreased $1.9 million.
In-pr ocess r esear ch and development
Fiscal 2007 in-process research and development (IPR&D) expense resulted from our acquisition of Nuvonyx in the third
quarter. At the date of acquisition, we immediately charged $2.2 million to expense, representing purchased IPR&D related to two
development projects that had not yet reached technological feasibility and had no alternative future use. The assigned value was
determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the
net cash flows from such project, and discounting the net cash flows back to its present value. At September 27, 2008, one project has
been put on hold and the other is expected to become commercially viable in fiscal 2009 with approximately $1.8 million of estimated
expenditures to complete. Fiscal 2006 IPR&D expense of $0.7 million resulted from our acquisition of Iolon in the first quarter of
fiscal 2006.
Selling, gener al and administr ative
Fiscal 2008 selling, general and administrative (“SG&A”) expenses decreased $7.3 million, or 5%, from fiscal 2007. The
decrease was primarily due to the fiscal 2007 $12.5 million loss on the sale of our Auburn campus, $4.1 million lower expense for
deferred compensation plan liabilities, $2.7 million lower costs related to our restatement of financial statements and litigation
resulting from our internal stock option investigation, $1.2 million lower spending on audit and tax services due to timing of services
provided and $0.3 million lower other spending, partially offset by the impact of foreign currency exchange rates ($6.3 million), the
fiscal 2007 gain of $3.6 million on the sale of our Condensa facility, $2.4 million higher stock-based compensation expense primarily
due to increased charges for liabilities for stock options subject to Section 409A and higher footprint and headcount-related
restructuring costs ($1.2 million). On a segment basis, CLC SG&A expenses decreased $10.7 million, including the fiscal 2007
$12.5 million loss on the sale of our Auburn campus, partially offset by the impact of foreign exchange rates and restructuring costs.
SLS SG&A expenses increased $3.2 million, including the impact of foreign exchange rates, higher headcount related spending and
higher sales demo costs. The increase in Corporate and other of $0.2 million includes the fiscal 2007 gain of $3.6 million on the sale
of our Condensa facility, $2.5 million higher stock-related compensation expense primarily due to increased charges for liabilities for
stock options subject to Section 409A, $4.1 million lower expense for deferred compensation plan liabilities and $2.7 million lower
costs related to our restatement of financial statements and litigation resulting from our internal stock option investigation.
39
Fiscal 2007 SG&A expenses increased by $21.2 million, or 16%, from fiscal 2006. The increase was primarily due to a
$12.5 million loss on the sale of our Auburn campus, costs related to our internal stock option investigation and litigation
($11.7 million), higher headcount related spending ($3.2 million), $1.7 million higher information technology spending including the
write-off of previously capitalized software and facilities investments, $1.4 million higher charges for gains on deferred compensation
plan liabilities, and $1.8 million higher legal and other spending, partially offset by $3.9 million lower stock-based compensation
expense under SFAS 123(R), a gain of $3.6 million on the sale of our Condensa facility, a decrease of $2.5 million due to the fiscal
2006 accrual of costs for estimated liabilities to former Lambda Physik shareholders and $1.1 million lower Excel pre-merger
integration costs. On a segment basis, CLC SG&A expenses increased $16.1 million, including the $12.5 million loss on the sale of
our Auburn campus, SLS SG&A expenses increased $1.3 million and Corporate and other increased $3.7 million primarily due to
costs related to our internal stock option investigation and litigation ($11.7 million) partially offset by $3.9 million lower stock-based
compensation expense under SFAS 123(R) and a gain of $3.6 million on the sale of our Condensa facility.
Restr uctur ing and other char ges (r ecover ies)
In fiscal 2007 and 2006, restructuring, impairment and other charges were due to adjustments to the estimated contractual
obligation for lease and other facility costs of a previously vacated building, net of estimated sublease income.
Acquisition-r elated expenses wr itten off
There were no acquisitions in fiscal 2008. In fiscal 2007, we wrote off remaining costs of $0.3 million related to the Excel
acquisition. In fiscal 2006, we wrote off $5.9 million of Excel acquisition related costs, primarily comprised of legal and consulting
fees.
Amor tization of intangible assets
Amortization of intangible assets increased $0.5 million, or 6%, from fiscal 2007 to fiscal 2008 primarily due to the
amortization of intangibles related to our April 2007 Nuvonyx acquisition.
Amortization of intangible assets decreased $1.1 million, or 11%, from fiscal 2006 to fiscal 2007 primarily due to lower
amortization of intangibles related to our fiscal 2005 TuiLaser acquisition, partially offset by amortization of intangibles related to our
April 2007 Nuvonyx acquisition.
Other income (expense)
Other income, net, decreased $3.1 million from fiscal 2007 to fiscal 2008. The decrease was primarily due to lower interest
income ($12.3 million) as a result of lower average cash, cash equivalents and short-term investments balances as well as lower rates
of return, lower gains, net of expenses, on our deferred compensation plan assets ($3.9 million) and lower sublease income
($0.8 million), partially offset by lower interest expense ($10.7 million) primarily due to the payoff of our convertible subordinated
notes in the fourth quarter of fiscal 2007, Japan consumption tax savings ($3.3 million) and higher foreign currency exchange gains
($0.7 million).
Other income, net, increased $6.3 million from fiscal 2006 to fiscal 2007. The increase was primarily due to higher interest
income ($8.0 million) as a result of higher average cash, cash equivalents and short-term investments balances and higher returns,
higher foreign exchange net gains ($2.8 million), $1.3 million higher investment gains, net of expenses, associated with our deferred
compensation plans, and a $1.0 million gain on our sale of substantially all of the assets of CIOL in the fourth quarter of fiscal 2007
partially offset by higher interest expense ($6.4 million) due to the interest on the convertible subordinated notes.
Income taxes
The effective tax rate on income before income taxes for fiscal 2008 of 37.2% was higher than the statutory rate of 35.0%.
This was primarily due to permanent differences related to foreign currency exchange gains on previously taxed income distributions
from foreign subsidiaries and deemed dividend inclusions under the Subpart F rules, partially offset by the benefit of foreign tax
credits and research and development tax credits.
The effective tax rate on income before income taxes for fiscal 2007 of 44.9% was higher than the statutory rate of 35.0%.
This was primarily due to permanent differences related to deemed dividend inclusions under the Subpart F rules, an increase in
valuation allowance against certain loss carryforwards and the non-deductibility of IPR&D expense related to the Nuvonyx
acquisition, partially offset by the benefit of foreign tax credits and research and development tax credits.
40
The effective tax rate on income before income taxes for fiscal 2006 of 1.7% was lower than the statutory rate of 35.0%. This
was primarily due to a net benefit of $15.4 million, which included the effects of consolidation of our entities in Japan and Germany
and R&D tax credits. In the first quarter of fiscal 2006, our German subsidiary, Lambda Physik GmbH, sold its wholly owned
Japanese subsidiary, Lambda Physik Co., Ltd, to Coherent Japan, Inc., and we completed the merger of these Japanese entities. As a
result of the sale and merger of the Japanese entities, the income of Lambda Physik Co., Ltd and a portion of the income of Lambda
Physik GmbH that were previously treated as permanently reinvested were deemed distributed to the United States and the income
and associated tax credits of the entities were reported for U.S. tax purposes.
FINANCIAL CONDITION
Liquidity and capital resources
Sour ces and Uses of Cash
Historically, our primary source of cash has been provided through operations. Other sources of cash in the past three fiscal
years include proceeds from our convertible subordinated note offering, proceeds received from the sale of stock through employee
stock option and purchase plans, as well as through debt borrowings. Our historical uses of cash have primarily been for the
repurchase of our common stock, capital expenditures, acquisitions of businesses and technologies and payments of principal and
interest on outstanding debt obligations. Supplemental information pertaining to our historical sources and uses of cash is presented as
follows and should be read in conjunction with our Consolidated Statements of Cash Flows and notes thereto (in thousands):
2008
Net cash provided by operating activities..........................................
Sales of shares under employee stock plans ......................................
Net proceeds from convertible subordinated notes............................
Repurchase of common stock............................................................
Capital expenditures ..........................................................................
Acquisition of businesses, net of cash acquired.................................
Net payments on debt borrowings .....................................................
$68,362
16,509
—
(228,214)
(22,612)
—
(8)
Fiscal
2007
$66,619
3,783
—
—
(21,693)
(14,228)
(200,209)
2006
$78,782
24,260
194,388
(22,250)
(17,225)
(5,942)
(11,511)
Net cash provided by operating activities increased by $1.7 million in fiscal 2008 compared to fiscal 2007 and decreased by
$12.2 million in fiscal 2007 compared to fiscal 2006. The increase in cash provided by operating activities in fiscal 2008 was
primarily due to higher net income and higher cash flows from other receivables and other assets, partially offset by lower cash flows
from the proceeds from sales of fixed assets and other current liabilities. The decrease in cash provided by operating activities in fiscal
2007 was primarily due to lower net income and lower cash flows from accounts payable, inventories and prepaid expenses, partially
offset by higher cash flows from the proceeds from sales of fixed assets, and higher cash flows from deferred taxes. We believe that
cash provided by operating activities will be adequate to cover our working capital needs, debt service requirements and planned
capital expenditures for at least the next 12 months to the extent such items are known or are reasonably determinable based on current
business and market conditions. However, we may elect to finance certain of our capital expenditure requirements through borrowings
under our bank credit facilities or other sources of capital. We continue to follow our strategy to further strengthen our financial
position by using available cash flow to fund operations.
We intend to continue pursuing acquisition opportunities at valuations we believe are reasonable based upon market
conditions. However, we cannot accurately predict the timing, size and success of our acquisition efforts or our associated potential
capital commitments. Furthermore, we cannot assure you that we will be able to acquire businesses on terms acceptable to us. We
expect to fund future acquisitions primarily through unrestricted cash balances and cash flows from operations. If required, we will
look for additional borrowings or consider the issuance of securities. The extent to which we will be willing or able to use our
common stock to make acquisitions will depend on its market value from time to time and the willingness of potential sellers to accept
it as full or partial payment.
Additional sources of cash available to us were multi-currency and domestic lines of credit and bank credit facilities totaling
$58.0 million as of September 27, 2008, of which $56.3 million was unused and available. These credit facilities were used in Europe
and Japan during fiscal 2008 as guarantees. Our domestic line of credit includes a $40 million unsecured revolving credit account with
Union Bank of California, which expires on March 31, 2010 and is subject to covenants related to financial ratios and tangible net
worth. No amounts have been drawn upon our domestic line of credit and $1.7 million has been used of the multi-currency lines as of
September 27, 2008.
41
Our ratio of current assets to current liabilities was 4.5:1 at September 27, 2008, compared to 5.2:1 at September 29, 2007.
The decrease in our ratio is primarily due to the decrease in cash, cash equivalents and short-term investments due to the repurchase of
common stock. Our cash position, short-term investments, working capital and debt obligations are as follows (in thousands):
Fiscal
2008
Cash and cash equivalents............................................................................
Short-term investments ................................................................................
Restricted cash, current ................................................................................
Working capital............................................................................................
Total debt obligations...................................................................................
2007
$213,826
4,268
2,645
396,456
24
$315,927
45,896
2,460
536,833
30
Cur r ent Restr icted Cash
As part of our tender offer to purchase the remaining outstanding shares of Lambda Physik, we were required by local
regulations to have funds available for the offer in an account located in Germany. As of September 27, 2008 and September 29, 2007,
we had $2.6 million and $2.5 million, respectively, restricted for remaining close out costs associated with our purchase of the
remaining outstanding shares of Lambda Physik, which are included in current restricted cash on our consolidated balance sheets.
Debt Obligations
On March 10, 2006 we issued $200.0 million of 2.75% convertible subordinated notes due March 2011. The notes were
unsecured and subordinate to all existing and future senior debt. The maturity date for the notes was March 1, 2011, unless earlier
redeemed or converted. Interest on the notes was payable in cash semi-annually in arrears on March 1 and September 1 of each year.
On December 15, 2006, we received a letter from U.S. Bank National Association (the “trustee”) for the holders of the
outstanding principal amount of the notes stating that we had violated certain provisions in the Indenture dated March 13, 2006 (the
“Indenture”) as a result of our failure to file our annual report for fiscal 2006 with the SEC. The Indenture provided that such a default
could be cured by making that filing with the SEC within 60 days after the receipt by us of the notice of default. The Indenture also
provided that such a default, if not cured by that date, would give certain holders and the trustee the right to accelerate the maturity of
the notes. We did not cure the default within 60 days after the receipt by us of the notice of default. On August 17, 2007, as amended
by an addendum delivered on August 20, 2007, we received a letter from the trustee under the Indenture declaring the principal
amount and accrued and unpaid interest, plus additional interest under the notes, to be immediately due and payable pursuant to the
Indenture due to our failure to file reports required to be filed with the SEC and delivered to the trustee under the Indenture. The
aggregate amount due and payable under the notes including interest was $202,984,067, which we paid on August 21, 2007.
Contr actual Obligations and Off-Balance Sheet Ar r angements
We have no off-balance sheet arrangements as defined by Regulation S-K of the Securities Act of 1933. The following
summarizes our contractual obligations at September 27, 2008 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands):
Total
Long-term debt payments ..................................
Operating lease payments ..................................
Obligations under SFAS 143 .............................
Purchase commitments with suppliers ...............
Purchase obligations ..........................................
Total...................................................................
Less than
1 year
$24
32,581
1,464
15,516
8,189
$57,774
$9
8,388
412
15,299
5,521
$29,629
1 to 3 year s
$15
11,149
872
—
2,668
$14,704
3 to 5 year s
$—
6,620
110
—
—
$6,730
Mor e than
5 year s
$—
6,424
70
217
—
$6,711
Because of the uncertainty as to the timing of such payments, we have excluded cash payments related to our contractual
obligations for our deferred compensation plans aggregating $28.5 million at September 27, 2008.
During the first quarter of fiscal 2008, we adopted the provisions of FIN 48. We had historically classified interest and
penalties and unrecognized tax benefits as current liabilities, but beginning with the adoption of FIN 48 we have reclassified gross
interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as
non-current liabilities within the condensed consolidated balance sheets. As of September 27, 2008, we recorded gross unrecognized
tax benefits of $51.7 million and gross interest and penalties of $6.5 million, both of which are classified as non-current liabilities in
42
the condensed consolidated balance sheet. A portion of the increase in the Company’s unrecognized tax benefit during the fiscal 2008
related to losses reported on the filing of its tax return. At this time, we are unable to make a reasonably reliable estimate of the timing
of payments in individual years due to uncertainties in the timing of tax audit outcomes.
Changes in financial condition
Cash provided by operating activities in fiscal 2008 was $68.4 million, which included depreciation and amortization of
$32.0 million, net income of $23.4 million, stock-based compensation expense of $8.8 million, non-cash restructuring expense of
$3.1 million, cash provided by operating assets and liabilities of $2.2 million and other items aggregating $0.5 million, partially offset
by increases in net deferred tax assets of $1.6 million.
Cash provided by investing activities in fiscal 2008 of $38.2 million included $41.5 million, net, proceeds from available-for­
sale securities, $12.9 million proceeds from dispositions of property and equipment and $6.5 million proceeds from the sale of
substantially all of the assets of CIOL, partially offset by $22.6 million used to acquire property and equipment, invest in information
technology and improve buildings and a decrease in restricted cash of $0.1 million.
Cash used by financing activities in fiscal 2008 of $211.8 million included $228.2 million used to repurchase our common
stock and a decrease in cash overdraft of $0.9 million, partially offset by $16.5 million generated from our employee stock option and
stock purchase plans and $0.8 million increase in excess tax benefit from stock-based payment arrangements.
Changes in exchange rates in fiscal 2008 provided $3.2 million, primarily due to the strengthening of the Euro and the
Japanese Yen in relation to the U.S. Dollar.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes,” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No.109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In addition, in May 2007,
the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,”(“FSP
FIN 48-1”) to amend FIN 48 by providing that previously unrecognized tax benefits can be recognized when the tax positions are
effectively settled upon examination by a taxing authority. According to FSP FIN 48-1, an enterprise’s tax position will be considered
effectively settled if the taxing authority has completed its examination, the enterprise does not plan to appeal, and the possibility is
remote that the taxing authority would reexamine the tax position in the future. We adopted FIN 48 and FSP FIN 48-1 for our fiscal
year beginning September 30, 2007. The cumulative effect of applying the provisions of FIN 48 and FSP FIN 48-1 was a decrease of
approximately $1.4 million in retained earnings at the beginning of fiscal 2008. See Note 15, “Income Taxes” in the notes to the
Consolidated Financial Statements, for additional information, including the effects of adoption on the Company’s Consolidated
Financial Statements.
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”)
which requires a policy be adopted to present externally imposed taxes on revenue producing transactions on either a gross or net
basis. Coherent’s policy is to present such taxes on a gross basis. Gross or net presentation may be elected for each different type of
tax, but similar taxes should be presented consistently. Taxes within the scope of this issue would include taxes that are imposed on a
revenue transaction between a seller and a customer. We adopted EITF 06-3 for our fiscal year beginning September 30, 2007. The
adoption of EITF 06-3 did not have a material impact on our consolidated financial statements.
In December 2007, the FASB ratified the EITF’s Consensus for Issue No. 07-1, “Accounting for Collaborative
Arrangements” (“EITF 07-1”), which defines collaborative arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 will
become effective beginning with our first fiscal quarter of 2009. We do not expect the adoption of EITF 07-01 to have a material
impact on our consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. SFAS 157 is effective for us for interim periods within our fiscal year beginning
September 28, 2008. We do not expect that the adoption in fiscal 2009 of SFAS 157 for financial assets and financial liabilities will
have a significant impact on our consolidated financial position and results of operations. In February 2008, the FASB issued FASB
43
Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 which delayed the effective date of SFAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring
basis, until January 1, 2009. We have not yet determined the impact that the implementation of SFAS 157 will have on our nonfinancial assets and liabilities; however we do not anticipate it to significantly impact our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards, which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure certain financial assets and
financial liabilities, on an instrument-by-instrument basis. If the fair value option is elected, unrealized gains and losses on existing
items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the
adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for us for our fiscal year beginning
September 28, 2008. We do not expect the adoption of SFAS 159 to have an effect on our consolidated financial position and results
of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”).
SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all
business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business
combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the
assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS 141(R) also
requires that acquisition related costs be recognized separately from the acquisition. SFAS 141(R) is effective for us for acquisitions
after the beginning of our fiscal year 2010.
In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities—an
amendment of SFAS No. 133” (“SFAS 161”). This statement changes the disclosure requirements for derivative instruments and
hedging activities. SFAS 161 requires us to provide enhanced disclosures about (a) how and why we use derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial
position, financial performance, and cash flows. SFAS 161 is effective for our interim period beginning December 28, 2008. We are
currently assessing the impact that the adoption of SFAS 161 will have on the disclosures to our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other
applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. We will evaluate the
potential impact of FSP SFAS 142-3 on acquisitions on a prospective basis.
In May 2008, the FASB issued SFAS No. 162 “ The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”).
This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This
statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles.” We are currently evaluating the potential impact, if any, of the adoption of SFAS 162 on our consolidated
financial position, results of operations and cash flows.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America
and pursuant to the rules and regulations of the SEC. The preparation of these financial statements 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. We have identified
the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition,
accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based
compensation and accounting for income taxes.
44
Revenue Recognition
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement
exists, the product has been delivered or the service has been rendered, the price is fixed or determinable and collection is probable.
Revenue from product sales is recorded when all of the foregoing conditions are met and risk of loss and title passes to the customer.
Our products typically include a warranty and the estimated cost of product warranty claims (based on historical experience) is
recorded at the time the sale is recognized. Sales to customers are generally not subject to any price protection or return rights.
The vast majority of our sales are made to original equipment manufacturers (OEMs), distributors, resellers and end-users in
the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other
post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those
instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue
from multiple element arrangements to the various elements based upon relative fair values.
Should changes in conditions cause management to determine these criteria are not met for certain future transactions,
revenue recognized for any reporting period could be adversely affected. Failure to obtain anticipated orders due to delays or
cancellations of orders could have a material adverse effect on our revenue. In addition, pressures from customers to reduce our prices
or to modify our existing sales terms may have a material adverse effect on our revenue in future periods.
Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and only
certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited to performance
under our published product specifications. For the few product sales that have customer acceptance provisions because of higher than
published specifications, (1) the products are tested and accepted by the customer at our site or by the customer’s acceptance of the
results of our testing program prior to shipment to the customer, or (2) the revenue is deferred until customer acceptance occurs.
Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations; however
our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue related to installation
services until completion of these services.
For most products, training is not provided; therefore, no post-delivery training obligation exists. However, when training is
provided to our customers, it is typically priced separately and recognized as revenue after these services have been provided.
Long-Lived Assets and Goodwill
We evaluate long-lived assets and amortizable intangible assets whenever events or changes in business circumstances or our
planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer
appropriate. Reviews are performed to determine whether the carrying values of the assets are impaired based on comparison to the
undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the comparison indicates
that impairment exists, the impaired asset is written down to its fair value.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) goodwill is tested for impairment
on an annual basis and between annual tests in certain circumstances, and written down when impaired (see Note 6 in the Notes to
Consolidated Financial Statements.) Under SFAS 142, goodwill is tested for impairment first by comparing each reporting unit’s fair
value determined using a discounted cash flow methodology to its respective carrying value. If such comparison indicates a potential
impairment, then the impairment is determined as the difference between the recorded value of goodwill and its fair value. Absent any
impairment indicators, we perform our annual impairment tests at the beginning of the fourth quarter of each fiscal year using the
balance sheet as of the end of the third fiscal quarter.
Significant management judgment is required in the forecast of future operating results that are used in the preparation of
expected discounted and undiscounted cash flows.
At September 27, 2008, we had $114.4 million of goodwill and purchased intangible assets on our consolidated balance
sheet. At September 27, 2008, we had $101.0 million of property and equipment on our consolidated balance sheet. We performed our
annual impairment testing as of the end of the third quarter of fiscal 2008 and noted no impairment. As no impairment indicators were
present during the fourth quarter of fiscal 2008, we believe these values remain recoverable.
It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the
products and technologies, or both, could differ from those used to assess the recoverability of these assets. In addition, if the price of
our common stock were to significantly decrease, thus indicating that the underlying fair value of our reporting units or other longlived assets may have decreased, we may be required to assess the recoverability of such assets in the period such circumstances are
identified. In that event, impairment charges or shortened useful lives of certain long-lived assets may be required.
45
Inventory Valuation
We record our inventory at the lower of cost (computed on a first-in, first-out basis) or market. We write-down our inventory
to its estimated market value based on assumptions about future demand and market conditions. Inventory write-downs are generally
recorded within guidelines set by management when the inventory for a device exceeds 12 months of its demand and when individual
parts have been in inventory for greater than 12 months. If actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required which could materially affect our future results of operations. Due to
rapidly changing forecasts and orders, additional write-downs for excess or obsolete inventory, while not currently expected, could be
required in the future. In the event that alternative future uses of fully written down inventories are identified, we may experience
better than normal profit margins when such inventory is sold. Differences between actual results and previous estimates of excess and
obsolete inventory could materially affect our future results of operations. We write-down our demo inventory by amortizing the cost
of demo inventory over a twenty month period starting from the fourth month after such inventory is placed in service.
Warranty Reserves
We provide warranties on certain of our product sales and allowances for estimated warranty costs are recorded during the
period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair
or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product
line. The weighted average warranty period covered is nearly 15 months. If actual return rates and/or repair and replacement costs
differ significantly from our estimates, adjustments to cost of sales may be required in future periods.
Stock-Based Compensation
We account for share-based compensation using the fair value recognition provisions of SFAS 123(R), “Share-Based
Payment.” We estimate the fair value of stock options granted using the Black-Scholes Merton model. We use historical data to
estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.
We amortize the fair value of stock options on a straight-line basis over the requisite service periods of the awards, which are
generally the vesting periods. We value restricted stock units using the intrinsic value method. We amortize the value of restricted
stock units on a straight-line basis over the restriction period.
SFAS 123(R) requires the use of option pricing models that were not developed for use in valuing employee stock options.
The Black-Scholes option- pricing model was developed for use in estimating the fair value of short-lived exchange traded options
that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective
assumptions, including the options expected life, the expected price volatility of the underlying stock and an estimate of expected
forfeitures. Our computation of expected volatility considers historical volatility and market- based implied volatility. Our estimate of
expected forfeitures is based on historical employee data and could differ from actual forfeitures.
See Note 12 in the notes to the Consolidated Financial Statements for a description of our share-based employee
compensation plans and the assumptions we use to calculate the fair value of share-based employee compensation.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax
provision (benefit) in each of the jurisdictions in which we operate. This process involves us estimating our current income tax
provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.
We record a valuation allowance to reduce our deferred tax assets to an amount that more likely than not will be realized.
While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess
of our net recorded amount, an adjustment to the allowance for the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in
the future, an adjustment to the valuation allowance for the deferred tax asset would be charged to income in the period such
determination was made.
Effective September 30, 2007, we adopted the provisions of FIN 48, which creates a single model to address accounting for
uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being
recognized in the financial statements. FIN 48 establishes a two-step approach for evaluating tax positions. The first step, recognition,
occurs when a company concludes (based solely on the technical aspects of the matter) that a tax position is more likely than not to be
sustained upon examination by a taxing authority. The second step, measurement, is only considered after step one has been satisfied
46
and measures any tax benefit at the largest amount that is deemed more likely than not to be realized upon ultimate settlement of the
uncertainty. These determinations involve significant judgment by management. Tax positions that fail to qualify for initial
recognition are recognized in the first subsequent interim period that they meet the more likely than not standard or when they are
resolved through negotiation or litigation with factual interpretation, judgment and certainty. Tax laws and regulations themselves are
complex and are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court
filings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the
need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities.
During fiscal 2008, we decreased our valuation allowance on deferred tax assets to $1.7 million, primarily due to the
expiration of federal and state capital loss carryforwards. In addition, the valuation allowance with respect to the loss from the disposal
of our Auburn facility in California was also reduced with a corresponding increase in uncertain tax positions. During fiscal 2007, we
increased our valuation allowance on deferred tax assets to $24.1 million, primarily due to the carryforward of additional losses from
the disposal of our Auburn facility in California. During fiscal 2006, our valuation allowance on deferred tax assets remained at
$21.2 million. In making the determination to record the valuation allowance, management considered the likelihood of future taxable
income and feasible and prudent tax planning strategies to realize deferred tax assets. In the future, if we determine that we expect to
realize more or less of the deferred tax assets, an adjustment to the valuation allowance will affect income in the period such
determination is made.
Federal income taxes have not been provided for on a portion of the unremitted earnings of foreign subsidiaries because such
earnings are intended to be permanently reinvested. The total amount of unremitted earnings of foreign subsidiaries for which we have
not yet recorded federal income taxes was approximately $86.0 million at fiscal 2008 year-end. In addition to federal income taxes
(which are not practicably determinable), withholding taxes of approximately $3.8 million would be payable upon repatriation of such
earnings which would result in additional foreign tax credits.
The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax
Relief Act of 2008”, was enacted on October 3, 2008. Under the Act, the federal R&D credit was retroactively extended for amounts
paid or incurred after December 31, 2007 and before January 1, 2010. The effects of the change in the tax law will be recognized in
our first quarter of FY 2009, which is the quarter in which the law was enacted. In addition to the federal legislation, California
Assembly Bill 1452 was enacted on September 30, 2008. This legislation limits the California R&D credit to 50% of the California
tax liability for tax years beginning on or after January 1, 2008 and before January 1, 2010. The Company is currently in the process
of analyzing the impact of both of these new laws.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mar ket r isk disclosur es
We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use
derivative financial instruments for speculative or trading purposes.
Inter est r ate sensitivity
A portion of our investment portfolio is composed of fixed income securities. These 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%
from levels at fiscal 2008 year-end, the fair value of the portfolio, based on quoted market prices, would decline by an immaterial
amount. We have the ability to generally hold our fixed income investments until maturity and therefore we would not expect our
operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our
securities portfolio. If necessary, we may sell short-term investments prior to maturity to meet our liquidity needs.
At fiscal 2008 year-end, the fair value of our available-for-sale debt securities was $3.4 million, all of which was classified as
short-term investments. Gross unrealized gains and losses on available-for-sale debt securities were $12,000 and ($6,000),
respectively, at fiscal 2008 year-end. At fiscal 2007 year-end, the fair value of our available-for-sale debt securities was $45.9 million,
all of which was classified as short-term investments. Gross unrealized gains and losses on available-for-sale debt securities were
$139,000 and ($19,000), respectively, at fiscal 2007 year-end.
For eign cur r ency exchange r isk
We maintain operations in various countries outside of the United States and foreign subsidiaries that manufacture and sell
our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in
other currencies, primarily the Euro and the Japanese Yen. As a result, our earnings and cash flows are exposed to fluctuations in
foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative
47
instruments, primarily forward contracts with maturities of three months or less, to manage our exposure associated with anticipated
cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are
mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for trading purposes.
We do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows
resulting from the use of these instruments. There can be no assurance that these strategies will be effective or that transaction losses
can be minimized or forecasted accurately.
A hypothetical 10% change in foreign currency rates would not have a material impact on our results of operations or
financial position.
The following table provides information about our foreign exchange forward contracts at September 27, 2008. The table
presents the weighted average contractual foreign currency exchange rates, the value of the contracts in U.S. dollars at the contract
exchange rate as of the contract maturity date and fair value. The U.S. notional fair value represents the contracted amount valued at
September 27, 2008 rates.
Forward contracts to sell (buy) foreign currencies for U.S. dollars (in thousands, except contract rates):
Aver age
Contr act Rate
Fair Value Hedges:
Euro..............................................................
British Pound Sterling ..................................
Canadian Dollar ...........................................
Japanese Yen................................................
Korean Won .................................................
1.4262
1.7574
0.9358
107.4863
1,099.9927
U.S. Notional
Contr act Value
$(11,918)
$1,230
$627
$(5,350)
$2,359
U.S. Notional
Fair Value
$(12,593)
$1,288
$692
$(5,471)
$2,243
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15 (a) for an index to the Consolidated Financial Statements and Supplementary Financial Information, which are
attached hereto and incorporated by reference herein. The financial statements and notes thereto can be found beginning on page 66 of
this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosur e Contr ols and Pr ocedur es
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures; as such term is
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this Annual Report
(“Evaluation Date”). The controls evaluation was done under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective in providing reasonable
assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934,
as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Repor t on Inter nal Contr ol Over Financial Repor ting
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company.
Management assessed the effectiveness of our internal control over financial reporting as of September 27, 2008, utilizing the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework. Based on the assessment by management, we determined that our internal control over financial
reporting was effective as of September 27, 2008. The effectiveness of our internal control over financial reporting as of
48
September 27, 2008 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their
report which appears below.
Inher ent Limitations Over Inter nal Contr ols
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that the Company’s receipts and
expenditures are being made only in accordance with authorizations of the Company’s management and directors;
and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the financial statements.
Management, including our CEO and CFO, does not expect that the Company’s internal controls will prevent or detect all errors and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have
been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Changes in Inter nal Contr ol Over Financial Repor ting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 27,
2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Coherent, Inc.:
We have audited the internal control over financial reporting of Coherent, Inc. and its subsidiaries (collectively, the
“Company”) as of September 27, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with
49
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 27, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended September 27, 2008, of the Company and our report dated
November 25, 2008, expressed an unqualified opinion on those consolidated financial statements and includes an explanatory
paragraph relating to the adoption of an accounting principle.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
November 25, 2008
50
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
Dir ector s
The names of the directors of Coherent, Inc. (the “Company”) and certain information about them are set forth below.
Name
Age
Dir ector
Since
John R. Ambroseo, PhD...............................................................
John H. Hart (1)(3).......................................................................
47
63
2002
2000
Susan M. James (2)(3) .................................................................
Clifford Press (3) .........................................................................
Garry W. Rogerson, PhD (1)(2)(3)(4)..........................................
62
55
56
2008
2008
2004
Lawrence Tomlinson (2)(4) .........................................................
68
2003
Sandeep Vij (1)(3)(4)(5) ..............................................................
43
2004
(1)
Member of the Compensation and H.R. Committee.
(2)
Member of the Audit Committee.
(3)
Member of the Governance and Nominating Committee.
(4)
Member of the Special Committee.
(5)
Member of the Special Litigation Committee.
Pr incipal Occupation
President and Chief Executive Officer
Retired Sr. Vice President and Chief Technical
Officer of 3Com Corp.
Consultant to Ernst & Young
Managing Member of Oliver Press Partners, LLC
Chairman of the Board of Coherent; President
and Chief Executive Officer of Varian, Inc.
Retired Senior Vice President and Treasurer of
Hewlett-Packard Co.
Vice President of Strategic Markets & Business
Development of Cavium Networks, Inc.
Except as set forth below, each of our directors has been engaged in his or her principal occupation set forth above during the
past five years. There is no family relationship between any of our directors or executive officers. The Board of Directors has
determined that, with the exception of Dr. Ambroseo, all of its current members are “independent directors” as that term is defined in
the marketplace rules of the Nasdaq Stock Market.
John R. Ambroseo. Dr. Ambroseo has served as our President and Chief Executive Officer as well as a member of the Board
of Directors since October 2002. Dr. Ambroseo served as our Chief Operating Officer from June 2001 through September 2002.
Dr. Ambroseo served as our Executive Vice President and as President and General Manager of the Coherent Photonics Group from
September 2000 to June 2001. From September 1997 to September 2000, Dr. Ambroseo served as our Executive Vice President and
as President and General Manager of the Coherent Laser Group. From March 1997 to September 1997, Dr. Ambroseo served as our
Scientific Business Unit Manager. From August 1988, when Dr. Ambroseo joined us, until March 1997, he served as a Sales
Engineer, Product Marketing Manager, National Sales Manager and Director of European Operations. Dr. Ambroseo received a
Bachelor degree from SUNY-College at Purchase and a PhD in Chemistry from the University of Pennsylvania.
51
John H. Hart. Mr. Hart was a Fellow at 3Com Corporation, a global provider of enterprise and small-business
networking solutions, from September 2000 until September 2001. In September of 2000, Mr. Hart retired as Senior Vice
President and Chief Technical Officer of 3Com Corporation, a position he had held since August 1996. From the time
Mr. Hart joined 3Com in September 1990 until July 1996, he was Vice President and Chief Technical Officer. Prior to
joining 3Com, Mr. Hart worked for Vitalink Communications Corporation for seven years, where his most recent position
was Vice President of Network Products. Mr. Hart serves on the boards of directors of Plantronics, Inc, a headset
communications company and PLX Technologies, Inc., an I/O interconnect developer.
Susan M. James. Ms. James originally joined Ernst & Young, a global leader in professional services, in 1975,
becoming a partner in 1987 and since June 2006, has been a consultant to Ernst & Young. During her tenure with Ernst &
Young, she has been the lead partner or partner-in-charge for the audit work for a significant number of technology
companies, including Intel Corporation, Sun Microsystems, Amazon.com, Autodesk and the Hewlett-Packard Corporation,
and for the Ernst & Young North America Global Account Network. She also served on the Ernst & Young Americas
Executive Board of Directors from January 2002 through June 2006. She is a certified public accountant and a member of the
American Institute of Certified Public Accountants. Ms. James also serves on the Board of Directors of the Tri-Valley
Animal Rescue, a non-profit that is dedicated to providing homes for homeless pets.
Clifford Press. Mr. Press has been a managing member of Oliver Press Partners, LLC, an investment advisory firm,
since March 2005. Prior to 1986 he was employed as an investment banker at Morgan Stanley & Co., Incorporated. From
1986 to March 2003, Mr. Press was a General Partner of Hyde Park Holdings, Inc., a private equity investment firm
(“HPH”). High Voltage Engineering Corporation, an industrial holding concern and a portfolio company of HPH, of which
Mr. Press had been an officer and a director from 1989 to August 2004, filed petitions under Chapter 11 of the United States
Bankruptcy Code in March 2004 and February 2005. Since 2001, he has been a director of GM Network Ltd., a private
holding company providing Internet- based digital currency services. Mr. Press received his MA degree from Oxford
University and an MBA degree from Harvard Business School.
Garry W. Rogerson. Dr. Rogerson has served as our Chairman of the Board since June 2007. Dr. Rogerson has been
President and Chief Executive Officer of Varian, Inc., a major supplier of scientific instruments and consumable laboratory
supplies, vacuum products and services, since 2002 and 2004, respectively. Dr. Rogerson served as Varian’s Chief Operating
Officer from 2002 to 2004, as Senior Vice President, Scientific Instruments from 2001 to 2002, and as Vice President,
Analytical Instruments from 1999 to 2001. Dr. Rogerson also serves on the board of directors of Varian.
Lawrence Tomlinson. Mr. Tomlinson retired from Hewlett-Packard Co., a global technology company, in June
2003. Prior to retiring from Hewlett- Packard Co., from 1993 to June 2003 Mr. Tomlinson served as its Treasurer, from 1996
to 2002 he was also a Vice President of Hewlett-Packard Co. and from 2002 to June 2003 was also a Senior Vice President of
Hewlett- Packard Co. Mr. Tomlinson is a member of the board of directors of Salesforce.com, Inc., a customer relationship
management service provider.
Sandeep Vij. Mr. Vij has held the position of Vice President of Strategic Markets and Business Development of
Cavium Networks, Inc., a leading provider of highly integrated semiconductor products since May 2008. Prior to that he held
the position of Vice President of Worldwide Marketing, Services and Support for Xilinx Inc., a digital programmable logic
device provider, from 2007 to April 2008. From 2001 to 2006, he held the position of Vice President of Worldwide
Marketing at Xilinx. From 1997 to 2001, he served as Vice President and General Manager of the General Products Division
at Xilinx. Mr. Vij joined Xilinx in 1996 as Director of FPGA Marketing.
On January 5, 2009, the Company entered into an amendment to its agreement with Oliver Press Partners, LLP and
certain of its affiliates (“OPP”). The agreement provides that the Board of Directors of the registrant will include Mr. Press in
the slate of directors for election at the annual meeting of the stockholders to be held in 2009 and that the signatories to the
agreement will not seek to call a special meeting or other actions relating to the election of directors for one year. In addition,
Mr. Press agreed to submit his resignation as a director if OPP ceases to hold at least 50% of the common stock of the
Company that OPP and its affiliates currently hold as a group. The settlement agreement includes certain standstill
restrictions that commenced upon the execution of the settlement agreement and will expire on the first anniversary of our
2009 annual meeting if Mr. Press is elected to our board of directors at the 2009 annual meeting, or at the final adjournment
of the 2009 annual meeting of stockholders if Mr. Press is not elected at our 2009 annual meeting. Under the terms of the
standstill restrictions, neither OPP nor any of its affiliates may, among other things, (i) submit or encourage any other person
or group to nominate directors for election to the registrant’s board of directors, (ii) submit any stockholder proposals,
(iii) call an annual or special meeting of stockholders, (iv) solicit proxies from stockholders of the registrant, (v) change the
composition of the board of directors. The standstill restrictions contain certain exceptions that, among other things, permit
OPP to seek to change the composition of our Board of Directors at the 2010 annual meeting by submitting nominees for
52
election and to solicit proxies in favor of such nominees for the 2010 annual meeting. In addition, during the effective period
of the standstill restrictions described above, OPP has agreed that it will cause any shares of our common stock that it owns
to be voted in accordance with the recommendation of our Board of Directors if Mr. Press has approved and joined in any
such recommendation.
Executive Officer s
The name, age, position and a brief account of the business experience of our chief executive officer and each of our
other executive officers as of January 5, 2008 are set forth below:
Name
Age
John R. Ambroseo, PhD ............................................................... 47
Helene Simonet............................................................................. 56
Luis Spinelli..................................................................................
61
Bret M. DiMarco .......................................................................... 40
Office Held
President and Chief Executive Officer Executive Vice President and Chief Financial Officer Executive Vice President and Chief Technology Officer
Executive Vice President, General Counsel and
Corporate Secretary
Please see “Directors” above for Dr. Ambroseo’s biographical information.
Helene Simonet. Ms. Simonet has served as our Executive Vice President and Chief Financial Officer since April
2002. Ms. Simonet served as Vice President of Finance of our former Medical Group and Vice President of Finance,
Photonics Division from December 1999 to April 2002. Prior to joining Coherent, she spent over twenty years in senior
finance positions at Raychem Corporation’s Division and Corporate organizations, including Vice President of Finance of the
Raynet Corporation. Ms. Simonet has both Master’s and Bachelor degrees from the University of Leuven, Belgium.
Luis Spinelli. Mr. Spinelli has served as our Executive Vice President and Chief Technology Officer since February
2004. Mr. Spinelli joined the Company in May 1985 and has since held various engineering and managerial positions,
including Vice President, Advanced Research from April 2000 to September 2002 and Vice President, Corporate Research
from September 2002 to February 2004. Mr. Spinelli has led the Advanced Research Unit from its inception in 1998, whose
charter is to identify and evaluate new and emerging technologies of interest for us across a range of disciplines in the laser
field. Mr. Spinelli holds a degree in Electrical Engineering from the University of Buenos Aires, Argentina with post­
graduate work at the Massachusetts Institute of Technology.
Bret M. DiMarco. Mr. DiMarco has served as our Executive Vice President and General Counsel since June 2006
and our Corporate Secretary since February 2007. From February 2003 until May 2006, Mr. DiMarco was a member and
from October 1995 until January 2003 was an associate at Wilson Sonsini Goodrich & Rosati, P.C., a law firm. Mr. DiMarco
received a Bachelor degree from the University of California at Irvine and a Juris Doctorate degree from the Law Center at
the University of Southern California. He is also an adjunct professor of law at the University of California Hastings College
of the Law, teaching corporate law and mergers & acquisitions.
Section 16(a) Beneficial Owner ship Repor ting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes
in ownership with the SEC. Such officers, directors and ten-percent stockholders are also required by SEC rules to furnish us
with copies of all forms that they file pursuant to Section 16(a). Based solely on our review of the copies of such forms
received by us, and on written representations from certain reporting persons that no other reports were required for such
persons, we believe that, during fiscal 2008, our officers, directors and greater than ten percent stockholders complied with
all applicable Section 16(a) filing requirements, except that Oliver Press Partners LLC filed its Form 3 in August 2008 and it
was originally due in March 2008.
Business Conduct Policy
We have adopted a worldwide Business Conduct Policy that applies to the members of our Board of Directors,
executive officers and other employees. This policy is posted on our Website at www.coherent.com and may be found as
follows:
53
1.
From our main Web page, first click on “Company” and then on “corporate governance.”
2.
Next, click on “Business Conduct Policy.”
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
from, a provision of this Business Conduct Policy by posting such information on our Website, at the address and location
specified above.
Stockholders may request free printed copies of our worldwide Business Conduct Policy from:
Coherent, Inc.
Attention: Investor Relations 5100 Patrick Henry Drive Santa Clara, California 95054 Audit Committee Infor mation
The Board has determined that directors James, Tomlinson and Rogerson are “audit committee financial experts” as
that term is defined in Item 401(h) of Regulation S-K of the Securities Act of 1933, as amended. All of the members of the
Audit Committee are “independent” as defined under rules promulgated by the SEC and qualify as independent directors
under the marketplace rules of the Nasdaq Stock Market.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our Executive Compensation Philosophy
Our executive compensation programs are designed to provide strong alignment between executive pay and
performance and to focus executives on making policies and decisions that enhance Coherent’s stockholder value over time.
As we explain further below, the Compensation and H.R. Committee is highly focused on having a significant portion of our
executive officers’ compensation tied to achieving certain performance goals. Accordingly, our objectives are to:
• Ensure that the executive team has clear goals and accountability with respect to our financial performance;
• Attract, motivate and retain talented executives who are responsible for the success of our company by
maintaining a total compensation program that is competitive with the prevailing practices in our industry;
• Provide market levels of pay for meeting target performance expectations, with above market pay for
performance above target and below market pay for performance below target;
• Be mindful in our design of an executive compensation structure of both our historical practices, as well as the
evolving practices in our industry as well as the broader high technology industry;
• Promote our culture of integrity by properly rewarding appropriate risk taking, while not promoting excessive
risk taking;
• Benchmark pay practices including and beyond the photonics industry to recognize that we face competitors
ranging from smaller to larger enterprises in the broader high technology market; and
• Prudently utilize discretion to make awards that differ from the defined pay structure, as warranted, to recognize
exceptional circumstances and performance.
Throughout this Proxy Statement, our chief executive officer and chief financial officer during fiscal 2008, as well
as the other individuals who are included in the Fiscal 2008 Summary Compensation Table, are referred to as our “Named
Executive Officers.”
54
Compensation and H.R. Committee Operations and Decision Making
The committee held ten (10) meetings in fiscal 2008. Typically, the committee has considered Named Executive
Officer base salary and other compensation during March or April of each fiscal year, but beginning in fiscal 2009, will be
reviewing such compensation during the first fiscal quarter.
Role and Authority of Our Compensation and H.R. Committee
During fiscal 2008, the Compensation and H.R. Committee of the Board of Directors consisted of Messrs. Hart
(Chair) and Vij and Dr. Rogerson. Each of these individuals qualifies as (i) an “independent director” under the requirements
of The NASDAQ Stock Market, (ii) a “non-employee director” under Rule 16b-3 of the Securities Exchange Act of 1934 (the
“1934 Act”), (iii) an “outside director” under Section 162(m) of the Code and (iv) an “independent outside director” as that
term is defined by RiskMetrics Group, formerly Institutional Shareholder Services.
The Compensation and H.R. Committee is responsible for ensuring that our executive compensation programs are
effectively designed, implemented and administered. In particular, the committee reviews the corporate goals and objectives
and approves the compensation for our Named Executive Officers. The compensation includes base salary and incentive nonequity and equity compensation as well as executive benefits and perquisites. The committee has sole authority delegated to
it by the Board to make equity grants to our Named Executive Officers.
Our Compensation and H.R. Committee has adopted a charter, a copy of which may be found on our website at
“www.coherent.com”—“Company”—“Corporate Governance.” The committee reviews its charter annually and, where
appropriate, revises it accordingly.
The committee may meet with or without management present, at its discretion. The committee regularly conducts
an executive session without management present. The objective of these sessions is to enable the committee to discuss
compensation issues without those who will be affected by the decisions in attendance.
Role of Executive Officers in Compensation Decisions
The Compensation and H.R. Committee regularly meets with Dr. Ambroseo, our chief executive officer, to obtain
recommendations with respect to the compensation programs, practices and packages for our Named Executive Officers
other than Dr. Ambroseo. Additionally, Ms. Simonet, our executive vice president and chief financial officer, and
Mr. DiMarco, our executive vice president and general counsel are regularly invited to meetings of the committee or
otherwise asked to assist the committee. During fiscal 2008, Mr. Victor, our former executive vice president, human
resources also regularly attended the committee’s meetings. The assistance of these individuals includes providing financial
information and analysis for the committee and its compensation consultants, taking minutes of the meeting or providing
legal advice, the development of compensation proposals for consideration, and providing insights regarding our employees
(executive and otherwise) and the business context for the committee’s decisions. Named Executive Officers will attend
portions of committee meetings when requested, but will leave the meetings as appropriate when matters which will
potentially affect them personally are discussed. From time to time, outside legal counsel attends committee meetings. The
Compensation and H.R. Committee makes decisions regarding Dr. Ambroseo’s compensation without him present.
Role of Compensation Consultants
In fiscal 2008, the Compensation and H.R. Committee engaged Farient Advisors (“Farient”) as its compensation
consultants. Farient was retained to comprehensively review and analyze our executive compensation program and to make
recommendations for fiscal 2008 compensation. Farient serves at the discretion of the committee and does no other work for
the Company unless it was expressly authorized by the committee. Since their retention, Farient has not done any work for
the Company other than its work with the committee. The committee believes that it is critical for its compensation
consultant to meet with management, especially our chief executive officer to obtain their perspectives on the context for
decision-making and impact of compensation recommendations.
The Board of Directors also determined that a separate consultant was needed for Board-related compensation to
avoid any perceived conflict of interest for the committee’s advisor, Farient. Mr. DiMarco, our general counsel and corporate
secretary, on behalf, and at the direction, of the Board, retained Compensia, Inc. (“Compensia”) to provide a comprehensive
review on compensation for membership on the Board and its committees. Following a recommendation from Compensia,
during fiscal 2008, the Board determined the compensation to be paid for service on special committees, including the
Special Committee and the Special Litigation Committee. Additionally, during fiscal 2008, Compensia provided
55
recommendations to the Board with regards to its non-equity compensation, which was adopted by the Board in September,
2008 and effective in fiscal 2009.
The table below illustrates director compensation for fiscal 2009:
Position
Annual Retainer (1)
Board Member.......................................................................................................
Board Chair ...........................................................................................................
Audit Committee Chair .........................................................................................
Compensation and H.R. Comm. Chair ..................................................................
Governance & Nominating Comm. Chair .............................................................
Audit Committee member (non-Chair) .................................................................
Compensation and H.R. Committee member (non-Chair) ....................................
Governance and Nominating Committee member (non-Chair).............................
(1)
$40,000
$16,000
$34,000
$16,000
$10,750
$12,500
$8,500
$6,500
The annual retainer is paid quarterly in equal installments.
Additionally, Coherent participates in and maintains a subscription to the Radford Executive Compensation Survey.
This survey provides benchmark data and overall practices reports to assist the Company with regards to employees
generally. Such data includes executive compensation data and is presented from time to time to the committee at its request.
Pay Positioning Strategy and Benchmarking of Compensation
Coherent has striven to position the midpoint of its target compensation ranges near the 50th percentile of its peers,
resulting in targeted total compensation that is competitive within our labor market for performance that meets the objectives
established by the committee. An individual’s actual salary, non-equity incentive compensation opportunity and equity
compensation may fall below or above the target position based on the individual’s experience, seniority, skills, knowledge,
performance and contributions. These factors are weighed individually by the committee in its judgment, and no one factor
takes precedence over others nor is any formula used in making these decisions. The chief executive officer’s review of the
performance of his direct reports is carefully considered by the committee in making individual pay decisions. Actual
realized pay will be higher or lower than the targeted amounts for each individual based primarily on Company performance.
In analyzing our executive compensation program relative to this target market positioning, the committee reviewed
information provided by its independent compensation consultant, which includes an analysis of data from peer companies’
proxy filings with respect to similarly situated individuals at the peer companies and from multiple compensation survey
sources, including a broad cross-section of technology companies of similar size to Coherent from the Radford Executive
Compensation Survey and survey data provided by Salary.com. For pay decisions made in fiscal 2008, Farient recommended
that the committee approve modifications to the group of peer companies for conducting compensation analyses from proxies
to better reflect the Company’s size, strategy and business. For fiscal 2008, the peer companies were Adaptec Inc., Altera
Corporation, Axcelis Technologies, Inc., Cirrus Logic, Inc., Cymer Inc., Cypress Semiconductor, Integrated Device
Technology, FEI Company, JDS Uniphase, Lam Research, Linear Technology, Newport Corporation, Novellus Systems,
Plantronics Inc., PMC-Sierra, Inc. and Trimble Navigation Limited.
The committee reviews and updates, if necessary, the peer group used for proxy analyses annually to ensure that the
comparisons are meaningful. Several factors are considered in selecting the peer group, the most important of which are:
•
Industry (primarilycompanies in the Electronic Equipment and Semiconductor sub-industry classifications
defined by the Global Industry Classification Standard (GICS) system);
• Revenue level (as a proxy for complexity) (primarily companies with between $200 million and $2 billion in
revenues); and
• Geographic location (technology markets, primarily in the Bay Area).
The committee’s perspective is that companies that meet these criteria are the most likely competitors for executive
talent in our labor markets.
56
For fiscal 2009, Farient recommended that the committee modify the group of peer companies for conducting
compensation analyses based on the factors above to better reflect the Company’s size, strategy and business. Following
these recommendations, the committee removed Adaptec, Inc., Cirrus Logic, Inc., Cypress Semiconductor Corp., Lam
Research Corp. and Novellus Systems, Inc. and added FLIR Systems, Inc. and GSI Group, Inc. to the peer group for fiscal
2009. The committee also was mindful and took into consideration the recent policy update by RiskMetrics with regards to
the formulation and use of peer groups and the relative size of peers, although the peer group selected is not confined to the
Global Industrial Classification System (GICS) code for Coherent.
Components of Compensation
The principal components of Coherent’s executive officer compensation and employment arrangements during
fiscal 2008 included:
•
Base salary;
•
Variable cash incentive payments;
•
Long-term equity awards through time-based stock options;
•
Long-term equity awards through time-based restricted stock units;
•
Long-term equity incentive awards through performance-based restricted stock units;
•
Change of control protection through participation in our Change of Control Plan;
•
Retirement savings matching benefits provided under a 401(k) plan and under a deferred compensation plan;
•
Executive perquisites; and
•
Benefit programs generally available to other employees.
These components were selected because the committee believes that a combination of salary, incentive pay,
benefits and perquisites is necessary to help us attract and retain the executive talent on which Coherent’s success depends
and in recognition of some of the benefits which have historically been available to executives at the Company. The variable
components are structured to allow the committee to reward performance throughout the fiscal year and to provide an
incentive for executives to appropriately balance their focus on short-term and long-term strategic goals. The fixed
components, including salary, benefits and perquisites, are structured to provide a minimum level of security for our
executives relative to their day-to-day spending needs and long-term needs for income and are intended to be competitive
with the levels of base income that each executive could receive from similar employment at other companies. The
committee believes that, when taken together, these components are effective in achieving the objectives of our compensation
program and philosophy and are reasonable relative to our strategy of managing total compensation near the 50th percentile
of market practices.
The committee annually reviews the entire compensation program with the assistance of Farient, its independent
compensation consultant. The committee reviews change in control protections every two years upon renewal of the plan.
However, the Compensation and H.R. Committee may at any time review one or more components as necessary or
appropriate to ensure such components remain competitive and appropriately designed to reward performance. In setting
compensation levels for a particular Named Executive Officer, the committee considers both individual (as described above)
and corporate factors.
As a result of the Company’s historical equity grant review, the committee did not make any equity grants to the
Named Executive Officers during fiscal 2007. During fiscal 2008, the committee made three types of grants to the Named
Executive Officers: (a) an option grant to address missed cycle grants in fiscal 2007, (b) a grant of time-based restricted stock
units and (c) as part of the committee’s focus on tying a significant portion of the Named Executive Officers’ compensation
to performance criteria, performance- based restricted stock units which will vest (assuming achievement of the performance
metrics) in November, 2010 (as discussed more fully below).
57
Base Salary and Variable Non-Equity Incentive Compensation
Base Salary
Coherent provides base salary to its Named Executive Officers and other employees to compensate them for
services rendered on a day-to-day basis during the fiscal year. The Compensation and H.R. Committee reviewed information
provided by its independent compensation consultant with respect to similarly situated individuals at the peer companies to
assist it in determining base salary for each Named Executive Officer. In addition, the committee considers each individual’s
experience, skills, knowledge and responsibility. In reviewing each Named Executive Officer other than the chief executive
officer, the committee also considers such individual’s performance review provided by the chief executive officer. With
respect to the chief executive officer, the committee additionally considers the performance of Coherent as a whole.
During Coherent’s voluntary internal review of its historical equity grants, the Compensation and H.R. Committee
determined not to consider changes to the compensation of the Named Executive Officers until that review was completed.
Accordingly, in the fourth quarter of fiscal 2007, following the announcement of the completion of the Special Committee’s
internal review, the Compensation and H.R. Committee asked Farient to review executive officer compensation. Farient
noted that Mr. DiMarco’s base salary was below the 50th percentile of the peer group and recommended to the committee
that it increase his annual base salary from $250,000 to $300,000, which put his base salary slightly below the
50th percentile, but brought his overall direct cash compensation (including incentive-based cash compensation) to
approximately the 50th percentile. The Compensation and H.R. Committee approved that recommendation and
Mr. DiMarco’s salary increase was effective in the first quarter of fiscal 2008.
In the third quarter of fiscal 2008, the committee again reviewed the base salaries of the Named Executive Officers.
Farient provided an extensive overview and analysis of the benchmarked data and comparative results for the base salaries of
our Named Executive Officers. In reviewing the base salaries of the Named Executive Officers, the Compensation and H.R.
Committee determined that increases were appropriate for Dr. Ambroseo, Ms. Simonet and Mr. Spinelli. Given the
adjustment made to Mr. DiMarco’s salary during the fourth quarter of the prior fiscal year, the committee determined that he
was compensated at the 50th percentile and, therefore, no further adjustment was needed at that time. Additionally, given that
Mr. Victor had previously announced his retirement effective in January 2009, no adjustment to base salary was warranted.
The following table illustrates the base salary adjustments (rounded) approved by the committee during the third fiscal
quarter of 2008:
Name
Pr ior Salar y
John Ambroseo .............................................................................................................
Incr ease
New Salar y
$32,000 or
6%
$18,000 or
$352,000
5%
$251,000 $5,000 or 2%
$548,000
Helene Simonet.............................................................................................................
Luis Spinelli..................................................................................................................
$580,000
$370,000
$256,000
During the first quarter of fiscal 2009, upon management’s recommendation, the committee determined not to
increase salaries for fiscal 2009. Prior to making this determination the committee discussed management’s recommendation
with Farient, which agreed with the recommendation.
Variable Non-Equity Incentive Compensation
To focus each executive officer on the importance of the performance of Coherent, a substantial portion of each
individual’s potential short-term compensation is in the form of variable incentive pay that is tied to achieving goals
established by the Compensation and H.R. Committee. In fiscal 2008, Coherent maintained one incentive cash program under
which executive officers were eligible to receive bonuses: the 2008 Variable Compensation Plan (“2008 VCP”). In the first
quarter of fiscal 2008, the Compensation and H.R. Committee amended the Company’s Productivity Incentive Plan (“PIP”)
to remove executive officers (including the Named Executive Officers) from being eligible participants for awards under PIP.
Going forward, the committee felt that PIP was not a material part of compensation for the Named Executive Officers and
that it would be administratively more effective to have the variable cash incentive compensation for Named Executive
Officers under a single plan.
2008 VCP
The 2008 VCP was designed to promote the growth and profitability of Coherent. It provided incentive
compensation opportunity in line with targeted market rates to our Named Executive Officers who are critical to the
58
successful development and attainment of the Company’s business objectives. Under the 2008 VCP, participants were
eligible to receive quarterly bonuses if specific performance goals set by the committee at the beginning of the year were
achieved. The Compensation and H.R. Committee established these goals when it adopted the 2008 VCP during the first
quarter of fiscal 2008. In setting the performance goals, the Compensation and H.R. Committee assessed the anticipated
difficulty and relevant importance to the success of Coherent of achieving the performance goals.
The actual awards (if any) payable for each quarter varied depending on the extent to which actual performance met,
exceeded or fell short of the goals approved by the committee. The 2008 VCP established goals tied to achieving varying
levels of quarterly revenue and pre-tax profit goals. The committee determined that the targeted goals for the 2008 VCP
would be (i) at least 80% of the budgeted quarterly revenue set forth in the Company operating plan and (ii) at least 80% of
the Company’s budgeted profit before taxes, as adjusted for extraordinary items, such as the fiscal impact of stock option
expensing under FASB 123(R), stock investigation costs and litigation related thereto, impairment or restructuring charges,
and the impact of significant acquisitions (the “PBIT Target”). Therefore, to have a minimum payout under the 2008 VCP,
the Company would have to meet or exceed, on a quarterly basis, 80% of (i) budgeted revenue and (ii) the PBIT Target, both
as measured against the Board- approved Company operating plan. Assuming each of the thresholds were met, the amount
each participant received could fluctuate between 0% (for less than 80% of the PBIT Target) and 200% (for 120% or higher
achievement of the PBIT Target) of the targeted amount for each quarter as follows:
PBIT Tar get
Achievement
Payout
Modifier
Less than 80% ..................................................................................................................
80%...................................................................................................................................
85%...................................................................................................................................
90%...................................................................................................................................
95%...................................................................................................................................
100%.................................................................................................................................
105%.................................................................................................................................
110%.................................................................................................................................
115%.................................................................................................................................
120%.................................................................................................................................
0%
50%
62.5%
75%
87.5%
100%
125%
150%
175%
200%
If Coherent failed to meet at least 80% of the goal for each of the targets for a particular quarter, the participant
would not receive any bonus for that particular quarter. As noted above, the committee set these performance goals to focus
the management team on increasing the performance of the Company through meeting quarterly revenue targets and
maximizing pretax profits. The committee and Farient chose to focus on revenue growth and pretax profits so that the
executive management was incentivized to deliver the type of growth which benefits our stockholders, namely increasing
sales and profitability. The specific goals used to determine 2008 VCP awards in each quarter included detailed information
on the Company’s cost structure and business plans and are therefore considered confidential business information, the
disclosure of which could result in competitive harm. Based on a review of past performance goals and the goals for fiscal
2008, the committee believes that the goals were reasonably difficult to achieve, as demonstrated by the fact that the
Company did not achieve all of the targets set by the committee for fiscal 2008, resulting in a payout less than the targeted
amount. Additionally, in approving the 2008 Variable Compensation Plan in the first quarter of fiscal 2008, the committee,
upon recommendation of Farient, determined that the amount each participant may receive can fluctuate between 0 and 200%
of the targeted amount. The committee determined to, as compared to the fiscal 2007 Variable Compensation Plan, increase
the cap from 150% to 200% and to decrease the achievement threshold from 90% to 80% to reflect the volatile nature of
quarterly performance results in technology companies and to be consistent with peer pay practices.
The table below describes for each Named Executive Officer under the 2008 Variable Compensation Plan (i) the
target percentage of base salary, (ii) the potential award range as a percentage of base salary, and (iii) the actual award earned
for fiscal 2008.
59
Named Executive
Officer
Tar get
Per centage
of Base Salar y
John Ambroseo ..................................................................
Helene Simonet..................................................................
Bret DiMarco .....................................................................
Luis Spinelli.......................................................................
Ron Victor .........................................................................
100%
70%
50%
50%
50%
Payout
Per centage
Range of Base
Salar y
0-200%
0-200%
0-200%
0-200%
0-200%
Actual Awar d(1)
$534,621
$239,649
$143,275
$120,635
$114,567
Actual Awar d
Per centage of Base
Salar y(2)(3)
94.8%
66.4%
47.8%
47.6%
47.8%
(1) Reflects amounts earned during fiscal year 2008.
(2) This reflects the aggregate quarterly bonuses earned by the Named Executive Officers for fiscal year 2008 under the
2008 Variable Compensation Plan.
(3) As seen in the plan-based award table below, no payments were made for the fourth fiscal quarter under the 2008
Variable Compensation Plan as the Company did not achieve the minimum performance requirements.
Long-Term, Equity-Based Incentive Awards
Equity-based awards are made to our employees, including the Named Executive Officers, under Coherent’s 2001
Stock Plan. The goal of our equity-based award program is to provide employees and executives the perspective of an owner
with a stake in the success of Coherent, thus further increasing alignment with our stockholders. Coherent’s long-term
incentive program may include the grant of stock options, time-based restricted stock and/or incentive-based restricted stock.
When making its compensation decisions, the committee reviews the comprehensive compensation overview
prepared by Farient which reflects potential realizable value under current short and long term compensation arrangements
for the Named Executive Officer.
Fiscal 2008 Awards
During several meetings over the first and second quarters of fiscal 2008, the committee met with Farient to discuss
the design of an appropriate long-term, equity based incentive award program. The committee determined to base the
program largely on restricted stock units, given the option grants made to certain employees (including certain Named
Executive Officers) during the first quarter of fiscal 2008. In particular, during the second quarter of fiscal 2008, the
committee determined to have a 50-50 split between time-based and performance-based restricted stock units in its grants to
Named Executive Officers, with the performance-based grants having a multiplier dependent upon achieving performance
goals. In reviewing and determining the performance goals to utilize in the grants, the committee focused on two elements:
the publicly announced adjusted EBITDA as a percentage of sales goals and a minimum gross revenue achievement.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and certain other non-operating
income and expense items and other items, such as the fiscal impact of stock option expensing under FASB 123(R), stock
investigation costs and litigation related thereto, impairment or restructuring charges, and the impact of significant
acquisitions.
The committee strongly believed that at least half of the long-term equity-based awards to the Named Executive
Officers should be tied through cliff vesting to these announced goals, so that the individuals who can significantly impact
the Company’s performance are incentivized to achieve or exceed these targets. The vesting of the performance-based grants
vary from 0-300% of the base-line performance grants and achievement will be measured in the first quarter of fiscal 2011—
the adjusted EBITDA and the revenue threshold are both measured against the full fiscal year 2010 results. The performance
targets are structured so that the grant recipients, including the Named Executive Officers, are strongly incentivized to take
the necessary operational steps to drive adjusted EBITDA improvement. The measurement for the performance grants is for
adjusted EBITDA for the entire fiscal year 2010, rather than the announced adjusted EBITDA goals which are measured for
exiting fiscal year 2010 to measure the recipient’s entire year’s performance. The revenue threshold selected represents a
dollar amount which would be the highest annual revenue ever achieved by the Company. Given the current economic
conditions, it is unlikely the Company will be able to achieve this revenue threshold. By way of illustration, in the case that
the Company met its adjusted EBITDA goals, but did not achieve the revenue threshold, none of the performance-based
restricted stock units would vest. The committee continues to believe that these targets are difficult to achieve, especially
60
given the included required minimum revenue threshold. The time-based grants vest in three equal annual installments from
the date of grant. The specific goals used to determine the achievement of the performance vesting requirements include
detailed information on the Company’s cost structure and business plans and are therefore deemed confidential business
information, the disclosure of which could result in competitive harm.
The following table reflects the grants and ranges for the Named Executive Officers for the time and
performance-based restricted stock unit grants during fiscal 2008:
Restricted Stock Unit Grants to Named Executive Officer During Fiscal 2008:
Named Executive
Officer
Time-Based RSU
Gr ants
John Ambroseo ....................................................................
Helene Simonet....................................................................
Bret DiMarco .......................................................................
Luis Spinelli.........................................................................
22,500
12,500
10,000
5,000
Potential Range for Per for mance-Based RSU
Gr ants,
depending upon achieving per for mance metr ics
0-67,500
0-37,500
0-30,000
0-15,000
In the first quarter of fiscal 2008, upon the recommendation of Farient, the committee granted stock options to
certain employees, including certain of the Named Executive Officers. These grants were made following the conclusion of
the voluntary stock option review and in recognition of the fact that no long-term incentive compensation was provided
during fiscal 2007. Stock options were selected as the equity vehicle for grant since they create an incentive to enhance
stockholder value, help to retain valuable talent through vesting provisions, and were available for grant during the period
that the Company was not current in its reporting obligations. Grants to selected individuals, including Dr. Ambroseo,
Ms. Simonet, and Mr. DiMarco included both a market-based portion tied to competitive pay practices and an above market
portion provided to recognize the extraordinary contributions of these individuals during the stock option review process and
to encourage their retention. These grants featured a shorter vesting period than our traditional grants (18 months rather than
three years) to recognize that the grants would have been made at the beginning of the year rather than after year end absent
the stock option review process.
Performance Outcomes of Prior Awards
During the third quarter of fiscal 2006, the Compensation and H.R. Committee adopted a performance-based
restricted stock program for certain employees of the Company, including the Named Executive Officers. The restricted stock
grants were subject to annual vesting over three years depending upon the achievement of performance measurements tied to
Coherent’s internal metrics for revenue growth of a range of approximately 5-12% and adjusted EBITDA of approximately
16-20% as a percentage of sales. The committee felt that a three year goal of revenue and adjusted EBITDA as a percentage
of sales improvements were the correct goals for incentivizing the management team. The committee set these goals so that
they were challenging to achieve. The vesting of the restricted stock was variable, so that the number of shares earned could
range from 0% to 125% of the grant target for fiscal 2006 and 0% to 200% of the grant target for fiscal 2007 and fiscal 2008.
In addition, the aggregate shares of restricted stock were to be awarded on a staggered basis as follows: 25% in 2006, 35% in
2007 and 40% in 2008. Given the variability, the range of the aggregate number of shares of restricted stock which could be
earned by the Company’s Named Executive Officers over the three year period was as follows: Dr. Ambroseo—0-52,562
shares; Ms. Simonet—0-24,468 shares; Mr. Spinelli—0-10,875 shares; Mr. Victor—0-6,706 shares and Mr. DiMarco—0­
5,981 shares. Based on the revenue growth and adjusted EBITDA percentage for fiscal 2007 and 2008, no shares under the
program vested in fiscal 2008 or fiscal 2009.
Remedial Actions Related to the Historical Equity Grant Investigation
During the second quarter of fiscal 2008, the committee reviewed a series of option grants which were due to expire
unexercised due to the Company not being current with respect to its voluntary stock option review. Options representing an
aggregate of 416,075 shares were due to expire in April 2008, of which 387,500 were held by Dr. Ambroseo, Ms. Simonet
and Messrs. Spinelli and Victor. None of the foregoing grants had incorrect original grant dates. The committee determined
to extend the expiration date for such grants by fifteen months, which was approximately equivalent to the period during
which such option holders were prohibited from exercising their options.
During the third quarter of fiscal 2008, the committee reviewed the Internal Revenue Code Section 409A
(“Section 409A”) liability faced by Mr. Spinelli related to his exercise in calendar year 2006 of a misdated option grant.
Mr. Spinelli is the only Named Executive Officer who had any potential Section 409A liability related to the exercise of
61
misdated options. The committee approved the Company reimbursing Mr. Spinelli for his tax obligations (approximately
$54,000) under Section 409A as a result of his exercise. Further, in June 2008, the committee authorized the Company to
amend two of Mr. Spinelli’s stock options (the “Spinelli Options”) to increase the exercise prices of such options: an option
to purchase 5,058 shares of Coherent common stock was amended to increase the exercise price from $19.77 to $24.90, and
an option to purchase 14,942 shares of Company common stock was amended to increase the exercise price from $19.77 to
$24.90. Because the Spinelli Options were originally granted with a per share exercise price less than the fair market value of
a share of Company common stock on the date of grant, such options may be subject to adverse tax consequences under
Section 409A of the Internal Revenue Code of 1986, as amended. The Internal Revenue Service promulgated special
transition rules to protect taxpayers from the adverse tax consequences of Section 409A by permitting certain holders of
discounted options to amend such option to increase the exercise price to the fair market value of the common stock on such
options’ original grant date, so long as such amendment occurs by December 31, 2008. Therefore, the committee authorized
the amendments to the Spinelli Options described above to avoid adverse tax consequences under Section 409A to
Mr. Spinelli. In addition, in order to compensate Mr. Spinelli for the loss of the built-in value associated with increasing the
exercise prices of the Spinelli Options, the committee authorized a cash payment to Mr. Spinelli of $107,730, which equals
approximately 105% of the built-in loss of value of the Spinelli Options. Such payment was made on the Company’s first
payroll date in calendar 2009, less applicable withholdings.
The Compensation and H.R. Committee has reviewed the number of option grants which expired unexercised held
by Dr. Ambroseo, Ms. Simonet and Messrs. Spinelli and Victor. At this time, the committee has not reached a conclusion as
to whether or not any remedial payments or actions will be taken with regards to such grants or, to the extent remedial
payments or actions are taken, how the value of such expired options should be measured.
Employee Stock Option Tender Offer
In April 2008, the Company initiated a tender offer related to certain discount options held by non-executive
employees discovered during our voluntary review of our historical stock option practices. Discount options are options with
an exercise price that is less than the fair market value of the shares underlying the option at the time of grant. The discounted
options included in this offer were certain options which vested after December 31, 2004. During the tender offer period,
non-executive employees had the ability to amend the exercise price per share for eligible options to the fair market value of
the underlying option as of the measurement date of that option, and receive a cash payment for the difference between the
discounted share price and the amended share price. This amendment was designed to allow holders of discount options to
avoid certain adverse tax consequences associated with discount options. The offer expired on May 9, 2008.
Equity Award Practices
Our broad-based employee stock option program is designed to promote long-term retention and recognize
individual performance. Participation is driven by the annual review process. Guidelines are based on competitive market
practice for grants for new hires, promotions, and ongoing performance-related grants. Typically, an employee may be
offered an option or restricted stock grant upon beginning employment and may be eligible for periodic grants thereafter. The
size of grants (and eligibility for the same) is influenced by the prevailing guidelines and the individual’s performance or
particular requirements at the time of hire. Employees, including the Named Executive Officers, are also eligible to
participate in our Employee Stock Purchase Plan.
Stock Grant Process
During the first quarter of fiscal 2008, following the recommendation of the Special Committee, the Board of
Directors approved a number of refinements to our stock grant processes. Beginning in fiscal 2008, the committee process for
granting equity awards is as follows:
• The Compensation and H.R. Committee has the authority to make equity grants to both executive officers and
other service providers;
• The Compensation and H.R. Committee will make grants in open trading window periods with grants effective
on the date of such meeting, or, if due to exigent circumstances they meet in a closed window period, the grant
will be effective 45 days thereafter;
• The Compensation and H.R. Committee has delegated authority to the equity grant committee, consisting of our
chief executive officer and our chief financial officer, to meet on the second Friday of any particular month
62
(only if such date is in an open trading window) to make equity grants consistent with previously approved
guidelines to non-executive officer service providers; and
•
Neither committee may grant equity awards by written consent.
During fiscal 2008 equity grants were only made by the Compensation and H.R. Committee.
Stock Grant Policies
The Board of Directors and/or the Compensation and H.R. Committee annually considers a “burn rate” which the
annual grants of equity awards under the 2001 Stock Plan will not exceed. “Burn rate” is the potential dilution of common
shares outstanding if all new equity grants are vested and/or exercised, expressed as a percentage of common shares
outstanding.
Due to the historical stock option investigation no burn rate target was set for fiscal 2007. Only two non-executive
officers received option grants during fiscal 2007 and, therefore, the fiscal year “burn rate” was only 0.11%.
In fiscal 2008, the Compensation and H.R. Committee granted an aggregate of 1,029,650 shares subject to options,
and time-based and performance-based (at 100% target) restricted stock units representing 3.26% of Coherent’s outstanding
common stock as of February 28, 2008 (excluding automatic grants to directors under the Director Option Plan). Given the
limited grants made in fiscal 2007, the committee, upon recommendation of Farient, believed that the increase to the annual
burn rate was warranted. Since those grants, Coherent has also completed a large stock repurchase so that the outstanding
shares of Coherent were reduced to 24,191,115 as of September 27, 2008. The committee has approved a burn rate of 3.3%
for fiscal 2009. With the assistance of Farient, the committee has reviewed this burn rate relative to peer practices and
guidance from RiskMetrics and found that the total dilution was consistent with the median of peer practices and complied
with the RiskMetrics guidelines.
In general, we issue only nonqualified stock options to employees and executives, although we have issued incentive
stock options in the past. In the last few years, we have typically granted options subject to either two or three year vesting,
with an equal tranche vesting on each of the applicable calendar anniversaries following the grant date. These grants typically
have a life of six years. As noted above, in the grants made in the first quarter of fiscal 2008 which vest over 18 months due
to the delay in granting, the committee determined that in order to have an immediate significant retention impact, the grants
were made with half of the shares vesting in each of April 2008 and April 2009 subject to continued service through such
dates.
Deferred Compensation
Executive officers are eligible to participate in our 401(k) Retirement Plan on the same terms as all other U.S.
employees. Our 401(k) Retirement Plan is a tax-qualified plan and therefore is subject to certain Internal Revenue Code
limitations on the dollar amounts of deferrals and Company contributions that can be made to plan accounts. These
limitations apply to our more highly- compensated employees (including the Named Executive Officers).
Coherent maintains a Deferred Compensation Plan for executive management personnel and certain former
members of the board of directors. Formerly a number of non-executive employees were eligible to participate in the plan.
The purpose of the Deferred Compensation Plan is to permit eligible participants the option to defer receipt of compensation
pursuant to the terms of the plan. The Deferred Compensation Plan permits participants to contribute, on a pre-tax basis, up
to 75% of their base salary earnings, up to 100% of their bonus pay and commissions and up to 100% of directors’ annual
retainer earned in the upcoming plan year. Plan participants may invest deferrals in a variety of different deemed investment
options. To preserve the tax-deferred status of deferred compensation plans, the IRS requires that the available investment
alternatives be “deemed investments.” Participants do not have an ownership interest in the funds they select; the funds are
only used to measure the gains or losses that are attributed to the participant’s deferral account over time. The participant’s
deferrals and earnings are reflected on Coherent’s financial statements and remain, respectively, a general asset and unfunded
liability of the Company. Participants have the status of unsecured creditors of Coherent with respect to the payment of plan
benefits. Separate distribution elections are made by the plan participant for each plan year and include lump sum payment,
annual installments and future year scheduled in-service withdrawals.
At our discretion, we may provide for contributions in excess of the Internal Revenue Code limit to qualified 401(k)
plans to be made to the non-qualified deferred compensation plan. The calculation for this non-qualified plan contribution is
6% of eligible compensation (as defined by the 401(k) qualified plan) less the 401(k) qualified plan match limit. In fiscal year
63
2008, a contribution was made to the non-qualified deferred compensation plan for certain Named Executive Officers for
plan year 2007. These amounts are reflected in both the Summary Compensation Table under “Other Compensation” and in
the “Non-Qualified Deferred Compensation Table” below.
The committee considers the Deferred Compensation Plan to be a reasonable and appropriate program because it
allows the Named Executive Officers and members of the Board to accumulate retirement benefits at a rate, relative to their
overall income, that is comparable to the rate that other employees are able to accumulate retirement benefits, and promotes
executive officer retention by offering a deferred compensation plan that is comparable to and competitive with what is
offered by our peer group of companies.
Change in Control and Severance Plan
We have adopted the Change in Control and Severance Plan (the “change in control plan”) which provides certain
benefits in the event of a change in control of Coherent for certain employees, including each of our Named Executive
Officers. Benefits are provided under this plan if there is a tender offer or merger resulting in Coherent being acquired by
another company or entity and within two years thereafter the executive’s employment is subsequently terminated without
cause or is voluntarily terminated following a constructive termination. The committee and our Board of Directors believe
that the prospect of such a change in control would likely result in our executive officers facing personal uncertainties and
distractions as to how a change in control might affect them. The committee believes that including our Named Executive
Officers in the plan allows them to focus solely on the best interests of our stockholders in the event of a possible, threatened
or pending change in control, and encourages them to remain with Coherent despite the possibility that a change in control
might affect them adversely. This change in control plan therefore serves as an important retention tool to ensure that
personal uncertainties do not dilute our executive’s complete focus on promoting stockholder value. The change in control
plan was amended in fiscal 2009 for Section 409A-related matters and other administrative matters. In calendar year 2009 the
change in control plan will come up for review and potential renewal by the committee.
With respect to our chief executive officer, Dr. Ambroseo, the change in control plan provides that in the event that
plan benefits plus any other benefits considered parachute payments under the Internal Revenue Code, equal or exceed 3.54
times his “base amount” (as determined under Internal Revenue Code Section 280G), he will receive an additional payment
sufficient to fully offset the impact of any excise tax under 280G. The committee believes that the level of benefits provided
under the plan is reasonable and not excessive. See “Change in Control Arrangements” for more details on this plan.
Executive perquisites and Other Personal Benefits
The committee also provides our executive officers with the following perquisites and other personal benefits:
automobile benefit and capped executive medical reimbursement. The committee has determined, with advice from Farient,
that the use of a company-leased vehicle and a medical reimbursement benefit are reasonable in the context of the overall
compensation levels of our Named Executive Officers, are consistent with a number of other peer companies, have been
historical components of compensation for executive officers at the Company and serve as further retention tools.
The Company has historically maintained a vehicle program whereby executive officers were eligible to receive
either (a) a monthly automobile allowance or (b) have the auto allowance apply as amortization against the purchase price of
a vehicle purchased and owned by the Company over such period of time for the amortized value of the automobile to reach
20% of the original value of the car, not to exceed four years (“amortized method”). During the fourth quarter of fiscal 2008,
the committee revised the administration of the program so that executive officers are instead eligible to receive either (a) a
monthly automobile allowance or (b) a leased vehicle with up to an aggregate purchase price as follows: (i) $95,000 for the
chief executive officer and (ii) $75,000 for other executive officers. For those individuals utilizing the automobile allowance
alternative, the auto allowance amount is set annually utilizing a prescribed formula. The administration of the leased
alternative under the program is through a third party financing agency and, when the leased vehicle alternative is selected,
the Company pays the monthly lease for such vehicle. Executive officers are either reimbursed for or provided gas, oil,
maintenance and insurance for vehicles leased under this program by the Company. Participants in the auto program incur
annual imputed income on the personal use of any vehicles under the program, including fuel and miles, as determined using
the Internal Revenue Service Code rules.
During fiscal 2008, prior to the change in policy highlighted in the prior paragraph, for vehicles purchased and
owned by the Company, the executive officer was required to either (a) purchase such vehicle from the Company for the
unamortized amount any time or (b) return the car for sale by the Company and reimburse the Company for the difference
between the value of the car from such sale and the amortized balance at the time the car is returned to the Company. The
executive officer also incurred imputed income on the positive difference, if any, between the amortized value of the car after
64
four years and its fair market value (as determined by Kelly Blue Book trade in value in “good condition”). Once purchased
from the Company, the vehicle was owned by the executive officer. In addition, in the event of the termination of the
employment of the executive officer, the executive officer would have to purchase the vehicle at the then-current amortized
value and incur the imputed income highlighted above. Executive officers were eligible to elect a new vehicle under the
amortized method whenever a car was purchased from the Company. The executive officer’s taxable income was affected by
the value of the vehicle at initial purchase (e.g., the higher the value of the car, the higher imputed income amount to the
individual). Additionally, if the amortized value was not scheduled to reach 20% of the purchase price after four years, then
the individual would have to have a set amount withheld from his or her paycheck to allow the amortization to reach 20% of
the purchase price within four years, but the amortized value would be higher in the event that a new car was chosen prior to
four years, with a resulting higher imputed income.
Each Named Executive Officer also receives up to $5,000 per calendar year of reimbursement for uninsured medical
expenses with the Company also paying such executive’s taxes on the amount of the benefit.
Tax and Accounting Consider ations
The Company’s compensation programs are affected by each of the following:
•
Accounting for Stock-Based Compensation—The Company accounts for stock-based compensation in
accordance with the requirements of FASB Statement 123(R). The Company also takes into consideration
FASB Statement 123(R) and other generally accepted accounting principles in determining changes to policies
and practices for its stock-based compensation programs.
•
Section 162(m) of the Internal Revenue Code—This section limits the deductibility of compensation for our
chief executive officer and our four other most highly compensated named executive officers unless the
compensation is less than $1 million during any fiscal year or is “performance-based” under Section 162(m).
Our 2001 Stock Plan is designed so that option grants thereunder are fully tax-deductible. Cash compensation
and, historically, restricted stock awards are not granted under plans which have been so designed. We may
from time to time pay compensation to our executive officers that may not be deductible when, for example, we
believe that such compensation is appropriate and in the best interests of the stockholders after taking various
factors into consideration, including business conditions and the performance of such executive officer.
•
Section 409A of the Internal Revenue Code—Section 409A imposes additional significant taxes in the event that
an executive officer, director or service provider received “deferred compensation” that does not satisfy the
requirements of Section 409A. We believe that we have designed and operated any plans to appropriately
comply with Section 409A.
Compensation Committee Inter locks and Insider Par ticipation
During fiscal 2008, the Compensation and H.R. Committee of the Board of Directors consisted of Messrs. Hart
(Chair) and Vij and Dr. Rogerson. None of the members of the Compensation and H.R. Committee has been or is an officer
or employee of Coherent. None of our executive officers serves on the board of directors or compensation committee of a
company that has an executive officer that serves on our Board of Directors or Compensation and H.R. Committee. No
member of our Board of Directors is an executive officer of a company in which one of our executive officers serves as a
member of the board of directors or compensation committee of that company.
65
Compensation and H.R. Committee Repor t
The Compensation and H.R. Committee of the Board has reviewed and discussed the Compensation Discussion and
Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation and H.R. Committee recommended to the Board of Directors that the Compensation Discussion and Analysis
be included in the proxy and to be incorporated by reference into the Company’s Annual Report on Form 10-K.
Respectively submitted by
THE COMPENSATION AND H.R.
COMMITTEE
John Hart, Chair
Garry Rogerson
Sandeep Vij
Fiscal 2008 Summar y Compensation Table
The table below presents information concerning the total compensation of Coherent’s Named Executive Officers
for the fiscal years ended September 27, 2008 and September 29, 2007.
Since no equity awards were granted to Named Executive Officers in fiscal 2007 other than the performance-based
awards which vested in November 2006 as a result of fiscal 2006 performance, non-equity-based compensation accounted for
all of the total compensation of the Named Executive Officers earned during fiscal 2007. The performance-based restricted
stock units granted to Named Executive Officers described elsewhere are not reflected in the summary compensation table, as
the single vesting date (and achievement determination) is not until fiscal 2011.
Name and Pr incipal
Position
(a)
John Ambroseo, ...........................................
Chief Executive Officer and President
Helene Simonet,...........................................
Executive Vice President and Chief
Financial Officer
Bret DiMarco, ..............................................
Executive Vice President and General
Counsel
Luis Spinelli,................................................
Executive Vice President and Chief
Technology Officer
F ormer Employees
Ronald Victor, .............................................
Executive Vice President, Human
Resources
Fiscal
Year
(b)
Salar y ($)
(c)
Stock
Awar ds
($)(1)
(e)
Option
Awar ds
($)(1)
(f)
246,003 1,666,688
280,064 1,261,297
118,392 663,063
115,647 493,108
Non-Equity
Incentive Plan
Compensation
($)(2)
(g)
All Other
Compensation
($)
(i)
534,621
372,329
239,649
171,933
80,676(3)
97,564(3)
62,142(4)
53,577(4)
3,089,300
2,559,027
1,442,581
1,185,984
Total ($)
(j)
2008
2007
2008
2007
561,312
547,773
359,334
351,719
2008
2007
298,076
250,077
57,116
6,294
315,114
67,579
143,275
142,271
38,607(5)
13,487(5)
852,188
479,708
2008
2007
252,862
250,759
46,182
45,419
116,615
203,860
120,635
90,677
137,041(6)
63,447(6)
673,335
654,162
2008
2007
239,886
239,983
15,862
37,399
36,116
163,660
114,567
86,815
96,314(7)
53,312(7)
450,768
581,169
(1)
Reflects the dollar amount recognized for financial statement reporting purposes (disregarding an estimate of
forfeitures related to service-based vesting conditions) for fiscal 2008 in accordance with FAS 123(R), and includes
grants made in fiscal 2008 and prior. For fiscal 2007, no awards were made and therefore the amounts for fiscal
2007 only include amounts awarded or granted prior to fiscal 2007. The amounts for stock awards includes both
performance-based and time-based vesting restricted stock awards to the extent such awards had FAS123(R)
calculated value. The assumptions used in the valuation of these awards are set forth in Note 12. “Employee Stock
Option and Benefit Plans” of the Financial Statements in this Annual Report on Form 10-K. These amounts do not
correspond to the actual value that will be recognized by the Named Executive Officers, for example as of
January 9, 2009, none of the option awards granted in fiscal 2008 are in the money as of January 26, 2009.
(2) Reflects the dollar amounts earned under the Variable Compensation Plan (VCP) during fiscal 2008 and fiscal 2007.
66
(3)
For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,501) and
deferred compensation plan ($19,356), (b) payment for buy-out of earned vacation ($21,685), (c) debt forgiveness
(see Item 13 hereof) ($10,200), (d) from the use of a Company- owned and maintained automobile (“Car
Allowance”) ($8,539) and (e) reimbursed pursuant to executive medical reimbursement ($5,463). For fiscal year
2007, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,500) and deferred
compensation plan ($37,139), (b) reflecting imputed income to Dr. Ambroseo from the sale of a Company car under
the terms of the Company’s auto policy described above, (c) for debt forgiveness (see “Related Person Transactions”
below), (d) from the use of a Company-owned and maintained automobile (“Car Allowance”) and (e) reimbursed
pursuant to executive medical reimbursement.
(4)
For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,800) and
deferred compensation plan ($7,591), (b) payment for buy-out of earned vacation ($17,255), (c) Car Allowance
($14,267) and (d) reimbursed pursuant to executive medical reimbursement ($5,775). For fiscal year 2007, includes
amounts (a) contributed by us under the Company’s 401(k) plan ($12,100) and deferred compensation plan
($14,898), (b) Car Allowance and (c) reimbursed pursuant to executive medical reimbursement.
(5)
For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($17,691), (b) Car
Allowance ($15,835) and (c) reimbursed pursuant to executive medical reimbursement ($4,447). For fiscal year
2007, includes amounts (a) contributed by us under the Company’s 401(k) plan ($3,462), (b) Car Allowance and
(c) reimbursed pursuant to executive medical reimbursement.
(6)
For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,520) and
deferred compensation plan ($1,533), (b) payment for buy-out of earned vacation ($13,612), (c) Car Allowance
($19,621), (d) reflecting imputed income to Mr. Spinelli from the sale of a Company car under the terms of the
Company’s auto policy ($25,867), (e) earned under our patent award program where Mr. Spinelli was an inventor
($5,048), (f) reimbursement for tax obligations arising under Section 409A as a result of exercise of stock options
with an exercise price less than fair market value as of the options grant date (these grants were made to Mr. Spinelli
prior to him becoming an executive officer) ($54,223) and (g) reimbursed pursuant to executive medical
reimbursement ($8,494). For fiscal year 2007, includes amounts (a) contributed by us under the Company’s 401(k)
plan ($13,467) and deferred compensation plan, (b) paid to Mr. Spinelli for buy-out of earned vacation, (c) Car
Allowance, (d) earned under our patent award program ($15,647) where Mr. Spinelli was an inventor and
(e) reimbursed pursuant to executive medical reimbursement.
(7)
For fiscal year 2008, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,500) and
deferred compensation plan ($893), (b) paid to Mr. Victor for buy-out of earned vacation ($11,533), (c) Car
Allowance ($22,183), (d) reflecting imputed income to Mr. Victor from the sale of a Company car under the terms
of the Company’s former auto policy ($37,305) and (e) reimbursed pursuant to executive medical reimbursement
($7,495). For fiscal year 2007, includes amounts (a) contributed by us under the Company’s 401(k) plan ($13,378),
(b) paid to Mr. Victor for buy-out of earned vacation, (c) Car Allowance and (d) reimbursed pursuant to executive
medical reimbursement.
67
Gr ants of Plan-Based Awar ds in Fiscal 2008
Except as set forth in the footnotes, the following table shows all plan-based non-equity incentive awards granted to
our Named Executive Officers during fiscal year 2008.
Gr ants of Plan-Based Awar ds
Estimated Futur e Payouts
Under Non-Equity Incentive
Plan Awar ds
Name
John
Ambroseo .......
Helene
Simonet...........
Bret
DiMarco..........
Luis
Spinelli............
Type
Gr ant
Date
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
10/3/2007
2/22/2008
2/22/2008
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
10/3/2007
2/22/2008
2/22/2008
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
10/3/2007
2/22/2008
2/22/2008
Option
PRSU
RSU
Q1 Bonus
Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
10/3/2007
2/22/2008
2/22/2008
Former
Employee ........ Q1 Bonus
Ronald A.
Victor........ Q2 Bonus
Q3 Bonus
Q4 Bonus
Total
Thr eshold
($)
Tar get
($)
Maximum
($)
Actual
Payouts
Under
NonEquity
Incentive
Plan
Awar ds
($)
Estimated Futur e Payouts
Under Equity Incentive
Plan Awar ds
Maximu
Thr eshold
Tar get
m
(#)
(#)
(#)
0(3)
22,500
All Other
Stock
Awar ds: #
of
Secur ities
Under lying
All Other
Option
Awar ds: #
of
Secur ities
Under lying
Exer cise
or
Base
Pr ice
of
Option
Gr ant
Date
Fair
Options
(#)
Options
(#)
Awar ds
($)
Value
($)(1)
250,000
$32.95
$2,087,000
—(2)
$646,088
100,000
$32.95
$834,800
—(2)
$358,938
50,000
$32.95
$417,400
—(2)
$287,150
15,000
$32.95
$125,220
—(2)
$143,575
67,500
22,500
0(3)
0(3)
0(3)
0(3)
0(3)
136,901
136,901
145,002
145,002
563,805
273,801
273,801
290,004
290,004
1,127,610
125,209
202,407
207,005
0
534,621
0(3)
12,500
37,500
12,500
0(3)
0(3)
0(3)
0(3)
0(3)
61,516
61,516
64,748
64,748
252,529
123,032
123,032
129,497
129,497
505,057
56,263
90,951
92,435
0
239,649
0(3)
10,000
30,000
10,000
0(3)
0(3)
0(3)
0(3)
0(3)
37,500
37,500
37,500
37,500
149,999
75,000
75,000
75,000
75,000
299,998
34,297
55,443
53,535
0
143,275
0(3)
5,000
15,000
5,000
0(3)
0(3)
0(3)
0(3)
0(3)
31,320
31,320
32,001
32,001
126,641
62,639
62,639
64,002
64,002
253,282
28,645
46,306
45,684
0
120,635
0(3)
29,986
59,972
27,425
0(3)
0(3)
0(3)
0(3)
29,986
29,986
29,986
119,943
59,972
59,972
59,972
239,886
44,334
42,808
0
114,567
(1)
Reflects the dollar amount recognized for financial statement reporting purposes (disregarding an estimate of
forfeitures related to service-based vesting conditions) for fiscal 2008 in accordance with FAS 123(R), and includes
grants made in fiscal 2008. The amounts for stock awards includes both performance-based and time-based vesting
restricted stock awards to the extent such awards had FAS123(R) calculated value. The assumptions used in the
valuation of these awards are set forth in Note 12. “Employee Stock Option and Benefit Plans” of the Financial
Statements in this Annual Report on Form 10-K. These amounts do not correspond to the actual value that will be
recognized by the Named Executive Officers, for example as of January 9, 2009, none of the option awards granted
in fiscal year 2008 are in the money.
(2) The performance based restricted stock grants are subject to annual vesting over three years depending upon the
achievement of performance measurements tied to the Company’s internal metrics for revenue growth and EBITDA
percentage and is variable, so that the number of shares earned ranged from 0% to 125% of the grant target for fiscal
2006 and range from 0% to 200% of the grant target for fiscal 2007 and fiscal 2008. For fiscal 2008 and 2007, the
Company determined that the metrics have not been met, and that no shares were earned.
(3) Failure to meet a minimum level of performance will result in no vesting of the performance restricted stock units
(PRSU) and no bonus paid out under the 2008 Variable Compensation Plan.
68
Option Exer cises and Stock Vested at 2008 Fiscal Year -End
The table below sets forth certain information for each Named Executive Officer regarding the exercise of options
and the vesting of stock awards during the year ended September 27, 2008, including the aggregate value realized upon such
exercise or vesting.
Option Awar ds
Number of
Shar es
Acquir ed
on Exer cise (#)
(b)
Name
(a)
John Ambroseo ..............................................................................
Helene Simonet..............................................................................
Bret DiMarco .................................................................................
Luis Spinelli...................................................................................
Ronald Victor ................................................................................
Stock Awar ds
Number of
Shar es
Acquir ed
on
Value Realized
Vesting (#)
on Vesting ($)
(d)
(e)
Value Realized
on
Exer cise ($)
(c)
13,000
50,000
—
25,000
55,000
$215,860
$849,707
—
$260,848
$702,800
20,000
8,000
—
3,000
2,700
$582,800
$233,120
—
$87,420
$78,678
Outstanding Equity Awar ds at Fiscal 2008 Year -End
The following table presents information concerning unexercised options and stock that has not yet vested for each
Named Executive Officer outstanding as of September 27, 2008.
Option Awar ds
Name
Gr ant
Date
John Ambroseo................... 10/3/2007
3/30/2006
4/7/2005
3/25/2004
3/25/2004
4/4/2003
5/2/2002
Helene Simonet .................. 10/3/2007
3/30/2006
4/7/2005
3/25/2004
3/25/2004
4/4/2003
5/2/2002
5/2/2002
Bret DiMarco...................... 10/3/2007
6/7/2006
Luis Spinelli ....................... 10/3/2007
3/30/2006
4/7/2005
3/25/2004
5/2/2002
5/2/2002
Ronald Victor ..................... 3/30/2006
4/7/2005
5/2/2002
5/2/2002
(1) Number of
Secur ities
Under lying
Options (#)
Exer cisable
125,000
90,000
90,000
3,786
146,214
137,000
6,468
50,000
35,000
25,000
3,786
66,214
10,000
96,766
3,234
25,000
10,000
7,500
10,000
12,000
35,000
1,766
3,234
10,000
11,000
3,234
16,766
Number of
Secur ities
Under lying
Unexer cised
Options (#)
Unexer cisable
(2)
125,000
—
—
—
—
—
—
50,000
—
—
—
—
—
—
—
25,000
—
7,500
—
—
—
—
—
—
—
—
Option
Exer cise
Pr ice(1)
$32.95
$35.01
$33.71
$26.41
$26.41
$19.77
$30.92
$32.95
$35.01
$33.71
$26.41
$26.41
$19.77
$30.92
$30.92
$32.95
$33.30
$32.95
$35.01
$33.71
$26.41
$30.92
$30.92
$35.01
$33.71
$30.92
$30.92
Option
Expir ation
Date
10/3/2013
3/30/2012
4/7/2011
3/25/2010
3/25/2010
4/4/2009
4/25/2008
10/3/2013
3/30/2012
4/7/2011
3/25/2010
3/25/2010
4/4/2009
4/25/2008
4/25/2008
10/3/2013
6/7/2012
10/3/2013
3/30/2012
4/7/2011
3/25/2010
4/25/2008
4/25/2008
3/30/2012
4/7/2011
4/24/2008
4/25/2008
Stock Awar ds
Mar ket
Number of
Value
Shar es or
of Shar es or
Units of Stock
Units of
That Have
Stock
Not
That Have
Vested
Not Vested
#
($)
Equity incentive
plan awar ds:
Equity incentive
plan awar ds:
Mar ket or
Number of
unear ned
shar es, units or
other r ights
that have not
vested
(#)(3)
payout value of
unear ned
shar es, units or
other r ights
that have not
vested
($)(3)
22,500
$787,275
22,500
$0
12,500
$437,375
12,500
$0
10,000
$349,900
10,000
$0
5,000
$174,950
5,000
$0
—
—
—
—
The exercise prices indicated are the prices originally recorded by the Company at grant and have not been adjusted
to reflect any new measurement date as a result of the Company’s historical stock option review. Only the grants
dated April 25, 2002 in the table had a new measurement date determined for accounting purposes, which had a
lower closing price by $0.16. No changes to the exercise price of these April 25, 2002 grants have been made.
69
(2) These shares vest on April 15, 2009.
(3) This column does not include the third tranche of restricted stock awards which are subject to the achievement of
certain performance metrics, which did not ultimately vest in November 2008. Market Value is determined by
multiplying the number of shares by $34.99, the closing price of the Company’s common stock on September 26,
2008, the last trading date of the fiscal year. As noted above, the performance-based restricted stock units vest in
November 2011 in an amount which is 0-300% of the targeted amount reflected in the table. Given the current
economic conditions, it is unlikely that the Company will meet the threshold for achievement and the payout value
is, therefore, reflected as $0 in the table.
Fiscal 2008 Non-Qualified Defer r ed Compensation
The following table presents information regarding the non-qualified deferred compensation activity for each
Named Executive Officer during fiscal 2008:
Executive
Contr ibutions
in
Last FY
($)(1)
Name
John Ambroseo ....................................................
Helene Simonet ....................................................
Bret DiMarco .......................................................
Luis Spinelli.........................................................
Ronald Victor(5)..................................................
$471,840
$—(4)
$41,407
$—(4)
$10,898
$124,892
$—(4)
$181,082
$—(4)
Registr ant
Contr ibutions
in
Last FY
($)(2)
$19,075
$—
$7,481
$—
N/A
$1,511
$—
$880
$—
Aggr egate
Ear nings in Last
FY
($)
Aggr egate
Withdr awals/
Distr ibutions
($)
$(431,141)
$(149,604)
$(107,209)
$(31,669)
$(1,015)
$(31,330)
$(35,697)
$(88,714)
$(34,919)
$—
$—
$—
$—
$—
$—
$—
$—
$—
Aggr egate
Balance of Last
FYE
($)(3)
$3,373,592
$1,097,976
$696,078
$148,168
$9,883
$397,354
$455,390
$755,336
$181,343
(1)
Amounts in this column consist of salary and/or bonus earned during fiscal 2008, which is also reported in the
Summary Compensation Table
(2) Amounts reflect Company contribution payments in excess of the Internal Revenue Code Sections 401(a)(17) and
402(g) qualified plan limits made to the non-qualified “Deferred Compensation Plan” for plan year 2007 made in
fiscal year 2008. Amounts reported in this column are also reported in the “All Other Compensation” column of the
Summary Compensation Table.
(3) The deferred compensation in a participant’s account is fully vested and is credited with positive or negative
investment results based on the plan investment options selected by the participant.
(4)
Amounts represent account balances and earnings from the Supplementary Retirement Plan (SRP) which was
suspended.
(5) Mr. Victor retired from the Company in January 2009.
Potential Payments upon Ter mination or Change of Contr ol
The following table shows the potential payments and benefits that Coherent (or its successor) would be obligated to
make or provide upon termination of employment of each our Named Executive Officers pursuant to the terms of the Change
of Control Severance Plan. Other than this plan, there are no other employment agreements or other contractual obligations
triggered upon a change of control. For purposes of this table, it is assumed that each Named Executive Officer’s
employment terminated at the close of business on September 26, 2008 (the last business day before the end of our fiscal year
end on September 27, 2008). The amounts reported below do not include the nonqualified deferred compensation
distributions that would be made to the Named Executive Officers following a termination of employment (for those amounts
and descriptions, see the prior table). These payments are conditioned upon the execution of a form release of claims by the
Named Executive Officer in favor of Coherent. There can be no assurance that a triggering event would produce the same or
similar results as those estimated below if such event occurs on any other date or at any other price, of if any other
70
assumption used to estimate potential payments and benefits is not correct. Due to the number of factors that affect the nature
and amount of any potential payments or benefits, any actual payments and benefits may be different.
Named Executive
Officer
John Ambroseo ...........................................
Helene Simonet...........................................
Bret DiMarco ..............................................
Luis Spinelli................................................
Former Employee
Ronald Victor .............................................
Multiplier for Base
Salar y and Bonus
2.99X
2X
2X
2X
2X
Natur e of
Benefit
Ter mination
for Cause
Any Other
Ter mination
Salary Severance
Bonus Severance
Equity Compensation
Acceleration(1)
Tax Gross Up(2)
Health Insurance(3)
Total Benefit
Salary Severance
Bonus Severance
Equity Compensation
Acceleration(1)
Health Insurance(3)
Total Benefit
Salary Severance
Bonus Severance
Equity Compensation
Acceleration(1)
Health Insurance(3)
Total Benefit
Salary Severance
Bonus Severance
Equity Compensation
Acceleration(1)
Health Insurance(3)
Total Benefit
— $1,734,200
— $1,734,200
— $3,404,100
—
$44,708
$1,527,808
Salary Severance
Bonus Severance
Equity Compensation
Acceleration(1)
Health Insurance(3)
Total Benefit
—
—
—
$480,000
$240,000
—
—
$31,283
$752,283
— $2,992,847
$67,062
—
$9,932,409 —
$740,000
—
$518,000
— $1,851,500
—
$31,283
$3,140,783 —
$600,000
—
$300,000
— $1,459,050
—
—
—
—
$44,708
$2,403,758 $512,000
$256,000
$715,100
(1) Equity Compensation Acceleration is the value of the in-the-money value of unvested stock options, time-based
restricted stock units and performance-based restricted stock units, in each case as of September 26, 2008 at the
closing stock price on that date ($34.99). The value of accelerated stock options are thus calculated by multiplying
the number of unvested shares subject to acceleration by the difference between the exercise price and the closing
stock price on September 26, 2008; the value of accelerated restricted stock is calculated by multiplying the number
of unvested shares subject to acceleration by the closing stock price on September 26, 2008. This assumes
immediate release and vesting of the performance-based restricted stock units at the maximum, or 300% of target,
achievement. The amounts reflected for Equity Compensation Acceleration do not reflect any applicable taxes, just
gross proceeds. Since the table assumes a triggering event on September 26, 2008, only those stock option and
restricted stock/RSU grants prior to that date are included in the table. Additionally, the third tranche of the
performance-based restricted stock granted in 2006, but which was to vest in November 2008 is not included in this
table as that tranche did not vest as the performance metrics were not achieved.
(2)
Estimated reimbursement (by way of a tax “gross-up”) for a 20% excise tax that would be due under Section 4999
of the Internal Revenue Code of 1986 on a portion of the amounts reported.
(3) Health Insurance is an estimate of the cost of covering the individual and his covered dependents for three years, in
the case of the chief executive officer and for two years for the other Named Executive Officers.
The change in control plan provides for the payment of specified compensation and benefits upon certain
terminations of the employment of the participants following a change in control of the Company. The Board has evaluated
the economic and social impact of an acquisition or other change of control on its key employees. The Board recognizes that
71
the potential of such an acquisition or change of control can be a distraction to its key employees and can cause them to
consider alternative employment opportunities. The Board has determined that it is in the best interests of Coherent and its
stockholders to assure that Coherent will have the continued dedication and objectivity of its key employees. The Board
believes that the change of control plan will enhance the ability of our key employees to assist the Board in objectively
evaluating potential acquisitions or other changes of control.
Furthermore, the Board believes a change of control plan aids us in attracting and retaining the highly qualified, high
performing individuals who are essential to its success. The plan’s assurance of fair treatment will ensure that key employees
will be able to maintain productivity, objectivity and focus during the period of significant uncertainty that is inherent in an
acquisition or other change of control. A change in control of Coherent is defined under the change of control plan as an
occurrence of a business combination, an acquisition by any person directly or indirectly of fifty percent or more of the
combined voting power of Coherent’s common stock or a change in the composition of the Board of Directors where less
than fifty percent are incumbent directors.
The change of control plan provides that if within 24 months after a change in control the Company terminates the
executive’s employment other than by reason of his death, disability, retirement or for cause, or the executive officer
terminates his employment for “good reason,” the executive will receive a lump sum severance payment equal to 2.99 (in the
case of Dr. Ambroseo) or 2.0 (in the case of Ms. Simonet and Messrs. Spinelli and DiMarco) times the executive’s annual
base salary and annual bonus (assuming achievement of all performance requirements thereof). “Good reason” is defined in
each Agreement as any of the following that occurs after a change in control of the Company: certain reductions in
compensation; certain material changes in employee benefits and perquisites; a change in the site of employment; reduction
in the executive’s duties and responsibilities; the Company’s failure to obtain the written assumption by its successor of the
obligations set forth in the Agreement; attempted termination of employment on grounds insufficient to constitute a basis of
termination for cause under the terms of the change of control plan; or the Company’s breach of any of the provisions of the
change of control plan. Under the terms of the plan, the executives will also have acceleration of all vesting conditions for
equity grants and health care for the executive (and his or her covered family members) will be provided on the same terms
for two years and, in the case of Dr. Ambroseo, three years. Further, Dr. Ambroseo will receive a gross-up for any Internal
Revenue Code section 280G (“280G”) excise taxes to the extent that the severance benefits are more than 20% over the limit
imposed by 280G (i.e., more than 3.59x the “base amount” as defined by Section 280G). If the benefits are less than 20%
over the limit, the benefits will be reduced to the extent necessary so that no 280G excise tax is triggered. To the extent 280G
is triggered as a result of the severance benefits for the other executive participants, such payments will either be paid in full
or reduced so that the executive receives the maximum severance benefit without triggering 280G.
Dir ector Compensation
During fiscal 2008, we paid our non-employee directors an annual retainer (depending upon position) and per
meeting fees for service on the Board of Directors. In fiscal 2008, the annual retainer amounts for non-employee directors
were as follows:
•
Chairman of the Board: $41,000
•
Lead independent director: $33,000
•
Chairman of the Audit Committee: $33,000
•
Member of the Board: $25,000
Additionally, non-employee members of the Board of Directors received $2,000 per board meeting attended, plus
$1,000 per committee meeting attended, except that the Chairman of the Audit Committee received $3,000 per meeting of the
Audit Committee attended, and the Chairmen of the Compensation and H.R. Committee and the Governance and Nominating
Committee, respectively, received $2,000 per meeting of the Compensation and H.R. Committee and the Governance and
Nominating Committee attended. As discussed above, each director serving on the Special Committee and/or the Special
Litigation Committee earned $4,000 per month for service thereon. There was no additional compensation paid to directors
for serving on the Ad Hoc Repurchase Committee, which was formed for the purpose of decision-making with regards to our
announced stock buy-back. Additionally, since we had a Chairman of the Board who was an independent director, no
member of the Board of Directors held the position of Lead independent director in fiscal 2008. For fiscal 2009, members of
the Board of Directors will receive cash compensation from annual retainers, with no per meeting fees. See “Compensation
Discussion and Analysis.”
The chart below summarizes the gross cash amounts earned by non-employee directors for service during fiscal
2008 on the Board and its committees (all amounts in dollars):
72
Name
Annual
Boar d
and
Chair per son
ser vice
including per
Boar d
meeting
attended(1)
John H. Hart...........................................
61,000
Susan James ........................................... 32,500(2)
Clifford Press ......................................... 34,500(2)
81,000
Garry W. Rogerson................................
73,000
Lawrence Tomlinson .............................
65,000
Sandeep Vij............................................
Former Director
Charles W. Cantoni................................ 28,500(3)
Compensation
and H.R.
Committee(1)
Nominating
and
Gover nance
Committee(1)
—
6,000
—
12,000
39,000
—
20,000
—
—
9,000
—
10,000
3,000
1,000
—
—
—
6,000
—
—
—
12,000
12,000
12,000
6,000
—
1,000
—
Audit
Committee
(1)
Special
Special
Litigation
Committee Committee
Total
— 84,000
— 39,500
— 34,500
— 114,000
— 124,000
60,000 141,000
—
35,500
(1) Includes the annual retainer, where applicable, as well as per meeting fees. For Mr. Tomlinson, this includes his
retainer as Chairperson of the Audit Committee.
(2)
Includes pro rated amount for service as a director after joining in March 2008.
(3)
Includes pro rated amount for service as a director before retiring in March 2008.
The chart below summarizes the amounts earned by non-employee directors for service (including both Board and,
where applicable, committee service) during fiscal 2008:
Fees Paid
in
Cash ($)
Name
Stock
Awar ds
($)(1)(2)
John H. Hart.............................................................................................................. 84,000
33,071
Susan James .............................................................................................................. 39,500
9,795
Clifford Press ............................................................................................................ 34,500
9,795
Garry W. Rogerson................................................................................................... 114,000
33,071
Lawrence Tomlinson ................................................................................................ 124,000
33,071
Sandeep Vij............................................................................................................... 141,000
33,071
Former Director
Charles W. Cantoni................................................................................................... 35,500 23,276(4)
Option
Awar ds
($)(1)(2)
Total ($)
81,038
26,847
26,847
50,318
50,318
50,318
198,109
76,142
71,142
197,389
207,389
224,389
—(5)
58,776
(1) These amounts do not reflect compensation actually received. Rather, these amounts represent the aggregate
expense recognized by the Company for financial statement reporting purposes in fiscal year 2008, in accordance
with FAS 123(R), for restricted stock units and stock options which were granted in fiscal year 2008 and prior to
fiscal year 2008 under the Company’s Director Stock Plan. The assumptions used to calculate the value of these
stock units and stock options are set forth in Note 12. “Employee Stock Option and Benefit Plans” of the Notes to
the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended September 27, 2008.
(2) The directors’ aggregate holdings of restricted stock units as of the end of fiscal year 2008 were as follows (the
vesting for which is 100% on March 29, 2009 for 2,000 shares (for Dr. Rogerson and Messrs. Hart, Tomlinson and
Vij) and 100% on March 11, 2010 for 2,000 shares to the extent such individual is a member of the Board at such
time):
John H. Hart.......................................................................................................................
Susan James.......................................................................................................................
Clifford Press.....................................................................................................................
Garry W. Rogerson............................................................................................................
Lawrence Tomlinson .........................................................................................................
Sandeep Vij .......................................................................................................................
73
4,000 shares 2,000 shares 2,000 shares 4,000 shares 4,000 shares 4,000 shares (3) The directors’ aggregate holdings of stock option awards (both vested and unvested) as of the end of fiscal year
2008 were as follows:
John H. Hart ...................................................................................................................
Susan James....................................................................................................................
Clifford Press..................................................................................................................
Garry W. Rogerson.........................................................................................................
Lawrence Tomlinson ......................................................................................................
Sandeep Vij ....................................................................................................................
52,500 shares
24,000 shares
24,000 shares 53,000 shares
44,800 shares
54,000 shares
(4) Mr. Cantoni did not receive a restricted stock unit grant in fiscal 2008, and his 5,000 share RSU grant and an option
grant for 5,000 shares expired unexercised following his retirement.
(5) This director had options for which the expense was accelerated in fiscal 2006 as provided under FAS123(R) and
the Director Option Plan pursuant to which he was eligible to retire. At retirement, the options fully vested. All
expense related to the options was recognized prior to fiscal 2007.
Restr icted Stock Units Gr anted
in
Fiscal 2008 (#)
Name
John H. Hart.................................................................................................
Susan James .................................................................................................
Clifford Press ...............................................................................................
Garry W. Rogerson......................................................................................
Lawrence Tomlinson ...................................................................................
Sandeep Vij..................................................................................................
2,000
2,000
2,000
2,000
2,000
2,000
Stock Options Gr anted
in
Fiscal 2008 (# shar es)
6,000
24,000
24,000
6,000
6,000
6,000
Our 1998 Directors’ Stock Plan was adopted by the Board of Directors on November 24, 1998 and was approved by
the stockholders on March 17, 1999. The 1998 Directors’ Stock Plan was amended on March 23, 2003, and was further
amended on March 30, 2006, when the 1998 Directors’ Stock Plan was renamed the 1998 Director Stock Plan (the “1998
Director Plan”). As of September 30, 2007, 150,000 shares were reserved for issuance thereunder. Under the terms of the
1998 Director Plan, the number of shares reserved for issuance thereunder is increased each year by the number of shares
necessary to restore the total number of shares reserved to 150,000 shares.
As of September 27, 2008, the 1998 Director Plan provided for the automatic and non-discretionary grant of a nonstatutory stock option to purchase 24,000 shares of the Company’s common stock to each non-employee director on the date
on which such person becomes a director. Thereafter, each non-employee director will be automatically granted a nonstatutory stock option to purchase 6,000 shares of common stock on the date of and immediately following each Annual
Meeting of Stockholders at which such non-employee director is reelected to serve on the Board of Directors, if, on such
date, he or she has served on the Board of Directors for at least three months. Such plan provides that the exercise price must
be equal to the fair market value of the common stock on the date of grant of the options.
Additionally, as of September 27, 2008, the 1998 Director Plan provides for the automatic and non-discretionary
grant of 2,000 shares of restricted stock units (“RSUs”) to each non-employee director on the date on which such person
becomes a director. Thereafter, each non-employee director will be automatically granted 2,000 shares of RSUs on the date
of and immediately following each Annual Meeting of Stockholders at which such non-employee director is reelected to
serve on the Board of Directors, if, on such date, he or she has served on the Board of Directors for at least three months.
The 1998 Director Plan provides that with respect to any options held by a director who retires after at least eight
years of service on the Board, such director will fully vest in and have the right to exercise his or her option as to both vested
and unvested shares as of such date. The option will remain exercisable for the lesser of (i) two (2) years following the date
of such director’s retirement or (ii) the expiration of the option’s original term.
As of September 27, 2008, 188,700 shares had been issued on exercise under the 1998 Director Plan. There were no
options exercised by non-employee directors during fiscal 2008.
74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Secur ity Owner ship of Cer tain Beneficial Owner s and Management
The following table sets forth, as of September 30, 2008, certain information with respect to the beneficial
ownership of common stock by (i) any person (including any “group” as that term is used in Section 13(d)(3) of the
Exchange Act known by us to be the beneficial owner of more than 5% of our voting securities, (ii) each director and each
nominee for director, (iii) each of the executive officers named in the Summary Compensation Table appearing herein, and
(iv) all executive officers and directors as a group, based on information available to the Company as of filing this proxy
statement. We do not know of any arrangements, including any pledge by any person of our securities, the operation of which
may at a subsequent date result in a change of control. Unless otherwise indicated, the address of each stockholder in the
table below is c/o Coherent, Inc., 5100 Patrick Henry Drive, Santa Clara, California 95054.
Number of
Shar es
Name and Addr ess
Oliver Press Partners, LLC(2) ................................................................................................
152 West 57th Street
New York, New York 10019
Dimensional Fund Advisors(2)...............................................................................................
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Eagle Asset Management, Inc.(2)...........................................................................................
880 Carillon Parkway
St. Petersburg, FL 33716
Wells Fargo Capital Management (2).....................................................................................
525 Market Street, 10th Floor
San Francisco, CA 94105
John R. Ambroseo, PhD(3).....................................................................................................
Helene Simonet(4) ..................................................................................................................
Luis Spinelli(5) .......................................................................................................................
Bret M. DiMarco(6)................................................................................................................
Ronald A. Victor(7) ................................................................................................................
John H. Hart(8) .......................................................................................................................
Susan James (9) ......................................................................................................................
Clifford Press (10) ..................................................................................................................
Garry W. Rogerson, PhD(11) .................................................................................................
Lawrence Tomlinson(12)........................................................................................................
Sandeep Vij(13) ......................................................................................................................
All directors and executive officers as a group (11 persons)(14) ...........................................
Per cent of Total(1)
2,581,097
10.67%
2,066,651
8.54%
1,905,149
7.88%
1,293,061
5.35%
911,005
303,618
72,402
35,607
47,585
51,000
—
2,581,097
48,000
42,000
51,600
4,143,914
3.64%
*
*
*
*
*
*
10.67%
*
*
*
16.21%
*
Represents less than 1%.
(1)
Based upon 24,191,115 shares of Coherent common stock outstanding as of September 30, 2008. Beneficial
ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power
with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, each share of Coherent common stock subject to options held by that person that are
currently exercisable or will be exercisable within 60 days of September 30, 2008 and all shares of restricted stock
which are vested on September 30, 2008, are deemed outstanding. For Dr. Ambroseo, Ms. Simonet,
Messrs. Spinelli, Victor and DiMarco, no shares of performance-based restricted stock or restricted stock units are
included. In addition, such shares, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Based on the most recent Schedule 13D (or amendments thereto) filed by such person with the SEC prior to the date
of filing this proxy statement and a review of a shareholder listing report provided by a third party provider. For
Oliver Press Partners, LLC, the Company notes that the 13 D/A filed by Oliver Press Partners, LLC on January 10,
2008 was a joint filing and included shares held by the individuals and entities set forth in the filing. See also
footnote 10 below.
75
(3)
Includes 849,500 shares issuable upon exercise of options held by Dr. Ambroseo which were exercisable or would
become exercisable within 60 days of September 30, 2008.
(4) Includes 290,000 shares issuable upon exercise of options held by Ms. Simonet which were currently exercisable or
would become exercisable within 60 days of September 30, 2008.
(5) Includes 69,500 shares issuable upon exercise of options held by Mr. Spinelli which were exercisable or would
become exercisable within 60 days of September 30, 2008.
(6)
Includes 35,000 shares issuable upon exercise of options held by Mr. DiMarco which were exercisable or would
become exercisable within 60 days of September 30, 2008.
(7) Includes 41,000 shares issuable upon exercise of options held by Mr. Victor which were exercisable or would
become exercisable within 60 days of September 30, 2008.
(8)
Includes 46,500 shares issuable upon exercise of options held by Mr. Hart which were exercisable or would become
exercisable within 60 days of September 30, 2008.
(9)
Ms. James was elected to the Board of Directors in March 2008 and, accordingly, has no options which were
exercisable or would become exercisable within 60 days of September 30, 2008.
(10)
Mr. Press was elected to the Board of Directors in March 2008 and, accordingly, has no options which were
exercisable or would become exercisable within 60 days of September 30, 2008. Mr. Press is also a (i) Managing
Member of Oliver Press Investors, LLC, a Delaware limited liability company and the general partner of each of
Davenport Partners, L.P., a Delaware limited partnership (“Davenport”), JE Partners, a Bermuda partnership (“JE”),
and Oliver Press Master Fund LP, a Cayman limited partnership (“Master Fund”; and, together with Davenport and
JE, the “Partnerships”), and (ii) Managing Member of Oliver Press Partners, LLC, a Delaware limited liability
company and the investment advisor to each of the Partnerships. The Partnerships own the securities reflected
herein, all of which are subject to the shared voting and investment authority of Mr. Press, among others. Mr. Press’
interest in the securities reflected herein is limited to the extent of his pecuniary interest in the Partnerships, if any
and he disclaims beneficial ownership thereof.
(11)
Includes 47,000 shares issuable upon exercise of options held by Dr. Rogerson which were exercisable or would
become exercisable within 60 days of September 30, 2008.
(12)
Includes 38,800 shares issuable upon exercise of options held by Mr. Tomlinson which were exercisable or would
become exercisable within 60 days of September 30, 2008.
(13)
Includes 48,000 shares issuable upon exercise of options held by Mr. Vij which were exercisable or would become
exercisable within 60 days of September 30, 2008.
(14) Includes an aggregate of 1,465,300 options which were exercisable or would become exercisable within 60 days of
September 30, 2008.
76
Equity Compensation Plan Infor mation
The following table provides information as of September 27, 2008 about the Company’s equity compensation plans
under which shares of our common stock may be issued to employees, consultants or members of our Board of Directors:
(a)
Number of
secur ities to be
issued upon
exer cise of
outstanding
options,
war r ants and
r ights
Plan
categor y
Equity compensation plans approved by security holders ............................ 3,155,752(1)
—
Equity compensation plans not approved by security holders ......................
3,155,752
Total..............................................................................................................
(b)
Weighted-aver age
exer cise pr ice of
outstanding
options,
war r ants and
r ights
(c)
Number of
secur ities
r emaining
available for
futur e issuance
under equity
compensation
plans (excluding
secur ities
r eflected in
column (a))
$27.67 3,457,686(2)(3)
—
—
$27.67
3,457,686
(1) This number does not include any options which may be assumed by Coherent through mergers or acquisitions,
however, Coherent does have the authority, if necessary, to reserve additional shares of Coherent common stock
under these plans to the extent necessary for assuming such options.
(2)
This number of shares includes 224,536 shares of Coherent common stock reserved for future issuance under the
Employee Stock Purchase Plan, 177,000 shares reserved for future issuance under the 1998 Director Plan and
3,056,150 shares reserved for future issuance under the 2001 Stock Plan.
(3) The 1998 Director Plan provides for annual increases to the number of shares available for issuance under the 1998
Director Plan so that the total number of shares reserved is not less than 150,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Review, Appr oval or Ratification of Related Per son Tr ansactions
In accordance with the charter for the Audit Committee of the Board of Directors, the members of the Audit
Committee, all of whom are independent directors, review and approve in advance any proposed related person transactions.
Additionally, from time to time the Board of Directors may directly consider these transactions. For purposes of these
procedures, the individuals and entities that are considered “related persons” include:
• Any of our directors, nominees for director and executive officers;
• Any person known to be the beneficial owner of five percent or more of our common stock (a “5%
Stockholder”); and
• Any immediate family member, as defined in Item 404(a) of Regulation S-K, of a director, nominee for
director, executive officer and 5% Stockholder. We will report all such material related person transactions
under applicable accounting rules, federal securities laws and SEC rules and regulations.
77
Related Per son Tr ansactions
Certain Transactions
The following table sets forth information with respect to the one executive officer of the Company who was
indebted to us during Fiscal 2008.
New Loans
Dur ing 2008
Name
John Ambroseo .....................................................
(1) Inter est Rates
—
8.00%
Matur ity Date(s)
2/15/08
Lar gest
Amount
Outstanding
Dur ing Fiscal
2008
Balance at the
End of Fiscal
2008
$10,000(1)
$0
This loan was granted to Dr. Ambroseo in February 1998, prior to the effective date of Section 402 of the
Sarbanes-Oxley Act of 2002, and matured in February 2008.
The promissory note was full recourse. Ten percent of the original principal balance of this loan was forgiven each
year during the life of the loan, as Dr. Ambroseo was employed by us during the life of the loan. This loan was related to a
promotion. The interest on the loan was deducted from payments under the Company’s annual Variable Compensation Plans.
In the event that no payments were made under such plans for a particular period, then interest on the promissory note was
forgiven for such period. Such amounts are reflected in the Summary Compensation Table under “Other Compensation.” The
original amount of the promissory note was $100,000.
In April 2008 the Compensation and HR Committee approved the adoption of a Retention Agreement for Mr. Victor
(the “Victor Agreement”). The Agreement provided, among other things, that Mr. Victor will provide service to the
Company as our Executive Vice President, Human Resources through the period ending January 2, 2009 and that Mr. Victor
will receive a single lump sum payment of $250,000 after providing the Company with a full release. Mr. Victor provided the
release and received the payment in January 2009.
See above under Item 10 for a discussion of the agreement between the Company and OPP.
Other Matters
We have entered into indemnification agreements with each of our executive officers and directors. Such
indemnification agreements require us to indemnify these individuals to the fullest extent permitted by law. We also intend to
execute these agreements with our future directors and officers.
Dir ector Independence
For information concerning director independence, please see Item 10 under the caption “Directors.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pr incipal Accounting Fees and Ser vices
The following table sets forth fees for services Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, “Deloitte”) provided during fiscal years 2008 and 2007:
2008
2007
Audit fees(1) ......................................................................................................................................... $4,753,342 $3,271,370
—
—
Audit-related fees..................................................................................................................................
—
—
Tax fees.................................................................................................................................................
34,300
2,000
All other fees(2)....................................................................................................................................
Total...................................................................................................................................................... $4,787,642 $3,273,370
(1) Represents fees for professional services provided in connection with the integrated audit of our annual financial
statements and internal control over financial reporting and review of our quarterly financial statements, advice on
accounting matters that arose during the audit and audit services provided in connection with other statutory or
78
regulatory filings. Includes approximately $1,885,000 and $980,000 incurred during fiscal 2008 and 2007,
respectively, for additional services related primarily to the restatement of our consolidated financial statements for
the fiscal years 1995 through 2005.
(2) Represents the annual subscription for access to the Deloitte Accounting Research Tool, which is a searchable on­
line accounting database ($2,000) and for fiscal 2008, project assistance.
Pr e-Appr oval of Audit and Non-Audit Ser vices
The Audit Committee has determined that the provision of non-audit services by Deloitte is compatible with
maintaining Deloitte’s independence. In accordance with its charter, the Audit Committee approves in advance all audit and
non-audit services to be provided by Deloitte. In other cases, the Chairman of the Audit Committee has the delegated
authority from the Committee to pre-approve certain additional services, and such pre-approvals are communicated to the full
Committee at its next meeting. During fiscal year 2008, 100% of the services were pre-approved by the Audit Committee in
accordance with this policy.
79
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management is responsible for the preparation, integrity, and objectivity of the Consolidated Financial Statements
and other financial information included in the Company’s 2008 Annual Report on Form 10-K. The Consolidated Financial
Statements have been prepared in conformity with U.S. generally accepted accounting principles and reflect the effects of
certain estimates and judgments made by management. It is critical for investors and other users of the Consolidated
Financial Statements to have confidence that the financial information that we provide is timely, complete, relevant and
accurate
Management, with oversight by the Company’s Board of Directors, has established and maintains a corporate
culture that requires that the Company’s affairs be conducted to the highest standards of business ethics and conduct.
Management also maintains a system of internal control that is designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in accordance with management’s authorization. This
system is regularly monitored through direct management review, as well as extensive audits conducted by internal auditors
throughout the organization.
Our Consolidated Financial Statements as of and for the year ended September 27, 2008 have been audited by
Deloitte & Touche LLP, an independent registered public accounting firm. Their audit was conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States) and included an integrated audit under such
standards.
The Audit Committee of the Board of Directors meets regularly with management, the internal auditors and the
independent registered public accounting firm to review accounting, reporting, auditing and internal control matters. The
Audit Committee has direct and private access to both internal and external auditors.
See Item 9A for Management’s Report on Internal Control Over Financing Reporting.
We are committed to enhancing shareholder value and fully understand and embrace our fiduciary oversight
responsibilities. We are dedicated to ensuring that our high standards of financial accounting and reporting as well as our
underlying system of internal controls are maintained. Our culture demands integrity and we have the highest confidence in
our processes, internal controls, and people, who are objective in their responsibilities and operate under the highest level of
ethical standards.
/s/ JOHN R. AMBROSEO
John R. Ambroseo
President and Chief Executive Officer
/s/ HELENE SIMONET
Helene Simonet
Executive Vice President and Chief Financial Officer
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Coherent, Inc.:
We have audited the accompanying consolidated balance sheets of Coherent, Inc. and its subsidiaries (collectively,
the “Company”) as of September 27, 2008 and September 29, 2007, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period ended September 27, 2008. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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
the Company as of September 27, 2008 and September 29, 2007, and the results of its operations and its cash flows for each
of the three years in the period ended September 27, 2008, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the accompanying consolidated financial statements, on September 30, 2007, the
Company changed its method of accounting for uncertain tax positions in accordance with the guidance provided in Financial
Accounting Standards Board Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109.”
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of September 27, 2008, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated November 25, 2008 expressed an unqualified opinion on the Company’s internal control
over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
November 25, 2008
81
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
September 27,
2008
ASSETS
Current assets:
Cash and cash equivalents ....................................................................................................
Restricted cash ......................................................................................................................
Short-term investments .........................................................................................................
Accounts receivable—net of allowances of $2,494 in 2008 and $2,918 in 2007 .................
Inventories ............................................................................................................................
Prepaid expenses and other assets.........................................................................................
Deferred tax assets ................................................................................................................
Total current assets ...........................................................................................................
Property and equipment, net .....................................................................................................
Goodwill ...................................................................................................................................
Intangible assets, net.................................................................................................................
Other assets...............................................................................................................................
Total assets ...............................................................................................................................
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations ..............................................................................
Accounts payable..................................................................................................................
Income taxes payable............................................................................................................
Other current liabilities .........................................................................................................
Total current liabilities......................................................................................................
Long-term obligations ..............................................................................................................
Other long-term liabilities.........................................................................................................
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, par value $.01:
Authorized—500,000 shares;
Outstanding—24,191 shares in 2008 and 31,552 shares in 2007 .....................................
Additional paid-in capital .....................................................................................................
Accumulated other comprehensive income ..........................................................................
Retained earnings..................................................................................................................
Total stockholders’ equity.................................................................................................
Total liabilities and stockholders’ equity ..................................................................................
See accompanying Notes to Consolidated Financial Statements.
82
September 29,
2007
$213,826
2,645
4,268
96,611
120,519
41,793
30,121
509,783
100,996
86,818
27,556
81,230
$806,383
$315,927
2,460
45,896
102,314
112,893
50,244
35,844
665,578
104,305
83,376
35,570
58,771
$947,600
$9
26,333
7,847
79,138
113,327
15
94,606
$9
27,849
17,829
83,058
128,745
21
47,848
241
177,646
79,089
341,459
598,435
$806,383
313
380,516
70,672
319,485
770,986
$947,600
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per shar e data)
September 27,
2008
Net sales ................................................................................................
Cost of sales ..........................................................................................
Gr oss pr ofit ..........................................................................................
Oper ating expenses:
Research and development ................................................................
In-process research and development ................................................
Selling, general and administrative....................................................
Restructuring and other charges (recoveries).....................................
Acquisition-related expenses .............................................................
Amortization of intangible assets.......................................................
Total operating expenses ...............................................................
Income fr om oper ations ......................................................................
Other income (expense):
Interest and dividend income .............................................................
Interest expense .................................................................................
Other—net .........................................................................................
Total other income, net ..................................................................
Income befor e income taxes ................................................................
Provision for income taxes ....................................................................
Net income ............................................................................................
Net income per shar e:
Basic ..................................................................................................
Diluted ...............................................................................................
Shar es used in computation:
Basic ..................................................................................................
Diluted ...............................................................................................
Year Ended
September 29,
2007
$599,262
347,356
251,906
$601,153
351,145
250,008
$584,652
328,539
256,113
74,287
—
146,376
—
—
8,651
229,314
22,592
74,590
2,200
153,697
(74)
322
8,152
238,887
11,121
73,051
690
132,545
97
5,857
9,207
221,447
34,666
10,876
(152)
3,971
14,695
37,287
13,884
$23,403
23,136
(10,849)
5,515
17,802
28,923
12,972
$15,951
15,144
(4,453)
824
11,515
46,181
787
$45,394
$0.85
$0.83
$0.51
$0.50
$1.47
$1.44
27,505
28,054
31,398
32,024
30,973
31,567
See accompanying Notes to Consolidated Financial Statements.
83
September 30,
2006
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Thr ee Year s in the Per iod Ended September 27, 2008
(In thousands)
Balances, October 1, 2005.........................................
Components of comprehensive income:
Net income ..................................................................
Translation adjustment, net of tax..........................
Unrealized gain on available for sale securities,
net of tax............................................................
Net loss on derivative instruments, net of tax........
Total comprehensive income .................................
Effect on deferred stock compensation upon
adoption of SFAS 123(R).......................................
Amortization, issuance and forfeitures of restricted
stock........................................................................
Sales of shares under Employee Stock Option Plan ...
Sales of shares under Employee Stock Purchase Plan
Stock compensation expense.......................................
Tax benefit of Employee Stock Option Plan ..............
Repurchases of Common Stock ..................................
Balances, September 30, 2006 ..................................
Components of comprehensive income:
Net income ..................................................................
Translation adjustment, net of tax..........................
Unrealized gain on available for sale securities,
net of tax............................................................
Net gain on derivative instruments, net of tax .......
Total comprehensive income .................................
Amortization, issuance and forfeitures of restricted
stock........................................................................
Sales of shares under Employee Stock Option Plan ...
Sales of shares under Employee Stock Purchase Plan
Stock compensation expense.......................................
Tax benefit of Employee Stock Option Plan ..............
Collection of notes receivable.....................................
Balances, September 29, 2007 ..................................
Components of comprehensive income:
Net income ..................................................................
Translation adjustment, net of tax..........................
Unrealized gain on available for sale securities,
net of tax............................................................
Net gain on derivative instruments, net of tax .......
Total comprehensive income .................................
Amortization, issuance and forfeitures of restricted
stock........................................................................
Sales of shares under Employee Stock Option Plan ...
Stock compensation expense.......................................
Tax benefit of Employee Stock Option Plan ..............
Repurchases of Common Stock ..................................
Cumulative effect of adoption of FIN 48....................
Balances, September 27, 2008 ..................................
Common
Stock
Shar es
31,173
Common
Stock Par
Value
$309
Add.
Paid-in
Capital
$353,230
Defer r ed
Stock
Comp.
$(3,699)
Notes
Rec.
Fr om
Stock
Sales
$(324)
—
—
—
—
—
—
—
—
—
—
—
14,681
45,394
—
45,394
14,681
—
—
—
—
—
—
—
—
—
—
19
(21)
—
—
19
(21)
60,073
—
—
(3,699)
3,699
—
—
—
—
51
722
188
—
—
(722)
31,412
—
7
2
—
—
(7)
311
2,059
19,598
4,653
12,403
1,289
(22,243)
367,290
—
—
—
—
—
—
—
—
—
—
—
—
—
(324)
—
—
—
—
—
—
46,693
—
—
—
—
—
—
303,534
2,059
19,605
4,655
12,403
1,289
(22,250)
717,504
—
—
—
—
—
—
—
—
—
—
—
23,755
15,951
—
15,951
23,755
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
187
37
—
—
—
—
187
37
39,930
1
52
87
—
—
—
31,552
1
1
—
—
—
313
(225)
1,260
2,521
9,648
22
—
380,516
—
—
—
—
—
—
—
—
—
—
—
—
324
—
—
—
—
—
—
—
70,672
—
—
—
—
—
—
319,485
(225)
1,261
2,522
9,648
22
324
770,986
—
—
—
—
—
—
—
—
—
—
—
8,247
23,403
—
23,403
8,247
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
165
5
—
—
—
—
165
5
31,820
(32)
643
—
—
(7,972)
—
24,191
1
7
—
—
(80)
—
$241
(884)
16,501
8,982
665
(228,134)
—
$177,646
—
—
—
—
—
—
$—
—
—
—
—
—
—
$—
—
—
—
—
—
—
$79,089
—
—
—
—
—
(1,429)
$341,459
(883)
16,508
8,982
665
(228,214)
(1,429)
$598,435
See accompanying Notes to Consolidated Financial Statements.
84
Accum.
Other
Comp.
Income
$32,014
Retained
Ear nings
$258,140
Total
$639,670
COHERENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
September 27,
2008
Cash flows fr om oper ating activities:
Net income................................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Purchased in-process research and development................................................................
Non-cash restructuring and other charges (recoveries) ......................................................
Depreciation and amortization ............................................................................................
Amortization of intangible assets........................................................................................
Stock based compensation ..................................................................................................
Excess tax benefit from stock-based compensation arrangements.....................................
Tax benefit from employee stock options...........................................................................
Deferred income taxes.........................................................................................................
Loss on disposal of property and equipment ......................................................................
Equity in loss of joint ventures ...........................................................................................
Other non-cash expense ......................................................................................................
Non-cash impact of sale of CIOL .......................................................................................
Non-cash write-off of Excel acquisition cost......................................................................
Amortization of bond issue costs ........................................................................................
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable .......................................................................................................
Inventories ......................................................................................................................
Prepaid expenses and other assets..................................................................................
Other assets.....................................................................................................................
Accounts payable ...........................................................................................................
Income taxes payable/receivable ...................................................................................
Other current liabilities ..................................................................................................
Other long-term liabilities ..............................................................................................
Net cash pr ovided by oper ating activities............................................................................
Cash flows fr om investing activities:
Purchases of property and equipment .................................................................................
Proceeds from dispositions of property and equipment .....................................................
Purchases of available-for-sale securities ...........................................................................
Proceeds from sales and maturities of available-for-sale securities ...................................
Acquisition of businesses, net of cash acquired .................................................................
Change in restricted cash ....................................................................................................
Premiums paid for life insurance contracts.........................................................................
Proceeds from sale of CIOL................................................................................................
Other-net..............................................................................................................................
Net cash pr ovided by (used in) investing activities .............................................................
(continued)
85
Year Ended
September 29,
2007
September 30,
2006
$23,403
$15,951
$45,394
—
3,111
23,319
8,651
8,809
(749)
665
(1,642)
417
—
208
—
—
—
2,200
(128)
25,822
8,152
9,937
(77)
22
2,037
10,722
—
506
(1,993)
491
5,139
690
97
26,270
9,207
13,995
(858)
1,289
(16,484)
—
90
641
—
1,945
624
9,049
(6,491)
7,019
2,902
(1,085)
1,717
(8,837)
(2,104)
68,362
12,211
(8,377)
(9,751)
(5,208)
(1,683)
(3,347)
3,356
637
66,619
(22,947)
3,333
191
(2,973)
9,834
(742)
6,839
2,347
78,782
(22,612)
12,863
(109,846)
151,362
—
(109)
—
6,519
—
38,177
(21,693)
24,630
(339,107)
341,978
(14,228)
5
(2,800)
—
3
(11,212)
(17,225)
1,806
(89,444)
174,084
(5,942)
12,684
—
—
(570)
75,393
September 27,
2008
Cash flows fr om financing activities:
Short-term borrowings .........................................................................................................
Short-term repayments .........................................................................................................
Long-term debt borrowings..................................................................................................
Long-term debt repayments .................................................................................................
Cash overdrafts increase (decrease).....................................................................................
Repayments of capital lease obligations ..............................................................................
Repurchase of common stock ..............................................................................................
Proceeds received from issuance of convertible subordinated notes ..................................
Debt issuance costs...............................................................................................................
Issuance of common stock under employee stock option and purchase plans....................
Excess tax benefits from stock-based compensation arrangements ....................................
Collection of notes receivable from stock sales...................................................................
Net cash pr ovided by (used in) financing activities .............................................................
Effect of exchange rate changes on cash and cash equivalents ...........................................
Net incr ease (decr ease) in cash and cash equivalents..........................................................
Cash and cash equivalents, beginning of year .....................................................................
Cash and cash equivalents, end of year ................................................................................
Supplemental disclosur e of cash flow infor mation:
Cash paid during the year for:
Interest .............................................................................................................................
Income taxes....................................................................................................................
Cash received during the year for:
Income taxes....................................................................................................................
Noncash investing and financing activities:
Net issuances (retirements) of restricted stock awards........................................................
Unpaid property and equipment...........................................................................................
Borrowings under capital leases ..........................................................................................
Year Ended
September 29,
2007
$371
(370)
—
—
(855)
(9)
(228,214)
—
—
16,509
749
—
(211,819)
3,179
(102,101)
315,927
$213,826
—
—
(200)
(200,002)
(1,854)
(7)
—
—
—
3,783
77
324
(197,879)
13,168
(129,304)
445,231
$315,927
—
(12,741)
1,387
(155)
493
(2)
(22,250)
200,000
(5,612)
24,260
858
—
186,238
7,311
347,724
97,507
$445,231
$577
$18,781
$6,397
$17,038
$4,360
$16,551
$4,213
$1,253
$888
$(883)
$1,052
$—
$(225)
$1,584
$—
$48
$1,241
$35
(concluded)
See accompanying Notes to Consolidated Financial Statements
86
September 30,
2006
COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Founded in 1966, Coherent, Inc. provides photonics-based solutions for commercial and scientific research
applications. We design and manufacture a diversified selection of photonics products and solutions, primarily lasers,
precision optics and related accessories. Headquartered in Santa Clara, California, we have worldwide operations including
research and development, manufacturing, sales, service and support capabilities.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2008, 2007 and 2006 ended on
September 27, September 29, and September 30, respectively, and are referred to in these financial statements as fiscal 2008,
fiscal 2007, and fiscal 2006 for convenience. All fiscal years included 52 weeks. The fiscal years of the majority of our
international subsidiaries end on September 30. Accordingly, the financial statements of these subsidiaries as of that date and
for the years then ended have been used for our consolidated financial statements. Management believes that the impact of
the use of different year-ends is immaterial to our consolidated financial statements taken as a whole.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) 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 consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Basis of Pr esentation
The consolidated financial statements include the accounts of Coherent, Inc. and its majority-owned subsidiaries
(collectively, “the Company”, “we”, “our”, or “Coherent”). Intercompany balances and transactions have been eliminated.
Investments in business entities in which we do not have control, but have the ability to exercise significant influence over
operating and financial policies (generally 20-50% ownership) are accounted for by the equity method.
Cor r ection of Er r or in Consolidated Statements of Cash Flows
In July 2008, we determined that the purchase and sale activity of securities classified as cash equivalents had been
improperly included in the presentation of purchases and sales of investments within the investing section of the statement of
cash flows within the captions “Purchases of available-for-sale securities” and “Proceeds from sales and maturities of
available-for-sale securities.” As a result, we have corrected this error in the accompanying statements of cash flows for fiscal
2007 and fiscal 2006 by removing the purchases, sales and maturities of the securities classified as cash equivalents from the
amounts previously reported. The correction of the error does not change the net effect of these purchases, maturities and
sales of available for sale securities within cash flows from investing activities. All amounts discussed are in thousands. For
fiscal 2007, we previously reported purchases of available for sale securities of $831,764, which we have reduced by
$492,657 of purchases related to cash equivalents to purchases of $339,107, as corrected. For fiscal 2007, we previously
reported sales and maturities of available-for-sale securities of $834,635, which we have reduced by $492,657 of sales and
maturities related to cash equivalents to maturities and sales of $341,978, as corrected. For fiscal 2006, we previously
reported purchases of available for sale securities of $281,545, which we have reduced by $192,101 of purchases related to
cash equivalents to purchases of $89,444, as corrected. For fiscal 2006, we previously reported sales and maturities of
available-for-sale securities of $366,185, which we have reduced by $192,101 of sales and maturities related to cash
equivalents to maturities and sales of $174,084, as corrected.
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Fair Value of Financial Instr uments
The carrying amounts of certain of our financial instruments including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. Short-term
investments are comprised of available-for-sale securities, which are carried at fair value. Other non-current assets include
trading securities related to our deferred compensation plans, which are carried at fair value. The recorded carrying amount of
our long-term obligations approximates fair value at fiscal 2008 year-end. Foreign exchange contracts are stated at fair value
based on prevailing financial market information.
Cash Equivalents
All highly liquid investments with maturities of three months or less at the time of purchase are classified as cash
equivalents.
Concentr ation of Cr edit Risk
Financial instruments that may potentially subject us to concentrations of credit risk consist principally of cash
equivalents, short-term investments and accounts receivable. At fiscal 2008 year-end, the majority of our short-term
investments are in commercial paper, corporate obligations, bank certificates of deposit and federal agency obligations. Cash
equivalents and short-term investments are maintained with several financial institutions and may exceed the amount of
insurance provided on such balances. The majority of our accounts receivable are derived from sales to customers for
commercial applications. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount
of credit extended when deemed necessary but generally require no collateral. We maintain reserves for potential credit
losses. Our products are broadly distributed and there were no customers who accounted for more than 10% of accounts
receivable at fiscal 2008 year-end. One customer accounted for 10.5% of accounts receivable at fiscal 2007 year-end, there
were no other customers who accounted for more than 10%.
Accounts Receivable Allowances
Accounts receivable allowances reflect our best estimate of probable losses inherent in our accounts receivable
balance. We regularly review allowances by considering factors such as historical experience, credit quality, the age of the
accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. Activity in
accounts receivable allowance is as follows (in thousands):
Fiscal year -end
2007
2008
Beginning balance .......................................................
Additions charged to expenses ....................................
Deductions from reserves............................................
Ending balance ............................................................
$2,918
1,246
(1,670)
$2,494
$3,275
1,698
(2,055)
$2,918
2006
$3,136
3,378
(3,239)
$3,275
Inventor ies
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are as follows (in thousands):
Fiscal year -end
2008
2007
Purchased parts and assemblies..............................................
Work-in-process .....................................................................
Finished goods........................................................................
Inventories..............................................................................
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$36,919
46,128
37,472
$120,519
$29,786
44,368
38,739
$112,893 Pr oper ty and Equipment
Property and equipment are stated at cost and are depreciated or amortized using the straight-line method. Cost,
accumulated depreciation and amortization and estimated useful lives are as follows (in thousands):
Fiscal year -end
2008
2007
Land ....................................................................................
Buildings and improvements ..............................................
Equipment, furniture and fixtures .......................................
Leasehold improvements ....................................................
Accumulated depreciation and amortization.......................
Property and equipment, net ...............................................
$6,289
68,120
199,099
14,513
288,021
(187,025)
$100,996
$6,260
67,166
191,050
13,630
278,106
(173,801)
$104,305
Useful Life
5-40 years
3-10 years
Lesser of useful life or terms of lease
In September 2007, we sold our Condensa building in Santa Clara, California for approximately $24.8 million,
resulting in a capital gain of approximately $3.6 million. In the third quarter of fiscal 2007, as part of a plan to consolidate
facilities, we moved our operations from that facility to other existing facilities and classified the property as held for sale.
The net book value of the land was approximately $12.9 million and the net book value of the building and improvements
was approximately $8.3 million. In September 2007, as part of a plan to consolidate facilities, we also sold our Auburn
campus in Auburn, California, for approximately $9.8 million and incurred related expenses of $0.7 million, resulting in a
loss of approximately $12.6 million. We have leased back a portion of the campus on a month-to-month basis. The net book
value of the building and improvements was approximately $21.7 million. We did not recognize any tax benefit on the net
loss of $9.0 million generated by the Condensa and Auburn transactions since it is not considered realizable. See Note 15.
Asset Retir ement Obligations
We account for our asset retirement obligations in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations” (“SFAS 143”). SFAS 143 requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the
life of the asset. All of our existing asset retirement obligations are associated with commitments to return property subject to
original condition upon lease termination at various sites and costs to clean up and dispose of certain fixed assets at our
Finland site. We estimated that as of fiscal 2008 year-end, gross expected future cash flows of $1.9 million would be required
to fulfill these obligations.
The following table reconciles changes in our asset retirement liability, which is reported in other long-term
liabilities on our consolidated balance sheets, for fiscal 2008 and 2007 (in thousands):
Asset retirement liability as of September 30, 2006...........................................................
Additional obligation......................................................................................................
Adjustment to asset retirement obligations recognized ..................................................
Accretion recognized......................................................................................................
Changes due to foreign currency exchange ....................................................................
Asset retirement liability as of September 29, 2007...........................................................
Adjustment to asset retirement obligations recognized ..................................................
Accretion recognized......................................................................................................
Changes due to foreign currency exchange ....................................................................
Asset retirement liability as of September 27, 2008...........................................................
$1,765
46
(716)
152
9
1,256
54
84
70
$1,464
Long-lived Assets
We account for long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS 144”). Accordingly, we evaluate the carrying value of long-lived assets, including intangible
assets, whenever events or changes in business circumstances or our planned use of long-lived assets indicate that their
carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to
89
determine whether the carrying values of long-lived assets are impaired based on a comparison to the undiscounted expected
future net cash flows. If the comparison indicates that impairment exists, long-lived assets that are classified as held and used
are written down to their respective fair values. When long-lived assets are classified as held for sale, they are written down
to their respective fair values less costs to sell. Significant management judgment is required in the forecast of future
operating results that is used in the preparation of expected undiscounted cash flows.
Goodwill
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) goodwill is tested for
impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired (see
Note 6). Under SFAS 142, goodwill is tested for impairment by comparing the respective fair value with the respective
carrying value of the reporting unit. Fair value is determined using a discounted cash flow methodology. Absent any
impairment indicators, we perform our annual impairment tests at the beginning of the fourth quarter of each fiscal year using
the balance sheet as of the end of the third fiscal quarter.
Intangible Assets
Intangible assets, including acquired existing technology, customer lists, trade name, non-compete agreements,
patents and order backlog are amortized on a straight-line basis over estimated useful lives of one year to fifteen years.
War r anty Reser ves
We provide warranties on certain of our product sales and allowances for estimated warranty costs are recorded
during the period of sale. The determination of such allowances requires us to make estimates of product return rates and
expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical
warranty costs for each product line. The weighted average warranty period covered is nearly 15 months. If actual return rates
and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in
future periods.
Revenue Recognition
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an
arrangement exists, the product has been delivered or the service has been rendered, the price is fixed or determinable and
collection is probable. Revenue from product sales is recorded when all of the foregoing conditions are met and risk of loss
and title passes to the customer. Our products typically include a warranty and the estimated cost of product warranty claims
(based on historical experience) is recorded at the time the sale is recognized. The weighted average warranty period covered
is nearly 15 months. Sales to customers are generally not subject to any price protection or return rights.
The vast majority of our sales are made to original equipment manufacturers (“OEMs”), distributors, resellers and
end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are
not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or
provide training. In those instances, we defer revenue related to installation services or training until these services have been
rendered. We allocate revenue from multiple element arrangements to the various elements based upon relative fair values.
2. SIGNIFICANT ACCOUNTING POLICIES
Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and
only certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited
to performance under our published product specifications. For the few product sales that have customer acceptance
provisions because of other than published specifications, (1) the products are tested and accepted by the customer at our site
or by the customer’s acceptance of the results of our testing program prior to shipment to the customer, or (2) the revenue is
deferred until customer acceptance occurs.
Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations;
however, our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue
related to installation services until completion of these services.
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For most products, training is not provided; therefore, no post-delivery training obligation exists. However, when
training is provided to our customers, it is typically priced separately and is recognized as revenue after these services have
been provided.
Resear ch and Development
Research and development expenses include salaries, contractor and consultant fees, supplies and materials, as well
as costs related to other overhead such as depreciation, facilities, utilities and other departmental expenses. The costs we
incur with respect to internally developed technology and engineering services are included in research and development
expenses as incurred as they do not directly relate to any particular licensee, license agreement or license fee.
We treat third party and government funding of our research and development activity, where we are the primary
beneficiary of such work conducted, as a credit to research and development cost. Amounts offset against research and
development costs were not material in any of the periods presented.
For eign Cur r ency Tr anslation
The functional currencies of our foreign subsidiaries are generally 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 (“OCI”). Foreign currency transaction gains and losses are included
in earnings.
Der ivatives
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended,
requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value.
If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of the changes in the fair value of the derivative are recorded in OCI and are recognized in the income statement
when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in
other income (expense).
Our objective of holding derivatives is to minimize the risks of foreign currency fluctuation by using the most
effective methods to eliminate or reduce the impact of these exposures. Principal currencies hedged include the Euro,
Japanese Yen, British Pound, Canadian Dollar and Korean Won.
For foreign currency forward contracts under SFAS 133, hedge effectiveness is measured by comparing the
cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward
rates. For foreign currency option contracts under SFAS 133, hedge effectiveness is asserted when the critical elements
representing the total changes in the option’s cash flows continue to match the related elements of the hedged forecasted
transaction. Should discrepancies arise, effectiveness is measured by comparing the change in option value and the change in
value of a hypothetical derivative mirroring the critical elements of the forecasted transaction.
Forwards not designated as hedging instruments under SFAS 133 are also used to hedge the impact of the variability
in exchange rates on accounts receivable and collections denominated in certain foreign currencies. Our forward contracts
have maturities of three months or less and changes in fair value of these derivatives are recognized in other income
(expense).
Compr ehensive Income (Loss)
Comprehensive income (loss) 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 and is presented in our Consolidated Statements of
Stockholders’ Equity and in Note 13, “Accumulated Other Comprehensive Income (Loss).”
Ear nings Per Shar e
Basic earnings per share is computed based on the weighted average number of shares outstanding during the
period, excluding unvested restricted stock. 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, awards including restricted stock and
stock purchase contracts using the treasury stock method.
91
In September 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF No. 04-8, “The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share”, that contingently convertible debt should be
treated as convertible debt and included in the calculation of diluted earnings per share (“EPS”). The assumed proceeds from
our previous $200.0 million 2.75% convertible subordinated notes (see Note 9) under the treasury stock method were
calculated by subtracting the aggregate weighted- average conversion price from the average market price of the shares
related to the contingently convertible debt. As the market price for our shares did not reach the conversion price at any point
during fiscal 2007 or 2006 while the contingently convertible debt was outstanding, there was no dilutive effect in our diluted
EPS calculation under the treasury stock method. Therefore we did not include any shares related to the convertible
subordinated notes, in accordance with the provisions of EITF No. 90-19, “Convertible Bonds With Issuer Option to Settle in
Cash Upon Conversion” and SFAS No. 128, “Earnings Per Share”.
The following table presents information necessary to calculate basic and diluted earnings per share (in thousands,
except per share data):
2008
Weighted average shares outstanding(1)—Basic ...........................
Dilutive effect of employee stock plans .........................................
Weighted average shares outstanding—Diluted ............................
Net income .....................................................................................
Net income—basic .........................................................................
Net income—diluted ......................................................................
(1)
27,505
549
28,054
$23,403
$0.85
$0.83
Fiscal
2007
31,398
626
32,024
$15,951
$0.51
$0.50
2006
30,973
594
31,567
$45,394
$1.47
$1.44
Net of restricted stock
A total of 2,265,373, 1,369,385 and 850,774 potentially dilutive securities have been excluded from the dilutive
share calculation for fiscal 2008, 2007 and 2006, respectively, as their effect was anti-dilutive.
Stock-Based Compensation
We account for share-based compensation using the fair value recognition provisions of SFAS 123(R),
“Share-Based Payment.” We estimate the fair value of stock options granted using the Black-Scholes Merton model. We use
historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards
that are expected to vest. We amortize the fair value of stock options on a straight-line basis over the requisite service periods
of the awards, which are generally the vesting periods. We value restricted stock units using the intrinsic value method. We
amortize the value of restricted stock units on a straight-line basis over the restriction period. See Note 12 for a description of
our share-based employee compensation plans and the assumptions we use to calculate the fair value of share-based
employee compensation.
Adver tising Costs
Advertising costs are expensed as incurred and were $2.3 million, $2.6 million and $2.4 million in fiscal 2008, fiscal
2007 and fiscal 2006, respectively.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax
provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax
provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated
balance sheets.
We record a valuation allowance to reduce our deferred tax assets to an amount that more likely than not will be
realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an adjustment to the allowance for the deferred tax
asset would increase income in the period such determination was made. Likewise, should we determine that we would not
be able to realize all or part of our net deferred tax asset in the future, an adjustment to the allowance for the deferred tax
asset would be charged to income in the period such determination was made.
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Federal income taxes have not been provided for on a portion of the unremitted earnings of foreign subsidiaries
because such earnings are intended to be permanently reinvested. The total amount of unremitted earnings of foreign
subsidiaries for which we have not yet recorded federal income taxes was approximately $86.0 million at fiscal 2008 year
end. In addition to federal income taxes (which are not practicably determinable), withholding taxes of approximately
$3.8 million would be payable upon repatriation of such earnings which would result in additional foreign tax credits.
Recent Accounting Pr onouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes,” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”)
No.109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. In addition, in May 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement
in FASB Interpretation No. 48,”(“FSP FIN 48-1”) to amend FIN 48 by providing that previously unrecognized tax benefits
can be recognized when the tax positions are effectively settled upon examination by a taxing authority. According to FSP
FIN 48-1, an enterprise’s tax position will be considered effectively settled if the taxing authority has completed its
examination, the enterprise does not plan to appeal, and the possibility is remote that the taxing authority would reexamine
the tax position in the future. We adopted FIN 48 and FSP FIN 48-1 for fiscal year 2008 beginning September 30, 2007. The
cumulative effect of applying the provisions of FIN 48 and FSP FIN 48-1 was a decrease of approximately $1.4 million in
retained earnings at the beginning of fiscal 2008. See Note 15, “Income Taxes”, for additional information, including the
effects of adoption on the Company’s Consolidated Financial Statements.
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”
(“EITF 06-3”) which requires a policy be adopted to present externally imposed taxes on revenue producing transactions on
either a gross or net basis. Coherent’s policy is to present such taxes on a gross basis. Gross or net presentation may be
elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this issue
would include taxes that are imposed on a revenue transaction between a seller and a customer. We adopted EITF 06-3 for
our fiscal year beginning September 30, 2007. The adoption of EITF 06-3 did not have a material impact on our consolidated
financial statements.
In December 2007, the FASB ratified the EITF’s Consensus for Issue No. 07-1, “Accounting for Collaborative
Arrangements” (“EITF 07-1”), which defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between participants in the arrangement and third
parties. EITF 07-1 will become effective beginning with our first fiscal quarter of 2009. We do not expect the adoption of
EIFT 07-01 to have a material impact on our consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance
with GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for us for interim periods within
our fiscal year beginning September 28, 2008. We do not expect that the adoption in fiscal 2009 of SFAS 157 for financial
assets and financial liabilities will have a significant impact on our consolidated financial position and results of operations.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 which
delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We have not yet determined the
impact that the implementation of SFAS 157 will have on our non-financial assets and liabilities; however we do not
anticipate it to significantly impact our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards, which
require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure
certain financial assets and financial liabilities, on an instrument-by-instrument basis. If the fair value option is elected,
unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings.
SFAS 159 is effective for us for our fiscal year beginning September 28, 2008. We do not expect the adoption of SFAS 159
to have an effect on our consolidated financial position and results of operations.
93
In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”).
SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be
used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and
requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as
of the acquisition date. SFAS 141(R) also requires that acquisition related costs be recognized separately from the
acquisition. SFAS 141(R) is effective for us for acquisitions after the beginning of our fiscal year 2010.
In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging
Activities—an amendment of SFAS No. 133” (“SFAS 161”). This statement changes the disclosure requirements for
derivative instruments and hedging activities. SFAS 161 requires us to provide enhanced disclosures about (a) how and why
we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative
instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS 161 is
effective for our interim period beginning December 28, 2008. We are currently assessing the impact that the adoption of
SFAS 161 will have on the disclosures to our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP SFAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to
intangible assets acquired after the effective date. We will evaluate the potential impact of FSP SFAS 142-3 on acquisitions
on a prospective basis.
In May 2008, the FASB issued SFAS No. 162 “ The Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented
in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We are currently evaluating the potential
impact, if any, of the adoption of SFAS 162 on our consolidated financial position, results of operations and cash flows.
3. RESTRUCTURING ACTIVITIES
On April 16, 2008, we announced that we entered into an agreement to sell certain assets of our Auburn Optics
manufacturing operation to Research Electro- Optics, Inc. (“REO”), a privately held optics manufacturing and technology
company. We also entered into a strategic supply agreement with REO. REO will provide optical manufacturing capabilities
for us, including fabrication and coating of optical components. The transition of the optics manufacturing assets from
Auburn to REO is expected to be completed no later than the end of the second quarter of fiscal 2009. The transition has
resulted in charges primarily for employee terminations, supplier qualification, moving costs for related equipment, and other
exit related costs associated with a plan approved by management.
During fiscal 2008, we consolidated our German DPSS manufacturing into our Lübeck, Germany site. The transfer
was completed in the fourth quarter of fiscal 2008. On October 13, 2008, we announced the consolidation of the remainder of
our Munich facility into our Göttingen site. The transfer is scheduled for completion by the end of our third quarter of fiscal
2009. The transfer has resulted in charges primarily for a grant repayment liability, employee termination and other exit
related costs associated with a plan approved by management.
At fiscal 2008 and 2007 year-ends, we had $3.6 million and $0.5 million, respectively, accrued as a current liability
on our consolidated balance sheet for restructuring charges. We recognize restructuring costs in accordance with SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Restructuring charges in fiscal 2008 are
94
recorded in cost of sales, research and development and selling, general and administrative expenses in our consolidated
statements of operations. The following table sets forth an analysis of the components of the restructuring charges, payments
made against the accrual and other provisions for fiscal 2008 and 2007 (in thousands):
Sever ance Related
Balance, September 30, 2006 ..............
Provision..............................................
Deductions for rent payments ..............
Balance, September 29, 2007 ..............
Provision..............................................
Deductions for payments .....................
Balance, September 27, 2008 ..............
Facilities Related Char ges
$—
—
—
—
3,654
(1,073)
$2,581
$1,616
406
(1,546)
476
75
(532)
$19
Other Restr uctur ing Costs
$—
—
—
—
2,075
(1,088)
$987
Total
$1,616
406
(1,546)
476
5,804
(2,693)
$3,587
The current year severance related costs are primarily comprised of severance pay, outplacement services, medical
and other related benefits for employees being terminated due to the transition of activities out of Auburn, California. The
remaining severance related restructuring accrual balance of approximately $2.6 million at September 27, 2008 is expected to
result in cash expenditures through the third quarter of fiscal 2009. The other restructuring costs are primarily for a grant
repayment liability, project management fees and other exit related costs associated with a plan approved by management.
4. BUSINESS COMBINATIONS
Nuvonyx, Inc.
On April 24, 2007, we acquired Nuvonyx, Inc., a technology leader in high-power laser diode components, arrays,
and industrial laser systems for materials processing and defense applications for approximately $14.0 million in cash, net of
acquisition costs of $0.3 million. Nuvonyx produces high power arrays with powers in excess of 50 Kilowatts through its
proprietary cooling and stacking technologies. The industrial laser systems are used for cladding and hardening of metals,
joining materials, and other materials processing applications. We have accounted for the acquisition of Nuvonyx’s assets as
a business combination and the operating results of Nuvonyx have been included in our consolidated financial statements
from the date of acquisition. Our allocation of the purchase price is as follows (in thousands):
Tangible assets..............................................................................................................................................................
Goodwill .......................................................................................................................................................................
In-process research and development (IPR&D) ...........................................................................................................
Intangible assets:
Existing technology ..................................................................................................................................................
Customer lists ...........................................................................................................................................................
Non-compete agreements .........................................................................................................................................
Backlog.....................................................................................................................................................................
Trade name ...............................................................................................................................................................
Deferred tax liabilities ..................................................................................................................................................
Liabilities assumed .......................................................................................................................................................
Total..............................................................................................................................................................................
$5,345
6,882
2,200
1,800
900
140
60
20
(1,256)
(1,826)
$14,265
The goodwill recognized from this acquisition resulted primarily from anticipated increases in market share and
synergies of combining this entity and has been included in our Commercial Lasers and Components segment. None of the
goodwill from this purchase is deductible for tax purposes. The identifiable intangible assets are being amortized over their
respective useful lives of one to five years.
At the date of acquisition, we immediately charged $2.2 million to expense, representing purchased IPR&D related
to two development projects that had not yet reached technological feasibility and had, in management’s opinion, no
alternative future use. The assigned value was determined by estimating the costs to develop the acquired in-process
technology into commercially viable products, estimating the net cash flows from such project, and discounting the net cash
flows back to its present value. Separate projected cash flows were prepared for both the existing, as well as the in-process
projects. The key assumptions used in the valuation include, among others, the expected completion date of the in-process
project identified as of the acquisition date, the estimated costs to complete the project, revenue contribution and expense
projection assuming the resulting products have entered the market, and the discount rate based on the risks associated with
95
the development life cycle of the in-process technology acquired. The discount rate used in the present value calculations was
obtained from a weighted-average cost of capital analysis, adjusted upward to account for the inherent uncertainties
surrounding the successful development of the in-process research and development, the expected profitability level of such
technology, and the uncertainty of technological advances that could potentially impact the estimates. Projected net cash
flows were based on estimates of revenue and operating profit (loss) of the project. At September 27, 2008, one project has
been put on hold and the other is expected to become commercially viable in fiscal 2009 with approximately $1.8 million of
estimated expenditures to complete.
Unaudited pro forma results of operations had the acquisition taken place at the beginning of fiscal 2007 would have
resulted in net sales of $606.1 million, net income of $16.4 million, and net income per basic and diluted share of $0.52 and
$0.51, respectively, for fiscal 2007. Unaudited pro forma results of operations had the acquisition taken place at the
beginning of fiscal 2006 would have resulted in net sales of $589.9 million, net income of $41.5 million, and net income per
basic and diluted share of $1.34 and $1.31, respectively, for fiscal 2006.
These unaudited pro forma results are not necessarily indicative of the results that actually would have been
obtained had the acquisition been in effect for the periods described or that may be obtained in the future.
Excel Technology, Inc.
On February 21, 2006, we entered into a definitive agreement to acquire Excel Technology, Inc. (“Excel”), a
manufacturer of photonics-based solutions, consisting of laser systems and electro-optical components, primarily for
industrial, commercial, and scientific applications. On October 25, 2006 we received a prohibition order from the German
Federal Cartel Office (FCO) regarding our proposed acquisition. The acquisition had previously been approved by antitrust
authorities in the United States. On November 1, 2006, we received notice from Excel that it was terminating the merger
agreement. As a result, our fiscal 2006 results include a charge of $5.9 million for previously capitalized costs related to the
terminated merger agreement, and our fiscal 2007 results include a pretax charge of $0.3 million for additional costs incurred
during the period related to the terminated merger agreement.
Iolon, Inc.
On November 10, 2005, we acquired the assets of privately held Iolon, Inc. (Iolon) of San Jose, California for
approximately $4.9 million in cash, net of acquisition costs of $0.1 million. Iolon designs and manufactures optical
components including widely tunable lasers and filters. We intend to utilize the acquired technology in our core portfolio. We
have accounted for the acquisition of Iolon’s assets as a business combination and the operating results of Iolon have been
included in our consolidated financial statements from the date of acquisition. Our allocation is as follows (in thousands):
Tangible assets................................................................................................................................................................
Goodwill .........................................................................................................................................................................
In-process research and development (IPR&D) .............................................................................................................
Intangible assets: Existing technology ........................................................................................................................................................
Total................................................................................................................................................................................
$1,678
785
690
1,800
$4,953
The goodwill recognized from this acquisition resulted primarily from anticipated increases in market share from
implementing the acquired technology into our core products and has been included in our Commercial Lasers and
Components segment. All of the goodwill from this purchase is expected to be deductible for tax purposes. The existing
technology is being amortized over an estimated useful life of eight years.
At the date of acquisition, we immediately charged $0.7 million to expense, representing purchased IPR&D related
to a development project that had not yet reached technological feasibility and had, in management’s opinion, no alternative
future use. The assigned value was determined by estimating the costs to develop the acquired in-process technology into
commercially viable products, estimating the net cash flows from such project, and discounting the net cash flows back to its
present value. Separate projected cash flows were prepared for both the existing, as well as the in-process projects. The key
assumptions used in the valuation include, among others, the expected completion date of the in-process project identified as
of the acquisition date, the estimated costs to complete the project, revenue contribution and expense projection assuming the
resulting products have entered the market, and the discount rate based on the risks associated with the development life
cycle of the in-process technology acquired. The discount rate used in the present value calculations was obtained from a
weighted-average cost of capital analysis, adjusted upward to account for the inherent uncertainties surrounding the
successful development of the in-process research and development, the expected profitability level of such technology, and
96
the uncertainty of technological advances that could potentially impact the estimates. Projected net cash flows were based on
estimates of revenue and operating profit (loss) of the project. The project became commercially viable in the second quarter
of fiscal 2006.
Pro forma financial information has been excluded as the information is considered immaterial.
Lambda Physik
On June 3, 2003, we initiated a tender offer to purchase the 5,250,000 (39.62%) outstanding shares of our Lambda
Physik subsidiary that were owned by other shareholders (the minority interest) for approximately $10.50 per share. During
fiscal 2003, we purchased 4,489,823 outstanding shares of Lambda Physik for approximately $47.7 million, resulting in a
total ownership percentage of 94.26% (inclusive of shares previously owned) at fiscal 2003 year-end. During fiscal 2004, we
purchased an additional 98,677 of outstanding shares of Lambda Physik for approximately $1.3 million, resulting in a total
ownership percentage of 95.01% (inclusive of shares previously owned) at fiscal 2004 year-end. During fiscal 2005, we
acquired the remaining 661,500 (“remaining interest”) outstanding shares for approximately $11.8 million, resulting in our
full ownership of Lambda Physik. We accounted for this transaction as a step acquisition using the purchase method. In the
fourth quarter of fiscal 2006, we accrued an additional $2.5 million in purchase price and related legal and other fees
associated with the acquisition of the remaining interest.
At fiscal 2008 and fiscal 2007 year-ends, we had $2.6 million and $2.5 million, respectively, remaining in an escrow
account that will be applied towards remaining close out costs for the acquisition and the amount is included in current
restricted cash on our consolidated balance sheet.
5. SHORT-TERM INVESTMENTS
We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash
equivalents. Marketable short-term investments in debt and equity securities are classified and accounted for as available-for­
sale securities and are valued based on quoted market prices. Investments classified as available-for-sale are reported at fair
value with unrealized gains and losses, net of related tax, recorded as a separate component of OCI in stockholders’ equity
until realized. Interest and amortization of premiums and discounts for debt securities are included in interest income. Gains
and losses on securities sold are determined based on the specific identification method and are included in other income
(expense).
Cash, cash equivalents and short-term investments consist of the following (in thousands):
Cost Basis
Cash and cash equivalents ............................................
Less: restricted cash......................................................
Short-term investments:
Available-for-sale securities:
Commercial paper.................................................
Certificates of deposit ...........................................
U.S. Treasury and agency obligations ..................
Corporate notes and obligations............................
Total short-term investments ............................
Short-term investments:
Available-for-sale securities:
U.S. Treasury and agency obligations .................
Corporate notes and obligations...........................
Total short-term investments ...........................
Fair Value
$216,474
$2
$(5)
$216,471
(2,645)
$213,826
$1,496
900
607
1,254
$4,257
$—
5
5
7
$17
$—
—
—
(6)
$(6)
$1,496
905
612
1,255
$4,268
Cost Basis
Cash and cash equivalents ...........................................
Less: restricted cash.....................................................
Fiscal 2008 Year -end
Unr ealized Gains
Unr ealized Losses
Fiscal 2007 Year -end
Unr ealized Gains
Unr ealized Losses
Fair Value
$318,352
$35
$—
$318,387
(2,460)
$315,927
$6,036
39,740
$45,776
$7
132
$139
$—
(19)
$(19)
$6,043
39,853
$45,896
97
At fiscal 2008 and fiscal 2007 year-ends, $2.6 million and $2.5 million of cash and cash equivalents respectively,
were restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda
Physik (see Note 4).
The amortized cost and estimated fair value of available-for-sale investments in debt securities at fiscal 2008 and
2007 year-ends, classified as short-term investments on our consolidated balance sheet, were as follows (in thousands):
Amor tized Cost
Due in less than 1 year...........................
Due in 1 to 5 years .................................
Due in 5 to 10 years ...............................
Due beyond 10 years .............................
Total investments in available-for-sale debt securities ....................................
Fiscal Year -end
2008
Estimated Fair Value
Amor tized Cost
2007
Estimated Fair Value
$2,926
275
—
156
$2,935
277
—
151
$39,937
2,399
—
3,440
$39,981
2,409
—
3,506
$3,357
$3,363
$45,776
$45,896
During fiscal 2008, we received proceeds totaling $70.1 million from the sale of available-for-sale securities and
realized gross losses of less than $0.1 million. During fiscal 2007, we received proceeds totaling $139.7 million from the sale
of available-for-sale securities and realized gross losses of less than $0.1 million.
The following table shows the gross unrealized losses and fair values of our investments with unrealized losses that
are not deemed to be other-than-temporarily impaired, aggregated by the investment category and length of time that the
individual securities have been in a continuous unrealized loss position at fiscal 2008 year-end (in thousands):
Less Than 12 Months
Descr iption of
Secur ities
Fair Value
U.S. Treasury and agency
obligations .................................
Corporate notes and obligations.....
Total...............................................
$12,405
1,530
$13,935
12 Months or Gr eater
Unr ealized Losses
Fair Value
$(5)
—
$(5)
Total
Unr ealized Losses
$—
646
$646
$—
(6)
$(6)
Fair Value
Unr ealized Losses
$12,405
2,176
$14,581
$(5)
(6)
$(11)
U.S. Treasury and agency obligations: The unrealized losses on our investments in U.S. Treasury and agency
obligations were caused by interest rate increases.
Corporate notes and obligations: The unrealized loss on our investments in corporate notes and obligations relates
to a $2.2 million investment. The credit ratings of the investments in the notes and obligations range from AAA to A (S&P
and Moody’s) and therefore the decline in the market value is attributable to change in interest rates and not credit quality.
6. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by segment for fiscal 2008 and 2007 are as follows (in thousands):
Commer cial
Laser s and
Components
Balance as of September 30, 2006.......................................
Acquisition related ..............................................................
Translation adjustments and other.......................................
Balance as of September 29, 2007.......................................
Translation adjustments and other.......................................
Balance as of September 27, 2008.......................................
98
$16,813
6,882
396
24,091
(305)
$23,786
Specialty
Laser
Systems
$55,058
—
4,227
59,285
3,747
$63,032
Total
$71,871
6,882
4,623
83,376
3,442
$86,818
The components of our amortizable intangible assets are as follows (in thousands):
Fiscal 2008 Year -end
Gr oss
Car r ying
Amount
Existing technology ......................................
Patents...........................................................
Drawings.......................................................
Order backlog ...............................................
Customer lists ...............................................
Trade name ...................................................
Non-compete agreement ...............................
Total..............................................................
Accumulated
Amor tization
$54,615
10,496
1,433
5,052
5,440
3,861
2,454
$83,351
$(33,370)
(8,090)
(1,433)
(5,034)
(3,253)
(2,236)
(2,379)
$(55,795)
Fiscal 2007 Year -end
Net
$21,245
2,406
—
18
2,187
1,625
75
$27,556
Gr oss
Car r ying
Amount
Accumulated
Amor tization
$54,091
10,184
1,390
4,907
5,366
3,754
2,408
$82,100
$(26,955)
(6,943)
(1,390)
(4,864)
(2,562)
(1,751)
(2,065)
$(46,530)
Net
$27,136
3,241
—
43
2,804
2,003
343
$35,570
The weighted average remaining amortization period for existing technology, patents, trade name, customer lists and
non-compete agreements are approximately 5 years, 3 years, 5 years, 4 years and 1 year, respectively. Amortization expense
for intangible assets during fiscal years 2008, 2007 and 2006 was $8.7 million, $8.2 million and $9.2 million, respectively.
Estimated amortization expense for the next five fiscal years and all years thereafter are as follows (in thousands):
Estimated
Amor tization
Expense
2009..............................................................................................................................
2010..............................................................................................................................
2011..............................................................................................................................
2012..............................................................................................................................
2013..............................................................................................................................
Thereafter .....................................................................................................................
Total .............................................................................................................................
$7,983
6,623
5,135
3,372
2,029
2,414
$27,556
7. BALANCE SHEET DETAILS
Prepaid expenses and other assets consist of the following (in thousands):
Fiscal Year -end
2008
2007
Prepaid and refundable income taxes ...............................................................
Prepaid expenses and other ..............................................................................
Total prepaid expenses and other assets ...........................................................
$23,277
18,516
$41,793
$8,616
41,628
$50,244
Other assets consist of the following (in thousands):
Fiscal Year -end
2008
2007
Assets related to deferred compensation arrangements (see Note 12)..............
Deferred tax assets............................................................................................
Other assets.......................................................................................................
Total other assets ..............................................................................................
99
$28,122
50,208
2,900
$81,230
$30,706
25,165
2,900
$58,771
Other current liabilities consist of the following (in thousands):
Fiscal Year -end
2008
2007
Accrued payroll and benefits............................................................................
Accrued expenses and other .............................................................................
Reserve for warranty ........................................................................................
Other taxes payable ..........................................................................................
Customer deposits ............................................................................................
Accrued restructuring charges (Note 3)............................................................
Deferred income ...............................................................................................
Total other current liabilities ............................................................................
$30,807
12,252
13,214
4,858
2,324
3,587
12,096
$79,138
$28,247
18,471
13,660
9,840
1,868
476
10,496
$83,058
Components of the reserve for warranty costs during fiscal 2008, 2007 and 2006 were as follows (in thousands):
Fiscal
2007
2008
Beginning balance ..................................................................
Additions related to current period sales ................................
Warranty costs incurred in the current period ........................
Accruals resulting from acquisitions ......................................
Adjustments to accruals related to prior period sales .............
Ending balance .......................................................................
$13,660
21,872
(22,287)
—
(31)
$13,214
$11,462
21,423
(20,157)
247
685
$13,660
2006
$10,424
19,540
(18,636)
—
134
$11,462
Other long-term liabilities consist of the following (in thousands):
Fiscal Year -end
2008
2007
Deferred compensation (see Note 12) ..............................................................
Long-term taxes payable ..................................................................................
Deferred tax liabilities ......................................................................................
Deferred income ...............................................................................................
Asset retirement liability (see Note 2) ..............................................................
Other long-term liabilities ................................................................................
Total other long-term liabilities........................................................................
$28,459
45,343
13,738
1,800
1,464
3,802
$94,606
$31,336
—
10,433
1,585
1,256
3,238
$47,848
8. SHORT-TERM BORROWINGS
We have several lines of credit which allow us to borrow in the applicable local currency. At September 27, 2008,
the foreign lines of credit totaled $18.0 million, of which $16.3 million was unused and available, thus reducing credit
available for borrowing. These credit facilities were used as guarantees in Europe and Japan during fiscal 2008. Our foreign
lines of credit are concentrated in Europe and Japan and are principally unsecured. All of our lines of credit generally provide
borrowings at the bank reference rate or better, which varies depending on the country where the funds are borrowed. In
addition, our domestic line of credit, which was opened on March 31, 2008, includes a $40 million unsecured revolving
credit account with Union Bank of California, which expires on March 31, 2010 and is subject to covenants related to
financial ratios and tangible net worth. We are in compliance with all covenants and no amounts are outstanding on our
domestic line of credit as of September 27, 2008.
9. LONG-TERM OBLIGATIONS AND CONVERTIBLE SUBORDINATED NOTES
The components of long-term obligations are as follows (in thousands):
Fiscal Year -end
2008
2007
Notes payable ...........................................................................................
Capital leases............................................................................................
Current portion .........................................................................................
Long-term obligations ..............................................................................
100
$—
24
24
(9)
$15
$—
30
30
(9)
$21
Notes payable
At fiscal 2008 and 2007 year-end, notes payable consist of a capital lease obligation of less than $0.1 million.
Conver tible Subor dinated Notes
In March 2006, we issued $200.0 million of 2.75% convertible subordinated notes due March 2011. The notes are
unsecured and subordinate to all existing and future senior debt. The maturity date for these notes was on March 1, 2011,
unless earlier redeemed or converted. Interest on the notes was payable in cash semi-annually in arrears on March 1 and
September 1 of each year.
On December 15, 2006, we received a letter from U.S. Bank National Association (“the trustee”) for the holders of
the outstanding principal amount of 2.75% convertible subordinated notes due 2011 stating that we had violated certain
provisions in the indenture dated March 13, 2006 (the “Indenture”) as a result of our failure to file our annual report for fiscal
2006 with the SEC. The Indenture provided that such a default could be cured by making that filing with the SEC within
60 days after the receipt by us of the notice of default. The Indenture also provided that such a default, if not cured by that
date, would give certain holders and the trustee the right to accelerate the maturity of the notes. We did not cure the default
within 60 days after the receipt by us of the notice of default. On August 17, 2007, as amended by an addendum delivered on
August 20, 2007, we received a letter from the trustee under that Indenture declaring the principal amount and accrued and
unpaid interest, plus additional interest under the Notes, to be immediately due and payable pursuant to the Indenture due to
our failure to file reports required to be filed with the SEC and delivered to the trustee under the Indenture and Sections 13
and 15(d) of the Securities Exchange Act of 1934. The aggregate amount due and payable under the Notes including interest
was $203.0 million, which we paid on August 21, 2007. In connection therewith, we also recorded a charge of $2.6 million to
write off unamortized capitalized deferred issuance costs.
10. COMMITMENTS AND CONTINGENCIES
Commitments
We lease several of our facilities under operating leases.
Future minimum payments under our non-cancelable leases at September 27, 2008 are as follows (in thousands):
Oper ating
Leases
Fiscal
2009..................................................................................................................................
2010..................................................................................................................................
2011..................................................................................................................................
2012..................................................................................................................................
2013..................................................................................................................................
Thereafter .........................................................................................................................
Total .................................................................................................................................
$8,388
6,207
4,942
3,696
2,924
6,424
$32,581
Rent expense, exclusive of sublease income, was $10.5 million, $9.5 million and $9.4 million in fiscal 2008, 2007
and 2006, respectively. Sublease income was $0.1 million, $0.8 million and $1.4 million for fiscal years 2008, 2007 and
2006, respectively.
As of September 27, 2008, we had total purchase commitments for inventory of approximately $15.5 million and
purchase obligations for fixed assets and services of $8.2 million compared to $17.5 million of purchase commitments for
inventory and $5.1 million of purchase obligations for fixed assets and services at fiscal 2007 year-end.
Contingencies
We are subject to legal claims and litigation arising in the ordinary course of business, such as employment or
intellectual property claims, including, but not limited to, the matters described below. The outcome of any such matters is
currently not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material
adverse effect on our consolidated financial position or results of operations, an adverse result in one or more matters could
negatively affect our results in the period in which they occur.
101
Derivative Lawsuits—Between February 15, 2007 and March 2, 2007, three purported shareholder derivative
lawsuits were filed in the United States District Court for the Northern District of California against certain of Coherent’s
current and former officers and directors. Coherent is named as a nominal defendant. The complaints generally allege that the
defendants breached their fiduciary duties and violated the securities laws in connection with the granting of stock options,
the accounting treatment for such grants, and the issuance of allegedly misleading public statements and stock sales by
certain of the individual defendants. On May 29, 2007, these lawsuits were consolidated under the caption In re
Coherent, Inc. Shareholder Derivative Litigation, Lead Case No. C-07-0955-JF (N.D. Cal.). On June 25, 2007, plaintiffs filed
an amended consolidated complaint. The consolidated complaint asserts causes of action for alleged violations of federal
securities laws, violations of California securities laws, breaches of fiduciary duty and/or aiding and abetting breaches of
fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, insider selling
and misappropriation of information. The consolidated complaint seeks, among other relief, disgorgement and damages in an
unspecified amount, an accounting, rescission of allegedly improper stock option grants, punitive damages and attorneys’
fees and costs.
The Company’s Board of Directors has appointed a Special Litigation Committee (“SLC”) comprised of
independent director Sandeep Vij to investigate and evaluate the claims asserted in the derivative litigation and to determine
what action(s) should be taken with respect to the derivative litigation. The SLC’s investigation is ongoing.
Securities and Exchange Commission Inquiry—In 2006, the Company was advised that the San Francisco District
Office of the Securities and Exchange Commission was conducting an informal inquiry relating to the Company’s past
granting of stock options. In July 2008 the Company was formally notified by the Securities and Exchange Commission that
its investigation had been terminated and that it will not recommend any enforcement action.
11. STOCKHOLDERS’ EQUITY
Each outstanding share of our common stock carries a stock purchase right (“right”) issued pursuant to a dividend
distribution declared by our 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 our common stock at an exercise price of $80. The rights
will become exercisable following the tenth day after a person or group announces an acquisition of 20% or more of our
common stock or announces commencement of a tender offer, the consummation of which would result in ownership by the
person or group of 20% or more of the common stock. We 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 our common stock.
If, prior to redemption of the rights, we are acquired in a merger or other business combination in which we are the
surviving corporation, or a person or group acquires 20% or more of our 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 we sell more than 50% of
our assets or earning power or are acquired in a merger or other business combination in which we are 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. Unless otherwise extended by the Board of Directors,
the rights will expire on December 16, 2008.
On February 12, 2008, the Company announced that the Board of Directors had authorized the Company to
repurchase up to $225 million of its common stock through a modified “Dutch Auction” tender offer and an additional
$25 million of its common stock, following the completion or termination of the tender offer, under its stock repurchase
program, terminating no later than February 11, 2009. On March 17, 2008, we completed our tender offer, repurchased and
retired 7,972,313 shares of outstanding common stock at a price of $28.50 per share for a total of $228.2 million, including
expenses. Such repurchases were accounted for as a reduction in additional paid in capital. There were no other repurchases
during fiscal 2008.
In September 2005, our Board of Directors authorized a share repurchase program of up to 1.5 million shares of our
common stock. Under the terms of the repurchase program, purchases may be made from time to time in both the open
market and in private transactions, as conditions warrant. During fiscal 2006, we purchased and cancelled a total of 721,942
shares of our common stock for approximately $22.3 million. There were no purchases during fiscal 2007 as the program was
suspended during the first quarter of fiscal 2007 due to an internal stock option investigation and the repurchase program was
terminated effective September 30, 2007.
102
12. EMPLOYEE STOCK OPTION AND BENEFIT PLANS
Defer r ed Compensation Plans
Under our deferred compensation plans (“plans”), eligible employees are permitted to make compensation deferrals
up to established limits set under the plans. Asset investments in Company-owned life insurance contracts held under the
plans are recorded at the cash surrender value of the insurance contracts. Asset investments in mutual funds and cash are
recorded at their respective fair values. Life insurance premiums loads, policy fees and cost of insurance that are paid from
the asset investments and gains and losses from the asset investments for these plans are recorded as components of other
income or expense. Increases in the obligation to plan participants are recorded as operating expenses. At fiscal 2008 year­
end, the cash surrender value of Company-owned life insurance contracts was $19.4 million and the fair value of mutual
funds was $10.7 million. At fiscal 2008 year-end, $28.1 million was recorded as non-current other assets (see Note 7) and
$2.0 million was recorded as current assets. At fiscal 2007 year-end, the cash surrender value of Company-owned life
insurance contracts was $19.9 million and the fair value of mutual funds and cash balances was $13.0 million and
$0.1 million, respectively. At fiscal 2007 year-end, $30.7 million was recorded as non-current other assets (see Note 7) and
$2.3 million was recorded as current assets. Liabilities associated with participant balances under our deferred compensation
plans are affected by individual contributions and distributions made, as well as gains and losses on the participant’s
investment allocation election.
Coher ent Employee Retir ement and Investment Plan
Under the Coherent Employee Retirement and Investment Plan, we match employee contributions to the plan up to a
maximum of 6% of the employee’s individual earnings. Employees become eligible for participation on their first day of
employment and for Company matching contributions after completing one year of service. Our contributions (net of
forfeitures) during fiscal 2008, 2007, and 2006 were $4.8 million, $4.1 million and $4.1 million, respectively.
Special Committee Review of Histor ical Stock Option Pr actices
A Special Committee was established by our Board of Directors in 2006 to conduct an independent investigation
relating to our historical stock option practices. We requested the independent review following an internal review of our
historical stock option practices, which was a voluntary review initiated in light of news of the option practices of numerous
companies across several industries. The Special Committee, comprised of three independent members of our Board of
Directors, retained independent outside counsel and forensic accountants to assist in conducting the investigation. Together
with its independent counsel, the Special Committee conducted an extensive review of historical stock option practices.
During the period of this review, grant and exercise activities in our Employee Stock Purchase Plan and Stock Option Plans
were suspended.
Employee Stock Pur chase Plan
We have an Employee Stock Purchase Plan (“ESPP”) 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 six-month offering period. During fiscal 2008, 2007
and 2006, a total of none, 87,191 and 188,053 shares, respectively, were purchased by and distributed to employees at an
average price of none, $28.93 and $24.75 per share, respectively. At fiscal 2008 year-end, we had 224,536 shares of our
common stock reserved for future issuance under the plan.
In the second quarter of fiscal 2007, the ESPP was suspended and employee contributions made to the ESPP were
returned while a voluntary review of our historical stock option practices was conducted. The ESPP was reopened on
March 2, 2008 with an 8 month offering period ending October 31, 2008 and employees began making contributions during
the second quarter of fiscal 2008.
Stock Option Plans
We have two Stock Option Plans for which all service providers are eligible participants and a non-employee
Directors’ Stock Option Plan for which only non-employee directors are eligible participants. The Directors’ Stock Option
Plan is designed to work automatically without administration, however to the extent administration is necessary, it will be
performed by the Board of Directors (or an independent committee thereof). Under these three plans, Coherent may grant
options to purchase up to an aggregate of 5,500,000, 6,300,000 and 689,000 shares of common stock, respectively, of which
zero, 3,056,150 and 177,000, respectively remain available for grant at fiscal 2008 year-end. Employee options are generally
103
exercisable between two and four years from the grant date at a price equal to the fair market value of the common stock on
the date of the grant and generally vest 25% to 50% annually. The Company settles stock option exercises with newly issued
shares of common stock. Grants under employee plans generally expire six years from the original grant date. Director
options are automatically granted to our non-employee directors. Such directors initially receive a stock option for 24,000
shares exercisable over a three-year period and an award of restricted stock units of 2,000 shares. Additionally, the nonemployee directors receive an annual stock option grant of 6,000 shares exercisable as to 50% of the shares on the day prior
to each of the next two annual stockholder meetings. Grants under director plans expire ten years from the original grant date.
In addition, each non-employee director receives an annual grant of 2,000 shares of restricted stock units that vest on the day
prior to the annual stockholder meeting held in the third calendar year following the date of grant.
In April 2008, we initiated a tender offer for non-executive officer employees related to certain discount options
discovered during our voluntary review of our historical stock option practices. Discount options are options with an exercise
price that is less than the fair market value of the shares underlying the option at the time of grant. The discounted options
included in this offer were certain options which vested after December 31, 2004. During the tender offer period, employees
had the ability to amend the exercise price per share for eligible options to the fair market value of the underlying option as of
the measurement date of that option, and receive a cash payment for the difference between the discounted share price and
the amended share price. This amendment was designed to allow holders of discount options to avoid certain adverse tax
consequences associated with discount options. The offer expired on May 9, 2008. The incremental stock compensation
expense resulting from the offer was $0.4 million which was recognized immediately as all eligible options were fully vested.
We also recorded expense of $2.5 million for tax payments to be made to United States and United Kingdom tax authorities
on behalf of employees in connection with these amended shares.
Deter mining Fair Value
Valuation and amortization method—We estimate the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a
straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Expected Term—The expected term represents the period that our stock-based awards are expected to be
outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual
terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to
the terms of its stock-based awards.
Expected Volatility—Our computation of expected volatility is based on a combination of historical volatility and
market-based implied volatility.
Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes-Merton valuation method is based on
the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend—The expected dividend assumption is based on our current expectations about our anticipated
dividend policy.
The fair values of the Company’s stock options granted to employees and shares purchased under the stock purchase
plan for fiscal 2008, 2007 and 2006 were estimated using the following weighted-average assumptions:
Employee Stock
Option Plans
Fiscal
2008
2007
2006
Expected life in years ...............................
Expected volatility....................................
Risk-free interest rate ...............................
Expected dividends...................................
Weighted average fair value .....................
3.5
29.5%
3.9%
none
$8.78
104
4.4
34.2%
4.7%
none
$12.04
Employee Stock
Pur chase Plans
Fiscal
2008
2007
2006
4.9
0.5
0.5
0.7
35.2% 31.9% 29.0% 33.1%
4.9% 1.8%
5.1% 4.3%
none none
none
none
$12.91 $7.31 $8.43 $8.32
Stock Compensation Expense
The following table shows total stock-based compensation expense included in the Consolidated Statements of
Operations for fiscal 2008 and 2007 (in thousands):
Fiscal 2008
Cost of sales ............................................................
Research and development ......................................
Selling, general and administrative .........................
Income tax benefit ...................................................
$1,893
1,970
9,062
(3,919)
$9,006
Fiscal 2007
$1,809
1,899
6,666
(3,204)
$7,170
Fiscal 2006
$1,261
2,300
10,419
(5,408)
$8,572
Total stock-based compensation cost capitalized as part of inventory during fiscal 2008 was $1.3 million.
$1.1 million was amortized into income during fiscal 2008, which includes amounts capitalized in fiscal 2008 and amounts
carried over from fiscal 2007. Total stock-based compensation cost capitalized as part of inventory during fiscal 2007 was
$1.3 million, of which $1.6 million was amortized into income in fiscal 2007, which includes amounts capitalized in fiscal
2007 and amounts carried over from fiscal 2006. As required by SFAS 123(R), management made an estimate of expected
forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
At fiscal 2008 year-end, the total compensation cost related to unvested stock-based awards granted to employees
under the Company’s stock option and award plans but not yet recognized was approximately $7.5 million, net of estimated
forfeitures of $0.5 million. This cost will be amortized on a straight-line basis over a weighted-average period of
approximately 1.6 years and will be adjusted for subsequent changes in estimated forfeitures.
At fiscal 2008 year-end, the total compensation cost related to options to purchase common shares under the ESPP
but not yet recognized was approximately $0.1 million. This cost will be amortized on a straight-line basis over a
weighted-average period of approximately one month.
In accordance with SFAS 123(R), the cash flows resulting from excess tax benefits (tax benefits related to the excess
of proceeds from employee’s exercises of stock options over the stock-based compensation cost recognized for those options)
are classified as financing cash flows. During fiscal 2008 and 2007, we recorded approximately $0.7 million and
$0.1 million, respectively, of excess tax benefits as cash flows from financing activities.
During fiscal 2008, our Board of Directors approved an extension of the exercise period to August 25, 2009 for
397,500 fully vested stock options previously granted by the Company to employees. As a result, we recorded approximately
$0.5 million in compensation expense related to the stock option modification during fiscal 2008. During fiscal 2007, our
Board of Directors approved an extension of the exercise period to December 31, 2007 for 210,088 fully vested stock options
previously granted by the Company to employees. As a result, we recorded approximately $0.5 million in compensation
expense related to the stock option modification during fiscal 2007.
During fiscal 2008 and fiscal 2007, we recorded cash-based compensation expense of $0.6 million and $0.2 million,
respectively, for cash payments to employees for options that were not able to be exercised due to the internal stock option
investigation. In addition, we recorded compensation expense of $1.6 million in fiscal 2008 for tax payments to be made to
United States and United Kingdom tax authorities on behalf of employees in connection with discounted options previously
exercised, for the adverse tax consequences associated with these discount options. We also recorded $0.4 million in fiscal
2008 for tax payments to be made to United States tax authorities on behalf of employees in connection with shares amended
to allow the holders of unexercised discount options to avoid certain adverse tax consequences associated with those discount
options.
105
Stock Options & Awar ds Activity
The following is a summary of option activity for our Stock Option Plans for the year ended September 27, 2008 (in
thousands, except per share amounts and remaining contractual term in years):
Number of
Shar es
Outstanding at September 29, 2007 .........................................
Granted ....................................................................................
Exercised .................................................................................
Forfeitures................................................................................
Expirations...............................................................................
Outstanding at September 27, 2008 .........................................
Vested and expected to vest at September 27, 2008 ................
Exercisable at September 27, 2008..........................................
Weighted
Aver age
Exer cise Pr ice
Per Shar e
3,196
851
(643)
(75)
(449)
2,880
2,873
2,442
$29.00 32.50 25.67 32.99 31.36 $30.31
$30.31
$29.99
Weighted
Aver age
Remaining
Contr actual
Ter m in Year s
3.0
3.0
2.6
Aggr egate
Intr insic
Value
$13,496
$13,475
$12,218
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and
the quoted price of our common stock. During fiscal 2008, 2007 and 2006, the aggregate intrinsic value of options exercised
under the Company’s stock option plans were $6.0 million, $0.5 million and $5.8 million, respectively, determined as of the
date of option exercise.
Under one of our Stock Option Plans, certain employees and non-employee directors are eligible for grants of
restricted stock awards and/or restricted stock units. Restricted stock awards and restricted stock units are independent of
option grants and are subject to restrictions. All of the shares of restricted stock outstanding at fiscal 2008 year-end are
subject to forfeiture if employment terminates prior to the release of restrictions. During this period, ownership of the shares
cannot be transferred. The service-based restricted awards generally vest three years from the date of grant. The
performance-based restricted stock grants are subject to annual vesting over three years depending upon the achievement of
performance measurements tied to the Company’s internal metrics for revenue growth and EBITDA percentage and is
variable, so that the number of shares earned ranged from 0% to 125% of the grant target for fiscal 2006 and range from 0%
to 200% of the grant target for fiscal 2007 and fiscal 2008. For fiscal 2008 and 2007, the Company determined that the
metrics have not been met, and that no shares were earned. The Company granted performance-based restricted stock units
during the second quarter of fiscal 2008 which have a single vesting measurement date of November 14, 2010, which vest as
to anywhere between 0% and 300% of the targeted amount based upon achievement by the Company of (a) an annual
revenue threshold amount and (b) adjusted EBITDA percentage targets. Restricted stock (not including performance-based
restricted stock and units) has the same cash dividend and voting rights as other common stock and is considered to be
currently issued and outstanding. The cost of the awards and units, determined to be the fair market value of the shares at the
date of grant, is expensed ratably over the period the restrictions lapse. We had 341,015 shares and units of restricted stock
outstanding at fiscal 2008 year-end and 261,315 shares and units of restricted stock outstanding at fiscal 2007 year-end.
The following table summarizes our restricted stock award and restricted stock unit activity for fiscal 2008 and 2007
(in thousands, except per share amounts):
Number of
Shar es(3)
Nonvested stock at October 1, 2005 ..................................................
Granted ..............................................................................................
Vested................................................................................................
Forfeited ............................................................................................
Nonvested stock at September 30, 2006............................................
Granted ..............................................................................................
Vested(1) ...........................................................................................
Forfeited ............................................................................................
Nonvested stock at September 29, 2007............................................
Granted ..............................................................................................
Vested(2) ...........................................................................................
Forfeited ............................................................................................
Nonvested stock at September 27, 2008............................................
106
96
209
—
(6)
299
8
(19)
(27)
261
262
(79)
(103)
341
Weighted
Aver age
Gr ant Date
Fair Value
$33.47
32.86
—
32.88
$33.06
32.23
33.20
33.23
$33.02
28.72
33.35
32.80
$29.70
(1)
Performance-based restricted shares earned based on achievement of goals for fiscal 2006.
(2)
Service-based restricted stock vested during fiscal 2008.
(3)
Performance-based awards and units included at 100% of target goal.
Option activity for all plans for fiscal 2007 and 2006 is summarized as follows (in thousands, except per share
amounts):
Outstanding Options
Weighted
Aver age
Exer cise
Pr ice Per
Number of
Shar es
Shar e
Outstanding, October 1, 2005............................................................
Options granted ....................................................................................
Options exercised .................................................................................
Options forfeited...................................................................................
Options expired ....................................................................................
Outstanding, September 30, 2006 .....................................................
Options granted ....................................................................................
Options exercised .................................................................................
Options forfeited...................................................................................
Options expired ....................................................................................
Outstanding, September 29, 2007 .....................................................
4,789
511
(722)
(95)
(660)
3,823
25
(53)
(99)
(500)
3,196
$31.72
33.28
27.20
30.08
53.01
$29.15
33.87
24.13
31.26
33.37
$29.00
At fiscal 2008 year-end, 3,233,150 options were available for future grant under all plans. At fiscal 2008 year-end,
all outstanding stock options have been issued under plans approved by our shareholders.
12. EMPLOYEE STOCK OPTION AND BENEFIT PLANS
The following table summarizes information about stock options outstanding at fiscal 2008 year-end:
Range of Exer cise
Pr ices
Options Outstanding
Weighted
Weighted
Aver age
Aver age
Remaining
Number of
Exer cise
Contr actual
Shar es
Pr ice
Life (Year s)
Number of
Shar es
$18.25 - $24.90.........................
$26.12 - $26.12.........................
$26.41 - $26.41.........................
$26.90 - $29.98.........................
$30.54 - $30.54.........................
$30.92 - $30.92.........................
$30.93 - $32.23.........................
$32.95 - $32.95.........................
$33.18 - $34.99.........................
$34.99 - $37.91.........................
$18.25 - $37.91.........................
294,581
35,919
291,000
296,113
3,000
514,094
179,550
708,250
249,715
308,190
2,880,412
294,581
35,919
291,000
219,113
3,000
514,094
178,050
348,500
249,715
308,190
2,442,162
$21.10
26.12
26.41
27.66
30.54
30.92
32.07
32.95
33.61
35.05
$30.31
1.15
1.65
1.98
3.52
1.35
0.91
3.69
5.02
3.57
3.56
3.02
Options Exer cisable
Weighted
Aver age
Exer cise
Pr ice
$21.10
26.12
26.41
27.55
30.54
30.92
32.07
32.95
33.61
35.05
$29.99
There were 2,865,401 and 2,678,349 options exercisable as of fiscal 2007 and 2006 year-ends with weighted
average exercise prices of $27.99 and $28.32, respectively.
107
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in accumulated other comprehensive income (loss) related to derivatives, net of tax, held by us is as follows
(in thousands):
Balance, September 30, 2006 ...........................................................................................
Changes in fair value of derivatives .................................................................................
Net losses reclassified from OCI ......................................................................................
Balance, September 29, 2007 ...........................................................................................
Changes in fair value of derivatives .................................................................................
Net losses reclassified from OCI ......................................................................................
Balance, September 27, 2008 ...........................................................................................
$(135)
—
37
(98)
—
5
$(93)
Accumulated other comprehensive income (net of tax) at fiscal 2008 year-end is comprised of accumulated
translation adjustments of $79.2 million and net loss on derivative instruments of $0.1 million. Accumulated other
comprehensive income (net of tax) at fiscal 2007 year-end is comprised of accumulated translation adjustments of
$71.0 million, net loss on derivative instruments of $0.1 million and unrealized loss on available-for-sale securities of
$0.2 million.
14. OTHER INCOME (EXPENSE)
Other income (expense) is as follows (in thousands):
Foreign exchange gain (loss)....................................................
Sublease income, net of expenses.............................................
Net gain on sale of assets..........................................................
Japan consumption tax benefit(1).............................................
Gain (loss) on investments, net.................................................
Other—net................................................................................
Other income, net .....................................................................
(1)
2008
Fiscal
2007
$1,965
—
—
3,330
(99)
(1,225)
$3,971
$1,259
810
974
—
2,880
(408)
$5,515
2006
$(1,564)
966
—
—
1,318
104
$824
The Japanese consumption tax (JCT) benefit is due to a two-year exemption from the JCT registration
and filing requirements.
15. INCOME TAXES
The provision for income taxes on income before income taxes consists of the following (in thousands):
Currently payable:
Federal................................................................................
State....................................................................................
Foreign ...............................................................................
Deferred:
Federal................................................................................
State....................................................................................
Foreign ...............................................................................
Provision for income taxes .....................................................
108
2008
Fiscal
2007
$5,956
316
10,959
17,231
$3,434
542
8,045
12,021
$3,263
925
12,195
16,383
(7,069)
1,195
2,527
(3,347)
$13,884
(3,586)
(3,033)
7,570
951
$12,972
(18,270)
(833)
3,507
(15,596)
$787
2006
The components of income before income taxes consist of (in thousands):
Fiscal
2007
2008
United States...........................................................................
Foreign ...................................................................................
Income before income taxes ...................................................
$(6,222)
43,509
$37,287
$(11,376)
40,299
$28,923
2006
$3,684
42,497
$46,181
The reconciliation of the statutory federal income tax rate related to income before income taxes to the effective rate
is as follows:
2008
Federal statutory tax rate ...................................................................
Valuation allowance ..........................................................................
Foreign tax rates in excess (less than) of U.S. rates, net....................
Stock-based compensation ................................................................
State income taxes, net of federal income tax benefit .......................
Research and development credit ......................................................
In-process research and development................................................
Other..................................................................................................
Provision for income taxes ................................................................
35.0%
0.6
(0.5)
3.4
1.2
(3.1)
—
0.6
37.2%
Fiscal
2007
2006
35.0%
12.7
11.9
1.4
(1.2)
(19.6)
2.7
2.0
44.9%
35.0%
—
(22.0)
4.2
2.3
(17.4)
—
(0.4)
1.7%
The significant components of deferred tax assets and liabilities were (in thousands):
Fiscal year -end
2008
2007
Deferred tax assets: Reserves and accruals not currently deductible....................................
Operating loss carryforwards and tax credits .......................................
Capital loss carryforwards....................................................................
Asset impairment..................................................................................
Other prepaids ......................................................................................
Deferred service revenue......................................................................
Depreciation and amortization..............................................................
Inventory capitalization ........................................................................
Stock-based compensation ...................................................................
Competent authority offset to transfer pricing tax reserves..................
Other.....................................................................................................
Valuation allowance .................................................................................
Deferred tax liabilities: Gain on issuance of stock by subsidiary...............................................
Depreciation and amortization..............................................................
Accumulated translation adjustment.....................................................
Other.....................................................................................................
Total deferred tax assets and liabilities.....................................................
$24,914
49,588
1,672
706
5,753
1,912
43
1,460
9,037
18,949
—
114,034
(1,672)
112,362
$26,764
45,124
24,112
706
6,833
2,808
4,822
1,341
8,751
—
1,895
123,156
(24,112)
99,044
22,660
8,580
7,306
9,055
47,601
$64,761
22,660
12,002
6,239
7,889
48,790
$50,254
In determining our fiscal 2008, 2007 and 2006 tax provisions under SFAS No. 109, “Accounting for Income Taxes,”
we calculated the deferred tax assets and liabilities for each separate tax entity. We then considered a number of factors
including the positive and negative evidence regarding the realization of our deferred tax assets to determine whether a
valuation allowance should be recognized with respect to our deferred tax assets. We determined that a valuation allowance
was appropriate for a portion of the deferred tax assets of our federal and state capital loss carryforwards at fiscal 2008, 2007
and 2006 year-ends.
109
For U.S. tax purposes, we decreased our valuation allowance to $1.7 million for fiscal 2008 primarily due to the
expiration of federal and state capital loss carryforwards. In addition, the valuation allowance with respect to the loss from
the disposal of our Auburn facility in California was also reduced with a corresponding increase in uncertain tax positions.
The valuation allowance was established based on our determination that it is more likely than not that the remaining capital
loss carryforwards will not be utilized to offset capital gains prior to their expiration in fiscal years 2009 to 2011.
The net deferred tax asset is classified on the consolidated balance sheets as follows (in thousands):
Fiscal year -end
2008
2007
Current deferred income tax assets.......................................................
Current deferred income tax liabilities .................................................
Non-current deferred income tax assets ...............................................
Non-current deferred income tax liabilities ..........................................
Net deferred tax assets..........................................................................
$30,121
(1,830)
50,208
(13,738)
$64,761
$35,844
(322)
25,165
(10,433)
$50,254
Federal net operating loss carryforwards of $3.6 million will expire in fiscal years 2024 to 2026. Foreign net
operating loss carryforwards are $5.1 million; of which $3.9 million have no expiration date and of which $0.6 million and
$0.6 million will expire in fiscal years 2017 and 2018, respectively.
Federal capital loss carryforwards of $4.2 million will expire in fiscal years 2009 to 2011. State capital loss
carryforwards of $4.2 million will expire in fiscal 2009 to 2011.
Federal R&D credit carryforwards of $10.5 million will expire in fiscal years 2022 to 2028. California R&D credit
carryforwards of $12.7 million have no expiration date.
Federal foreign tax credit carryforwards of $13.4 million will expire in fiscal years 2012 to 2018.
Included in the net deferred tax asset balance is $7.3 million of deferred tax liabilities related to the accumulated
translation adjustment. The associated tax expenses were appropriately recorded as a part of other comprehensive income.
The IRS is conducting an audit of our 2003 and 2004 tax returns. The IRS has issued a number of Notices of
Proposed Adjustments (“NOPAs”) to these returns. Among other items, the IRS has challenged our research and
development credits and our extraterritorial income (“ETI”) exclusion. We have agreed to the various adjustments proposed
by the IRS and we believe that we have adequately provided for these exposures and any other items identified by the IRS as
a result of the audit of these tax years. As part of its audit of our 2003 and 2004 years, the IRS has requested information
related to our stock option investigation and we will comply with this request and address any issues that are raised in a
timely manner. The IRS has also indicated that it may consider an audit of our 2005 and 2006 tax returns.
15. INCOME TAXES
The IRS is also auditing the research and development credits generated in the years 1999 through 2001 and carried
forward to future tax years. We received a NOPA from the IRS in October 2008 to decrease the amount of research and
development credits generated in years 2000 and 2001. We will respond to this NOPA and intend to dispute the adjustment
with the IRS through the appeals process available to us. While we believe we have adequately provided for any adjustments
related to these credits that may be determined under the IRS appeals process, there exists the possibility of a material
adverse impact on our results of operations in the event that this issue is resolved unfavorably to us.
The German tax authorities are conducting an audit of our subsidiary in Göttingen and its affiliates for the tax years
1999 through 2005. We believe that we have adequately provided for any adjustments that may be proposed by the German
tax authorities.
Effective September 30, 2007, we adopted the provisions of FIN 48 and FSP FIN 48-1. Upon adoption, we recorded
a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $1.4 million in
accordance with the transition rules under FIN 48. We had historically classified interest and penalties and unrecognized tax
benefits as current liabilities. With the adoption of FIN 48, we classify gross interest and penalties and unrecognized tax
benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the
consolidated balance sheets. The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was
110
$44.9 million, of which $21.7 million, if recognized, would affect our effective tax rate. As of September 27, 2008, the total
amount of gross unrecognized tax benefits was $51.7 million, of which $27.6 million, if recognized, would affect our
effective tax rate. Our total gross unrecognized tax benefit was classified as non-current liabilities in the consolidated balance
sheets. Our policy to include interest and penalties related to unrecognized tax benefits within the provision for income taxes
did not change as a result of adopting FIN 48. As of the date of adoption, we had accrued $4.7 million for the gross interest
and penalties relating to the gross unrecognized tax benefits. As of September 27, 2008, the total amount of gross interest and
penalties accrued was $6.5 million, which is classified as non-current liabilities in the consolidated balance sheets.
Management believes that it has adequately provided for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in our tax audits be
resolved in a manner not consistent with management’s expectations, we could be required to adjust its provision for income
tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, we do
not believe it is reasonably possible that our unrecognized tax benefits would materially change in the next 12 months.
A reconciliation of the change in gross unrecognized tax benefits, excluding interest and penalties, is as follows (in
thousands):
Balance, September 29, 2007 .........................................................................................
Tax positions related to current year:
Additions ....................................................................................................................
Reductions ..................................................................................................................
Tax positions related to prior year:
Additions ....................................................................................................................
Reductions ..................................................................................................................
Settlements .....................................................................................................................
Lapses in statutes of limitations......................................................................................
Reductions......................................................................................................................
Balance, September 27, 2008 .........................................................................................
$40,116
1,349
—
4,214
(468)
—
—
—
$45,211
A summary of the fiscal tax years that remain subject to examination, as of September 27, 2008, for our major tax
jurisdictions is:
United States—Federal......................................................................................
United States—Various States...........................................................................
Netherlands........................................................................................................
Germany ............................................................................................................
Japan..................................................................................................................
United Kingdom ................................................................................................
1999—forward 1999—forward 2005—forward
1999—forward
2004—forward 2002—forward The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative
Minimum Tax Relief Act of 2008”, was enacted on October 3, 2008. Under the Act, the federal R&D credit was retroactively
extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The effects of the change in the
tax law will be recognized in our first quarter of FY 2009, which is the quarter in which the law was enacted. In addition to
the federal legislation, California Assembly Bill 1452 was enacted on September 30, 2008. This legislation limits the
California R&D credit to 50% of the California tax liability for tax years beginning on or after January 1, 2008 and before
January 1, 2010. We are currently in the process of analyzing the impact of both of these new laws.
16. SEGMENT AND GEOGRAPHIC INFORMATION
We are organized into two reportable operating segments: Commercial Lasers and Components (“CLC”) and
Specialty Lasers and Systems (“SLS”). CLC focuses on higher volume products that are offered in set configurations. The
product architectures are designed for easy exchange at the point of use such that product service and repairs are based upon
advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include OEM components and instrumentation
and materials processing. SLS develops and manufacturers configurable, advanced-performance products largely serving the
microelectronics and scientific research markets. The size and complexity of many of our SLS products require service to be
performed at the customer site by factory-trained field service engineers.
111
We have identified CLC and SLS as operating segments for which discrete financial information was available.
Both units have engineering, marketing, product business management and product line management. A small portion of our
outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined.
The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs
as described below.
Pursuant to SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, our Chief Executive
Officer has been identified as the chief operating decision maker (CODM) as he assesses the performance of the segments
and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that
our CODM uses to assess performance and make decisions. Assets are not a measure used to assess the performance of the
company by the CODM; therefore we do not report assets by segment internally or in our disclosures. Income (loss) from
operations represents the sales less the cost of sales and direct operating expenses incurred within the operating segments as
well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain
operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based
compensation, corporate functions (certain research and development, management, finance, legal and human resources) and
are included in the results below under Corporate and Other in the reconciliation of operating results. Management does not
consider unallocated Corporate and Other costs in its measurement of segment performance.
The following table provides sales and income from operations for our operating segments (in thousands):
2008
Net sales:
Commercial Lasers and Components ...............................
Specialty Laser Systems ...................................................
Corporate and other ..........................................................
Total net sales.......................................................................
Income from operations:
Commercial Lasers and Components ...............................
Specialty Laser Systems ...................................................
Corporate and other ..........................................................
Total income from operations: .............................................
Fiscal
2007
2006
$285,239
313,923
100
$599,262
$290,017
309,467
1,669
$601,153
$272,068
311,058
1,526
$584,652
$21,641
43,927
(42,976)
$22,592
$17,015
39,479
(45,373)
$11,121
$33,298
51,832
(50,464)
$34,666
The following table provides a reconciliation of our total income from operations to net income (in thousands):
Reconciliation of Income Fr om Oper ations to Net Income
Total income from operations: ...................................................
Total other income, net...........................................................
Income before income taxes .......................................................
Provision for income taxes .....................................................
Net Income .................................................................................
112
2008
$22,592
14,695
37,287
13,884
$23,403
Fiscal
2007
$11,121
17,802
28,923
12,972
$15,951
2006
$34,666
11,515
46,181
787
$45,394
Geogr aphic Infor mation
Our foreign operations consist primarily of manufacturing facilities in Europe and sales offices in Europe and AsiaPacific. Sales, marketing and customer service activities are conducted through sales subsidiaries throughout the world.
Geographic sales information for fiscal 2008, 2007 and 2006 is based on the location of the end customer. Geographic longlived asset information presented below is based on the physical location of the assets at the end of each year.
Sales to unaffiliated customers are as follows (in thousands):
SALES
2008
United States.........................................................................
Foreign countries:
Japan.................................................................................
Germany ...........................................................................
Europe, other ....................................................................
Asia-Pacific, other ............................................................
Rest of World ...................................................................
Total foreign countries sales.........................................
Total sales.............................................................................
Fiscal
2007
2006
$194,349
$192,540
$185,430
128,056
106,642
62,623
66,905
40,687
404,913
$599,262
131,471
92,872
81,028
66,744
36,498
408,613
$601,153
143,584
96,447
79,679
46,301
33,211
399,222
$584,652
Long-lived assets, which include all non-current assets other than goodwill, intangibles and deferred taxes, by
geographic region, are as follows (in thousands):
Fiscal Year -end
2008
2007
LONG-LIVED ASSETS
United States..............................................................................................
Foreign countries:
Germany ................................................................................................
Europe, other .........................................................................................
Asia-Pacific ...........................................................................................
Total foreign countries long-lived assets ...........................................
Total long-lived assets...............................................................................
$85,481
$88,392
33,691
10,750
2,093
46,534
$132,015
33,732
13,585
2,187
49,504
$137,896
For fiscal 2008, 2007 and 2006, no one customer accounted for 10% or more of total net sales.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the years ended September 27, 2008 and September 29, 2007 are as follows
(in thousands, except per share amounts):
Fiscal 2008:
Net sales.................................................................................................
Gross profit ............................................................................................
Net income.............................................................................................
Net income per basic share ....................................................................
Net income per diluted share .................................................................
Fiscal 2007:
Net sales.................................................................................................
Gross profit ............................................................................................
Net income (loss)...................................................................................
Net income (loss) per basic share ..........................................................
Net income (loss) per diluted share .......................................................
113
Fir st
Quar ter
Second
Quar ter
Thir d
Quar ter
Four th
Quar ter
$144,296
60,494
4,729(1)
$0.15
$0.15
$155,942
67,124
6,125(2)
$0.20
$0.19
$157,024
69,259
8,402(3)
$0.36
$0.35
$142,000
55,029
4,147(4)
$0.18
$0.17
$147,509
61,974
10,758(5)
$0.34
$0.33
$152,116
64,470
7,282(6)
$0.23
$0.23
$142,608
57,138
(763)(7)
$(0.02)
$(0.02)
$158,920
66,426
(1,326)(8)
$(0.04)
$(0.04)
(1) The first quarter of fiscal 2008 includes $1,933 of after tax stock-related compensation expense and $2,849 of after
tax expense related to litigation and our restatement of financial statements resulting from our internal stock option
investigation.
(2) The second quarter of fiscal 2008 includes $3,734 of after tax stock-related compensation expense, $1,528 of after
tax expense related to litigation and our restatement of financial statements resulting from our internal stock option
investigation and a tax charge of $1,394 in connection with a dividend from one of our European subsidiaries.
(3) The third quarter of fiscal 2008 includes $2,031 of after tax stock-related compensation expense, $1,374 of after tax
restructuring costs primarily related to the exit of our Auburn, California facility and $935 of after tax expense
related to litigation resulting from our internal stock option investigation.
(4) The fourth quarter of fiscal 2008 includes $1,308 of after tax stock-related compensation expense, $2,566 of after
tax restructuring costs primarily related to the exit of our Auburn, California facility, the consolidation of our
German DPSS manufacturing into one location in Germany and headcount reductions due to the evolving global
economic situation and $184 of after tax expense related to litigation resulting from our internal stock option
investigation.
(5) The first quarter of fiscal 2007 includes $2,191 after-tax stock-based compensation expense, $1,026 of after-tax
costs related to our internal stock option investigation and a $2,147 tax benefit due to reinstatement of the research
and development tax credit.
(6) The second quarter of fiscal 2007 includes $2,567 of after-tax costs related to our internal stock option investigation
and litigation and $2,483 after-tax stock-based compensation expense.
(7) The third quarter of fiscal 2007 includes an after-tax in-process research and development (IPR&D) charge of
$2,200 associated with the purchase of Nuvonyx, $1,775 of after-tax costs related to our internal stock option
investigation and litigation and $1,558 after-tax stock-based compensation expense.
(8) The fourth quarter of fiscal 2007 includes a loss of $12,569 on the sale of our Auburn campus in Auburn, California,
a $2,614 after-tax charge to write off unamortized capitalized deferred issuance costs associated with our convertible
subordinated notes, $1,677 of after-tax costs related to our internal stock option investigation and litigation, $938
after-tax stock-based compensation expense, a capital gain of $3,566 on the sale of our Condensa building in Santa
Clara, California and a $681 after-tax gain on the sales of substantially all of the net assets of our Coherent Imaging
Optics Limited (CIOL) subsidiary.
114
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COHR_AR2008_final.qxd:COHR_AR2007 2/5/09 1:17 PM Page 4
Directors and Executive Officers of Coherent, Inc.
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Garry W. Rogerson, Ph.D.
Chairman of the Board, Coherent, Inc.;
President and Chief Executive Officer
Varian, Inc.
John R. Ambroseo, Ph.D.
President and Chief Executive Officer
Coherent, Inc.
John R. Ambroseo, Ph.D.
President and Chief Executive Officer
Coherent, Inc.
Helene Simonet
Executive Vice President and
Chief Financial Officer
Coherent, Inc.
John H. Hart
Chief Technical Officer and
Senior Vice President (retired)
3Com Corporation
Luis Spinelli
Executive Vice President and
Chief Technology Officer
Coherent, Inc.
Susan James
Consultant to Ernst & Young
Partner (retired) and
Former Americas Executive Board Member
Ernst & Young
Bret DiMarco
Executive Vice President,
General Counsel and Corporate Secretary
Coherent, Inc.
Clifford Press
Managing Member
Oliver Press Partners LLC
Lawrence Tomlinson
Senior Vice President and
Treasurer (retired)
Hewlett­Packard Company
Sandeep Vij
Vice President of Strategic Markets
and Business Development
Cavium Networks
Independent Registered Public Accounting Firm
Deloitte & Touche, LLP
San Jose, CA
SEC Form 10­K and 10K/A
Forms 10­K and 10K/A were filed with the Securities and Exchange Commission
on November 25, 2008 and January 26, 2009, respectively for the 2008 fiscal year.
Copies will be made available without charge upon request.
COHR_AR2008_final.qxd:COHR_AR2007 2/5/09 1:17 PM Page 5
Investor Relations
Coherent, Inc.
Investor Relations
P.O. Box 54980
Santa Clara, CA 95056­0980
Telephone: (408) 764­4110
Fax: (408) 970­9998
http://www.coherent.com
Annual meeting of shareholders will held on
March 11, 2009 at 1:00 pm.
Stock Symbol
Common Stock is traded on NASDAQ under the
symbol COHR
Coherent, Inc. is an equal opportunity employer,
M/F/H/V
Financial Information
Coherent invites security analysts and
representatives of portfolio management
firms to contact:
Helene Simonet
Executive Vice President and
Chief Financial Officer
Coherent, Inc.
Telephone: (408) 764­4110
Please send change of address and other
correspondence to the transfer agent:
American Stock Transfer & Trust Company, LLC
59 Maiden Lane
New York, NY 10038
Telephone: (800) 937­5449
[email protected]
http://www.amstock.com
SPECIAL NOTE REGARDING FORWARD­LOOKING STATEMENTS: Except for
historical statements, this annual report contains certain “forward­looking
statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 including without
limitation, those statements regarding our expected annual savings
for vacating our Auburn, San Jose, and Munich facilities, the relocation
of our St. Louis business to Santa Clara, and our asset acquisition in
December 2008. Actual results, events and performance may differ
materially. Readers are cautioned not to place undue reliance on these
forward­looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update these forward­looking
statements as a result of events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
Readers are encouraged to refer to the risk disclosures described in the
Company’s reports on Forms 10­K, 10­K/A, 10­Q and 8K, as applicable.
COHR_AR2008_final.qxd:COHR_AR2007 2/5/09 1:17 PM Page 6
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, CA 95054
Printed in the U.S.A. MC­003­09­15K0209
Copyright © 2009 Coherent, Inc.
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