-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GDVZ0ZxOJkT6c6dPFK8zCXe3mH1ecbeFlmwpkXtY0j1sK77tag7Lo0gXQ7R+HsYp SntnB07ytBmTymPanYEU/Q== 0000873603-00-000002.txt : 20000307 0000873603-00-000002.hdr.sgml : 20000307 ACCESSION NUMBER: 0000873603-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCEL TECHNOLOGY INC CENTRAL INDEX KEY: 0000873603 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 112780242 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19306 FILM NUMBER: 561667 BUSINESS ADDRESS: STREET 1: 45 RESEARCH WAY CITY: E SETUAKET STATE: NY ZIP: 11733 BUSINESS PHONE: 5162736900 MAIL ADDRESS: STREET 1: 45 ADAMS AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ...................... OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ....................... ................. Commission File Number 0-19306 EXCEL TECHNOLOGY, INC. (Exact name of Registrant as specified in its Charter) Delaware 11-2780242 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 41 Research Way (631) 784-6100 E. Setauket, NY 11733 (Registrant's Telephone Number) (Address of Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was $276,917,294 based on the average bid and ask price as reported by NASDAQ on March 3, 2000. The number of shares of the Registrant's common stock outstanding as of March 3, 2000 was: 11,350,071. DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement to be filed in connection with the Registrant's 2000 Annual Meeting of Stockholders (incorporated by reference under Part III.) PART I This Annual Report on Form 10-K (and other reports issued by the Company and its officers from time to time) contain certain statements concerning the Company's future results, future performance, intentions, objectives, plans, and expectations that are or may be deemed to be "forward-looking statements". Such statements, including statements regarding capital expenditures, competition, products under development, and the company's ability to obtain spare parts and fill its current backlog; are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Such forward- looking statements are subject to a number of known and unknown risks and uncertainties that, in addition to general economic and business conditions, could cause the Company's actual results, performance, and achievements to differ materially from those described or implied in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." In light of the significant uncertainties inherent in such forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the Company's objectives and plans will be achieved. Words such as "believes," "anticipates," "expects," "intends," "may," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The Company undertakes no obligation to revise any of these forward-looking statements. ITEM 1. BUSINESS General Excel Technology, Inc. (the "Company") designs, develops, manufactures and markets laser systems and electro-optical components for industry, science, and medicine. The word laser is an acronym for "Light Amplification by Stimulated Emission of Radiation." The essence of the laser is the ability of a photon (light energy) to stimulate the emission of other photons, each having the same wavelength (color) and direction of travel. The laser beam is so concentrated and powerful that it can produce power densities millions of times more intense than that found on the surface of the sun, capable of cutting, welding and marking industrial products, yet can be precisely controlled and directed, capable of performing delicate surgery on humans. In October 1992, the Company acquired Quantronix Corporation, a Delaware corporation ("Quantronix"), for Common Stock and warrants of the Company valued at approximately $9 million, in a transaction pursuant to which Quantronix became a wholly owned subsidiary of the Company. The acquisition of Quantronix and its wholly-owned subsidiaries, Control Laser Corporation, located in Orlando, Florida ("Control Laser"), Excel Technology Europe (previously named Quantronix GmbH), located in Germany ("Excel Technology Europe"), and The Optical Corporation, located in Oxnard, California ("Optical"), provided the Company with its industrial, scientific and semiconductor product lines, supplemented the Company's dental products and provided the Company with a significant revenue base as well as established manufacturing, engineering, marketing and customer service capabilities. On February 14, 1995, the Company acquired Cambridge Technology, Inc. ("Cambridge"), located in Cambridge, Massachusetts. Cambridge is engaged primarily in the manufacture of laser scanners, essential components to moving a laser beam with precision at a specified speed. These products have both industrial and consumer applications, such as laser marking and etching, high-density laser printing and writing, digitized x-ray imaging and entertainment laser light shows and displays. The acquisition allowed the Company to expand into new markets and enhanced its market position in the industrial business. The Company acquired all of the outstanding shares of capital stock of Cambridge in exchange for $4.75 million, consisting of $4.5 million in cash (of which $3.5 million was paid on February 14, 1995) and $250 thousand in shares of Common Stock (which was paid on February 14, 1995). Of the balance due, $600 thousand was paid in March 1996 and $400 thousand was paid in February 1997. Pursuant to the acquisition agreement, additional payments were made due to Cambridge meeting certain performance goals during the first two fiscal years after the acquisition. In connection therewith, the Company paid $731 thousand in 1995 and $323 thousand in 1996. On October 2, 1995, the Company acquired the Photo Research Division ("The Photo Research Division") of Kollmorgen Instruments Corporation ("Kollmorgen"). The Photo Research Division is engaged primarily in the business of developing, manufacturing and marketing photometric and spectroradiometer instruments and systems (the "Business"). In accordance with an Asset Purchase Agreement, the Company purchased substantially all of the net assets and properties utilized in connection with the Business, in consideration of $3.5 million in cash. The Company utilized its own cash to finance the acquisition. Subsequently, the Company obtained a $3.5 million five-year term loan, from U.S. Trust, the proceeds of which were utilized by the Company to replenish its own cash used in financing the acquisition. On August 14, 1998, the Company acquired substantially all of the assets and properties of Synrad Inc. ("Synrad") a company engaged in the business of developing, manufacturing and marketing sealed CO2 lasers and related accessories. In accordance with the Asset Purchase Agreement, Excel Purchasing Company (a wholly owned subsidiary of the Company) purchased substantially all of Synrad's assets and properties for consideration of approximately $21.7 million in cash, which includes transaction costs and the repayment of certain of Synrad's outstanding debt. In addition, the Company assumed certain liabilities, including trade payables, accrued expenses and other specified liabilities. The Company funded the acquisition of Synrad by utilizing its own cash and by borrowing $6.5 million on its $15 million credit facility with The Bank of New York (the "Bank") all of which was repaid as of March 31, 1999. Excel Purchasing Company changed its name to Synrad, Inc. after the acquisition. Excel was organized under the laws of Delaware in 1985. CURRENT PRODUCTS AND APPLICATIONS Marking Systems ............... Control Laser, the Company's subsidiary located in Orlando, Florida, designs, manufactures and markets computer controlled industrial laser systems for material marking, engraving and coding. These systems include standard and custom workstations. Control Laser's Icon and Insignia laser systems allow for permanent, high speed, computer-controlled product marking for the aerospace, automotive, medical device, electronic, tooling and consumer industries. Customers include Honeywell, ITT, Bosch, Nissan, Ford, General Electric, General Motors and Chrysler. Control Laser's marking systems can be used independently or can be utilized as part of an automated assembly line system. During 1998, the Company started delivery of its "on the fly" marking system called the "Instamark Express". In 1999, Control Laser introduced new marking systems utilizing frequency doubled, tripled and quadrupled wavelengths of Nd:YAG and Nd:YLF lasers. During 1999, Control Laser also began development of their new diode pumped series of Nd:YAG and Nd:YLF laser marking systems, which are due for introduction to the market in 2000. Carbon Dioxide Lasers ..................... Synrad, the Company's subsidiary based in Mukilteo, Washington, manufactures a range of sealed CO2 lasers for cutting, marking, drilling or other machining applications for a variety of materials. The CO2 lasers range in power from 10W to 240W. Currently, Synrad is developing a new generation of sealed CO2 lasers. Synrad sells primarily to OEMs and system integrators who incorporate the lasers with suitable motion systems and optical assemblies and then sell the complete system. Applications include desktop engraving systems found in many trophy/award shops throughout the world, large area flatbed systems for cutting dieboard or airbag material, and 3D prototyping using paper, sintered metals and other materials to create 3D models and molds directly from CAD packages. Higher power lasers also are finding uses in manufacturing plants for trimming of flashing from injection- molded parts in the automobile industry, cutting textiles and woven fabrics on continuous production lines, and slitting/sealing of plastic packaging. Synrad also manufactures a galvo marking head which, when configured with a Synrad laser, provides a fast and effective method of marking parts with lot codes, serial number/date information and bar-codes. Scanners ........ Cambridge, the Company's subsidiary based in Cambridge, Massachusetts, manufactures high-speed mirror positioning components and sub-systems used to direct laser energy. These optical scanning products are key to a variety of applications where visible or invisible laser energy is positioned quickly and precisely. An increasingly broad base of laser system applications are served by these products including laser marking, machining, heat treating, welding and cutting, semiconductor wafer inspection and processing, laser entertainment, corporate advertising and a growing number of laser based medical applications, which include digital radiography, skin resurfacing, eye treatment and others. With patented designs, Cambridge is a technology leader in galvanometer-based optical scanning and supports research and development of new applications through a wide range of academic institutions, private firms and government agencies. Photomask Repair Systems ........................ Quantronix, the Company's subsidiary located in East Setauket, New York, manufactures and markets Defect Repair Systems (DRS) which are laser-based systems for use in semiconductor production. The DRS provides a means to repair defects on the complex photomasks used to produce integrated circuits. A pioneer in this field, Quantronix has provided laser mask repair systems to the industry since 1975. Currently, the DRSII Model 840e system has been the industry standard, with over 100 installed Quantronix repair systems in operation. In recognition of the demand for smaller, denser features on next generation integrated circuits, Quantronix has embarked on a development program to produce the next generation machines (DRS II Model 850 and DRSII Model 855) that will support circuit production through the 0.35 microns, 0.25 microns and 0.18 microns design generations, promoting product viability in the future. During 1999, Quantronix completed production and installation of the new DRS II Model 855. Scientific and Industrial Solid-State Lasers ............................................ Quantronix also manufactures and markets solid-state lasers for science, industry and OEM uses. On a worldwide basis, scientific lasers represent one of the most stable and long-established laser markets. Scientific lasers are used by chemists, biologists, physicists and by other scientists and engineers. In this market, end-users are generally familiar with the various product specifications, features and reliability, which are the major factors in choosing between competing products. Quantronix's current scientific line includes the Titan and Odin Series Ultrafast Amplifiers and the Series 527 High Power Green lasers. Quantronix's Ultrafast Amplifiers incorporate a material called Titanium Sapphire ("Ti:Sapphire") which has created opportunities for a greater volume of research than previous materials. Ultrafast Amplifiers deliver high energy short pulses on the femtosecond or picosecond time scale. (A femtosecond is one quadrillionth of a second, a picosecond is one trillionth of a second.) These short pulses enable the investigation of a wide range of physical, chemical and biological phenomena. The scientific systems utilize Nd:YLF lasers to produce high-energy pulses at a rate of 1kHz (1000 pulses per second). These pulses drive the Ti:Sapphire Amplifier that can then pump other optical systems (also marketed by Quantronix) which deliver tunable light from ultraviolet to infrared regions of the spectrum. The material properties to be studied vary over this range. Quantronix's industrial and OEM solid state lasers offer a variety of Nd:YAG, Ho:YAG and ER:YAG lasers in various configurations for material processing applications. The wavelengths of these lasers vary from 1064 nm to 263 nm. Optical Products ................ Optical, a subsidiary of the Company based in Oxnard, California, specializes in the manufacture of custom precision optical components used for measurement in systems such as optical scanners, laser systems, professional motion picture cameras and other industrial and scientific applications. Light and Color Measurement ........................... Photo Research, the Company's Chatsworth, California subsidiary, is a leader in high precision, state of the art electro-optical instrumentation and systems for light and color measurement. The Spectra product line offers systems to a wide variety of industries for research, quality control and on- line testing. Video instrumentation provides high resolution CRT and flat panel inspection. The Photo Research Optical Metrology Laboratory is a supplier of and service provider to optical radiation standards, calibration and measurement for major manufacturers of instruments, displays, devices and materials. Spare Parts ........... Quantronix also sells spare parts and related consumable materials used primarily in its semiconductor, industrial and scientific systems. This operation is based in East Setauket, New York. Spare parts and consumables include replacement optical elements, lamps and electronic components. Marketing and Sales The Company's marketing activities include the presentation of its product lines at domestic and international trade shows and advertising. The marketing and sales staff conduct professional meetings, conferences and in- person and telephone sales calls. The Company also engages independent manufacturers' representatives for the sale of its products. Foreign sales of its products are made primarily through foreign equipment distribution organizations and representatives by Excel Technology Europe, its German subsidiary, and by Excel Technology Asia, its Malaysian subsidiary. Excel Technology Europe and Excel Technology Asia are engaged in the business of marketing, distributing, integrating and servicing laser systems (for industrial, semiconductor, scientific and dental products) manufactured at the Company's facilities in East Setauket, New York; Orlando, Florida; and Mukilteo, Washington. The sales territory covered by Excel Technology Europe is primarily Europe and the sales territory for Excel Technology Asia is primarily Southeast Asia. In Excel Technology Europe, the staff of thirty- six includes seventeen engineers who install and service all products including complex semiconductor, scientific, and other industrial systems. In addition, Excel Technology Europe provides spare parts for its installed base. In Excel Technology Asia the staff of five includes two engineers. The following table represents a breakdown between the Company's domestic and foreign revenues for the years ended December 31, 1999, 1998 and 1997 (in thousands of dollars): 1999 1998 1997 ................. ................. ................. Dollars Percent Dollars Percent Dollars Percent ....... ....... ....... ....... ....... ....... DOMESTIC $47,987 54% $42,157 63% $42,186 64% FOREIGN 40,956 46% 24,935 37% 23,762 36% ....... ....... ....... ....... ....... ....... TOTAL $88,943 100% $67,092 100% $65,948 100% ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... Manufacturing The Company assembles its products at its facilities in East Setauket, New York; Orlando, Florida; Oxnard, California; Cambridge, Massachusetts; Chatsworth, California; and Mukilteo, Washington. The Company relies upon unaffiliated suppliers for the material components and parts used to assemble its products. Most parts and components purchased from suppliers are available from multiple sources. To date, the Company has not experienced any significant delays in obtaining parts and components for its products. The Company believes that it will be able to continue to obtain most required components and parts from a number of different suppliers, although there can be no assurance thereof. Lack of availability of certain components could require major redesign of the products and could result in production delays. Warranty and Customer Services The Company's warranty for all of its new products varies between three months and twelve months. The Company also provides field support services on an individual call basis and through service maintenance contracts, and provides customer support services by telephone to customers with operational and service problems. Research and Development Due to the intense competition and rapid technological change in the laser and optical industries, the Company believes that it must continue to improve and refine its existing products and systems and develop new applications for its technology. Research and development expenses for the years ended December 31, 1999, 1998 and 1997 were $7.29 million, $5.59 million and $4.86 million, respectively. Competition The laser industry is subject to intense competition and rapid technological change. Several of the Company's competitors are substantially larger and have greater financial and other resources than the Company. Competition among laser manufacturers extends to attracting and retaining qualified technical personnel. The overall competitive position of the Company will depend primarily upon a number of factors, including the price and performance of its products, the compatibility of its products with existing laser systems and the Company's overall reputation in the laser industry. The Company's scientific and industrial solid state lasers face a number of competitors including Spectra Physics and Coherent Inc., which are two of the largest solid state laser companies. The Company's marking systems for material marking applications compete primarily with those manufactured by A.B. Laser, GSI-Lumonics, and Rofin- Sinar. These products have generally been subject to intense price competition in recent years. In the semiconductor photomask repair market, the Company primarily competes with NEC and Seiko. The market for semiconductor products recently has been oversaturated and has experienced rapid advances in miniaturization of integrated circuits and computers. These factors are behind the Company's commitment to continue developing its next generation mask repair products. Competition for sealed carbon dioxide lasers comes from Coherent, Inc. and more recently DEOS, Inc. and Universal Laser Systems. Rofin-Sinar, a large European manufacturer of industrial lasers, also is developing competitive products. In light and color measurement, the major competitor to the Company's Spectra product is Minolta. Minolta has approximately a 30% to 35% worldwide market share compared with Photo Research's 20% to 25% share. In the high- end Spectra market, Photo Research has a 60% to 65% market share. In the video-based products, the company's video photometer remains the preferred product to characterize new display technologies, with Microvision as its key competitor. In the laser scanner market, General Scanning, which has an estimated current market share of 45%, is a significant competitor of the Company. General Scanning also was one of the Company's largest customers for scanners in 1998 and 1997. The Company has a significant market presence worldwide with greater than 50% of the closed-loop optical scanners. Backlog As of December 31, 1999, the Company had a backlog of firm orders of approximately $22.3 million as compared to a backlog of $19 million as of December 31, 1998. The Company believes that the current backlog will be filled during the present fiscal year. Historically, backlog is shipped within 90 days from the order date. Patents and Licenses The Company has several United States patents covering a wide variety of its products and has applications pending in the United States patent office. There can be no assurance that any other patents will be issued to the Company or that such patents, if and when issued, will provide any protection or benefit to the Company. Although the Company believes that its patents and its pending patent applications are valuable, the Company does not consider the ownership of patents essential to its business. The Company believes that, in general, the best protection of proprietary technology in the laser industry will come from market position, technical innovation and product performance. There is no assurance that any of these advantages will be realized by the Company. Government Regulation The Company is subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health of the FDA. Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate certain design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. The Company believes that it is currently in compliance with these regulations. There are two principal methods by which FDA regulated products may be marketed in the United States. One method is a FDA pre-market notification filing under Section 510(k) of the Food, Drug and Cosmetics Act (a "510(k) Application"). Applicants under the 510(k) procedure must demonstrate that the device for which approval is sought is substantially equivalent to devices on the market prior to the Medical Device Amendments of 1976 or devices approved thereafter pursuant to the 510(k) procedure. The review period for a 510(k) Application is 90 days from the date of filing the application. While applications not rejected within the 90-day period are deemed approved, applicants typically defer marketing until a favorable response to the 510(k) Application is received from the FDA. In 1992, the Company's three dental products received 510(k) approval for use in soft tissue applications. The alternate method, where section 510(k) is not available, is to obtain pre-market approval ("PMA") from the FDA. Under the PMA procedure, the applicant must obtain an investigational device exemption before beginning the substantial clinical testing required to determine the safety, efficacy and potential hazards of the product. The preparation of a PMA application is significantly more complex and time consuming than the 510(k) Application. The review period under a PMA application is 180 days from the date of filing but the application is not automatically deemed approved if not rejected during the period and the FDA often responds with requests for additional information or clinical reports. The PMA approval process can take up to several years. The FDA also imposes various requirements on manufacturers and sellers of products under its jurisdiction, such as labeling, manufacturing practices, record keeping and reporting requirements. The FDA also may require post-market testing and surveillance programs to monitor a product's effects. There can be no assurance that the appropriate approvals from the FDA will be granted, that the process to obtain such approvals will not be excessively expensive or lengthy or that the Company will have sufficient funds to pursue such approvals at the time they are sought. The failure to receive requisite approvals for the Company's products or processes, when and if developed, or significant delays in obtaining such approvals, would prevent the Company from commercializing its products as anticipated and would have a materially adverse effect on the business of the Company. Foreign Regulatory Requirements Foreign sales of the Company's dental and medical laser systems are or will be subject in each case to approval by the recipient country. Regulatory requirements vary widely among the countries, from electrical approvals to clinical applications similar to the PMA applications filed with the FDA for sales in the United States. The Company has obtained appropriate approvals for its dental products in Japan, Korea and certain European countries including Germany. Employees As of December 31, 1999, the Company had four hundred thirty nine (439) full-time employees, consisting of two (2) executive officers, thirteen (13) subsidiary executive officers, one hundred fifty one (151)scientists, engineering and technical personnel and two hundred seventy three (273) manufacturing, administrative and sales support personnel. The Company believes that its relations with its employees are satisfactory. None of the Company's employees is represented by a union. Financial Information About Foreign and Domestic Operations and Export Sales For the years ended December 31, 1999, 1998 and 1997, the Company had net sales to customers in foreign countries amounting to approximately $41.0 million, $24.9 million and $23.8 million, respectively (approximately 46%, 37% and 36% of total net sales and services, respectively). These sales included sales by Excel Technology Europe, the Company's German subsidiary. Excel Technology Europe buys laser systems, spare parts and related consumable materials from Quantronix, Control Laser and Synrad, the Company's New York, Florida and Washington subsidiaries, for resale to European and other foreign customers, and also furnishes field repair services. See Note 14 of the "Notes to Consolidated Financial Statements." Foreign currency translation for Excel Technology Europe, the Company's subsidiary in Germany, is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, except for property, plant and equipment which is translated at historical rates, while revenues, costs and other expenses are translated at the average exchange rate for the reporting period. The resulting translation adjustment of $(642) thousand and $(53) thousand at December 31, 1999 and 1998, respectively, is included as accumulated other comprehensive loss, a component of stockholders' equity. Currency and exchange rate fluctuations from transaction gains and losses resulted in a net loss of $227 thousand, a net gain of $55 thousand and a net loss of $167 thousand for the years ended December 31, 1999, 1998 and 1997, respectively. Such amounts are based upon the accounting treatment of foreign intercompany balances and transaction gains and losses. ITEM 2. PROPERTIES Excel leases approximately 2,900 square feet in New York City from an unaffiliated landlord for its corporate offices. The lease is for a five-year period at an average annual rent of $108,000, and expires in November 2001. Quantronix completed construction of its own building during 1998. The building is approximately 33,500 square feet located in East Setauket, New York. The building is used for its manufacturing operations and administrative offices. Control Laser leases a 50,000 square foot building in Orlando, Florida from an unaffiliated landlord, which it utilizes for administrative offices and laser manufacturing operations. Annual rent is approximately $240,000. The lease expires in December 2001. Optical leases a 14,000 square foot building in Oxnard, California from an unaffiliated landlord for manufacturing purposes, at an annual rent of approximately $84,000. The lease term expires in August 2009. Cambridge leases a 17,000 square foot building in Cambridge, Massachusetts from an unaffiliated landlord for manufacturing operations and administrative offices. The lease is for a ten-year period ending in October 2006, at an annual rent of approximately $150,000 through October 2003 and $175,000 from November 2003 through October 2006. Excel Technology Europe leases approximately 7,500 square feet of office space, used for sales and service, in Darmstadt, Germany from an unaffiliated landlord at an average annual rent of approximately $106,000. The lease expires in June 2005. Photo Research purchased its own building in July 1998. The building is approximately 22,000 square feet and is located in Chatsworth, California. The building is used for manufacturing operations and administrative offices. Synrad leases a 50,000 square foot building in Mukilteo, Washington from an unaffiliated landlord, which it utilizes for manufacturing, sales and administrative operations. Annual rent is approximately $728,000, which includes all utilities. The lease is for a five-year period and expires in April 2001. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company has disputes that arise in the ordinary course of its business, none of which the Company believes should have a material impact on its business. Currently, there are no material pending legal proceedings to which the Company or its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ....... ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock has been traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "XLTC" since May 1991, the date of the Company's initial public offering, and on the NASDAQ National Market System since October 2, 1992. The following table sets forth the high and low bid quotations reported on NASDAQ NMS for the Common Stock for the periods indicated. Year ended: High Low ........ ........ December 31, 1999 First Quarter 12-15/16 10 Second Quarter 14-3/8 9-15/16 Third Quarter 15 11 Fourth Quarter 18-1/8 14-1/8 December 31, 1998 First Quarter 11-1/4 9-5/8 Second Quarter 10-13/16 8-3/16 Third Quarter 9-1/4 6-3/8 Fourth Quarter 10-5/16 5-3/4 The above quotations represent prices between dealers, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions. As of March 2, 2000, there were approximately 848 holders of record of Common Stock. Since many shares are registered in street name, the number of beneficial owners is considerably higher. The Company has never paid cash dividends on its Common Stock. Payment of dividends to holders of the Common Stock is within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. At the present time, the Company's anticipated capital requirements are such that it intends to follow a policy of retaining earnings, if any, in order to finance the development of its business. ITEM 6. SELECTED FINANCIAL DATA The following tables summarize certain consolidated financial data, which should be read in conjunction with the report of the Company's independent auditor and the more detailed consolidated financial statements and notes thereto which appear elsewhere herein. Statement of Operations Data ............................ Year Ended December 31, .......................................................... 1999 1998 1997 1996 1995 ........... ........... ........... ........... ........... Net sales and services $88,943,148 $67,091,933 $65,947,896 $57,462,263 $43,914,222 Net earnings (loss) $11,551,766 $ 8,881,464 $ 8,234,697 $ 4,892,826 $(1,595,835) Net earnings (loss) per share Basic $1.04 $0.79 $0.77 $0.55 $(0.21) Diluted $1.00 $0.78 $0.73 $0.50 (0.21) Weighted average common and common equivalent shares outstanding Basic 11,118,782 11,190,197 10,686,763 8,862,217 8,281,194 Diluted 11,608,266 11,395,186 11,327,086 9,757,411 8,281,194 Common stock cash dividends 0 0 0 0 0 Preferred stock cash dividends 0 0 0 0 $162,137 Balance Sheet Data .................. As of December 31, .......................................................... 1999 1998 1997 1996 1995 ........... ........... ........... ........... ........... Total assets $79,650,551 $71,293,164 $59,219,681 $39,816,442 $43,007,614 Total liabilities $10,649,338 $14,141,209 $ 8,316,574 $10,800,102 $20,948,036 Working capital $35,198,724 $25,577,458 $37,166,960 $17,492,287 $17,609,490 Stockholders' equity $69,001,213 $57,151,955 $50,903,107 $29,016,340 $22,059,578 Long-term liabilities $ 0 $ 3,500,000 $ 0 $ 0 $ 7,573,320 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ....... The following discussion should be read in conjunction with the consolidated financial statements of the Company and notes thereto set forth elsewhere herein. Summary ....... The Company achieved revenues of approximately $88.9 million for the year ended December 31, 1999 as compared to approximately $67.1 million and $66.0 million for the years ended December 31, 1998 and 1997, respectively. Earnings before provision for income taxes were approximately $17.2 million, $13.7 million and $12.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. The net earnings and earnings per share on a diluted basis were approximately $11.6 million and $1.00 per share in 1999. The net earnings and earnings per share on a diluted basis were approximately $8.9 million and $0.78 per share in 1998. Excluding the non-recurring investment gain (after tax effect) in 1998, net earnings and earnings per share on a diluted basis were approximately $7.8 million and $0.68 per share. The net earnings and earnings per share on a diluted basis were approximately $8.2 million and $0.73 per share in 1997. The following table presents consolidated financial data for the years ended December 31, 1999, 1998 and 1997 (in thousands of dollars and as a percentage of total net sales and services.) Results of Operations ..................... 1999 1998 1997 .... .... .... Dollars Percent Dollars Percent Dollars Percent ....... ....... ....... ....... ....... ........ Net Sales and Services $88,943 100.0% $67,092 100.0% $65,948 100.0% Cost of Sales 44,682 50.2% 34,184 51.0% 33,245 50.4% ....... ....... ....... ....... ....... ........ Gross Profit/Margin 44,261 49.8% 32,908 49.0% 32,703 49.6% Operating Expenses: Selling and Marketing 11,936 13.4% 9,833 14.7% 10,639 16.1% General and Administrative 6,645 7.5% 5,565 8.3% 4,805 7.3% Research and Development 7,294 8.2% 5,586 8.3% 4,861 7.4% Amortization of Goodwill 1,219 1.4% 723 1.1% 370 0.6% ....... ....... ....... ....... ....... ........ Earnings from Operations 17,167 19.3% 11,201 16.6% 12,028 18.2% Non-Operating Expense (Income) (73) (0.1%) (2,482) (3.7%) (615) (1.0%) ....... ....... ....... ....... ....... ........ Earnings before Provision for Income Taxes 17,240 19.4% 13,683 20.3% 12,643 19.2% Provision for Income Taxes 5,688 6.4% 4,802 7.1% 4,408 6.7% ....... ....... ....... ....... ....... ........ Net Earnings $ 11,552 13.0% $8,881 13.2% $8,235 12.5% ....... ....... ....... ....... ....... ........ ....... ....... ....... ....... ....... ........ Net Sales and Services ...................... Net sales and services for the year ended December 31, 1999 increased to $88.9 million from $67.1 million in 1998 and from $65.9 million in 1997. The increase from 1998 to 1999 of $21.8 million or 32.5 percent was primarily attributable to Synrad, which was purchased in August of 1998. Net sales and services in 1999 reflect Synrad's activity for that entire year, whereas in 1998, sales and services only encompass a portion of Synrad's 1998 activity, beginning from the time of purchase. The increase from 1997 to 1998 of $1.2 million or 1.8 percent was attributable to the acquisition of Synrad, which was partially offset by a decrease in sales for all products. Gross Margins and Cost of Sales ............................... Gross margins as a percentage of sales were 49.8 percent compared to 49.0 percent in 1998 and 49.6 percent in 1997. Cost of sales and services increased to $44.7 million from $34.2 million in 1998 and $33.2 million in 1997. The increase in gross margins as a percentage of sales from 1998 to 1999 was primarily due to the product mix sold during the year and the acquisition of Synrad. The decrease from 1997 to 1998 was primarily due to the product mix sold during the year and the decrease in sales volume. Operating Expenses .................. Selling and Marketing Selling and marketing expenses were $11.9 million compared to $9.8 million in 1998 and $10.6 million in 1997. The increase of $2.1 million or 21.4 percent was primarily attributable to the increased sales due to the acquisition of Synrad. Selling and marketing expenses as a percentage of sales decreased to 13.4 percent in 1999 from 14.7 percent in 1998 and 16.1 percent in 1997. The decrease in selling and marketing expenses as a percentage of sales is primarily attributable to the acquisition of Synrad, which has lower variable selling expenses. General and Administrative General and administrative expenses increased to $6.6 million in 1999 from $5.6 million in 1998 and $4.8 million in 1997. The increase of $1.0 million or 17.9 percent in 1999 was primarily due to additional administrative costs associated with Synrad. General and administrative expenses as a percentage of sales decreased to 7.5 percent as compared to 8.3 percent in 1998 and 7.3 percent in 1997. Research and Development Research and development costs for the year ended December 31, 1999 were $7.3 million as compared to $5.6 million and $4.9 million for the years ended December 31, 1998 and 1997, respectively. The increase of $1.7 million from 1998 to 1999 was primarily attributable to increased research and development projects and the acquisition of Synrad. The increase of $700 thousand from 1997 to 1998 was attributable to increased research and development projects and the acquisition of Synrad. Amortization of Goodwill The amortization of the excess of cost over fair value of the net assets of businesses acquired of $1.2 million, $723 thousand and $370 thousand for the years ended December 31, 1999, 1998 and 1997, respectively, was a result of the acquisition of Quantronix in October 1992, Cambridge in February 1995, Photo Research in October 1995 and Synrad in August 1998. The increases in 1999 and 1998 were primarily due to the acquisition of Synrad. Other Income/Expense Interest expense was $47 thousand, $174 thousand and $160 thousand for the years ended December 31, 1999, 1998 and 1997, respectively. Interest expense decreased $127 thousand in 1999 as a result of the prepayment, in March 1999, of the loan associated with the acquisition of Synrad. Interest expense increased $14 thousand or 8.8 percent from 1997 to 1998 due to the borrowings for the acquisition of Synrad. The decrease in interest income from $768 thousand in 1998 to $335 thousand in 1999 was due to a decrease in average investments. The average investment in 1999 was lower due to cash being utilized for the payoff of the loan associated with the acquisition of Synrad. The decrease in interest income of $104 thousand from $872 thousand in 1997 to $768 thousand in 1998 was due to a decrease in the average investment balances resulting from the utilization of cash and investments for the acquisition of Synrad Other income/expense for the year ended December 31, 1999 was $214 thousand of expense compared to $1.89 million of income in 1998. The expense in 1999 was due primarily to foreign exchange losses. The income in 1998 was due primarily to a $1.9 million gain on the sale of an investment. Liquidity and Capital Resources ............................... Working capital at December 31, 1999 and 1998 was $35.2 million and $25.6 million, respectively. Cash and cash equivalents increased by approximately $7.6 million from December 31, 1998 to December 31, 1999. Such increase was primarily attributable to net cash provided by operating activities of approximately $13.0 million and the proceeds from the exercise of stock options of $1.2 million, offset by capital expenditures of $2.1 million, the purchase of treasury stock of $350 thousand and the repayment of debt associated with the acquisition of Synrad of $3.5 million. The Company had capital expenditures of approximately $2.1 million for the year ended December 31, 1999. The Company had capital expenditures of $5.4 million in 1998, which included the costs for two buildings. The Company anticipates spending approximately $8.0 million for capital expenditures in 2000, which includes a building for Synrad. On August 14, 1998, the Company acquired substantially all of the assets and properties of Synrad, Inc. ("Synrad"), a company engaged in the business of developing, manufacturing and marketing sealed CO2 lasers and related accessories, for $21.7 million in cash, which includes transaction costs, and the repayment of certain of Synrad's outstanding debt. In addition, the Company assumed certain liabilities, including trade payables, accrued expenses and other specified liabilities. The Company funded the acquisition of Synrad by utilizing its own cash and by borrowing $6.5 million on its credit facility with The Bank of New York, all of which has been repaid as of March 31, 1999. The acquisition was accounted for as a purchase. The acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The total cost of the acquisition was $21.7 million of which $4.8 million was allocated to identifiable net tangible assets. The remaining balance of $16.9 million represents the excess of the purchase price over the fair value of the net assets acquired, which is being amortized on a straight line basis over 20 years. During 1999, the Company recorded an adjustment to the initial allocation of the purchase price due to inventory write-downs, which resulted in a $200 thousand increase to the cost in excess of fair value of assets acquired. On July 23, 1998, the Company entered into a credit facility with The Bank of New York (the "Bank") that provides the Company with a $15 million revolving line of credit for acquisitions or working capital requirements. The term of this agreement is for five years, maturing on July 22, 2003. This credit facility allows for interest to be calculated utilizing an Alternative Base Rate ("ABR") or a LIBOR rate plus a premium ranging from 0.50% to 2.25%. The ABR is the higher rate of either the prime rate or the Federal Funds Rate plus 0.50%. The credit facility contains certain financial covenants, including the prohibition of the payment of dividends, and requires payment of interest on a quarterly basis. During the quarter ended March 31, 1999, the Company prepaid all of its outstanding long-term debt of $3,500,000. As of December 31, 1999 the Company had no borrowings and had all of its $15 million available on its line of credit. On January 23, 1998 the Board of Directors authorized the Company to repurchase up to 2,000,000 of its common shares in the open market at prevailing market prices. In 1999, the Company purchased 31,700 shares of its common shares as treasury stock as compared to 382,763 shares purchased in 1998. All outstanding treasury stock was retired in December 1999. The Company estimates that its current resources and anticipated cash to be generated from operations will be sufficient to meet its cash requirements for at least the next 12 months. Year 2000 Compliance As of December 31, 1999 the Company believed it was year 2000 compliant. As of March 3, 2000, no significant Year 2000 issues relating to the Company's internal systems, interfaces with third parties or products have been experienced. In addition, as of March 3, 2000, information and products from third parties associated with the Company have not had any adverse effects on the Company's operations. To date, the costs incurred in association with any Year 2000 compliance projects have not been material to the Company's results of operations or liquidity. In addition, the Company does not anticipate any additional significant costs to be incurred in order to remain compliant. Euro Conversion The January 1, 1999 adoption of the Euro created a single-currency market in much of Europe. For a transition period from January 1, 1999 through January 1, 2002, the existing local currencies are anticipated to remain legal tender as denominations of the Euro. The Company does not anticipate that its operations will be materially adversely affected by the conversion to the Euro. The Company has analyzed the impact of conversion to the Euro on its existing systems and operations and implemented modifications to its systems to enable the Company to handle Euro invoicing for transactions commencing in 1999. The Company anticipates that the cost of such modifications should not have a material adverse effect on its results of operations or liquidity. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". This statement requires companies to record derivatives on the balance sheet as assets and liabilities at their fair value. This statement (as amended by SFAS 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this statement is expected to have no impact on the Company's results of operations or financial position. Inflation In the opinion of management, inflation has not had a material effect on the operations of the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Follow on next page. EXCEL TECHNOLOGY, INC. Index to Consolidated Financial Statements and Financial Statement Schedule filed with the Annual Report of the Company on Form 10-K For the Year ended December 31, 1999. Page .... Independent Auditors' Report 18 Consolidated Financial Statements: Balance Sheets as of December 31, 1999 and 1998 19 Statements of Earnings for each of the three years in the period ended December 31, 1999. 20 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1999. 21 Statements of Cash Flows for each of the three years in the Period ended December 31, 1999 22 Notes to Consolidated Financial Statements. 23 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II - Valuation and Qualifying Accounts and Reserves 39 ................ Schedules not listed above have been omitted because they are either not applicable or the required information has been given elsewhere in the consolidated financial statements or notes thereto. Independent Auditors' Report Board of Directors and Stockholders Excel Technology, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Excel Technology, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Excel Technology, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Melville, New York January 21, 2000 EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998 Assets 1999 1998 .... .... Current assets: Cash and cash equivalents $ 13,481,251 5,839,339 Accounts receivable, less allowance for doubtful accounts of $464,000 in 1999 and $426,000 in 1998 16,107,179 13,383,865 Inventories 14,383,943 15,672,576 Deferred income taxes, net 1,363,300 873,100 Other current assets 512,389 449,787 ............ .......... Total current assets 45,848,062 36,218,667 ............ .......... Property, plant and equipment, net 10,986,243 10,874,881 Other assets 341,416 497,664 Deferred income taxes, net 1,162,800 1,371,000 Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $3,791,559 and $2,572,637 21,312,030 22,330,952 ............ .......... $ 79,650,551 71,293,164 ............ .......... ............ .......... Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 35,937 105,304 Accounts payable 2,974,832 3,612,934 Accrued expenses and other current liabilities 7,638,569 6,922,971 ............ .......... Total current liabilities 10,649,338 10,641,209 ............ .......... Long-term debt 0 3,500,000 Stockholders' equity: Preferred stock, par value $.001 per share, 2,000,000 shares authorized, none issued 0 0 Common stock, par value $.001 per share: 20,000,000 shares authorized, 11,300,941 and 11,810,349 shares issued in 1999 and 1998, respecitvely 11,301 11,810 Additional paid-in capital 43,438,702 49,116,700 Retained earnings 26,193,600 14,641,834 Treasury stock, 757,763 shares in 1998 0 (6,565,794) Accumulated other comprehensive loss (642,390) (52,595) ............ .......... 69,001,213 57,151,955 ............ .......... $ 79,650,551 71,293,164 ............ .......... ............ .......... See accompanying Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 ............ .......... .......... Net sales and services $ 88,943,148 67,091,933 65,947,896 Cost of sales and services 44,682,521 34,184,072 33,245,432 ............ .......... .......... Gross profit 44,260,627 32,907,861 32,702,464 Operating expenses: Selling and marketing 11,936,078 9,832,757 10,639,570 General and administrative 6,644,820 5,565,365 4,805,284 Research and development 7,294,314 5,586,127 4,860,903 Amortization of excess cost over fair value of net assets of businesses acquired 1,218,922 723,305 369,704 ............ .......... .......... 27,094,134 21,707,554 20,675,461 ............ .......... .......... Earnings from operations 17,166,493 11,200,307 12,027,003 Non operating expenses (income): Interest expense 47,330 174,358 159,888 Interest income (335,104) (767,576) (872,481) Other expense (income), net 213,907 (1,889,716) 96,814 ............ .......... .......... Earnings before provision for income taxes 17,240,360 13,683,241 12,642,782 Provision for income taxes 5,688,594 4,801,777 4,408,085 ............ .......... .......... Net earnings $ 11,551,766 8,881,464 8,234,697 ............ .......... .......... ............ .......... .......... Basic earnings per common share $1.04 0.79 0.77 ..... .... .... ..... .... .... Weighted average common shares outstanding 11,118,782 11,190,197 10,686,763 ............ .......... .......... ............ .......... .......... Diluted earnings per common share $1.00 0.78 0.73 ..... .... .... ..... .... .... Weighted average common shares and common equivalents outstanding 11,608,266 11,395,186 11,327,086 ............ .......... .......... ............ .......... .......... See accompanying Notes to Consolidated Financial Statements.
Excel Technology, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended December 31, 1999, 1998 and 1997 Retained Accumulated Additional Earnings Other Com- Compre- Preferred Stock Common Stock Treasury Paid-In (Accumulated prehensive hensive Shares Amounts Shares Amounts Stock Capital Deficit) Loss Total Income ...... ....... ......... .......... ............ .......... ........... ......... ............ ......... Balance at December 31, 1996 0 $ 0 9,189,265 $ 9,189 0 $31,559,063 $(2,474,327) $ (77,585) $29,016,340 $ 0 Exercise of common stock options and warrants 0 0 2,525,206 2,525 0 17,167,015 0 0 17,169,540 0 Acquisition of treasury stock 0 0 0 0 $(3,339,375) 0 0 0 (3,339,375) 0 Net earnings for the year 0 0 0 0 0 0 8,234,697 0 8,234,697 8,234,697 Foreign currency trans- lation adjustment 0 0 0 0 0 0 0 (178,095) (178,095) (178,095) Comprehensive income, net of tax 0 0 0 0 0 0 0 0 0 8,056,602 ... ... .......... ......... ............ ............ ............ .......... ............ .......... Balance at December 31, 1997 0 0 11,714,471 11,714 (3,339,375) 48,726,078 5,760,370 (255,680) 50,903,107 0 Exercise of common stock options and warrants 0 0 95,878 96 0 390,622 0 0 390,718 0 Acquisition of treasury stock 0 0 0 0 (3,226,419) 0 0 0 (3,226,419) 0 Net earnings for the year 0 0 0 0 0 0 8,881,464 0 8,881,464 8,881,464 Foreign currency trans- lation adjustment 0 0 0 0 0 0 0 203,085 203,085 203,085 Comprehensive income, net of tax 0 0 0 0 0 0 0 0 0 9,084,549 ... ... .......... ........ ............ ............ ............ .......... ........... .......... Balance at December 31, 1998 0 0 11,810,349 11,810 (6,565,794) 49,116,700 14,641,834 (52,595) 57,151,955 0 Exercise of common stock options and warrants 0 0 280,055 280 0 1,235,016 0 0 1,235,296 0 Acquisition of treasury stock 0 0 0 0 (348,009) 0 0 0 (348,009) 0 Retirement of treasury stock 0 0 (789,463) (789) 6,913,803 (6,913,014) 0 0 0 0 Net earnings for the year 0 0 0 0 0 0 11,551,766 0 11,551,766 11,551,766 Foreign currency trans- lation adjustment 0 0 0 0 0 0 0 (589,795) (589,795) (589,795) Comprehensive income, net of tax 0 0 0 0 0 0 0 0 0 10,961,971 ... ... ........... ........ ............ ............ ............ .......... ........... ........... Balance at December 31, 1999 0 $ 0 11,300,941 $11,301 $ 0 $43,438,702 $26,193,600 $(642,390) $69,001,213 $ 0 ... ... .......... ........ ............ ............ ............ .......... ........... ...........
See accompanying Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 .... .... .... Cash flows from operating activities: Net earnings $11,551,766 8,881,464 8,234,697 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,010,231 2,238,350 1,479,499 Provision for bad debts 70,697 110,337 71,722 Deferred income taxes (282,000) 123,000 139,000 Gain on sale of investment 0 (1,875,537) 0 Changes in operating assets and liabilities, net of effects from acquisitions: (Increase) decrease in accounts receivable (2,794,011) 1,121,402 (2,448,303) Decrease (increase) in inventories 1,288,633 (154,313) (1,165,733) (Increase) decrease in other current assets (62,602) 226,350 (52,545) Decrease (increase) in Other assets 156,248 (14,927) 29,239 (Decrease) increase in accounts payable (638,102) 21,758 73,369 Increase (decrease) in accrued expenses and other current liabilities 715,598 (701,456) 471,521 ........... ............ ........... Net cash provided by operating activities 13,016,458 9,976,428 6,832,466 ........... ............ ........... Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired 0 (15,242,943) (723,150) Purchases of property, plant and equipment (2,102,671) (5,379,850) (3,902,132) Redemption (purchase) of investments, net 0 14,209,854(10,133,809) Proceeds from sale of investment 0 1,875,537 0 ........... ............ ........... Net cash used in Investing activities (2,102,671) (4,537,402)(14,759,091) ........... ............ ........... Cash flows from financing activities: Proceeds from exercise of common stock options and warrants 1,235,296 390,718 17,169,540 Purchase of treasury stock (348,009) (3,226,419) (3,339,375) Payments of notes payable (69,367) (298,230) (382,244) Payments of borrowings on long term debt and revolving credit line, net (3,500,000) (3,000,000) (1,923,024) ........... ............ ........... Net cash (used in) provided by financing activities (2,682,080) (6,133,931) 11,524,897 ........... ............ ........... Effect of exchange rate changes on cash and cash equivalents (66,971) 11,605 (2,797) Effect of exchange rate changes on assets and liabilities (522,824) 191,480 (175,298) ........... ............ ........... Net increase (decrease) in cash and cash equivalents 7,641,912 (491,820) 3,420,177 Cash and cash equivalents - beginning of year 5,839,339 6,331,159 2,910,982 ........... ............ ........... Cash and cash equivalents - end of year $13,481,251 5,839,339 6,331,159 ........... ............ ........... ........... ............ ........... Supplemental disclosure of cash flow information Cash paid for: Interest $ 48,220 166,176 159,888 ........... ............ ........... ........... ............ ........... Income taxes $ 5,477,543 4,021,809 3,989,709 ........... ............ ........... ........... ............ ........... See accompanying Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 and 1998 (1) Summary of Significant Accounting Policies .......................................... a) Principles of Consolidation ........................... The consolidated financial statements include the accounts of Excel Technology, Inc. (Excel) and its wholly-owned subsidiaries: Synrad, Inc. (Synrad); Photo Research, Inc. (Photo Research); Excel Technology Asia (previously named Quantronix GmbH), Cambridge Technology, Inc. (Cambridge); Quantronix Corporation (Quantronix) and Quantronix' wholly- owned subsidiaries: Control Laser Corporation, The Optical Corporation, Quantronix International Corporation (a FSC);and Excel Technology Europe. Collectively, this group is referred to as the Company. All material intercompany transactions and balances have been eliminated in consolidation. b) Nature of Business .................. Excel designs, develops, manufactures and markets laser systems and electro-optical components, primarily for the electronic, semiconductor, dental, scientific and other industrial markets. c) Revenue Recognition ................... Net sales and services are recognized when the earnings process is complete, generally upon shipment of products or performance of services. d) Investments and Cash Equivalents ................................ The Company records debt and equity securities that have readily determinable fair values at fair value unless they are classified as held to maturity. Investments are classified as held to maturity and carried at amortized cost only if the Company has a positive intent and ability to hold those securities to maturity. If not classified as held to maturity, investments are classified as trading securities or securities available for sale. Unrealized gains or losses for securities available for sale are excluded from earnings and reported as a net amount as a separate component of stockholders' equity. Unrealized holding gains and losses for trading securities are included in earnings. Investments, which consist primarily of commercial paper, are recorded at fair value. Investments with original maturities of three months or less at the time of purchase are considered cash equivalents. Cash and cash equivalents of $13.5 million and $5.8 million at December 31, 1999 and 1998, respectively, consist primarily of money market funds. e) Inventories ........... Inventories consist of material, labor and overhead and are stated at the lower of average cost or market. Average cost approximates actual cost on a first-in, first-out basis. f) Depreciation and Amortization ............................. The Company's property, plant and equipment, recorded at cost, are depreciated or amortized over their estimated useful lives under the straight-line method. Leasehold improvements are amortized over the life of the lease or over the estimated life of the asset, whichever is less. Patents are amortized over their estimated useful lives, not exceeding 17 years, using the straight-line method. The excess of cost over fair value of net assets of businesses acquired ("goodwill") is amortized on a straight-line basis over twenty years. The Company assesses the recoverability of unamortized goodwill based on the undiscounted projected future cash flows of the related businesses. g)Impairment of Long-Lived Assets and Long-Lived Assets ..................................................... to Be Disposed Of ................. The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No.121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. h) Income Taxes ............ The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. i) Foreign Currency Translation ............................ Foreign currency translation for the Company's German subsidiary, Excel Technology Europe, is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, except for property, plant and equipment which is translated at historical rates. Revenues, costs, and expenses are translated at the average exchange rate for the reporting period. The resulting cumulative translation adjustment of $(642,390) and $(52,595) at December 31, 1999 and 1998 is reflected as accumulated other comprehensive loss, a component of stockholders' equity. In addition, there were transaction gains and losses and inter-company balances not deemed long-term in nature at the balance sheet date that resulted in a net loss of $227,249, a net gain of $55,478, and a net loss of $166,906 for the years ended December 31, 1999, 1998 and 1997, respectively, which is reflected in other (income) expense in the consolidated statements of earnings. j) Net Earnings Per Share ...................... The Company presents two earnings per share (EPS) amounts. Basic EPS is calculated based on income available to common shareholders and the weighted-average number of common shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock including stock issuable pursuant to the exercise of dilutive stock options and warrants outstanding and the effect of assuming the conversion of convertible preferred stock. k) Fair Value of Financial Instruments ................................... Cash and cash equivalents, accounts receivable, notes payable, accounts payable and accrued expenses are reflected in the consolidated financial statements at fair value because of the short-term maturity of these financial instruments. The carrying value of the outstanding balance on the Company's revolving line of credit approximates its fair value since the interest rate fluctuates with changes in market conditions (See Note 8). l) Use of Estimates ................ Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. m) Accounting for Stock-Based Compensation ....................................... The Company records compensation expense for employee stock options and warrants only if the market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has elected not to implement the fair value based accounting method for employee and directors' stock options and warrants of Statement of Financial Accounting Standards No. 123, (SFAS123) "Accounting for Stock-Based Compensation," but has elected to disclose the pro-forma net earnings and pro-forma earnings per share to account for employee and directors' stock option and warrant grants beginning in 1995 as if such method had been used to account for such stock-based compensation cost. n) Comprehensive Income .................... In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", which the Company implemented during the first quarter of 1998. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The components of comprehensive income are net earnings and foreign currency translation adjustments. o) New Accounting Standards ........................ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 (as amended by SFAS 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this statement is expected to have no impact on the Company's results of operations or financial position. (2) Acquisitions ............ On February 14, 1995, the Company acquired Cambridge Technology, Inc. which is engaged primarily in the manufacture of laser scanners, essential components to moving a laser beam with precision at a specified speed. These products have both industrial and consumer applications, such as laser marking and etching, high-density laser printing and writing, digitized x-ray imaging and entertainment laser light shows and displays. The Company acquired all of the outstanding shares of capital stock of Cambridge in exchange for $4.75 million, consisting of $4.5 million in cash and $250,000 in shares of Common Stock. Pursuant to the acquisition agreement, additional payments were made due to Cambridge meeting certain performance goals during the first two fiscal years after the acquisition. In connection therewith, the Company paid $731,000 for 1995 and $323,150 for 1996. The amount owed at December 31, 1996 of $723,150 was paid in 1997. The acquisition was accounted for as a purchase and the operating results of Cambridge were included in the consolidated financial statements commencing February 1, 1995. The excess of the cost of the acquisition over the fair value of the net assets acquired, amounting to $4,830,000, is being amortized over twenty years. During 1996 goodwill was reduced by $522,000 as a result of the sale of Cambridge's medical product line. The sales price, net of expenses, approximated the net book value of the assets sold. On August 14, 1998, the Company acquired substantially all of the assets and properties of Synrad Inc. ("Synrad"), a company engaged in the business of developing, manufacturing and marketing sealed CO2 lasers and related accessories, for $21.7 million in cash, which includes transaction costs, and the repayment of certain of Synrad's outstanding debt. In addition, the Company assumed certain liabilities including trade payables, accrued expenses and other specified liabilities. The Company funded the acquisition of Synrad by utilizing its own cash and by borrowing $6.5 million on its credit facility all of which was repaid as of March 31, 1999 (see Note 8). The acquisition was accounted for as a purchase. The acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The total cost of the acquisition was $21.7 million of which $4.8 million was allocated to identifiable net tangible assets. The remaining balance of $16.9 million represents the excess of the purchase price over the fair value of the net assets acquired, which is being amortized on a straight line basis over 20 years. During 1999, the Company recorded an adjustment to the initial allocation of the purchase price due to inventory write-downs, which resulted in a $200 thousand increase to the cost in excess of fair value of assets acquired. Pro-forma results of operations assume the acquisition of Synrad had been made at the beginning of each period and reflect the historical results of operations of the purchased business adjusted for the increased interest expense as a result of borrowings, reduced interest income, amortization expense and income tax expense. Year ended December 31, .......................... 1998 1997 ........... ........... Net sales and services $83,180,660 $93,458,696 Net earnings 8,399,083 8,397,243 Basic earnings per common share $0.75 $0.79 Diluted earnings per common share $0.74 $0.74 The pro-forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchase been made at the beginning of the periods, or the results that may occur in the future. (3) Investments ........... The Company had an investment in the common stock of a private company, which was carried at a nominal value. In the fourth quarter of 1998, this private company was acquired. As a result, the Company realized a gain of approximately $1.9 million, net of related expenses, on the sale of the common stock which is included in other income in the 1998 consolidated statement of earnings. (4) Inventories ........... Inventories consist of the following: December 31, ....................... 1999 1998 ........... .......... Raw materials $ 6,547,811 7,555,877 Work-in-process 5,509,431 6,294,045 Finished goods 1,862,941 1,260,475 Consigned inventory 463,760 562,179 ........... .......... $14,383,943 15,672,576 ........... .......... ........... .......... (5) Property, Plant and Equipment ............................. Property, plant and equipment consists of the following: December 31, ....................... Useful life 1999 1998 ........... ........... .......... Land 0 $ 840,408 840,408 Buildings 30 years 4,998,818 4,989,542 Leasehold improvements Lease term 1,322,615 1,067,552 Fixtures and computer equipment 3-8 years 4,040,978 3,165,926 Machinery and equipment 4-8 years 6,595,011 6,266,988 Laboratory equipment 4-8 years 1,891,734 1,553,503 ........... .......... 19,689,564 17,883,919 ........... .......... Less accumulated depreciation and amortization (8,703,321) (7,009,038) ........... .......... $10,986,243 10,874,881 ........... .......... ........... .......... Quantronix acquired land and constructed a building for its manufacturing operations and administrative offices during 1997, which was completed during 1998. The building is approximately 33,500 square feet located in East Setauket, New York. Photo Research also acquired land and a building for manufacturing operations and administrative offices during 1998. The building is approximately 22,000 square feet located in Chatsworth, California. Depreciation and amortization expense aggregated approximately $1,991,000, $1,442,000 and $985,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (6) Income Taxes ............ Pre-tax income for the years ended December 31, 1999, 1998 and 1997 was comprised of domestic income of $17,888,074, $13,660,166 and $12,833,403, respectively, and foreign income (loss) of $(647,714), $23,075 and $(190,621), respectively. The provision for income taxes consists of: Year ended December 31, ................................... 1999 1998 1997 .......... ......... ......... Current: Federal $5,022,224 4,128,777 3,477,085 State and local 948,370 550,000 792,000 Foreign 0 0 0 .......... ......... ......... $5,970,594 4,678,777 4,269,085 .......... ......... ......... Deferred: Federal $(282,000) 123,000 139,000 State and local 0 0 0 Foreign 0 0 0 .......... ......... ......... (282,000) 123,000 139,000 .......... ......... ......... $5,688,594 4,801,777 4,408,085 .......... ......... ......... .......... ......... ......... The current provision for income taxes includes a tax benefit of $281,000 for 1999, 1998 and 1997 for utilizing Federal net operating loss carry-forwards. The effective income tax rate differed from the statutory Federal income tax rate for the following reasons: Year ended December 31, ................................... 1999 1998 1997 .......... ......... ......... Taxes at statutory Federal income tax rate $5,861,700 4,652,300 4,298,600 Amortization of excess of cost over fair value of net assets of businesses acquired 96,400 96,400 96,400 Foreign Sales Corporation (FSC) benefit (688,400) (349,000) (343,700) Increase (decrease) of valuation allowance 201,000 (142,000) (411,100) State income taxes, net of Federal benefit 632,300 362,800 523,000 Other (414,406) 180,677 244,885 .......... ......... ......... $5,688,594 4,801,777 4,408,085 .......... ......... ......... .......... ......... ......... The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1999 and 1998 are presented below: December 31, 1999 1998 ........... .......... Deferred tax assets: Excess of tax over financial statement basis of inventory $ 791,000 448,000 Allowance for doubtful accounts 77,000 49,000 Accrued warranty reserve 92,000 118,000 Other accrued expenses 403,000 258,000 Benefits of U.S. net operating loss carryforwards 1,867,000 2,148,000 Benefits of foreign net operating loss carryforwards 401,000 110,000 Plant and equipment depreciation 66,000 11,000 ........... .......... Total deferred tax assets 3,697,000 3,142,000 Less valuation allowance (935,900) (734,900) Net deferred tax assets 2,761,100 2,407,100) ........... .......... Deferred tax liabilities: Capitalized software development costs (79,000) (113,000) Goodwill amortization (156,000) (50,000) ........... .......... Total deferred tax liabilities (235,000) (163,000) ........... .......... Net deferred tax asset $ 2,526,100 2,244,100 ........... .......... ........... .......... At December 31, 1999, Excel has available net operating loss carryforwards (NOL's), expiring in 2005 through 2007, of approximately $1.6 million for income tax purposes. The utilization of NOL's by Excel for income tax purposes is subject to annual limitations imposed by Internal Revenue Code Section 382 due to various equity transactions from 1991 to 1993 and alternative minimum tax limitations. If the full amount of that limitation is not used in any year, the amount not used increases the allowable limit in the following year. At December 31, 1999, Quantronix and its subsidiaries have available for tax purposes utilizable NOL's of approximately $3.9 million expiring in 2005 through 2007. Such NOL's can only be utilized to offset Quantronix's future taxable income and are limited, in a similar fashion to Excel's NOL's, in each year to approximately $560,000 as a result of the change in ownership from the merger with Excel. During 1996, the Company reduced goodwill by $1,923,000 for the establishment of deferred tax assets and the utilization of Quantronix's preacquisition deductible temporary differences and net operating loss carryforwards. While management believes that the Company's deferred tax asset will be realized based on its generation of taxable income in recent years and its future projected taxable income, the substantial restrictions on and time periods required to realize certain of the Company's NOL's makes it appropriate to record a valuation allowance against a portion of those NOL's. In addition, a valuation allowance has been provided against all of the Company's foreign net operating loss carryforwards. Accordingly, Excel has provided a total valuation allowance of $935,900, as of December 31, 1999. There can be no assurance that the Company will generate sufficient taxable earnings in future years to fully realize recorded tax benefits. (7) Accrued Expenses and Other Current Liabilities .............................................. Accrued expenses and other current liabilities consist of the following: December 31, 1999 1998 ........... .......... Salaries, wages, commissions and bonuses $1,809,337 1,859,080 Accrued vacation/holiday/sick pay 628,236 499,288 Accrued accounts payable 139,232 39,158 Customer deposits 351,536 329,157 Accrued royalties payable 149,654 144,745 Warranty reserve 277,660 407,086 Unearned service contract revenue 285,426 309,231 Professional fees payable 109,000 193,399 Income taxes payable 2,179,991 1,628,631 Other 1,708,497 1,513,196 ........... .......... 7,638,569 6,922,971 ........... .......... ........... .......... (8) Long-Term Debt .............. Long-term debt consists of the following: December 31, 1999 1998 ........... .......... Revolving line of credit 0 3,500,000 Less current installments 0 0 ........... .......... 0 3,500,000 ........... .......... ........... .......... On July 23, 1998, the Company entered into a credit facility with The Bank of New York (the "Bank") that provides the Company with a $15 million revolving line of credit for acquisitions or working capital requirements. The term of this agreement is for five years, maturing on July 22, 2003. This credit facility allows for interest to be calculated utilizing an Alternative Base Rate ("ABR") or a LIBOR rate plus a premium ranging from 0.50% to 2.25%. The ABR is the higher rate of either the prime rate or the Federal Funds Rate plus 0.50%. This credit facility contains certain financial covenants, including a minimum tangible net worth requirement of at least $15 million, prohibits the payment of dividends, and requires payment of interest on a quarterly basis. During the quarter ended March 31, 1999, the Company prepaid all of its outstanding long-term debt of $3.5 million. As of December 31, 1999, the Company had no borrowings and had all of its $15 million available on its revolving line of credit. (9) Stockholders' Equity .................... a) Stock Option Plan ................. In 1990, Excel adopted a stock option plan (the "Plan") which provides for the granting of incentive stock options and nonincentive stock options to certain key employees, including officers and directors of Excel, to purchase an aggregate of 2,000,000 shares of common stock, as amended, at prices and terms determined by the Board of Directors. The option price per share of incentive stock options must be at least 100% of the fair market value of the stock on the date of grant, except in the case of shareholders owning more than 10% of the outstanding shares of common stock, the option price must be at least 110% of the fair market value on the date of grant, and for nonincentive stock options such price may be less than 100% of the fair market value of the stock on the date of grant. Options granted under the Plan, which terminates on July 30, 2000, may be exercisable for a period of up to ten years. Through December 31, 1999, all options granted under the Plan have exercise prices equal to the market value of the stock on the date of grant, vest ratably over three or five years and expire either five or ten years from date of grant. The Plan was amended in August 1993 to provide for the automatic grant to each member of the Board of Directors, on the date of each annual meeting of stockholders, non-incentive options to purchase 10,000 shares of common stock at the fair market value of the common stock on such date. In 1998, the Company adopted a stock option plan (the "1998 Plan") which provides for the granting of incentive stock options and nonincentive stock options to certain key employees, including officers and directors of the Company and consultants to purchase an aggregate of 1,000,000 shares of common stock at prices and terms determined by the Board of Directors. The option price per share of incentive stock options must be at least 100% of the fair market value of the stock on the date of the grant, except in the case of shareholders owning more than 10% of the outstanding shares of common stock, it must be at least 110% of the fair market value on the date of the grant, and for nonincentive stock options such price may be less than 100% of the fair market value of the stock on the date of grant. Options granted under the 1998 Plan, which terminates on April 8, 2008, may be exercisable for a period up to ten years. Through December 31, 1999, all options granted under the 1998 Plan have exercise prices equal to the market value of the stock on the date of grant, vest ratably over three or five years and expire either five or ten years from the date of grant. On October 19, 1998, the Company elected to reduce the exercise price of certain outstanding stock options to purchase 503,192 shares of common stock at prices ranging from $7.875 to $12.375 per share (the average price of which is $9.518 per share) to $7.00 per share, which was greater than the fair market value of the common stock on the date of the reduction. A summary of activity related to the Company's stock option plans is as follows: Number Weighted average of shares exercise price .......... ................. Outstanding at December 31, 1996 1,427,827 $ 6.17 Granted 307,850 8.73 Exercised (643,804) 3.28 Canceled (77,115) 4.77 .......... Outstanding at December 31, 1997 1,014,758 7.87 .......... Granted 211,500 8.07 Exercised (66,145) 4.95 Canceled (40,593) 6.78 .......... Outstanding at December 31, 1998 1,119,520 6.88 .......... ...... .......... ...... Granted 115,000 13.06 Exercised (261,509) 6.70 Canceled (78,319) 7.00 .......... ...... Outstanding at December 31, 1999 894,692 $ 7.70 .......... .......... At December 31, 1999, a total of 571,582 options were exercisable at a weighted average exercise price of $7.52, and options for the purchase of 862,700 common shares were available for future grant under the plans. The options outstanding as of December 31, 1999 are summarized in ranges as follows: Weighted Number of Weighted Range of average options average exercise price exercise price outstanding remaining life .............. .............. ........... .............. $3.26- $ 6.00 $ 4.73 27,617 0.5 years $6.01- $ 7.00 $ 6.99 752,075 5.4 years $7.01- $ 13.06 $ 13.06 115,000 9.5 years .......... 894,692 .......... .......... (b) Other ..... In February 1997, Class B Warrants to purchase 1,191,856 shares of common stock at $8.00 per share were exercised, and resulted in net proceeds of approximately $9.5 million to the Company. The remaining 394,369 Class B Warrants were redeemed by the Company at $.05 per warrant in accordance with their terms. An underwriter's warrant was also exercised in 1997 that resulted in net proceeds to the Company of approximately $2.2 million for the issuance of 280,500 shares of common stock. At December 31, 1999, 23,000 warrants were outstanding that expire between 2000 and 2002 with exercise prices ranging from $4.00 to $5.50. During 1999, 1998 and 1997, 14,000, 11,000 and 383,100, respectively, of these warrants were exercised. During 1998, 3,000 warrants were canceled. In 1999, the Company issued 4,546 shares of common stock in exchange for Quantronix shares that remained outstanding. In 1998, the Company issued 18,733 shares of common stock in exchange for Quantronix shares that remained outstanding. (c) Shares Reserved for Issuance ............................ At December 31, 1999 the Company had reserved, authorized and unissued common shares for the following purposes: Shares ......... 1990 Stock option plan 762,545 1998 Stock option plan 994,847 Stock purchase warrants 23,000 ......... 1,780,392 ......... ......... (d) Stock-Based Compensation ........................ The per share weighted-average fair value of stock options and warrants granted during 1999, 1998 and 1997 was $5.03, $1.36, and $2.53, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1999- expected dividend yield of 0%, risk free interest rate of 5.0%, expected stock volatility of 40% and an expected option life of approximately 4.0 years, 1998- expected dividend yield of 0%, risk free interest rate of 5.0%, expected stock volatility of 20% and an expected option life of 2.5 years; 1997 - expected dividend yield of 0%, risk free interest rate of 5.5%, expected stock volatility of 31%, and an expected option life of 2.5 years. The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized in the consolidated financial statements for its stock options and warrants which have an exercise price equal to or greater than the fair value of the stock on the date of the grant. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net earnings would have been reduced to the pro-forma amounts indicated below: 1999 1998 1997 .......... .......... .......... Net earnings: As reported $11,551,766 $8,881,464 $8,234,697 Pro-forma $10,991,766 $7,946,464 $7,423,697 Basic earnings per common share: As reported $1.04 $0.79 $0.77 Pro-forma $0.99 $0.71 $0.69 Diluted earnings per common share: As reported $1.00 $0.78 $0.73 Pro-forma $0.95 $0.70 $0.66 Pro-forma net earnings reflect only options and warrants granted commencing in 1995. Therefore, the full impact of calculating compensation cost for stock options and warrants under SFAS 123 is not reflected in the pro-forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 was not considered. (10) Earnings Per Share .................. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations: 1999 .... Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. .......... Basic EPS $11,551,766 11,118,782 $1.04 Effect of Dilutive Securities: Options and Warrants 489,484 ............. Diluted EPS $11,551,766 11,608,266 $1.00 ........... ............. .......... ........... ............. .......... 1998 .... Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. .......... Basic EPS $8,881,464 11,190,197 $0.79 Effect of Dilutive Securities: Options and Warrants 204,989 ............. Diluted EPS $8,881,464 11,395,186 $0.78 ........... ............. .......... ........... ............. .......... 1997 .... Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. .......... Basic EPS $8,234,697 10,686,763 $0.77 Effect of dilutive securities: Options and warrants 640,323 ............. Diluted EPS $8,234,697 11,327,086 $0.73 ........... ............. .......... ........... ............. .......... (11) Treasury Stock .............. The Board of Directors of the Company has authorized the purchase of up to 2,000,000 shares of common stock in the open market at prevailing market prices. As part of this program, the Company acquired 31,700, 382,763 and 375,000 shares as treasury stock in 1999, 1998 and 1997 for $348,009, $3,226,419 and $3,339,375, respectively. In December 1999, the Company retired all of its treasury stock. (12) Employee Benefit Plan ..................... The Company has a voluntary contribution pension plan, which complies with Section 401(k) of the Internal Revenue Code, as amended. The plan permits employees to make a voluntary contribution of pretax dollars to a pension trust, with a matching contribution by the Company equal to 50% of an employee's basic contribution to the plan up to a maximum of 3% of their salaries. Company contributions to the plan were approximately $390,000, $319,000, and $303,000 in 1999, 1998 and 1997, respectively. (13) Commitments and Contingencies ............................. (a) Operating Leases ................ The Company and its subsidiaries lease certain buildings, vehicles and equipment under non-cancelable operating leases. At December 31, 1999, the future minimum lease payments under non-cancelable operating leases are as follows: 2000 $1,505,267 2001 1,001,207 2002 408,362 2003 411,070 2004 438,878 Thereafter 895,772 ......... $4,660,556 ......... ......... Rent expense approximated $1.57 million, $1.63 million, and $1.34 million for the years ended December 31, 1999, 1998 and 1997, respectively. (b) Employment and Consulting Agreements .................................... Excel has entered into employment agreements with certain key executives that provide for severance upon termination without cause, aggregating approximately $1 million. (14) Foreign and Domestic Operations and Export Sales ................................................ Information concerning foreign and domestic operations and export sales is as follows: As of or the year ended December 31, 1999 1998 1997 ........... ........... ........... Net sales and services to unaffiliated customers: United States $ 81,837,044 61,565,506 58,468,251 Germany 7,106,104 5,526,427 7,479,645 ........... ........... ........... $ 88,943,148 67,091,933 65,947,896 ........... ........... ........... ........... ........... ........... Operating earnings (loss): United States $ 17,454,571 11,258,544 12,088,227 Germany (288,078) (58,237) ( 61,224) ........... ........... ........... $ 17,166,493 11,200,307 12,027,003 ........... ........... ........... ........... ........... ........... Identifiable assets: United States $ 77,775,495 68,883,025 54,508,949 Germany 1,875,056 2,410,139 4,710,732 ........... ........... ........... $ 79,650,551 71,293,164 59,219,681 ........... ........... ........... ........... ........... ........... In determining operating earnings (loss) for each geographic area, sales and purchases between areas have been accounted for on the basis of internal transfer prices set by the Company. Identifiable assets are those tangible and intangible assets used in operations in each geographic area. During the years ended December 31, 1999, 1998 and 1997, the Company had foreign and export sales of approximately $41.0 million, $24.9 million, and $23.8 million, representing 46%, 37%, and 36%, respectively, of total net sales and services. No single customer accounted for more than ten percent of the Company's net sales and services in 1999, 1998 and 1997. One account receivable from a single customer exceeded five percent of the Company's total accounts receivable at December 31, 1999, and no account receivable from any customer exceeded five percent of the Company's total accounts receivable at December 31, 1998. Schedule II EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended December 31, 1999, 1998 and 1997 Column A Column B Column C Column D Column E ........... .......... ................. ............. .......... Balance at Additions charged Additions Balance at beginning to cost and (deductions) - end of Description of period expenses describe period ........... .......... ................. ............. .......... Allowance for doubtful accounts: Year ended December 31,: 1999 $426,000 70,697 (32,697)(1) 464,000 1998 $254,000 110,000 (128,000)(1) 426,000 190,000 (2) 1997 $276,000 72,000 (94,000)(1) 254,000 (1) Uncollectible accounts written off, net of recoveries. (2) Allowance of acquired subsidiary at date of acquisition. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ........ ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 with respect to the directors and executive officers of registrant is hereby incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 1999. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 is hereby incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 is hereby incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Howard S. Breslow, a director of the Company, is a partner in Breslow & Walker, LLP, the Company's legal counsel. In 1999, the Company paid Breslow & Walker, LLP $16,000 for legal services. Joseph A. Ortego, a director of the Company, is a partner in Nixon Peabody, LLP, the Company's legal counsel. In 1999, the Company paid Nixon Peabody, LLP $65,000 for legal services. PART IV ....... ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements (included in Part II, Item 8): Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998 Consolidated Statements of Earnings for each of the years in the three-year period ended December 31, 1999 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1999 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1999 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedule and Report of Independent Auditor (included in Part II Item 8)* Schedule II Valuation and Qualifying Accounts and Reserves ............................... * Financial statement schedules other than those listed are omitted because they are either not applicable or not required, or because the information sought is included in the Consolidated Financial Statements or the Notes thereto. 3. Exhibits included herein: See Exhibit Index below for exhibits filed as part of this Form 10-K annual report. (b) Reports on Form 8-K. No reports on Form 8-K were filed in the last quarter of the period covered by this report. INDEX TO EXHIBITS ................. Exhibit Number Document ............ ........ 2 (a) Agreement and Plan of Merger, dated March 20, 1992, by and among the Company, Excel Merging Corporation and Quantronix Corporation, as amended July 16, 1992. (1) (b) Agreement and Plan of Merger, dated as of February 14, 1995, by and among, the Company, Excel Merging Corporation and Cambridge Technology, Inc. (4) (c) Asset Purchase Agreement, dated as of October 29, 1995 by and among Kollmorgen Instruments Corporation and Photo Research, Inc. (5) (d) Asset Purchase Agreement, dated as of August 14, 1998, by and among, Excel Purchasing Company, Peter Laakman, et al (6) 3 (a) Restated Certificate of Incorporation dated November 13, 1990, as amended. (2) (b) By-Laws, as amended. (1) 4 (a) Specimen Certificate for Company's Common Stock. (2) 10 (a) 1990 Stock Option Plan, as amended. (3) (b) Employment Agreement, dated as of January 22, 1996, between the Company and J. Donald Hill (4), amended as of July 14, 1997. (c) Employment Agreement, dated as of January 22, 1996, between the Company and Antoine Dominic (4), amended as of July 14, 1997. (d) 1998 Stock Option Plan (filed as Exhibit A to the Company's Definitive Proxy Statement, dated April 27, 1998 for the Annual Meeting of Stockholders held on June 24, 1998). (e) Loan Agreement, dated as of July 20, 1998, by and among the Company and The Bank of New York. 21 List of subsidiaries 23 Consent of KPMG LLP 27 Financial Data Schedule .................................................................... (1) Incorporated by reference to the Company's Registration Statement on Form S-4, File No. 33-47440. (2) Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-39375. (3) Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-52612. (4) Incorporated by reference to the Company's Report on Form 8-K dated February 28, 1995 (5) Incorporated by reference to the Company's Report on Form 8-K dated October 13, 1995. (6) Incorporated by reference to the Company's Report on Form 8-K dated August 27, 1998. SIGNATURES .......... PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. EXCEL TECHNOLOGY, INC. By: /s/ J. Donald Hill ............................. J. Donald Hill, Chairman of the Board and Chief Executive Officer By: /s/ Antoine Dominic ............................. Antoine Dominic, Chief Operating Officer and Principal Accounting Officer Date: March 6, 2000 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Signature Title Date ...................... ........ .............. /s/ J. Donald Hill Director March 6, 2000 ...................... J. Donald Hill /s/ Antoine Dominic Director March 6, 2000 ...................... Antoine Dominic /s/ Steven Georgiev Director March 6, 2000 ...................... Steven Georgiev /s/ Howard S. Breslow Director March 6, 2000 ...................... Howard S. Breslow /s/ Jan Melles Director March 6, 2000 ...................... Jan Melles /s/ Joseph A. Ortego Director March 6, 2000 ...................... Joseph A. Ortego EX-27 2
5 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 13,481,251 5,839,339 0 0 16,107,179 13,383,865 0 0 14,383,943 15,672,576 45,848,062 36,218,667 10,986,243 10,874,881 0 0 79,650,551 71,293,164 10,649,338 10,641,209 0 0 0 0 0 0 11,301 11,810 68,989,912 57,140,145 79,650,551 71,293,164 88,943,148 67,091,933 88,943,148 67,091,933 44,682,521 34,184,072 44,682,521 34,184,072 27,094,134 21,707,554 0 0 47,330 174,358 17,240,360 13,683,241 5,688,594 4,801,777 11,551,766 8,881,464 0 0 0 0 0 0 11,551,766 8,881,464 1.04 0.79 1.00 0.78
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