UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2007

 

or

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to

 

Commission File Number: 0-5255

 

COHERENT, INC.

 

Delaware

 

94-1622541

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (408) 764-4000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes o  No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on January 15, 2008 was 31,544,990 shares.

 

 



 

COHERENT, INC.

 

INDEX

 

 

 

Page

Part I.

Financial Information

 

 

 

 

Item I.

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Operations
Three and six months ended March 31, 2007 and April 1, 2006 (Restated)

5

 

 

 

 

Condensed Consolidated Balance Sheets
March 31, 2007 and September 30, 2006

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows
Six months ended March 31, 2007 and April 1, 2006 (Restated)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

Item 1A.

Risk Factors

56

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

 

 

 

Item 3.

Defaults upon Senior Securities

66

 

 

 

Item 4.

Submission of Matters to Vote of Security Holders

66

 

 

 

Item 5.

Other Information

66

 

 

 

Item 6.

Exhibits

67

 

 

 

Signatures

 

68

 

2



 

EXPLANATORY NOTE REGARDING RESTATEMENT OF OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

This quarterly report contains the restatement of our condensed consolidated statements of operations for the three and six months ended April 1, 2006 and condensed consolidated statements of cash flows for the six months ended April 1, 2006.

 

As previously announced on November 1, 2006, a Special Committee was established by our Board of Directors 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 including all awards made by us between January 1, 1995 and September 30, 2006, (the “Relevant Period”) that included the review of over one million documents and interviews of over 30 current and former employees, directors and advisors.

 

As a result of the investigation, our management and the Special Committee, with the assistance of independent legal counsel and forensic accounting experts, determined that incorrect measurement dates for a significant number of stock option awards during the Relevant Period were used, resulting in errors in our accounting related to stock option compensation expenses during the Relevant Period. We determined that corrections to previously issued consolidated financial statements were required to reflect additional material charges for stock-based compensation expenses and related income and payroll tax effects.

 

Options granted during the Relevant Period to purchase an aggregate of approximately 8,735,590 shares were determined to have incorrect measurement dates.  Accordingly, our consolidated retained earnings as of April 1, 2006 has been restated to incorporate an aggregate of approximately $22.6 million in incremental stock-based compensation charges, including payroll taxes, net of a $3.0 million tax benefit, during the period from January 1, 1995 through April 1, 2006.  We determined that the revised measurement dates for accounting purposes differed from the originally recorded measurement dates due primarily to a number of factors, including (1) delays in the final determination or approval of the awards, (2) retroactive selection of grant dates, (3) the absence of definitive documentation regarding approval, and (4) other process-related issues.  These included annual grants to existing employees and officers and option grants made to new hires or to employees recently promoted.

 

In those cases in which we previously used a measurement date that we determined was incorrect, we have developed and applied a methodology to remeasure those stock option grants and record the relevant stock-based compensation charges. For more information on our restatement, including the methodology we adopted, see Part I. Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restatement of Condensed Consolidated Financial Statements” and Note 3 of Notes to Condensed Consolidated Financial Statements appearing in Part I. Item 1 of this quarterly report.

 

In addition to restatements for stock-based compensation, we recorded restatements to correct other errors that occurred in the fiscal 2006 periods which have been reflected in the restated condensed consolidated financial statements. These restatements, including the nature thereof, are further discussed in Note 3 of Notes to Condensed Consolidated Financial Statements appearing in Part I. Item 1 of this quarterly report.

 

All financial information contained in this quarterly report gives effect to the restatements of our consolidated financial statements as described above.

 

3



 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements.  These statements are generally accompanied by words such as “trend,” “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Future Trends”, “Our Strategy”, discussions regarding our bookings and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.  Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned “Future Trends,” “Risk Factors,” “Key Performance Indicators,” as well as any other cautionary language in this quarterly report.  All forward-looking statements included in the 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.

 

4



 

PART I.  FINANCIAL INFORMATION

 

Item I.  FINANCIAL STATEMENTS

 

COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31, 2007

 

April 1, 2006

 

March 31, 2007

 

April 1, 2006

 

 

 

 

 

(As Restated) (1)

 

 

 

(As Restated) (1)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

152,116

 

$

145,988

 

$

299,625

 

$

276,982

 

Cost of sales

 

87,646

 

82,160

 

173,181

 

157,160

 

Gross profit

 

64,470

 

63,828

 

126,444

 

119,822

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

18,884

 

19,196

 

37,206

 

33,944

 

In-process research and development

 

 

 

 

690

 

Selling, general and administrative

 

37,139

 

32,120

 

70,623

 

62,008

 

Restructuring and other charges (recoveries)

 

111

 

(90

)

248

 

(90

)

Amortization of intangible assets

 

1,950

 

2,474

 

3,893

 

4,918

 

Total operating expenses

 

58,084

 

53,700

 

111,970

 

101,470

 

Income from operations

 

6,386

 

10,128

 

14,474

 

18,352

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

6,236

 

2,745

 

12,309

 

4,626

 

Interest expense

 

(1,871

)

(626

)

(3,653

)

(894

)

Other—net

 

731

 

48

 

1,714

 

(92

)

Total other income, net

 

5,096

 

2,167

 

10,370

 

3,640

 

Income before income taxes

 

11,482

 

12,295

 

24,844

 

21,992

 

Provision for income taxes

 

4,200

 

6,298

 

6,804

 

7,158

 

Net income

 

$

7,282

 

$

5,997

 

$

18,040

 

$

14,834

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.19

 

$

0.57

 

$

0.48

 

Diluted

 

$

0.23

 

$

0.19

 

$

0.56

 

$

0.47

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

 

 

 

Basic

 

31,417

 

30,754

 

31,378

 

30,939

 

Diluted

 

31,937

 

31,314

 

32,030

 

31,393

 

 


(1) See Note 3, “Restatement of Condensed Consolidated Financial Statements” of the accompanying Notes to Condensed Consolidated Financial Statements.

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5



 

COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except par value)

 

 

 

March 31,
2007

 

September 30,
2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

411,867

 

$

445,231

 

Short-term investments

 

117,127

 

48,767

 

Restricted cash, current

 

2,460

 

 

Accounts receivable—net of allowances of $3,430 and $3,275, respectively

 

107,279

 

111,446

 

Inventories

 

103,417

 

101,494

 

Prepaid expenses and other assets

 

37,430

 

21,256

 

Deferred tax assets

 

46,197

 

29,201

 

Total current assets

 

825,777

 

757,395

 

Property and equipment, net

 

149,644

 

148,592

 

Restricted cash, non-current

 

1,341

 

3,709

 

Goodwill

 

73,758

 

71,871

 

Intangible assets, net

 

35,819

 

38,863

 

Other assets

 

58,017

 

62,094

 

Total assets

 

$

1,144,356

 

$

1,082,524

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term obligations

 

$

8

 

$

8

 

Convertible subordinated notes

 

199,776

 

 

Accounts payable

 

33,861

 

29,498

 

Income taxes payable

 

20,085

 

17,720

 

Other current liabilities

 

89,137

 

79,352

 

Total current liabilities

 

342,867

 

126,578

 

Long-term obligations

 

1,336

 

1,276

 

Other long-term liabilities

 

42,499

 

37,419

 

Convertible subordinated notes

 

 

199,747

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $.01 per share:

 

 

 

 

 

Authorized—500,000 shares

 

 

 

 

 

Outstanding—31,564 shares and 31,412 shares, respectively

 

313

 

311

 

Additional paid-in capital

 

377,850

 

367,290

 

Notes receivable from stock sales

 

 

(324

)

Accumulated other comprehensive income

 

57,917

 

46,693

 

Retained earnings

 

321,574

 

303,534

 

Total stockholders’ equity

 

757,654

 

717,504

 

Total liabilities and stockholders’ equity

 

$

1,144,356

 

$

1,082,524

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

6



 

COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

 

 

 

Six Months Ended

 

 

 

March 31, 2007

 

April 1, 2006

 

 

 

 

 

(As Restated) (1)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

18,040

 

$

14,834

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Purchased in-process research and development

 

 

690

 

Depreciation and amortization

 

12,696

 

13,241

 

Amortization of intangible assets

 

3,893

 

4,918

 

Deferred income taxes

 

(2,314

)

572

 

Stock-based compensation

 

6,990

 

7,201

 

Excess tax benefit from stock-based compensation arrangements

 

(77

)

(273

)

Tax benefit from employee stock options

 

 

391

 

Non-cash restructuring and other charges (recoveries)

 

(128

)

 

Amortization of bond issue costs

 

583

 

83

 

Other non-cash expense (income)

 

249

 

(201

)

Changes in assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

Accounts receivable

 

6,008

 

(11,929

)

Inventories

 

66

 

7,544

 

Prepaid expenses and other assets

 

(16,608

)

(3,071

)

Other assets

 

(2,957

)

(2,068

)

Accounts payable

 

4,638

 

5,760

 

Income taxes payable/receivable

 

2,117

 

(659

)

Other current liabilities

 

4,838

 

(3,704

)

Other long-term liabilities

 

1,902

 

(250

)

Net cash provided by operating activities

 

39,936

 

33,079

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(12,523

)

(8,127

)

Proceeds from dispositions of property and equipment

 

167

 

182

 

Purchases of available-for-sale securities

 

(349,530

)

(117,981

)

Proceeds from sales and maturities of available-for-sale securities

 

281,170

 

175,546

 

Acquisition of businesses, net of cash acquired

 

 

(5,114

)

Change in restricted cash

 

(26

)

(1,352

)

Deferred business acquisition costs

 

 

(2,106

)

Premiums paid for life insurance contracts

 

(2,800

)

 

Other – net

 

197

 

(175

)

Net cash provided by (used in) investing activities

 

(83,345

)

40,873

 

 

(continued)

 

7



 

COHERENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited; in thousands)

 

Cash flows from financing activities:

 

 

 

 

 

Long-term debt borrowings

 

$

 

$

1,387

 

Long-term debt repayments

 

(2

)

 

Repayment of capital lease obligation

 

(2

)

 

Cash overdrafts increase (decrease)

 

909

 

(2,686

)

Issuance of common stock under employee stock option and purchase plans

 

3,784

 

6,947

 

Repurchase of common stock

 

 

(22,250

)

Collection of notes receivable from stock sales

 

324

 

 

Proceeds received from issuance of convertible subordinated notes

 

 

200,000

 

Debt issuance costs

 

 

(5,112

)

Excess tax benefits from stock-based compensation arrangements

 

77

 

273

 

Net cash provided by financing activities

 

5,090

 

178,559

 

Effect of exchange rate changes on cash and cash equivalents

 

4,955

 

3,276

 

Net increase (decrease) in cash and cash equivalents

 

(33,364

)

255,787

 

Cash and cash equivalents, beginning of period

 

445,231

 

97,507

 

Cash and cash equivalents, end of period

 

$

411,867

 

$

353,294

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,730

 

$

659

 

Income taxes

 

$

8,513

 

$

6,891

 

Cash received during the period for:

 

 

 

 

 

Income taxes

 

$

1,662

 

$

1,390

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

Unpaid property and equipment

 

$

496

 

$

526

 

Net retirement of restricted stock awards

 

$

225

 

$

 

 


(1) See Note 3, “Restatement of Condensed Consolidated Financial Statements” of the accompanying Notes to Condensed Consolidated Financial Statements.

 

(concluded)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

8



 

COHERENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

1.              BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Coherent, Inc. (referred to herein as the Company, we, our or Coherent) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended September 30, 2006.  In the opinion of management, all adjustments necessary for a fair presentation have been made and include only normal recurring adjustments.  Interim results of operations are not necessarily indicative of results to be expected for the year.  Our fiscal year ends on the Saturday closest to September 30.  Fiscal years 2007 and 2006 include 52 weeks each.

 

2.              TERMINATED ACQUISITION

 

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. 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 fourth quarter fiscal 2006 results included a pre-tax charge of $5.9 million for previously capitalized costs related to the terminated merger agreement. In addition, our results for the first six months of fiscal 2007 include a pretax charge of $0.3 million for additional costs incurred during the period related to the terminated merger agreement.

 

3.              RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Background

 

Based upon an investigation and determinations made by a Special Committee of the Board of Directors and management’s undertaking of a separate review of historical stock option activity subsequent to the filing of our quarterly report for the quarter ended July 1, 2006, we identified errors in our accounting related to stock-based compensation expense in prior periods.

 

As previously announced on November 1, 2006, a Special Committee was established by our Board of Directors to conduct an independent investigation relating to our historical stock option practices.  The Special Committee, comprised of three independent members of our Board of Directors, retained independent legal 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 including all awards made by us between January 1, 1995 and September 30, 2006 (the “Relevant Period”).

 

On July 26, 2007, we announced that our management and the Special Committee, with the assistance of independent legal counsel and forensic accounting experts, had determined that incorrect measurement dates for a significant number of stock option awards during the Relevant Period were used.   After receiving the Special Committee’s conclusions, we subsequently reviewed stock option grants during the Relevant Period.  On September 26, 2007, our Audit Committee, after consultation with management, determined that additional charges for stock-based compensation expense were required as a result of such incorrect measurement dates. As a result of the Special Committee’s investigation and our management’s subsequent reviews and analyses, options granted during the Relevant Period to purchase an aggregate of approximately 8,735,590 shares were determined to have incorrect measurement dates. We determined that the revised measurement dates for accounting purposes (“Revised Measurement Date”) differed from the originally recorded measurement dates due primarily to a number of factors, including (1) delays in the final determination or approval of the awards, (2) retroactive selection of grant dates, (3) the absence of definitive documentation regarding approval, and (4) other process-related issues. These included annual grants to existing employees and officers and option grants made to new hires or to employees recently promoted. In those cases in which we previously used a measurement date that we determined was incorrect, we developed and applied a methodology in determining the revised measurement dates for option grants during the Relevant Period.

 

9



 

In addition to restatements for stock-based compensation and the related income and payroll tax effects, we recorded adjustments to correct other errors that occurred prior to fiscal 2007, which have been reflected in the accompanying related condensed consolidated financial statements.

 

Restatement Adjustments

 

Our restated condensed consolidated financial statements for the three and six months ended April 1, 2006 incorporate adjustments to correct for errors in stock-based compensation expense, payroll tax expense and other accounting matters, including the income tax impacts related to the restatement adjustments and other tax errors (collectively, the “restatement adjustments”). The table below presents the decrease to net income for the first three and six months of fiscal 2006 of the individual restatement adjustments, which are explained in further detail following the table (in thousands, except per share data):

 

 

 

Three Months
Ended
April 1, 2006

 

Six Months
Ended
April 1, 2006

 

Stock-based compensation

 

 

 

 

 

Annual grants to employees

 

$

(102

)

$

326

 

Annual grants to officers

 

15

 

143

 

Non-annual grants to employees

 

(84

)

6

 

Non-annual grants to officers

 

 

3

 

Total stock-based compensation expense

 

(171

)

478

 

 

 

 

 

 

 

Payroll taxes, interest and penalties

 

102

 

189

 

Total stock-based compensation adjustments

 

(69

)

667

 

 

 

 

 

 

 

Other miscellaneous accounting adjustments

 

 

 

 

 

Correction of Lambda Physik purchase accounting

 

139

 

277

 

Correction of accounting for asset retirement obligations

 

66

 

135

 

Classification of unrealized foreign exchange losses on intercompany note

 

37

 

77

 

 

 

242

 

489

 

Total adjustments to income before income taxes

 

173

 

1,156

 

Income tax expense

 

2,003

 

1,499

 

 

 

 

 

 

 

Total decrease to net income

 

$

2,176

 

$

2,655

 

 

 

 

 

 

 

Decrease in diluted earnings per share

 

$

0.07

 

$

0.09

 

 

Stock-Based Compensation Summary—These adjustments are from management’s determination, based upon the Special Committee’s investigation and our subsequent reviews and analyses that the initially recorded measurement dates for various categories of option grants during the Relevant Period were incorrect. These categories were:

 

·                  Annual grants to employees.  We determined that the appropriate measurement date for annual grants to employees was the date on which evidence indicates the allocation of the options to the individual employees was substantially complete, as further described below. As a result, annual grants for an aggregate of 4,749,940 shares through the first six months of fiscal 2006 were remeasured and accounted for as fixed awards under Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” or APB 25, for periods prior to fiscal 2006 and under Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123(R)), effective October 2, 2005 and thereafter, using the methodologies described below under “Accounting Considerations—Stock-Based Compensation.”

 

10



 

·           Annual grants to officers.  For annual grants to officers during fiscal years 1995, 1996, 1997, 1999, 2000 and 2002, we adopted a methodology to remeasure these option grants to a revised measurement date, as described below under “Accounting Considerations—Stock-Based Compensation”, and accounted for these grants as fixed awards under APB 25 or SFAS 123(R), as applicable. The grants represented options to purchase an aggregate of 1,251,500 shares through the first six months of fiscal 2006. For annual grants to officers during other fiscal years during the Relevant Period, management determined that the original measurement date was properly determined.

 

·           Non-annual grants to employees.  Non-annual grants to employees are initial grants to newly hired employees or incremental grants to existing employees upon their promotion. For non-annual grants to employees, we adopted a methodology to remeasure these option grants to a revised measurement date, as described below under “Accounting Considerations—Stock-Based Compensation”, and accounted for these grants as fixed awards under APB 25 or SFAS 123(R), as applicable. The grants represented options to purchase an aggregate of 2,380,150 shares through the first six months of fiscal 2006.

 

·           Non-annual grants to officers.  Non-annual grants to officers are initial grants to newly hired officers or incremental grants upon an existing employee’s promotion to an officer position. For non-annual grants to officers, we adopted a methodology to remeasure these option grants to a revised measurement date, as described below under “Accounting Considerations—Stock-Based Compensation”, and accounted for these grants, which represented options to purchase an aggregate of 351,500 shares through the first six months of fiscal 2006, as fixed awards under APB 25 or SFAS 123(R), as applicable.

 

Payroll taxes, interest and penalties—In connection with the stock-based compensation charges included in the restatement, certain options previously classified as Incentive Stock Options (“ISO”) were determined to have been granted with an exercise price below the fair market value of our stock on the revised measurement date. Under U.S. tax regulations, ISOs may not be granted with an exercise price less than the fair market value on the date of grant, and therefore might not qualify for ISO tax treatment. We refer to these stock options as the “Affected ISOs.” The potential disqualification of ISO status exposes us to additional payroll related withholding taxes on the exercise of options granted to U.S. employees, and interest and penalties for failing to properly withhold taxes on the exercise of those options. Additionally, we recorded tax, interest, and penalty expenses with respect to certain options granted in the U.K. which were determined to have been granted with an exercise price below the fair market value of our common stock on the revised measurement date (“U.K. Options”). The tax, interest and penalty expenses were recorded in the periods in which the underlying stock options were exercised. Then, in periods in which the liabilities were legally extinguished due to statutes of limitations, the expenses were reversed and recognized as a reduction in the related functional expense in our consolidated statements of operations. The net U.S. and U.K. tax liabilities at March 31, 2007 for this potential disqualification of ISO tax treatment for the Affected ISO’s and the U.K. Options totaled $1.2 million.

 

Management and the Board are considering possible ways to address the impact that Section 409A of the Internal Revenue Code (“IRC”) may have as a result of the exercise price of stock options being less than the fair market value of our common stock on the revised measurement date. IRC Section 409A imposes significant additional taxes to our employees on stock options granted with an exercise price lower than the fair market value on the date of grant that vest after December 31, 2004. The Internal Revenue Service (“IRS”) has issued transition rules under IRC Section 409A that allows for a correction, or “cure”, for non-exercised, non-executive options subject to IRC Section 409A. We continue to evaluate the potential corrections or cures in light of the additional time relief granted by the IRS through December 2008.

 

Other miscellaneous accounting adjustments—In addition to stock-based compensation related charges, we recorded adjustments to correct errors in the condensed consolidated financial statements for the fiscal 2006 periods that had not been previously reflected in our condensed consolidated financial statements. These restatements relate to the correction of errors in the purchase accounting related to our acquisition of a 39.62% interest in Lambda Physik in fiscal 2003, the failure to adopt the provisions of SFAS No. 143 “Accounting for Asset Retirement Obligations” and the correction of the classification of unrealized foreign exchange gains and losses related to an intercompany note.

 

Income tax benefit—We reviewed the income tax effect of the stock-based compensation charges, and we believe that the proper income tax accounting for U.S. stock options under GAAP depends, in part, on the tax distinction of the stock options as either ISOs or non-qualified stock options (“NSOs”). Under U.S. tax regulations, ISOs may not be granted with an exercise price less than the fair market value on the date of grant. Because of the potential impact of the measurement date changes on the qualified status of “Affected ISOs,” we have determined that all Affected ISOs might not be qualified ISOs under the tax regulations, and therefore should be accounted for as if they were NSOs for income tax accounting purposes. The Company recorded a tax benefit with respect to the Affected ISOs. To the extent an ISO was not disqualified through a “same day sale” or sold before fulfilling the holding period requirements related to the Affected ISOs, the recorded tax asset was written off to earnings when the statute of limitations for the year of exercise closed.

 

11



 

We have recorded a net income tax benefit of approximately $3.0 million in connection with the stock-based compensation related expense during the period from fiscal year 1995 through April 1, 2006. The recognized tax benefit related to affected stock options granted to officers was limited due to the potential non-deductibility of the related expenses under IRC Section 162(m). This IRS rule limits the amount of executive compensation that may be deducted for U.S. tax purposes under certain circumstances. We did not record a tax benefit or deferred tax asset for affected stock options granted to non-U.S., non-U.K. and certain non-German employees because we determined that we could not receive tax benefits outside of the U.S., U.K. and Germany. The net tax benefit has resulted in an increase of our deferred tax assets for all U.S. and UK affected stock options and certain German affected stock options prior to the exercise or forfeiture of the related options. Upon exercise or cancellation of the underlying options, the excess or deficiency in deferred tax assets are written-off to either expense or additional paid-in capital in the period of exercise or cancellation.

 

Further, we have recorded additional restatements to income taxes to record the effect of errors identified in the accounting for income tax contingencies resulting from the misapplication of information available at the date of the misstatement as well as the tax effects of the other miscellaneous accounting adjustments.

 

Accounting Considerations – Stock-Based Compensation

 

Prior to the adoption of SFAS 123(R) in fiscal 2006, we originally accounted for all employee, officer and director stock option grants as fixed grants under APB 25, using the recorded grant date as the measurement date. We issued all grants with an exercise price equal to the fair market value of our common stock on the recorded grant date, and therefore originally recorded no stock-based compensation expense.

 

The Special Committee concluded that the measurement dates for certain stock option grants differed from the recorded grant dates for such grants. As described in APB 25, the measurement date is the first date on which both the number of shares that an individual employee was entitled to receive and the exercise price are known with finality. Using the methodologies described below we revised the measurement dates for the indicated option grants during the Relevant Period, and we refer to these revised measurement dates as the “Revised Measurement Dates”. For periods prior to fiscal 2006, we calculated stock-based compensation expense under APB 25 based upon the intrinsic value as of the Revised Measurement Dates of stock option awards determined to be “fixed” awards under APB 25 and the vesting provisions of the underlying options through October 1, 2005. We calculated the intrinsic value on the Revised Measurement Date as the closing price of our common stock on such date as reported on the Nasdaq National Market, now the Nasdaq Global Market, less the exercise price per share of common stock as stated in the underlying stock option agreement, multiplied by the number of shares subject to such stock option award. We recognized these amounts as compensation expense on a straight-line basis over the vesting period of the underlying options. Effective October 2, 2005, we adopted the fair value recognition provisions of SFAS 123(R), requiring us to recognize expense related to the fair value of our stock-based compensation awards. Therefore, subsequent to fiscal 2005, we calculated stock-based compensation expense based upon the fair value as of the Revised Measurement Date in accordance with the provisions of SFAS 123(R).

 

The methodology we used to determine the Revised Measurement Dates associated with prior stock option grants was as follows:

 

Annual grants to employees—For the majority of the annual grants to employees, the process of allocating stock option grants among individual employees continued beyond the recorded grant date. Based on available evidence, we have determined that the appropriate measurement date for annual grants to employees was the earliest date on which evidence indicates the allocation of the options to the individual employees was substantially complete. We defined substantially complete as the point at which evidence indicated that 96% or greater of the grant records had been determined with finality. Such determination was based on the earliest of the three following actions that could be verified with available evidence: (1) on evidence of a substantially complete listing of options allocated to individual employees, (2) on evidence of communication stating that the process was complete supported by records being added into our stock option database application prior to, on or within two days of such communication or (3) on evidence of dates that the employee records of the grants of the stock option were added to the stock option database application (the “record added date”), where evidence of a substantially complete listing of options allocated to individual employees was not available.

 

12



 

After the date on which substantially all granting activities were completed, there were an insignificant number of changes to option awards attributable to circumstances such as the effective cancellation of a grant because of an employee’s termination, or additions due to administrative error corrections, promotion or individual performance reassessment. Where option awards were added subsequent to the date the allocation process was substantially complete, we have determined that each award was a separate grant with its own measurement date and that this subsequent addition was not indicative that the broader granting process for such annual awards had failed to be completed by the Revised Measurement Date. Measurement dates for individual awards which were not substantially complete by the Revised Measurement Date were determined based on the earlier of (1) the date the additions were communicated to the stock administrator for addition to the annual grant pool, (2) the record added date or (3) for periods prior to the implementation of the current stock administration system, the print date of the Notice of Grant.

 

Annual grants to officers—For annual grants to officers during fiscal years 1995, 1996, 1997, 1999, 2000 and 2002, the grants were awarded between Board meeting dates and in certain cases between committee meeting dates, and there is a lack of evidence that the price and number of shares were determined with finality as of the recorded grant date.

 

Based on available evidence, we have determined that the appropriate measurement date for annual grants to officers was the date on which evidence indicates that both the shares awarded to the officers and the exercise price of those shares was known with finality. Such determination was based on the earliest date of the three following actions that could be verified with available evidence: (1) the date that the specific number of shares for each officer was approved for grant by the Board as evidenced by the minutes of the Board of Directors meeting, providing that the approval occurred prior to the submission of the applicable Form 3 or Form 4 to the Securities and Exchange Commission (“SEC”); (2) the record added date, providing that the record was added prior to the submission of the applicable Form 3 or Form 4 to the SEC; or (3) the date of submission of the applicable Form 3 or Form 4 to the SEC.

 

Non-annual grants to employees—Non-annual grants to employees are initial grants to newly hired employees or incremental grants to existing employees upon their promotion. For non-annual grants to employees prior to June 2003, our stated process was to select the grant date to be the Monday after the Human Resources department requested the award. On June 5, 2003, we strengthened our process to require the signature of the Executive Vice President of HR on all award requests with the grant date to be the Monday after receipt of such signature. Beginning on June 7, 2006, we changed our process to require three members of an equity grant committee, established by the Board and the Board’s Compensation and H.R. Committee, to meet only on a fixed date once a month to consider any requested awards, with the award effective on such date or, in the event action was required by written consent, the action would be effective on the date the last consent signature was received.

 

Based on available evidence, we determined that the process was not consistently followed during the period from fiscal 1995 through June 4, 2003. As a result, we determined that the appropriate measurement date for non-annual employee grants during the period from fiscal 1995 through June 4, 2003 was the earliest date of the two following actions that could be verified with available evidence: (1) the record added date and (2) the date the specific grant was approved as evidenced by the minutes of a Board of Directors meeting.

 

For the period from June 5, 2003 through June 6, 2006, we determined that most of the measurement dates for non-annual grants to employees during this period followed the stated process and were appropriate. For two grants that we determined did not follow the process, we determined the appropriate measurement date based on the stated process.

 

For the period from June 7, 2006 through September 30, 2006, we determined that we followed the process consistently and that all of the measurement dates for non-annual grants to employees during this period were appropriate.

 

Non-annual grants to officers—Non-annual grants to officers are initial grants to newly hired officers or incremental grants for existing employees upon their promotion to an officer position. For non-annual grants to officers, Board or Compensation and H.R. Committee approval was reflected in written actions. We determined that the original recorded grant dates lacked evidence supporting when such written actions were executed for ten of the twelve non-annual grants to officers during the period from fiscal 1995 through fiscal 2006.

 

Based on available evidence, we determined that the appropriate measurement date for each of the ten non-annual grants to officers was the earliest of the three following actions that could be verified with available evidence: (1) the date written actions reflecting approval by the Board or Compensation and H.R. Committee were executed; (2) the record added date, providing that the related notice of grant was printed by us prior to the submission of the applicable Form 3 or Form 4 to the SEC; and (3) the date the applicable Form 3 or Form 4 was submitted to the SEC.

 

13



 

Non-employee director automatic stock option grants—Our 1990 and 1998 Directors’ Option Plans provide for the automatic and non-discretionary grant of non-statutory stock options to our non-employee directors, such that the grants require no independent action of the Board of Directors. The 1998 Directors’ Plan replaced the 1990 Directors’ Plan which expired on December 8, 1999 and was approved by stockholders on March 17, 1999. From 1995 through March 27, 2003, under both Plans, each non-employee director was automatically granted a non-discretionary grant of a non-statutory stock option to purchase 20,000 shares of common stock upon appointment as a member of the Board, and each non-employee director was granted a non-discretionary grant of a non-statutory stock option to purchase 5,000 shares of our common stock on the date of each Annual Meeting of Stockholders. The 1998 Directors’ Plan was amended by the Stockholders on March 23, 2003 to increase the automatic non-discretionary grant of a non-statutory stock option to purchase shares of common stock upon appointment as a member of the Board from 20,000 to 30,000 shares (“Initial Grant”) and to increase the non-discretionary grant of a non-statutory stock option to purchase shares of our common stock on the date of and immediately following each Annual Meeting of Stockholders from 5,000 shares to 12,000 shares (“Subsequent Grant”). The Plans provide that the exercise price shall be equal to the fair market value of the common stock on the date of the grant of the options. On March 30, 2006, the 1998 Directors Plan was further amended to reduce the Initial Grant from 30,000 to 24,000 shares and the Subsequent Grant from 12,000 to 6,000 shares. In addition, non-employee directors receive a restricted stock unit of 2,000 shares upon first joining the Board of Directors and an award of restricted stock units of 2,000 shares on each Annual Meeting of Stockholders where such director is reelected.

 

We have determined that, as a result of administrative errors, a total of five automatic grants representing initial options to purchase a total of 140,000 shares under the 1998 Directors’ Plan upon the appointment of five of our directors to the Board of Directors were documented as having been made on dates other than as set forth in the 1998 Directors’ Option Plan. We have corrected the documentation of these grants to reflect the correct dates and exercise prices, as automatically established under the 1998 Directors’ Option Plan. Because these actions were corrections of administrative errors in the documentation, rather than changing any of the terms of the stock option grants as automatically granted, we determined that there was no accounting charge to be recognized in connection with these corrections, as the correct measurement date was the date of grant as automatically established by the 1998 Directors’ Option Plan, and the exercise price was the fair market value of our common stock on the correct measurement date.

 

Although we determined that there is no accounting charge resulting from the administrative correction, the administrative correction did result in an increase of the exercise price for each of the five grants. Four of such directors have expressly agreed to the correction to increase the exercise prices of certain of such grants to purchase 107,800 shares. The fifth director’s option expired unexercised; therefore no such agreement was needed. Further, the three directors who exercised misdocumented grants have reimbursed us for the difference between the aggregate exercise price as misdocumented and as corrected, in the amounts of $1,195, $1,100 and $1,272, respectively.

 

14



 

Impact of the Restatement Adjustments on our Condensed Consolidated Financial Statements

The following tables present the impact of the financial statement restatement adjustments on our previously reported condensed consolidated statements of operations for the three and six months ended April 1, 2006 and the condensed consolidated statements of cash flows for the six months ended April 1, 2006 (in thousands, except per share data):

 

 

 

Three Months Ended April 1, 2006

 

Six Months Ended April 1, 2006

 

 

 

As
Previously
Reported

 

Adjustments

 

As
Restated

 

As
Previously
Reported

 

Adjustments

 

As
Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

145,988

 

$

 

$

145,988

 

$

276,982

 

$

 

$

276,982

 

Cost of sales

 

82,124

 

36

(A,C)

82,160

 

156,967

 

193

(A,C)

157,160

 

Gross profit

 

63,864

 

(36

)

63,828

 

120,015

 

(193

)

119,822

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

19,263

 

(67

)(A)

19,196

 

33,881

 

63

(A)

33,944

 

In-process research and development

 

 

 

 

690

 

 

690

 

Selling, general and administrative

 

32,131

 

(11

)(A,C)

32,120

 

61,542

 

466

(A,C)

62,008

 

Restructuring and other charges (recoveries)

 

(90

)

 

(90

)

(90

)

 

(90

)

Amortization of intangible assets

 

2,335

 

139

(B)

2,474

 

4,641

 

277

(B)

4,918

 

Total operating expenses

 

53,639

 

61

 

53,700

 

100,664

 

806

 

101,470

 

Income from operations

 

10,225

 

(97

)

10,128

 

19,351

 

(999

)

18,352

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

2,745

 

 

2,745

 

4,626

 

 

4,626

 

Interest expense

 

(590

)

(36

)C

(626

)

(821

)

(73

)(C)

(894

)

Other—net

 

88

 

(40

)(A,D)

48

 

(8

)

(84

)(A,D)

(92

)

Total other income, net

 

2,243

 

(76

)

2,167

 

3,797

 

(157

)

3,640

 

Income before income taxes

 

12,468

 

(173

)

12,295

 

23,148

 

(1,156

)

21,992

 

Provision for income taxes

 

4,295

 

2,003

(A,E)

6,298

 

5,659

 

1,499

(A,E)

7,158

 

Net income

 

$

8,173

 

$

(2,176

)

$

5,997

 

$

17,489

 

$

(2,655

)

$

14,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

$

(0.08

)

$

0.19

 

$

0.57

 

$

(0.09

)

$

0.48

 

Diluted

 

$

0.26

 

$

(0.07

)

$

0.19

 

$

0.56

 

$

(0.09

)

$

0.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

30,754

 

 

30,754

 

30,939

 

 

30,939

 

Diluted

 

31,316

 

(2

)(F)

31,314

 

31,396

 

(3

)(F)

31,393

 

 


(A)         Adjustments for stock-based compensation expense and the associated payroll taxes, interest, penalties and income tax benefit.

(B)           Adjustment to correct errors in the amortization of intangibles related to the purchase accounting for our acquisition of a 39.62% interest in Lambda Physik in fiscal 2003.

(C)           Adjustments for errors in the accounting for asset retirement obligations.

(D)          Adjustment to correct the classification of unrealized foreign exchange gains and losses related to an intercompany note.

(E)            Adjustments to correct for errors in income taxes, including the income tax effects of adjustments described in A, C, and D above.

(F)            Adjustment to reflect the effect on diluted weighted average shares outstanding as a result of the restatements described in A above.

 

15



 

 

 

Six Months Ended April 1, 2006

 

 

 

As Previously Reported

 

Adjustments

 

As Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

17,489

 

$

(2,655

)

$

14,834

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Purchased in-process research and development

 

690

 

 

690

 

Depreciation and amortization

 

13,181

 

60

(C)

13,241

 

Amortization of intangible assets

 

4,641

 

277

(B)

4,918

 

Deferred income taxes

 

572

 

 

572

 

Stock-based compensation

 

6,735

 

466

(A)

7,201

 

Excess tax benefit from stock-based compensation arrangements

 

(15

)

(258

(A)

(273

)

Tax benefit from employee stock options

 

 

391

(G)

391

 

Amortization of bond issue costs

 

 

83

(F)

83

 

Other non-cash expense (income)

 

102

 

(303

(C,G)

(201

)

Changes in assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

(11,929

)

 

(11,929

)

Inventories

 

7,544

 

 

7,544

 

Prepaid expenses and other assets

 

(3,071

)

 

(3,071

)

Other assets

 

(2,068

)

 

(2,068

)

Accounts payable

 

5,760

 

 

5,760

 

Income taxes payable/receivable

 

(2,158

)

1,499

(A,E)

(659

)

Other current liabilities

 

(3,893

)

189

(A)

(3,704

)

Other long-term liabilities

 

(250

)

 

(250

)

Net cash provided by operating activities

 

33,330

 

(251

)

33,079

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(8,073

)

(54

)(C)

(8,127

)

Proceeds from dispositions of property and equipment

 

182

 

 

182

 

Purchases of available-for-sale securities

 

(117,981

)

 

(117,981

)

Proceeds from sales and maturities of available-for-sale securities

 

175,546

 

 

175,546

 

Acquisition of businesses, net of cash acquired

 

(5,114

)

 

(5,114

)

Change in restricted cash

 

(1,352

)

 

(1,352

)

Deferred business acquisition costs

 

(2,106

)

 

(2,106

)

Other-net

 

(146

)

(29

)(C,F)

(175

)

Net cash used in investing activities

 

40,956

 

(83

)

40,873

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Long-term debt borrowings

 

1,387

 

 

1,387

 

Cash overdrafts increase

 

(2,686

)

 

(2,686

)

Issuance of common stock under employee stock plans

 

6,947

 

 

6,947

 

Repurchase of common stock

 

(22,250

)

 

(22,250

)

Proceeds received from issuance of convertible subordinated notes

 

200,000

 

 

200,000

 

Debt issuance costs

 

(5,112

)

 

(5,112

)

Excess tax benefits from stock-based compensation arrangements

 

15

 

258

(A)

273

 

Net cash used in financing activities

 

178,301

 

258

 

178,559

 

Effect of exchange rate changes on cash and cash equivalents

 

3,200

 

76

(D)

3,276

 

Net increase in cash and cash equivalents

 

255,787

 

 

255,787

 

Cash and cash equivalents, beginning of period

 

97,507

 

 

97,507

 

Cash and cash equivalents, end of period

 

$

353,294

 

$

 

$

353,294

 

 

16



 


(A)         Adjustments for stock-based compensation expense and the associated payroll taxes, interest, penalties and income tax benefit.

(B)           Adjustment to correct errors in the amortization of intangibles related to the purchase accounting for our acquisition of a 39.62% interest in Lambda Physik in fiscal 2003.

(C)           Adjustments for errors in the accounting for asset retirement obligations.

(D)          Adjustment to correct the classification of unrealized foreign exchange gains and losses related to an intercompany note.

(E)            Adjustments to correct for errors in income taxes, including the income tax effects of adjustments described in A, C and D above.

(F)            Reclassification of amortization of bond issue costs from investing to operating cash flows to conform to current period presentation.

(G)           Reclassification of tax benefit from employee stock options to conform to current period presentation.

 

4.      RECENT ACCOUNTING STANDARDS

 

In June 2006, the 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 SFAS 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 No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,”(“FSP FIN 48-1”) to amend FIN No. 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. The requirements of FIN 48 and FSP FIN 48-1 are effective for our fiscal year beginning September 30, 2007. As of the end of fiscal year 2007, we estimate that our tax contingencies could increase by approximately $1 million to $3 million as a result of the adoption of FIN 48 and FSP FIN 48-1.  This amount would be an adjustment to our retained earnings for fiscal year beginning September 30, 2007.

 

In September 2006, the SEC issued Staff Accounting Bulletin 108 “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”) addressing how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC Staff believes that companies should quantify errors using both a balance sheet and an income statement approach and evaluate whether either of these approaches results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 also describes the circumstances where it would be appropriate for a registrant to record a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial as well as the required disclosures to investors. SAB 108 is effective for us for fiscal year 2007. We adopted SAB 108 on October 1, 2006 and our adoption did not have an impact on our consolidated financial position and results of operations.

 

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 fiscal years beginning after November 15, 2007 with earlier adoption permitted. We have elected not to early adopt and are currently assessing the impact of SFAS 159 on our consolidated financial position and results of operations.

 

5.     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 one-year 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.

 

17



 

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, which is determined based on the price charged for each deliverable on a standalone basis.

 

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.

 

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.

 

6.     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 income taxes, recorded as a separate component of other comprehensive income (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):

 

 

 

March 31, 2007

 

 

 

Cost Basis

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Cash and cash equivalents

 

$

415,663

 

$

9

 

$

(4

)

$

415,668

 

Less: restricted cash and cash equivalents, non-current

 

 

 

 

 

 

 

(3,801

)

 

 

 

 

 

 

 

 

$

411,867

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

30,392

 

$

36

 

$

(19

)

$

30,409

 

State and municipal obligations

 

52,607

 

805

 

(11

)

53,401

 

Corporate notes and obligations

 

33,225

 

110

 

(18

)

33,317

 

Total short-term investments

 

$

116,224

 

$

951

 

$

(48

)

$

117,127

 

 

 

 

September 30, 2006

 

 

 

Cost Basis

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Cash and cash equivalents

 

$

448,940

 

$

 

$

 

$

448,940

 

Less: restricted cash and cash equivalents, non-current

 

 

 

 

 

 

 

(3,709

)

 

 

 

 

 

 

 

 

$

445,231

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

18,125

 

$

131

 

$

(87

)

$

18,169

 

State and municipal obligations

 

16,130

 

237

 

(30

)

16,337

 

Corporate notes and obligations

 

14,235

 

59

 

(33

)

14,261

 

Total short-term investments

 

$

48,490

 

$

427

 

$

(150

)

$

48,767

 

 

18



 

At March 31, 2007, $2.5 million of cash and cash equivalents were restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda Physik and $1.3 million were restricted pursuant to an outstanding long-term debt arrangement at a subsidiary. At September 30, 2006, $2.5 million of cash and cash equivalents were restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda Physik and $1.2 million were restricted pursuant to an outstanding long-term debt arrangement at a subsidiary.

 

7.     INTANGIBLE ASSETS`

 

The changes in the carrying amount of goodwill for the period from September 30, 2006 to March 31, 2007 are summarized as follows (in thousands):

 

 

 

Commercial
Lasers and
Components

 

Specialty Laser
Systems

 

Total

 

Balance as of September 30, 2006

 

$

16,813

 

$

55,058

 

$

71,871

 

Acquisition related

 

 

 

 

Translation adjustments and other

 

159

 

1,728

 

1,887

 

Balance as of March 31, 2007

 

$

16,972

 

$

56,786

 

$

73,758

 

 

Refer to discussion on our operating segments in Note 16.

 

Components of our amortizable intangible assets are as follows (in thousands):

 

 

 

March 31, 2007

 

September 30, 2006

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Existing technology

 

$

51,215

 

$

(23,556

)

$

27,659

 

$

50,487

 

$

(20,602

)

$

29,885

 

Patents

 

9,540

 

(6,075

)

3,465

 

9,106

 

(5,391

)

3,715

 

Drawings

 

1,302

 

(1,302

)

 

1,243

 

(1,243

)

 

Order backlog

 

4,547

 

(4,547

)

 

4,344

 

(4,344

)

 

Customer lists

 

4,314

 

(2,127

)

2,187

 

4,213

 

(1,805

)

2,408

 

Trade name

 

3,513

 

(1,457

)

2,056

 

3,365

 

(1,217

)

2,148

 

Non-compete agreement

 

2,166

 

(1,714

)

452

 

2,084

 

(1,377

)

707

 

Total

 

$

76,597

 

$

(40,778

)

$

35,819

 

$

74,842

 

$

(35,979

)

$

38,863

 

 

19



 

Amortization expense for intangible assets for the six months ended March 31, 2007 was $3.9 million.  At March 31, 2007, estimated amortization expense for the remainder of fiscal 2007, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):

 

 

 

Estimated
Amortization
Expense

 

2007 (remainder)

 

$3,942

 

2008

 

7,464

 

2009

 

6,895

 

2010

 

5,560

 

2011

 

4,479

 

2012

 

3,235

 

Thereafter

 

4,244

 

Total

 

$35,819

 

 

8.     BALANCE SHEET DETAILS

 

Inventories consist of the following (in thousands):

 

 

 

March 31,
2007

 

September 30,
2006

 

Purchased parts and assemblies

 

$

25,518

 

$

17,365

 

Work-in-process

 

46,480

 

50,189

 

Finished goods

 

31,419

 

33,940

 

Inventories

 

$

103,417

 

$

101,494

 

 

Prepaid expenses and other assets consist of the following (in thousands):

 

 

 

March 31,
2007

 

September 30,
2006

 

Prepaid expenses and other

 

$31,207

 

$15,062

 

Prepaid and refundable income taxes

 

5,060

 

5,060

 

Prepaid debt issuance costs

 

1,163

 

1,134

 

Total prepaid expenses and other assets

 

$37,430

 

$21,256

 

 

Other assets consist of the following (in thousands):

 

 

 

March 31,
2007

 

September 30,
2006

 

Assets related to deferred compensation arrangements

 

$29,429

 

$23,069

 

Deferred tax assets

 

22,281

 

32,717

 

Prepaid debt issuance costs

 

3,393

 

3,875

 

Other assets

 

2,914

 

2,433

 

Total other assets

 

$58,017

 

$62,094

 

 

Other current liabilities consist of the following (in thousands):

 

 

 

March 31,
2007

 

September 30,
2006

 

Accrued payroll and benefits

 

$

25,306

 

$

30,661

 

Accrued expenses and other

 

40,969

 

25,041

 

Reserve for warranty

 

13,007

 

11,462

 

Deferred income

 

5,411

 

7,832

 

Customer deposits

 

3,802

 

2,740

 

Accrued restructuring charges

 

642

 

1,616

 

Total other current liabilities

 

$

89,137

 

$

79,352

 

 

In the first six months of fiscal 2007, we recorded $1.3 million of payments made against our accrued restructuring charges for remaining lease liabilities and recorded sublease income of $0.3 million.  In the first quarter of fiscal 2006, we exited our Fort Lauderdale, Florida facility and, as a result, we recorded a facility closure charge of $0.6 million.  The facility closure charge included the estimated contractual obligations for lease and other facility costs, net of estimated sublease income.

 

20



 

We provide warranties on certain of our product sales (generally one year) 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.  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.

 

Components of the reserve for warranty costs during the first six months of fiscal 2007 and 2006 were as follows (in thousands):

 

 

 

Six Months Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

Beginning balance

 

$

11,462

 

$

10,424

 

Additions related to current period sales

 

11,000

 

9,370

 

Warranty costs incurred in the current period

 

(9,672

)

(9,269

)

Adjustments to accruals related to prior period sales

 

217

 

(127

)

Ending balance

 

$

13,007

 

$

10,398

 

 

The following table reconciles changes in our asset retirement liability, which is reported in other long-term liabilities on our condensed consolidated balance sheets (in thousands):

 

 

 

Six Months Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

Beginning balance

 

$

1,765

 

$

1,674

 

Additional asset retirement obligations recognized

 

 

54

 

Adjustment to asset retirement obligations recognized

 

(7

)

 

Accretion recognized

 

75

 

73

 

Changes due to foreign currency exchange

 

114

 

 

Ending balance

 

$

1,947

 

$

1,801

 

 

Other long-term liabilities consist of the following (in thousands):

 

 

 

March 31,
2007

 

September 30,
2006

 

Deferred compensation

 

$

30,179

 

$

28,017

 

Deferred tax liabilities

 

2,567

 

684

 

Deferred income

 

4,915

 

4,390

 

Asset retirement liability

 

1,947

 

1,765

 

Other long-term liabilities

 

2,891

 

2,563

 

Total other long-term liabilities

 

$

42,499

 

$

37,419

 

 

9.     CONVERTIBLE SUBORDINATED NOTES

 

In March 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 notes were scheduled to mature on March 1, 2011, unless earlier redeemed or converted. Interest on the notes is payable in cash semi-annually in arrears on March 1 and September 1 of each year.

 

The fair value of the convertible debt at March 31, 2007 was estimated at $214.1 million, based on quoted market prices for the convertible notes. The carrying value of the convertible subordinated notes was $199.8 million at March 31, 2007.

 

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 Indentures 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 indentures also provided that such a default, if not cured by that date, would give certain

 

21



 

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 and delivered to the trustee under the Indenture and Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended. 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.

 

As a result of the violation and subsequent repayment, the convertible subordinated notes have been classified as current liabilities as of March 31, 2007.

 

10.  STOCK-BASED COMPENSATION

 

Stock-Based Benefit Plans

 

We have two Stock Option Plans for which all service providers are eligible participants and a Directors’ Stock Option Plan for which only non-employee directors are eligible participants.  The Director’s 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 a committee thereof.  Under these three plans, we may grant options to purchase up to an aggregate of 5,500,000, 6,300,000 and 681,000 shares of common stock, respectively of which no, 3,770,650 and 170,000, respectively, remain available for grant at March 31, 2007.  Employee options are generally exercisable between two to 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. We settle stock option exercises with newly issued shares of common stock.  Grants under employee plans expire six years from the original grant date, unless otherwise determined by the Board or a committee thereof, up to a maximum of ten years. 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 non-employee directors receive an annual 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.

 

Restricted stock awards granted under our Stock Option Plans are independent of option grants and are subject to restrictions.  At March 31, 2007, we had 270,065 shares of restricted stock outstanding, including 99,500 performance-based restricted stock awards and stock units, all of which 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. For fiscal 2006 awards, 115% of the target shares, or 19,479 shares, were issued. The number of shares earned can range from 0% to 200% of the grant target for 2007 and 2008.   Restricted stock (not including performance-based restricted stock) 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, 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 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.  At March 31, 2007, 224,536 shares of our common stock were reserved for future issuance under the plan.

 

In the second quarter of fiscal 2007, the stock purchase plan was suspended and employee contributions made to date were returned while the Special Committee conducted a voluntary review of our historical stock option practices. See Note 3, “Restatement of Condensed Consolidated Financial Statements.”  The remaining unamortized expense of $0.5 million was recognized in the second quarter of fiscal 2007.

 

Adoption of SFAS 123(R)

 

Effective October 2, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), requiring us to recognize expense related to the fair value of our stock-based compensation awards.  We recognize compensation expense for all share-based payment awards on a straight-line basis over the respective requisite service period of the awards.

 

22



 

Determining 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.

 

There were no grants made under our stock option and stock purchase plans during the second quarter of fiscal 2007 due to the voluntary review of our historical stock option practices. For the other periods presented, the fair values of our stock options granted to employees and shares purchased under the stock purchase plan for the three months ended April 1, 2006 and six months ended March 31, 2007 and April 1, 2006 were estimated using the following weighted-average assumptions:

 

 

 

Employee Stock Option Plans

 

Employee Stock Purchase Plans

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

March 31, 2007

 

April 1,
2006

 

March 31,
2007

 

April 1,
2006

 

March 31,
2007

 

April 1,
2006

 

Expected life in years

 

 

5.3

 

4.4

 

5.3

 

 

0.5

 

0.5

 

0.5

 

Expected volatility

 

%

36.3

%

34.2

%

36.3

%

%

34.8

%

29.0

%

34.1

%

Risk-free interest rate

 

%

4.6

%

4.7

%

4.6

%

%

4.2

%

5.1

%

4.1

%

Expected dividends

 

 

none

 

none

 

none

 

 

none

 

none

 

none

 

Weighted average fair value

 

$

 

$

14.07

 

$

12.04

 

$

13.98

 

$

 

$

7.54

 

$

8.43

 

$

7.57

 

 

Stock Compensation Expense

 

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2007 and April 1, 2006 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31, 2007

 

April 1, 2006

 

March 31, 2007

 

April 1, 2006

 

Cost of sales

 

$

667

 

$

269

 

$

1,103

 

$

443

 

Research and development

 

739

 

599

 

1,299

 

1,218

 

Selling, general and administrative

 

2,349

 

2,648

 

4,844

 

5,537

 

Income tax expense (benefit)

 

(1,272

)

1,039

 

(2,573

)

(191

)

 

 

$

2,483

 

$

4,555

 

$

4,673

 

$

7,007

 

 

During the three and six months ended March 31, 2007, $0.5 million and $0.9 million, respectively, for all stock plans was capitalized into inventory, $0.4 million and $0.9 million, respectively, was amortized into cost of sales and $0.5 million remained in inventory at March 31, 2007.  During the three and six months ended April 1, 2006, $0.5 million and $0.9 million, respectively, for all stock plans was capitalized into inventory, $0.1 million and $0.4 million, respectively, was amortized into cost of sales and $0.6 million remained in inventory at April 1, 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 March 31, 2007, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was approximately $8.0 million, net of estimated forfeitures of $0.6 million.  This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.3 years and will be adjusted for subsequent changes in estimated forfeitures.

 

23



 

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 the six months ended March 31, 2007 and April 1, 2006, we recorded less than $0.1 million and $0.3 million, respectively, of excess tax benefits as cash flows from financing activities.

 

During the quarter ended March 31, 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 the three and six months ended March 31, 2007.

 

Stock Options & Awards Activity

 

The following is a summary of option activity for our Stock Option Plans (in thousands, except per share amounts and remaining contractual term in years):

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price
Per Share

 

Weighted
Average
Remaining
Contractual
Term in Years

 

Aggregate
Intrinsic Value

 

Outstanding at October 1, 2006

 

3,823

 

$

29.15

 

 

 

 

 

Granted

 

25

 

33.87

 

 

 

 

 

Exercised

 

(52

)

24.13

 

 

 

 

 

Forfeitures

 

(69

)

30.85

 

 

 

 

 

Expirations

 

(135

)

40.85

 

 

 

 

 

Outstanding at March 31, 2007

 

3,592

 

$

28.80

 

2.9

 

$

12,927

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at March 31, 2007

 

3,560

 

$

28.77

 

2.9

 

$

12,912

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2007

 

2,788

 

$

27.83

 

2.3

 

$

12,202

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the 2.2 million options that were in-the-money at March 31, 2007.  There were no exercises of Company stock during the three months ended March 31, 2007, resulting in no intrinsic value realized during the period.  During the three months ended April 1, 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $0.6 million, determined as of the date of option exercise.  During the six months ended March 31, 2007 and April 1, 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $0.5 million and $0.8 million, respectively, determined as of the date of option exercise.

 

The following table summarizes our restricted stock award activity for the six months ended March 31, 2007 (in thousands, except per share amounts):

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date Fair
Value

 

Nonvested stock at October 1, 2006

 

299

 

$

33.06

 

Granted

 

8

 

32.23

 

Vested

 

(19

)

33.20

 

Forfeited

 

(18

)

33.32

 

Nonvested stock at March 31, 2007

 

270

 

$

33.02

 

 

11.  COMMITMENTS AND 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.

 

24



 

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. The Company is cooperating fully with the inquiry.

 

Income Tax Audits—The Internal Revenue Service (“IRS”) is conducting an audit of our 2003 and 2004 tax returns. The IRS has issued a number of Notices of Proposed Adjustments 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 adequate reserves 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.

 

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 believe that we have adequate reserves for any adjustments that may be proposed by the IRS related to these credits.

 

The German tax authorities are conducting an audit of our subsidiary in Göttingen for the tax years 1999 through 2005. We believe that we have adequate reserves for any adjustments that may be proposed by the German tax authorities.

 

12.  STOCKHOLDERS’ EQUITY

 

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. There were no repurchases during the first quarter of fiscal 2007. As of September 30, 2006,  we had 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 was terminated effective September 30, 2007.

 

25



 

13.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The components of comprehensive income (loss), net of income taxes, are as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

March 31,
2007

 

April 1,
2006

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,282

 

$

5,997

 

$

18,040

 

$

14,834

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Translation adjustment

 

4,279

 

4,754

 

11,106

 

2,662

 

Net gain (loss) on derivative instruments, net of taxes

 

(27

)

3

 

3

 

5

 

Changes in unrealized gains (losses) on available-for-sale securities, net of taxes

 

(30

)

23

 

115

 

26

 

Other comprehensive income (loss), net of tax

 

4,222

 

4,780

 

11,224

 

2,693

 

Comprehensive income

 

$

11,504

 

$

10,777

 

$

29,264

 

$

17,527

 

 

The following summarizes activity in accumulated other comprehensive income (loss) related to derivatives, net of income taxes, held by us (in thousands):

 

Balance, October 1, 2005

 

$

(114

)

Changes in fair value of derivatives

 

 

Net losses reclassified from OCI

 

5

 

Balance, April 1, 2006

 

$

(109

)

 

 

 

 

Balance, October 1, 2006

 

$

(135

)

Changes in fair value of derivatives

 

 

Net losses reclassified from OCI

 

3

 

Balance, March 31, 2007

 

$

(132

)

 

Accumulated other comprehensive income (net of tax) at March 31, 2007 is comprised of accumulated translation adjustments of $58.3 million, net loss on derivative instruments of $0.1 million and unrealized loss on available-for-sale securities of $0.2 million.  Accumulated other comprehensive income (net of tax) at September 30, 2006  is comprised of accumulated translation adjustments of $47.2 million, net loss on derivative instruments of $0.1 million and unrealized loss on available-for-sale securities of $0.4 million, respectively.

 

14.  EARNINGS PER SHARE

 

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.

 

The following table presents information necessary to calculate basic and diluted earnings per common share (in thousands, except per share data):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March
31, 2007

 

April 1,
2006

 

March 31,
2007

 

April 1,
2006

 

Weighted average shares outstanding (1) – basic

 

31,417

 

30,754

 

31,378

 

30,939

 

Dilutive effect of employee stock plans

 

520

 

560

 

652

 

454

 

Weighted average shares outstanding – diluted

 

31,937

 

31,314

 

32,030

 

31,393

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,282

 

$

5,997

 

$

18,040

 

$

14,834

 

 

 

 

 

 

 

 

 

 

 

Net income per basic share

 

$

0.23

 

$

0.19

 

$

0.57

 

$

0.48

 

Net income per diluted share

 

$

0.23

 

$

0.19

 

$

0.56

 

$

0.47

 

 


(1) Net of restricted stock

 

26



 

A total of 2,141,206 and 2,031,267 potentially dilutive securities have been excluded from the dilutive share calculation for the three months ended March 31, 2007 and April 1, 2006, respectively, as their effect was anti-dilutive.  A total of 1,535,628 and 2,041,983 potentially dilutive securities have been excluded from the dilutive share calculation for the six months ended March 31, 2007 and April 1, 2006, respectively, as their effect was anti-dilutive.

 

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 EPS. The assumed proceeds 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 the quarter ended March 31, 2007, there was no dilutive effect from our $200.0 million 2.75% convertible subordinated notes 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”.

 

15.  INCOME TAXES

 

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under the provisions of SFAS 109, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets