10-K 1 kdectext.txt DECEMBER 31, 2002 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ....................... FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ................. 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) 784-6175 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 Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [X] No [ ] The aggregate market value of the common stock held by non-affiliates of the Registrant was $240,732,828 based on the last sale price of the common stock as reported by NASDAQ on June 28, 2002. Shares held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant's common stock outstanding as of March 18, 2003 was: 11,806,889. DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement to be filed in connection with the Registrant's 2003 Annual Meeting of Stockholders (incorporated by reference under Part III.) PART I ...... ITEM 1. BUSINESS General ....... Excel Technology, Inc. (the "Company") was organized under the laws of Delaware in 1985. The Company designs, develops, manufactures and markets laser systems and electro-optical components for industry and science. 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 and is capable of cutting, welding and marking industrial products, yet it can be precisely controlled and directed and is capable of performing delicate surgery on humans. In October 1992, the Company acquired Quantronix Corporation ("Quantronix"). The acquisition of Quantronix and its then wholly-owned subsidiaries, Control Laser Corporation ("Control Laser"), located in Orlando, Florida, Excel Technology Europe GmbH (previously named Quantronix GmbH) ("Excel Europe"), located in Germany, and The Optical Corporation ("TOC"), located in Oxnard, California, provided the Company with its industrial, scientific and semiconductor product lines and provided the Company with a significant revenue base as well as established manufacturing, engineering, marketing and customer service capabilities. In February 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. In October 1995, the Company acquired the Photo Research Division ("Photo Research") of Kollmorgen Instruments Corporation. Photo Research is engaged primarily in the business of developing, manufacturing and marketing photometric and spectroradiometer instruments and systems. In August 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 April 1999, the Company formed Excel Technology Asia Sdn. Bhd. ("Excel Asia"). Excel Asia primarily engages in the business of marketing, selling, distributing, integrating and servicing Control Laser and Quantronix products throughout Southeast Asia. In July 2000, Excel Europe, a subsidiary of the Company, acquired substantially all of the assets and assumed certain liabilities of Baublys GmbH ("Baublys"), a company located in Ludwigsburg, Germany and engaged in the manufacturing and sale of customized laser systems and engraving machines. In January 2001, the Company formed Control Systemation, Inc. ("CSI") which focuses on turn-key laser based micro-machining systems and part handling workstations for factory automation. CSI operates as an independent, wholly owned subsidiary of the Company and is headquartered in new facilities in Orlando, Florida. In January 2002, the Company consolidated the product lines and development efforts of Baublys and Control Laser to eliminate duplicative products and efforts, to increase efficiencies, and to create a unified market presence for the Company's marking operations. While the subsidiaries remain legally separate entities, with separate profit and loss responsibility, assembly, operations and selling and marketing efforts, they will operate under one name, "Baublys-Control Laser," as though they were one entity with fully staffed operations in Florida and Germany. On August 31, 2002, the Company, through a newly formed wholly-owned subsidiary, Excel Technology Japan Holding Co., Ltd. ("Excel Japan"), acquired all of the issued and outstanding shares of OptoFocus Corporation ("OptoFocus"), a distribution organization representing the Company's Quantronix product line in Japan. On October 1, 2002, the Company, through a newly formed wholly-owned subsidiary, Continuum Electro-Optics, Inc., acquired substantially all of the assets and properties ("Assets") of Hoya Photonics, Inc. d/b/a Continuum, and Hoya Photonics' wholly-owned subsidiaries, Continuum Electro- Optics GmbH, Continuum France EURL and Hoya Continuum Corporation (collectively, "Continuum"), relating to the business of developing, manufacturing and marketing pulsed lasers and related accessories for the scientific and commercial marketplaces (the "Business of the Scientific Division"). Prior to the acquisition, the Company had not participated in the high- energy pulsed-laser market. The Company believes that the purchase of Continuum provides the Company with a foundation upon which to build. It is anticipated that the addition of this technology, coupled with its tenability will significantly increase the Company's ability to provide broad based, cost effective solutions for customers in the industrial and scientific markets. In addition, Quantronix and CSI are expected to contribute to and benefit from Continuum's technology. The acquisition also expands the Company's global presence as it has locations in the United States, Japan, Germany and France. Current Products and Applications ................................. Marking and Engraving Systems - Baublys-Control Laser ............................. Baublys-Control Laser designs, manufactures and markets industrial, computer-controlled turn-key laser marking, mechanical marking/engraving and 3D engraving systems. Baublys-Control Laser is a leading source of mechanical marking and engraving systems and industrial beam-steered laser marking systems used for coding, marking, engraving, deep engraving and 3D engraving, producing high quality, permanent, high speed marks on any material. These systems are used for marking part numbers, serial numbers, lot numbers, date codes, graphics, logos, OCR codes, barcodes, 2D Matrix codes, schematics, 2, 2-1/2 and 3D images and other identification marks for the aerospace, automotive, coining and jewelry, consumer/commercial, electronic/semiconductor, medical, mold and die, packaging, tools and tooling and the trophy and award industries. Baublys-Control Laser's integrated automation solutions include a wide variety of fully automatic, semi-automatic and manual parts handling systems for any part configuration or material. The fully integrated and stand-alone marking systems offer a comprehensive variety of user-friendly software allowing for seamless integration into any production process. The coding, marking, engraving and deep engraving product lines include multiple versions of the mechanical engraving systems with the Universal Marking & Engraving Machine, the Inclined Bed CNC Marking & Engraving Machine, the Mold Engraving Machine and the Table Top Engraving Machine. The laser marking systems include a full product range of CO2, lamp pumped and diode pumped infrared, frequency doubled, tripled and quadrupled Nd:YAG and Nd:YLF laser systems including the "Concorde", "Icon", "Insignia", "Image", "Aurora", "Accent", "Ultra Power Mark", "Deep Power Engraver", "BL65" and "BL150" Deep engraving systems. In 2002, Baublys Control Laser introduced the new "Deep Power Engraver" series of laser engravers, new high speed upgrades of all laser marking systems, Microsoft (Trademark) NT version of the "InstaMark" Graphics Plus Software, new Table Top Series of mechanical engraving systems as well as a wide variety of industry specific integrated marking systems coupled with automation and parts handling. Laser Micro-machining, Photomask Repair and Automation Systems - CSI .............................................................. CSI, the Company's subsidiary based in Orlando, Florida, designs and manufactures laser micro-machining systems, parts handling/automation, systems integration and software engineering solutions. CSI produces a variety of micro-machining systems ("TaskMaster" Series) for cutting, drilling, ablating and other micro machining applications. The "TaskMaster" series of micro-machining systems provides a versatile but affordable solution to almost any process requirement. They are modular in design allowing lasers of any wavelength such as Green, UV, DUV, Infrared, and CO2 in a variety of power levels to be integrated to the same workstation. The workstation can be taken from a basic XY system with a manually adjustable focusing beam delivery and enhanced with a variety of options such as XY with a programmable focusing beam delivery, vision system for part alignment and semi-automatic focusing adjustment, gas assist with programmable pressure regulator and part fixturing. CSI also designs and builds custom micro-machining systems such as active and passive resistor trimmers, glove box welders, diamond cutting systems and specialized sub-micron processing systems utilizing ultrafast lasers. The Company's DRS 855 Photomask Defect Repair System product line has recently been transferred to CSI from its sister subsidiary Quantronix. CSI continues to provide automation, software, vision systems and other system integration solutions to Baublys-Control Laser and also actively pursues automation, parts handling, systems integration and software engineering from non-laser marking-related customers. CSI also offers engineered software solutions including database, host communications, factory automation, vision adaptation and system integration development. Carbon Dioxide Lasers - Synrad ..................... Synrad, the Company's subsidiary based in Mukilteo, Washington, manufactures a range of sealed CO2 lasers for cutting, marking, drilling, and other machining applications for a variety of materials. The CO2 lasers range in power from 10W to 240W. Shipments of Synrad's "Firestar" series of sealed CO2 lasers started in September 2001. This series offers users the choice of higher performance and smaller size, with output powers from 20W to 100W. In 2002, further developments of the "Firestar" technology produced the f200, the world's only fully integrated 200W CO2 laser. In 2003 we plan to launch air-cooled 80W and 100W lasers, and a new 400W laser. Synrad sells primarily to Original Equipment Manufacturers ("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 and 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. Synrad's lower power lasers are the lasers of choice for the majority of the CO2 marking and coding systems in use throughout the world. Higher power lasers also are finding uses in manufacturing plants for trimming flashing from injection-molded parts in the automobile industry, cutting textiles and woven fabrics on continuous production lines and slitting and sealing of plastic packaging. Synrad also manufactures the FH-Series of OEM marking-heads which, when configured with a Synrad laser, provide a fast and effective method of permanently marking parts with lot codes, serial number/date information and bar codes. The FH-Series "Index" is ideal for stationary marking applications while the "Tracker" version features the capability to mark both moving and stationary parts. Synrad's WinMark software has been developed specifically for the FH-Series marking heads, and is available in multiple language versions, to run on Windows (trademark) 95, 98, 2000 and Windows (trademark) NT. Launched in December 2001, Synrad's FH-Series "Smart" marking head allows users to build marking systems that can be operated without a PC. Scanners - Cambridge ........ Cambridge, the Company's subsidiary based in Cambridge, Massachusetts, is a market leader in galvanometer based optical scanners. This technology is critical to a broad and growing community of laser based system applications. The breadth of laser applications served by Cambridge's systems includes: industrial through consumer product laser marking, laser machining, laser welding and cutting, high density via hole PCB drilling for the cell phone industry, scanning microscopy for Genomic DNA research and drug discovery, high resolution printing and diagnostics for the growing base of laser based biomedical systems, (which include digital radiography and ophthalmology), semiconductor wafer inspection and processing, laser entertainment and display. Cambridge is the recognized technology leader in laser scanning systems that require the highest accuracy and highest speed beam steering and positioning for industrial, medical, scientific, military and academic applications and environments. Its new 6200 product line of Moving Magnetic Optical Scanners with patented optical position detectors brings new levels of scanning speed and peak accelerations that have enabled application growth in the above markets. Another principal product line is the patented Moving Coil Optical Scanner with capacitive position detectors, whose design was pioneered by Cambridge for applications requiring the highest levels of scanning accuracy and repeatability. In addition, Cambridge provides a broad range of servo electronics, optics and mounts for complete customer scanning subassemblies and solutions. High Power Solid-State Lasers and Ultrafast Lasers - Quantronix .................................................. Quantronix, a subsidiary of the Company located in East Setauket, New York, designs, 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. Chemists, biologists, physicists and engineers use scientific lasers. 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 line of scientific products includes the "Integra RGA", "Integra MPPA", "Titan", "Mercury" and "Odin" Series of 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 (1,000 pulses per second). These pulses drive the Ti:Sapphire Amplifier that can then pump other optical systems such as optical parametric amplifiers, (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 high power lamp and diode pumped Nd:YAG and Nd:YLF lasers, available in infrared, Green, UV and Deep UV wavelengths, ideal for marking and micro- machining applications. Quantronix's series of scientific ultrafast amplifiers are being utilized for ultra-fine micro-machining applications. In addition, Quantronix launched a series of high-powered multi-wavelength diode and lamp-pumped marking systems. In 2002, Quantronix started offering a variety of laser options and accessories such as power monitoring systems, beam delivery systems, laser energy controllers, pulse shapers and motorized apertures. These options are available with software drivers and can be integrated to any laser system. High Energy Solid State Pulsed Lasers - Continuum ..................................... Continuum, the Company's subsidiary located in Santa Clara, California, is a leading manufacturer of high energy, solid-state laser systems. These systems produce pulsed laser energy outputs with very short duration (less than 10 billionths of a second) and very high (gigawatt) levels of peak power. The unique performance characteristics of these lasers allow researchers in the fields of chemistry, biology and physics to explore a wide range of chemical and physical phenomena. Applications range from remote sensing and measurement to a number of important spectroscopic techniques. Specific examples in the remote sensing area include atmospheric analysis of airborne contaminants and pollutants, Particle Image Velocimetry (PIV) for measuring fluid dynamic properties in gases and liquids, and laser range finding techniques for precise distance measurements and terrain mapping. Spectroscopic applications include, Laser Induced Breakdown Spectroscopy (LIBS) for metallurgical analysis of alloys, laser absorption and laser induced fluorescence spectroscopy for chemical analysis, nonlinear spectroscopic techniques for combustion diagnostics, time of flight mass spectroscopy for isotopic analysis, and time-resolved spectroscopy for analysis of chemical reaction rates. Continuum sells its products, worldwide, primarily to scientific researchers in university, industrial and government laboratories. Products range in complexity from small "turn-key" low energy lasers to advanced high-energy lasers that use multiple stages of power amplification for unsurpassed energy and superior beam quality. High-energy lasers can be coupled to tunable dye lasers or devices known as Optical Parametric Oscillators (OPO's) to provide laser outputs that can be continuously tuned in wavelength from the deep ultraviolet to the far infrared region of the electromagnetic spectrum. Product offerings include the "Minilite" and "Surelite" product lines, a series of "single oscillator" self-contained laser systems that do not require external water cooling that offer turn-key performance in a compact package. Energy outputs range from 0.05 to 0.8 Joules per pulse with wavelength coverage of 1064nm, 532nm, 355nm and 266nm. These lasers are ideal sources for applications such as laser radar (LIDAR), laser photolysis, ablation, mass spectroscopy and PIV. For advanced higher energy lasers, Continuum manufactures and sells the "Powerlite" series of lasers. The Precision II 8000 and Precision II 9000 and "Powerlite" Plus operate in oscillator/amplifier configurations that provide enhanced output energies with excellent beam quality. Energy outputs range from 0.55 to 3.0 Joules per pulse with wavelength coverage of 1064nm, 523nm 355nm and 266nm. These lasers are ideal as pump sources for tunable dye and OPO product lines and as research tools for laser ablation, non- linear spectroscopy and remote imaging. Continuum's wavelength tunable product lines, the "Surelite" OPO, the "Panther"(Registered trademark) OPO and the ND 6000 dye laser produce laser light with wavelengths from 200nm to 4500nm, providing researchers with full wavelength coverage over the range of greatest interest for optical spectroscopy. In addition to standard products, Continuum offers custom laser solutions to fit precise customer needs. Continuum offers a wide range of solutions including mode-locked picosecond and long-pulse Nd:YAG lasers, chirped pulse amplification systems, Nd:Glass macropulse systems, and Ti:Sapphire pump laser systems. Modular design and time proven reliability make these lasers flexible, versatile and easy to operate or upgrade. In total, Continuum has sold over 20,000 lasers worldwide to universities, government laboratories, research institutions and corporations. Optical Products - TOC ................ TOC, a subsidiary of the Company based in Oxnard, California, specializes in the manufacturing of custom precision optical components. TOC is an industry leader in the manufacturing of flying height test disks used in the disk drive industry. For more than 20 years, TOC has provided precision fabrication and coating services to meet demanding applications. TOC offers custom optics services which incorporate polishing optics to extreme flatness (better than 1/20 wave) with low surface roughness and difficult aspect ratios. TOC provides a complete range of thin film coatings in the UV-Visible-Near IR. This includes Edge Filters, Bandpass Filters, Hot Mirrors, Cold Mirrors, Beamsplitters, Neutral Density Filters, Enhanced Metallics, Polarizers, Broadband AntiReflection Coatings, V Coats, High Reflectors, Dielectric and Metallic Mirrors and Scanning Mirrors. The substrates and coated components are used in various systems such as optical scanners, laser systems, professional motion picture cameras and a myriad of other industrial and scientific applications, as well as interferometry and research and development. Light and Color Measurement - Photo Research ........................... Photo Research, the Company's Chatsworth, California subsidiary, is a world leader and innovator in high precision, state-of-the-art electro- optical instrumentation and systems. Photo Research has delivered world- class light and color measurement solutions, serving the cathode ray tube ("CRT")/flat panel display ("FPD"), automotive, aerospace, lighting, motion picture, research and development and related industries for over 60 years. Photo Research has three main product lines. The "Spectra" (Registered trademark) product line offers systems to a wide variety of industries for research, quality control and on-line testing. This line includes the only truly portable battery operated Spectroradiometer; the PR-650 fast scanning SpectraColorimeter. The PR-705/715 SpectraScan complements this line with an industry first automated aperture wheel with up to six apertures. The "Pritchard" (Registered trademark) line originated with the industry workhorse the PR-1980 series. The "Pritchard" is the most widely used photometer in the world. The newer addition to this series is the PR- 880. This is the only fully automated filter photometer available today. The PR-880 is ideal for today's automated factory and ATE/OEM environments. Photo Research developed the first commercially available video photometer over 15 years ago. In 2001, the newest and most advanced video photometer, the PR-920 digital video photometer, was introduced to this product line. Video instrumentation provides high-resolution inspection of CRT and flat panel displays and instrument panels. The Photo Research Optical Metrology Laboratory (PROML) is a supplier of and service provider to optical radiation standards, calibration and measurement for major manufacturers of instruments, displays, devices and materials. All Photo Research instruments are calibrated to NIST-traceable standards. Photo Research developed many industry standards, such as Spectra (Registered Trademark) Pritchard Optics, utilized in astronomical and star- simulation measurements. Photo Research is also instrumental in supporting standards for organizations including VESA, ISO and SAE. Marketing and Sales ................... The Company markets its products and services through several media sources in addition to the presentation of its product lines at domestic and international trade shows. The marketing and sales staff's efforts are enhanced by means of presentations and training at conferences, professional meetings, and through in-person and telephone sales and support calls. The Company also engages independent manufacturers' representatives for the sale of its products. Foreign sales of products are made primarily through foreign equipment distribution organizations, by representatives at Excel Europe, its German subsidiary, Excel Japan, its Japanese subsidiary and Excel Asia, its Malaysian subsidiary. Excel Europe has operations near Munich, Germany; Frankfurt, Germany; Ludwigsburg, Germany and Milan, Italy. Excel Japan has its operations in Tokyo, Japan. Excel Asia has operations in Penang, Malaysia. These subsidiaries engage in the business of marketing, distributing, integrating and servicing laser systems (for industrial, semiconductor, scientific, electronic products) manufactured at the Company's facilities in East Setauket, New York; Santa Clara, California; Orlando, Florida; and Mukilteo, Washington. The sales territory covered by Excel Europe is primarily Europe, Excel Japan covers Japan and the sales territory for Excel Asia is primarily Southeast Asia. At Excel Europe, the staff of 101 includes 39 engineers who install and service all products including complex semiconductor, scientific, and other industrial systems. In addition, Excel Europe provides spare parts for its installed base. Excel Japan has a staff of 22. Excel Asia currently has a staff of 10, which includes 3 engineers. Excel Asia offers sales and support services to semiconductor and electronics manufacturers, automation houses, universities, research and development facilities and local consumer manufacturers. The following table represents a breakdown between the Company's domestic and foreign net sales and services for the years ended December 31, 2002, 2001 and 2000 (in thousands of dollars): 2002 2001 2000 ................ ................. ................ Dollars Percent Dollars Percent Dollars Percent ........ ....... ........ ....... ....... ....... DOMESTIC $ 35,343 37% $ 37,225 42% $ 51,611 48% FOREIGN 59,170 63% 51,267 58% 56,109 52% ........ ....... ........ ....... ........ ....... TOTAL $ 94,513 100% $ 88,492 100% $107,720 100% ........ ....... ........ ....... ........ ....... ........ ....... ........ ....... ........ ....... Of the foreign amounts above, net sales and services generated from customers in Germany accounted for approximately $15.5 million of total consolidated net sales and services for 2002. No other individual foreign country accounted for more than 10% of total consolidated net sales and services in 2002, 2001 or 2000. Manufacturing ............. The Company assembles its products at its facilities in East Setauket, New York; Orlando, Florida; Oxnard, California; Cambridge, Massachusetts; Chatsworth, California; Santa Clara, California; Mukilteo, Washington and Ludwigsburg, Germany. 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, 2002, 2001, and 2000 were $9.8 million, $9.3 million, and $9.5 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 laser products face a number of competing product lines from Spectra Physics, Spectron Lasers and Coherent, Inc. Competition for the high energy solid state laser products comes from New Wave Research, Big Sky Lasers and Quantel Lasers, Spectra Physics, Positive Light, Spectron Lasers and Eksma. The Company's marking/engraving systems compete primarily with those manufactured by Rofin-Baasel, Electrox, Alltec, Foba and Trumpf. 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, Seiko and Micrion. The market for semiconductor products recently has been over-saturated and has experienced rapid advances in miniaturization of integrated circuits and computers. Competition for sealed carbon dioxide lasers comes from Coherent-DEOS (Bloomfield, Connecticut), Rofin (Hull, United Kingdom), and ULS (Scottsdale, Arizona). In light and color measurement, the major competitor to the Company's Spectra product is Minolta. Topcon is the prime competitor to the Pritchard line. In video-based products, the company's video photometer is utilized to characterize new display technologies, with Microvision as its key competitor. In the optical scanner market, GSI-Lumonics, is a significant competitor of the Company. Backlog ....... As of December 31, 2002, the Company had a backlog of firm orders of approximately $34.6 million as compared to a backlog of $23.6 million as of December 31, 2001. 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 the Company will realize any of these advantages. 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 United States Food and Drug Administration ("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. 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. Employees ......... As of December 31, 2002, the Company had 621 full-time employees consisting of 2 executive officers; 18 subsidiary executive officers; 203 scientists, engineering and technical personnel; and 398 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 .................................... Net sales and services to customers in the domestic U.S. amounted to approximately $35.3 million, $37.2 million and $51.6 million for the years ended December 31, 2002, 2001, and 2000, respectively (approximately 37%, 42% and 48% of total net sales and services, respectively). For the years ended December 31, 2002, 2001, and 2000, the Company had net sales and services to customers in foreign countries amounting to approximately $59.2 million, $51.3 million and $56.1 million, respectively (approximately 63%, 58% and 52%, of total net sales and services, respectively). These sales included sales by Excel Europe, Excel Asia and Excel Japan, the Company's foreign subsidiaries. Excel Europe buys laser systems, spare parts and related consumable materials from Quantronix, Baublys-Control Laser and Synrad for resale to European and other foreign customers, and also furnishes field repair services. Excel Asia primarily engages in the business of marketing, selling, distributing, integrating and servicing Quantronix and Baublys-Control Laser products in Southeast Asia. Excel Japan engages in the business of marketing, selling, distributing, integrating and servicing Quantronix and Continuum products in Japan. See Note 14 of the "Notes to Consolidated Financial Statements." The carrying amounts of long-lived assets held by the Company's foreign subsidiaries (Excel Europe, Excel Asia and Excel Japan) at December 31, 2002, 2001 and 2000 include property, plant and equipment and goodwill whose combined carrying amounts were approximately $4.9 million, $4.1 million and $4.3 million, respectively. The carrying amounts of the aforementioned long- lived assets held by the Company's domestic subsidiaries at December 31, 2002, 2001 and 2000 were approximately $52.7 million, $44.2 million and $32.5 million, respectively. Access to Information ..................... The Company is required to file its annual reports on Forms 10-K and quarterly reports on Forms 10-Q, and other reports and documents as required from time to time with the United States Securities and Exchange Commission (the "SEC"). The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Such information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company's electronic filings with the SEC at http://www.sec.gov. The Company's website is located at http://www.exceltechinc.com. The Company is in the process of updating its website to enable users to access its filings with the SEC as soon as reasonably practicable. When updated, the Company will make available, free of charge through its website, its annual, quarterly, and current reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Until such time as the website is updated, electronic copies of such reports can be accessed free of charge at the aforementioned SEC website. In addition, the Company will provide electronic or paper copies of such reports free of charge upon request. Requests may be made by calling Investor Relations at (631) 784-6175 or by writing to Investor Relations at 41 Research Way, East Setauket, New York 11733. Safe Harbor For Forward-Looking Statements Under ................................................ the Securities Litigation Reform Act of 1995; Risk Factors .......................................................... This Annual Report on Form 10-K and the other reports, releases, and statements (both written and oral) issued by the Company and its officers from time to time may contain statements concerning the Company's future results, future performance, intentions, objectives, plans, and expectations that are deemed to be "forward-looking statements." Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance, and achievements may differ significantly from those discussed or implied in the forward-looking statements as a result of a number of known and unknown risks and uncertainties including, without limitation, 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. Sometimes the Company communicates with securities analysts. It is against the Company's policy to disclose to analysts any material non-public information or other confidential commercial information. You should not assume that the Company agrees with any statement or report issued by any analyst regardless of the content of the statement or report. The Company has a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. If reports issued by securities analysts contain projections, forecasts or opinions, those reports are not the responsibility of the Company. The risks presented below may not be all of the risks the Company may face. These are the factors that the Company believes could cause actual results to be different from expected and historical results. Other sections of this report include additional factors that could have an effect on the Company's business and financial performance. The industry that the Company competes in is very competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results. Uncertain Market Acceptance. The Company's overall marketing objective is to strengthen its presence in existing markets, and establish its market presence in other industrial markets. With any technology, there is the substantial risk that the market may not appreciate the benefits or recognize the potential applications of the technology. Market acceptance of the Company's products will depend, in large part, upon the ability of the Company to demonstrate the potential advantages of its products over products manufactured by other companies. There can be no assurance that the Company will be able to achieve all or any of its marketing objectives, or that the Company's products will be accepted in their intended marketplaces on any significant basis. Intense Competition. The laser and electro-optical component industry generally is subject to intense competition. The Company's current and proposed products compete with existing and proposed products marketed by other manufacturers. Some of the Company's competitors are substantially larger in size and have substantially greater financial, managerial, technical and other resources than the Company. There can be no assurance that the Company will successfully differentiate its current and proposed products from the products of its competitors or that the marketplace will consider the Company's products to be superior to competing products. Technological Obsolescence. The laser and electro-optical component industry is characterized by extensive research and rapid technological change. The development by others of new or improved products, processes or technologies may make the Company's current or proposed products obsolete or less competitive. Compliance with Government Regulations. The Company currently 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. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of these regulatory requirements. Patent Protection. The Company's ability to effectively compete may depend upon the proprietary nature of its technologies. The Company owns several patents and has other applications pending. The Company expects to file additional patent applications in the future. There can be no assurance, however, that other companies are not investigating or developing other technologies that are similar to the Company's technologies, or that any additional patents will be issued to the Company or that such patents will afford the Company sufficiently broad patent coverage to provide any significant deterrent to competitive products. Even if a competitor's products were to infringe products owned by the Company, it could be very costly for the Company to enforce its rights in an infringement action. The validity and enforceability of such patents may be significant to the Company and may be important to the success of the Company. The Company, however, believes that the best protection of proprietary technology in the laser industry comes from market position, technical innovation and product performance. There can be no assurance that any of these will be realized or maintained by the Company. The Company has obtained licenses under certain patents covering lasers and related technology incorporated into the Company's products. However, there may be other patents covering the Company's current or proposed products. If valid patents are infringed, the patent owner will be able to prevent the future use, sale and manufacture of the subject products by the Company and also will be entitled to damages for past infringement. Alternatively, the Company may be required to pay damages for past infringement and license fees or royalties on future sales of the infringing components of its systems. Infringement of any patents also may render the Company liable to purchasers and end-users of the infringing products. If a patent infringement claim is asserted against the Company, then, whether or not the Company is successful in defending such claim, the defense of such claim may be very costly. While the Company is unable to predict what such costs, if any, will be incurred if the Company is obligated to devote substantial financial or management resources to patent litigation, its ability to fund its operations and to pursue its business goals may be substantially impaired. Dependence on Suppliers. The Company relies on outside suppliers for all of its manufacturing supplies, parts and components. Most parts and components used by the Company currently are available from multiple sources. There can be no assurance that, in the future, its current or alternative sources will be able to meet all of the Company's demands on a timely basis. Unavailability of necessary parts or components could require the Company to re-engineer its products to accommodate available substitutions which would increase costs to the Company and/or have a material adverse effect on manufacturing schedules, product performance and market acceptance. Dependence on Resellers, Distributors and OEMs. The Company sells some of its products through resellers, distributors and OEMs. Reliance upon third party distribution sources subjects the Company to risks of business failure by these individual resellers, distributors and OEMs, and credit, inventory and business concentration risks. Dependence on Foreign Sales. A significant amount of the Company's product sales are made to customers outside the United States. These sales are subject to the normal risks of foreign operations, such as: Currency fluctuations Protective tariffs Trade barriers and export/import controls Transportation delays and interruptions Reduced protection for intellectual property rights in some countries The impact of recessionary foreign economies Long receivable collection periods The Company cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation of the Company's products or supplies or to gauge the effect that new barriers would have on its financial position or results of operations. Manufacturing. The Company assembles its products at its various facilities in the United States and Germany. If use of any of the Company's manufacturing facilities were interrupted by natural disaster or otherwise, the Company's operations could be negatively affected until the Company could establish alternative production and service operations. In addition, the Company may experience production difficulties and product delivery delays in the future as a result of: Changing process technologies Ramping production Installing new equipment at its manufacturing facilities Shortage of key components Financial Performance. The Company's operating results may vary in the future as a result of a number of factors, including: Changes in technology New competition Economic conditions Customer demand A shift in the mix of the Company's products A shift in sales channels The market acceptance of new or enhanced versions of the Company's products The timing of introduction of other products and technologies Any associated charges to earnings Any cancellation or postponement of orders Research and Development. The Company is active in research and development of new products and technologies. The Company's research and development efforts may not lead to the successful introduction of new or improved products. The Company may encounter delays or problems in connection with its research and development efforts. New products often take longer to develop, have fewer features than originally considered desirable and achieve higher cost targets than initially estimated. There may be delays in starting volume production of new products and new products may not be commercially successful. Products under development are often announced before introduction and these announcements may cause customers to delay purchases of existing products until the new or improved versions of those products are available. Delays or deficiencies in development manufacturing, delivery of or demand for new products or of higher cost targets could have a negative affect on the Company's business, operating results or financial condition. Acquisitions. The Company has in the past and may in the future acquire businesses or product lines as a way of expanding its product offerings and acquiring new technology. If the Company does not identify future acquisition opportunities and/or integrate businesses that it may acquire effectively, the Company's growth may be negatively affected. ITEM 2. PROPERTIES North America ............. East Setauket, New York ....................... The Company owns a building that is approximately 65,000 square feet. The facility is utilized for manufacturing operations, administrative offices, research and development, engineering and laser applications. Orlando, Florida ................ Baublys-Control Laser owns a building that is approximately 78,000 square feet. This facility is utilized for administrative offices, manufacturing and research and development. In addition, CSI occupies approximately 50% of this building, which is utilized for all their operating activities. Oxnard, California .................. TOC leases a 14,000 square foot building in Oxnard, California from an unaffiliated landlord for manufacturing purposes, at an annual rent of approximately $88 thousand. The lease term expires in August 2009. Cambridge, Massachusetts ........................ 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 $155 thousand through October 2003 and $175 thousand from November 2003 through October 2006. Chatsworth, California ....................... 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. Mukilteo, Washington ....................... Synrad owns and occupies a 63,000 square foot building for its administrative offices and manufacturing operations. Santa Clara, California ....................... Continuum leases a 47,000 square foot building from an unaffiliated landlord for manufacturing purposes, at an annual rent of approximately $889 thousand. The lease expired in December 2002. The Company extended the lease for an additional year for approximately $574 thousand. Europe ...... Darmstadt, Germany .................. Excel Europe and its division Quantronix Europe lease approximately 6,300 square feet of office space in Darmstadt, Germany, which it uses for sales, marketing and services. The space is leased from an unaffiliated landlord at an average annual rent of approximately $103 thousand. The lease expires in May 2005. Munich, Germany ............... This Excel Europe satellite office located near Munich in Fuerstenfeldbruck, Germany, serves as Synrad Europe's sales, marketing and service operation. The office occupies approximately 3,150 square feet of space. The space is leased from an unaffiliated landlord, at an average annual rent of approximately $33 thousand. The lease expires in February 2005. Ludwigsburg, Germany .................... Baublys-Control Laser operates out of a 22,500 square foot facility located in Ludwigsburg, Germany, which houses its sales and marketing, research and development, manufacturing and services operations and executive offices. The facility is leased from an unaffiliated landlord at an average annual rent of approximately $131 thousand. The lease expires in June 2007. Milan, Italy ............ Excel Europe also maintains a sales and service office in Monza, Italy, located outside of Milan. The lease provides approximately 1,000 square feet of office space from an unaffiliated landlord at an approximate annual rent of $10 thousand. Asia .... Penang, Malaysia ................ Excel Asia leases a 7,500 square foot facility in Penang Free Industrial Zone, Penang, Malaysia, from an unaffiliated landlord. The building is utilized as a regional operations hub which houses the administrative offices, the light repair and integration services, technical and support offices, as well as applications laboratories for regional support. The annual rent is approximately $34 thousand. The lease expires in December 2005. Tokyo, Japan ............ Excel Technology Japan leases a 6,000 square foot facility in Tokyo, Japan, from an unaffiliated landlord. The building houses all its operations, administration and sales and marketing. The annual rent is approximately $144 thousand. The lease expires in September 2005. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company has disputes that arise in the ordinary course of its business. On May 10, 2002, Positive Light, Inc. ("Positive Light") filed a suit in the District Court for the Northern District of California against Quantronix for alleged infringement of U.S. Patent No. 5,790,303, false advertising and unfair competition. The allegations relate to the advertising, offer for sale and sale of diode-pumped, Q-switched, intracavity doubled lasers to pump optical amplifiers. Positive Light seeks unspecified monetary damages as well as injunctive relief. Quantronix denied the allegations, and asserted defenses and counterclaims of non- infringement, invalidity and unenforceability. On October 10, 2002, Quantronix filed a separate suit against Positive Light also in the Northern District of California, seeking a declaratory judgment of non-infringement, invalidity and unenforceability of Positive Light's U.S. Patent No. 6,122,097 and U.S. Patent No. 5,963,363. The suits have since been consolidated and are proceeding through discovery. Quantronix is vigorously defending against Positive Light's allegations of infringement, false advertising and unfair competition. The Company believes that there is no merit to the claims made by Positive Light. However, if Positive Light is successful in its claims, Quantronix could be subject to a permanent injunction against making, using, offering for sale, and selling its Darwin series of laser products for use in amplifiers. Quantronix could also be subject to damages and/or attorneys' fees. To date, Quantronix has sold only one unit from its Darwin series of laser products for use in pumping optical amplifiers. 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 Company's Common Stock trades on the NASDAQ National Market System under the symbol "XLTC." The following table sets forth the high and low closing sales prices reported on the NASDAQ for the Common Stock for the periods indicated. Year ended: High Low ...... ....... December 31, 2002 First Quarter $23.45 $14.10 Second Quarter $25.92 $20.94 Third Quarter $22.94 $18.24 Fourth Quarter $20.34 $15.97 December 31, 2001 First Quarter $27.50 $16.25 Second Quarter $25.54 $17.31 Third Quarter $22.89 $14.05 Fourth Quarter $19.00 $15.18 As of March 17, 2003, there were approximately 816 holders of record of the Common Stock. 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 its earnings, if any, in order to finance the development of its business. The following table summarizes the Company's equity compensation plans as of December 31, 2002: Equity Compensation Plan Information Plan category Number of Weighted average Number of securities to be exercise price of securities issued upon outstanding options remaining exercise of available outstanding options future for issuance Equity compensation plans approved by security holders 1,070,884 $15.65 147,050 Equity compensation plans not approved by security holders 0 0 0 Total 1,070,884 $15.65 147,050 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated statement of operations data for the years ended December 31, 2002, 2001 and 2000, and the consolidated balance sheet data as of December 31, 2002 and 2001, have been derived from the Company's audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended December 31, 1999 and 1998, and the selected consolidated balance sheet data as of December 31, 2000, 1999 and 1998, are derived from the Company's audited consolidated financial statements which are not included in this Annual Report on Form 10-K. The following tables summarize (in thousands, except per share data) the Company's consolidated statement of operations and balance sheet data. You should read this information together with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K. Statement of Operations Data (in thousands, except share data) Year Ended December 31, ...................................................... 2002 2001 2000 1999 1998 .......... .......... .......... .......... .......... Net sales and services $ 94,513 $ 88,492 $107,720 $ 88,943 $ 67,092 Net income $ 8,512 $ 5,938 $ 15,651 $ 11,552 $ 8,881 Net earnings per share Basic $0.72 $0.50 $1.35 $1.04 $0.79 Diluted $0.71 $0.50 $1.30 $1.00 $0.78 Weighted average Common and common equivalent shares outstanding Basic 11,792,350 11,761,911 11,597,102 11,118,782 11,190,197 Diluted 12,071,022 11,977,848 12,054,176 11,608,266 11,395,186 Balance Sheet Data (in thousands) As of December 31, ...................................................... 2002 2001 2000 1999 1998 .......... .......... .......... .......... .......... Total assets $118,724 $ 102,505 $ 98,986 $ 79,651 $ 71,293 Total liabilities $ 16,467 $ 10,907 $ 12,544 $ 10,649 $ 14,141 Working capital $ 44,765 $ 42,695 $ 48,584 $ 35,199 $ 25,577 Stockholders' equity $102,257 $ 91,598 $ 86,442 $ 69,001 $ 57,152 Long-term liabilities $ 180 $ 0 $ 0 $ 0 $ 3,500 Refer to Item 1 "Business" and Item 8 "Financial Statements and Supplementary Data" for additional information affecting the comparability of amounts above. 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 in Item 8. Critical Accounting Policies and Estimates .......................................... Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, inventories, and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition ................... The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as amended. SAB 101 requires that four basic criteria must be met before revenue can be recognized: 1) persuasive evidence that an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the fee is fixed and determinable; and 4) collectibility is reasonably assured. The Company's revenues are generated from the following: 1) product sales, including product upgrades and replacement part sales; 2) maintenance agreements; and 3) agreements for services to be rendered. For services rendered, customers are billed and revenues are recognized as the related services are performed. The Company's product lines principally consist of laser-based systems and electro-optical components used in a wide range of applications by different types of end-users and are often used as sub- assemblies required for end products manufactured by the customer. Revenue relating to these products is recognized upon transfer of title to the customer, which is generally the shipment date. With respect to maintenance agreements, revenue is recognized and customers are generally billed on a monthly or quarterly basis over the term of the agreement. The Company manufactures one product called a Photomask Defect Repair System ("DRS") which was formerly manufactured and sold by Quantronix but is now being manufactured and sold by CSI. DRS's are laser-based systems for use in semiconductor photomask repair. The DRS provides a means to repair defects on the complex photomasks used to produce integrated circuits. These are very large, highly complex machines ranging in price from $1.5 million to $2.0 million per unit (based upon the most recent range of historical sales prices). The terms of sale with respect to these items require that the Company perform installation due to the technical expertise required. Due to the post-shipment installation obligations with respect to the DRS's, the Company defers revenue recognition on the sale of DRS's until it has substantially satisfied its post-shipment obligations Allowances for Doubtful Accounts ................................ The Company is required to estimate the collectibility of its trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit- worthiness of each customer. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The collectibility of accounts receivable is evaluated based on a combination of factors. In circumstances where the Company is aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filings), a specific reserve for bad debts is recorded against amounts due, to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, management estimates a reserve for bad debts based upon the total accounts receivable balance and the percentage expected to be realized through subsequent cash collections. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount. Inventories ........... On a quarterly basis, the Company compares the amount of inventory on hand and under commitment with its latest forecasted requirements to determine whether write-downs for excess or obsolete inventory are required. Although the writedowns for excess or obsolete inventory reflected in the Company's consolidated balance sheet at December 31, 2002 and 2001 are considered adequate by the Company's management, there can be no assurance that these writedowns will prove to be adequate over time to cover ultimate losses in connection with the Company's inventory. Income Taxes ............ The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. As of December 31, 2002 and 2001, the Company has approximately $888 thousand and $1.7 million of net deferred tax assets, respectively, related principally to domestic and foreign loss carryforwards and inventory reserves. Should the pretax book income and taxable income be considerably lower than projected, an increase to the valuation allowance may be required. Recent Accounting Pronouncements ................................ On January 1, 2002, the Company adopted Financial Accounting Standards Board Statements No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations completed on or after July 1, 2001 and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with determinable useful lives will continue to be amortized. Beginning January 1, 2002, the Company ceased amortizing goodwill. During 2002, the Company has completed its assessment of the assets impacted by the adoption of SFAS 142, and based upon such review no impairment to the carrying value of goodwill was identified. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated retirement costs. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has adopted both SFAS 143 and SFAS 144 as of January 1, 2002. These statements did not materially impact the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This pronouncement is effective for exit or disposal activities that are initiated after December 31, 2002, and requires these costs to be recognized when the liability is incurred and not at project initiation. The Company does not expect this statement to have a material impact on its consolidated financial statements. Results of Operations ..................... The following table presents consolidated financial data for the years ended December 31, 2002, 2001 and 2000 (in thousands of dollars and as a percentage of total net sales and services). 2002 2001 2000 ............... ................ ............... Dollars Percent Dollars Percent Dollars Percent ....... ....... ....... ....... ........ ........ Net Sales and Services $94,513 100.0% $88,492 100.0% $107,720 100.0% Cost of Sales 51,851 54.9% 50,518 57.1% 53,065 49.3% ....... ...... ....... ....... ........ ........ Gross Profit/ Margin 42,662 45.1% 37,974 42.9% 54,655 50.7% Operating Expenses: Selling and Marketing 12,570 13.3% 11,553 13.1% 12,689 11.8% General and Administrative 8,062 8.5% 7,066 8.0% 7,930 7.3% Research and Development 9,838 10.4% 9,293 10.5% 9,547 8.9% Amortization of Goodwill 0 0.0% 1,459 1.6% 1,337 1.2% ....... ....... ....... ....... ........ ........ Income from Operations 12,192 12.9% 8,603 9.7% 23,152 21.5% Non-Operating Income (513) (0.5%) (573) (0.7%) (803) (0.7%) ....... ....... ....... ....... ........ ....... Income before Provision for Income Taxes 12,705 13.4% 9,176 10.4% 23,955 22.2% Provision for Income Taxes 4,193 4.4% 3,238 3.7% 8,304 7.7% ....... ....... ....... ....... ........ ........ Net Income $ 8,512 9.0% $ 5,938 6.7% $ 15,651 14.5% ....... ....... ........ ....... ........ ........ ....... ....... ........ ....... ........ ........ Net Sales and Services ....................... Net sales and services for 2002 increased to $94.5 million from $88.5 million in 2001. The increase from 2001 to 2002 of $6.0 million or 6.8% was primarily attributable to the acquisition of Continuum, the direct sales from our new subsidiary in Japan and scanner sales, offset by decreases in sales of marking systems. Net sales and services for 2001 decreased to $88.5 million from $107.7 million in 2000. The decrease from 2000 to 2001 of $19.2 million or 17.9% was primarily attributable to decreases in sales of marking systems, scanners, DRS systems and CO2 lasers. Gross Margins and Cost of Sales ............................... Gross margins as a percentage of sales in 2002 were 45.1% compared to 42.9% in 2001. Cost of sales and services increased by $1.4 million or 2.6% to $51.9 million in 2002 from $50.5 million in 2001. The increase in gross margins as a percentage of sales and the increase in cost of sales and services from 2001 to 2002 are primarily attributable to the increased sales volume. Gross margins as a percentage of sales in 2001 were 42.9% compared to 50.7% in 2000. Cost of sales and services decreased by $2.5 million or 4.8% to $50.5 million in 2001 from $53.1 million in 2000. The decrease in gross margins as a percentage of sales from 2000 to 2001 was due primarily to an inventory write-down of approximately $1 million, which was largely related to a specific vendor part where reliability was an issue. In addition, the marking operations of Baublys-Control Laser were merged, which also resulted in inventory write-offs of approximately $350 thousand. The decrease in cost of sales and services from 2000 to 2001 was primarily attributable to the decreased sales volume offset by the aforementioned write-downs and write-offs. Product margins vary from direct sales to distributor sales and also vary from product to product. The Company offers more than 250 product configurations. Operating Expenses .................. Selling and Marketing Selling and marketing expenses were $12.6 million in 2002 compared to 11.6 million in 2001 and $12.7 million in 2000. The increase of $1.0 million or 8.8% from 2001 to 2002 was primarily attributable to increased direct sales from our subsidiary in Japan and the acquisition of Continuum. The decrease of $1.1 million or 9.0% from 2000 to 2001 was primarily attributable to lower variable costs such as commissions associated with the lower sales volume. Selling and marketing expenses as a percentage of sales were 13.3% in 2002, 13.1% in 2001, and 11.8% in 2000. The changes in selling and marketing expenses as a percentage of sales are primarily attributable to fixed costs being absorbed by varying sales volumes. General and Administrative General and administrative expenses were $8.1 million in 2002, as compared with $7.1 million in 2001 and $7.9 million in 2000. The increase of $1.0 million or 14.1% from 2001 to 2002 was primarily attributable to the acquisitions of Continuum and OptoFocus. The decrease of $863 thousand or 10.9% from 2000 to 2001 was primarily due to decreased bonus expense associated with lower operating income in 2001. General and administrative expenses as a percentage of sales increased to 8.5% in 2002 as compared to 8.0% in 2001 and 7.3% in 2000. Research and Development Research and development expenses for 2002 were $9.8 million as compared to $9.3 million in 2001 and $9.5 million in 2000. The increase of $545 thousand or 5.9% from 2001 to 2002 was primarily attributable to the acquisition of Continuum and modest increases in research activities from all our manufacturing subsidiaries. The decrease of $254 thousand or 2.7% from 2000 to 2001 was primarily attributable to reduced research and development material costs during 2001. Amortization of Goodwill No amortization of goodwill was recorded in 2002, as compared to $1.5 million in 2001 and $1.3 million in 2000. Effective January 1, 2002, the Company ceased amortizing its goodwill pursuant to its adoption of SFAS 142. The increase in amortization of goodwill of $122 thousand or 9.1% from 2000 to 2001 was primarily due to a full year of amortization of goodwill recorded in connection with the acquisition of Baublys. Other Income/Expense Interest expense for 2002 was $8 thousand, as compared to $30 thousand in 2001 and $18 thousand in 2000. Interest expense decreased by $22 thousand or 73.0% from 2001 to 2002 due to less short-term borrowings by our European subsidiaries. Interest expense increased by $12 thousand or 64.9% from 2000 to 2001 due to short-term borrowings by the European subsidiary during the year, all of which were repaid by December 31, 2001. Interest income for 2002 was $220 thousand, as compared to $679 thousand in 2001 and $998 thousand in 2000. The decrease in interest income of $459 thousand or $67.8% from 2001 to 2002 is primarily due to lower interest rates and a decrease in our average cash balances due to the acquisitions of Continuum, OptoFocus and the final payments on our new buildings. The decrease in interest income of $320 thousand or 32.0% from 2000 to 2001 was due to reduced effective interest rates during the year and a decrease in the average invested cash balances of the Company. Balances were lower due to the funding for new buildings of approximately $12.4 million during 2001. Other income/expense for 2002 was $301 thousand of income, compared to $75 thousand of expense in 2001 and $178 thousand of expense in 2000. The income in 2002 was primarily attributable to the recording of foreign exchange transaction gains at Excel Europe for the purchase of inventories from the Company's U.S. Domestic subsidiaries as a result of the decline in the value of the U.S. dollar against the Euro. The expenses recorded in 2001 and 2000 were primarily the result of foreign exchange transaction losses recorded at Excel Europe for the purchase of inventories from the Company's U.S. Domestic subsidiaries as a result of the strengthening of the value of the U.S. dollar against the German Deutchmark. Provision for Income Taxes The provision for income taxes for 2002 was $4.2 million, compared to $3.2 million in 2001 and $8.3 million in 2000. The increase of $955 thousand or 29.5% from 2001 to 2002 is primarily attributable to higher taxable income. The decrease of $5.1 million or 61.0% from 2000 to 2001 was primarily attributable to the decrease in taxable earnings from 2000 to 2001. The Company's effective tax rate was 33.0% for 2002, as compared to 35.3% in 2001 and 34.7% in 2000. The decrease in the Company's effective tax rate from 2001 to 2002 is primarily attributable to increased foreign sales tax benefits as a result of increased foreign sales. The Company's effective tax rates were relatively consistent from 2000 to 2001. Liquidity and Capital Resources ............................... At December 31, 2002, the Company had working capital of $44.8 million, including cash and equivalents of $11.8 million, compared to working capital of $42.7 million, including cash and equivalents of $16.2 million, at December 31, 2001. The increase in working capital resulted primarily from additional accounts receivable and inventory acquired in connection with the acquisitions of Continuum and OptoFocus, offset by increases in current liabilities in connection with the aforementioned acquisitions and decreases in cash and equivalents primarily due to the funding of the purchase prices for the aforementioned acquisitions. Net cash provided by operating activities of $10.3 million for the year ended December 31, 2002 was primarily attributable to net income before depreciation and amortization and other non-cash charges, offset partially by net changes in working capital items. Net cash used in investing activities of $15.3 million for the year ended December 31, 2002 was due primarily to the acquisitions of Continuum and OptoFocus for $11.3 million, combined with capital expenditures of $4.0 million to fund the completion of buildings constructed for Synrad, Baublys- Control Laser and the completion of the expansion of Quantronix's facilities. Net cash provided by financing activities was $498 thousand for the year ended December 31, 2002, resulting primarily from the proceeds received upon the exercise of employee stock options. As of December 31, 2002, the Company's contractual obligations were as follows (in thousands of dollars): Contractual Obligations Payments Due by Period ............. ............................................... Less than 1 - 3 3 - 5 More than Total 1 Year Years Years 5 Years ..... ......... ...... ..... ......... Operating Leases $3,941 $1,488 $1,470 $ 738 $ 245 The Company has a credit facility with The Bank of New York 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 the prime rate or the Federal Funds Rate plus 0.50%. As of December 31, 2002, the Company had no borrowings outstanding. The Company intends to continue to invest in support of its growth strategy. These investments aid in retaining and acquiring new customers, expanding the Company's current product offerings and further developing its operating infrastructure. The Company believes that current cash and equivalents will be sufficient to meet these anticipated cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash and equivalents that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or increase its lines of credit. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the Company will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which might impact the Company's liquidity requirements or cause the Company to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. Selected Quarterly Financial Data ................................. Unaudited quarterly financial data (in thousands, except per share amounts) for 2002 and 2001 is summarized as follows:
2002 2001 .................................................. .................................................... Q1 Q2 Q3 Q4 YEAR Q1 Q2 Q3 Q4 YEAR ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Net sales and services $ 19,753 $ 22,061 $ 22,898 $ 29,801 $ 94,513 $ 24,795 $ 23,949 $ 21,564 $ 18,184 $88,492 Cost of sales and services 10,375 11,729 11,897 17,850 51,851 12,880 12,656 12,489 12,493 50,518 ........ ........ ........ ........ ....... ........ ........ ........ ........ ........ Gross profit 9,378 10,332 11,001 11,951 42,662 11,915 11,293 9,075 5,691 37,974 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Operating expenses: Selling and marketing 2,762 2,797 2,999 4,012 12,570 2,985 3,353 2,836 2,379 11,553 General and administrative 1,581 1,873 2,146 2,462 8,062 1,875 1,833 1,563 1,795 7,066 Research and development 2,273 2,176 2,334 3,055 9,838 2,360 2,228 2,329 2,376 9,293 Amortization of goodwill 0 0 0 0 0 365 363 362 369 1,459 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 6,616 6,846 7,479 9,529 30,470 7,585 7,777 7,090 6,919 29,371 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Income (loss) from operations 2,762 3,486 3,522 2,422 12,192 4,330 3,516 1,985 (1,228) 8,603 Non-operating expenses (income): Interest expense 2 2 2 2 8 12 0 2 16 30 Interest income (59) (67) (73) (21) (220) (266) (184) (139) (90) (679) Other expense (income), net 32 8 (134) (207) (301) (13) 31 21 37 76 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Income (loss) before provision for income taxes 2,787 3,543 3,727 2,648 12,705 4,597 3,669 2,101 (1,191) 9,176 Provision (benefit) for income taxes 920 1,169 1,230 874 4,193 1,632 1,295 718 (407) 3,238 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Net income (loss) $ 1,867 $ 2,374 $ 2,497 $ 1,774 $ 8,512 $ 2,965 $ 2,374 $ 1,383 $ (784) $ 5,938 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Basic earnings (loss) per common share $ 0.16 $ 0.20 $ 0.21 $ 0.15 $ 0.72 $ 0.25 $ 0.20 $ 0.12 $ (0.07) $ 0.50 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Weighted average common shares outstanding 11,773 11,792 11,800 11,804 11,792 11,760 11,761 11,763 11,764 11,762 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Diluted earnings (loss) per common share $ 0.16 $ 0.20 $ 0.21 $ 0.15 $ 0.71 $ 0.25 $ 0.20 $ 0.12 $ (0.07) $ 0.50 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Weighted average common and common equivalent shares outstanding 11,995 12,162 12,114 12,073 12,071 11,991 11,993 11,978 11,764 11,978 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
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 The principal market risks (i.e. the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed are interest rates on demand deposits with banks and money market funds and exchange rates, generating translation and transaction gains and losses. Interest Rates .............. The Company manages its cash and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. The Company's investment portfolios consist primarily of cash and equivalents, with carrying amounts approximating market value. Assuming year-end 2002 variable cash and investment levels, a one-point change in interest rates would not have a material impact on interest income. Foreign Exchange Rates ...................... Operating in international markets involves exposure to movements in currency exchange rates that are volatile at times. The economic impact of currency exchange rate movements on the Company is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause the Company to adjust its financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors. The Company's net sales and services to foreign customers represented approximately 63% of total net sales and services in 2002, 58% in 2001 and 52% in 2000. The Company expects net sales and services to foreign customers will continue to represent a large percentage of its total net sales and services. The Company's net sales and services denominated in foreign currencies represented approximately 28% of its total net sales and services in 2002, 24% of its total net sales and services in 2001 and 15% in 2000. The Company generally has not engaged in foreign currency hedging transactions. The aggregate foreign exchange gains and (losses) included in determining consolidated results of operations were $332 thousand, $(7) thousand and $(177) thousand in 2002, 2001 and 2000, respectively. Changes in the Euro and Yen have the largest impact on the Company's operating profits. The Company estimates that a 10% change in foreign exchange rates would not materially impact reported operating profits. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited financial statements and supplementary data follow on pages 27 to 44. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES 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, 2002. Page .... Report of Independent Auditors 26 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2002 and 2001 27 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000. 28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000. 29 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 30 Notes to Consolidated Financial Statements. 31 Consolidated Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts 44 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. Report of Independent Auditors .............................. To the Board of Directors and Stockholders Excel Technology, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Excel Technology, Inc. and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Excel Technology, Inc. and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002 the Company changed its method of accounting for goodwill. /s/ Ernst & Young LLP Melville, New York January 22, 2003 EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2002 and 2001 Assets 2002 2001 ...... ............ ............ Current assets: Cash and equivalents $ 11,822,081 $ 16,211,865 Accounts receivable, less allowance for doubtful accounts of $993,000 and $717,000 in 2002 and 2001, respectively 22,375,082 15,688,733 Inventories 24,481,364 19,219,695 Deferred income taxes 1,068,000 1,112,000 Other current assets 1,305,233 1,369,903 ............ ............ Total current assets 61,051,760 53,602,196 ............ ............ Property, plant and equipment - at cost, net 27,782,020 26,125,347 Other assets 507,237 64,362 Deferred income taxes 0 593,000 Goodwill 29,382,632 22,120,116 ............ ............ Total Assets $118,723,649 $102,505,021 ............ ............ ............ ............ Liabilities and Stockholders' Equity .................................... Current liabilities: Accounts payable $ 5,245,202 $ 3,786,154 Accrued expenses and other current liabilities 11,041,491 7,121,293 ............ ............ Total current liabilities 16,286,693 10,907,447 ............ ............ Deferred income taxes 180,000 0 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, 11,804,889 and 11,763,569 shares issued and outstanding in 2002 and 2001, respectively 11,805 11,764 Additional paid-in capital 45,400,554 44,856,504 Retained earnings 56,295,425 47,783,066 Accumulated other comprehensive income (loss) 549,172 (1,053,760) ............ ............ Total stockholders' equity 102,256,956 91,597,574 ............ ............ Total Liabilities and Stockholders' Equity $118,723,649 $102,505,021 ............ ............ ............ ............ See Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2002, 2001 and 2000 2002 2001 2000 ............ ............ ............ Net sales and services $ 94,513,481 $ 88,492,288 $107,720,400 Cost of sales and services 51,850,978 50,517,834 53,065,356 ............ ............ ............ Gross profit 42,662,503 37,974,454 54,655,044 Operating expenses: Selling and marketing 12,570,311 11,553,303 12,689,260 General and administrative 8,061,553 7,066,440 7,929,652 Research and development 9,838,153 9,292,777 9,547,342 Amortization of goodwill 0 1,458,639 1,336,575 ............ ............ ............ 30,470,017 29,371,159 31,502,829 ............ ............ ............ Income from operations 12,192,486 8,603,295 23,152,215 Non-operating expenses (income): Interest expense 8,072 29,905 18,130 Interest income (220,003) (678,515) (998,445) Other (income) expense, net (300,597) 75,381 177,849 ............ ............ ............ Income before provision for income taxes 12,705,014 9,176,524 23,954,681 Provision for income taxes 4,192,655 3,238,036 8,303,703 ............ ............ ............ Net income $ 8,512,359 $ 5,938,488 $ 15,650,978 ............ ............ ............ ............ ............ ............ Basic earnings per common share $0.72 $0.50 $1.35 ............ ............ ............ ............ ............ ............ Weighted average common shares outstanding 11,792,350 11,761,911 11,597,102 ............ ............ ............ ............ ............ ............ Diluted earnings per common share $0.71 $0.50 $1.30 ............ ............ ............ ............ ............ ............ Weighted average common and common equivalent shares outstanding 12,071,022 11,977,848 12,054,176 ............ ............ ............ ............ ............ ............ See Notes to Consolidated Financial Statements.
Excel Technology, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended December 31, 2002, 2001 and 2000 Accumulated Additional Other Compre- Compre- Preferred Stock Common Stock Paid-In Retained hensive (Loss) hensive Shares Amounts Shares Amounts Capital Earnings Income Total Income ....... ....... .......... ....... ........... ........... .............. ............ ........... Balances at December 31, 1999 0 $ 0 11,300,941 $11,301 $43,438,702 $26,193,600 $(642,390) $ 69,001,213 Exercise of common stock options and warrants 0 0 458,384 458 1,388,098 0 0 1,388,556 Net income for the year 0 0 0 0 0 15,650,978 0 15,650,978 $15,650,978 Foreign currency translation adjustment 0 0 0 0 0 0 401,014 401,014 401,014 ........... Comprehensive income 0 0 0 0 0 0 0 0 $16,051,992 ....... ....... .......... ....... ........... ........... ........... ............... ........... ........... Balances at December 31, 2000 0 0 11,759,325 11,759 44,826,800 41,844,578 (241,376) 86,441,761 Exercise of common stock options 0 0 4,244 5 29,704 0 0 29,709 Net income for the year 0 0 0 0 0 5,938,488 0 5,938,488 $ 5,938,488 Foreign currency translation adjustment 0 0 0 0 0 0 (812,384) (812,384) (812,384) ........... Comprehensive income 0 0 0 0 0 0 0 0 $ 5,126,104 ....... ....... .......... ....... ........... ........... ........... ............ ........... ........... Balances at December 31, 2001 0 0 11,763,569 11,764 44,856,504 47,783,066 (1,053,760) 91,597,574 Exercise of common stock options 0 0 41,320 41 544,050 0 0 544,091 Net income for the year 0 0 0 0 0 8,512,359 0 8,512,359 $ 8,512,359 Foreign currency translation adjustment 0 0 0 0 0 0 1,602,932 1,602,932 1,602,932 ........... Comprehensive income 0 0 0 0 0 0 0 0 $10,115,291 ....... ....... .......... ....... ........... ........... ........... ............... ........... ........... Balances at December 31, 2002 0 $ 0 11,804,889 $11,805 $45,400,554 $56,295,425 $ 549,172 $102,256,956 ....... ....... .......... ....... ........... ........... ........... ............... ....... ....... .......... ....... ........... ........... ........... ...............
See Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2002, 2001 and 2000 2002 2001 2000 ............ ............ ............ Operating activities: Net income $ 8,512,359 $ 5,938,488 $ 15,650,978 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,745,988 3,836,241 3,504,416 Provision for bad debts 313,800 336,365 191,410 Deferred income taxes 817,000 826,000 (4,900) Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (2,155,278) 3,337,401 (3,240,231) Inventories 94,644 89,934 (4,463,317) Other current assets 318,150 (297,835) (490,766) Other assets 9,878 173,413 100,097 Accounts payable (1,589,573) (427,961) 1,074,109 Accrued expenses and other current liabilities 1,247,458 (1,075,736) (281,791) ............ ............ ............ Net cash provided by operating activities 10,314,426 12,736,310 12,040,005 ............ ............ ............ Investing activities: Cash paid for acquisitions, net of cash acquired (11,254,981) 0 (4,409,916) Purchases of property, plant and equipment (4,033,841) (15,512,916) (3,874,144) ............ ............ ............ Net cash used in investing activities (15,288,822) (15,512,916) (8,284,060) ............ ............ ............ Financing activities: Proceeds from exercise of common stock options and warrants 498,101 29,709 1,388,556 Payments of notes payable 0 (15,364) (20,573) ............ ............ ............ Net cash provided by financing activities 498,101 14,345 1,367,983 ............ ............ ............ Effect of exchange rate changes on cash and cash equivalents 86,511 (32,066) 401,013 ............ ............ ............ Net (decrease) increase in cash and equivalents (4,389,784) (2,794,327) 5,524,941 Cash and equivalents - beginning of year 16,211,865 19,006,192 13,481,251 ............ ............ ............ Cash and equivalents - end of year $ 11,822,081 $16,211,865 $19,006,192 ............ ............ ............ ............ ............ ............ Supplemental Cash Flow Information .................................. Cash paid for: Interest $ 8,072 $ 33,066 $ 18,130 ............ ............ ............ ............ ............ ............ Income taxes $ 1,949,780 $ 3,239,876 $ 8,901,062 ............ ............ ............ ............ ............ ............ See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements December 31, 2002 and 2001 (1) Summary of Significant Accounting Policies .......................................... Excel Technology, Inc. and Subsidiaries (the "Company") designs, develops, manufactures and markets laser systems and electro-optical components, primarily for the electronic, semiconductor, scientific and other industrial markets. The significant accounting policies used in the preparation of the consolidated financial statements of the Company are as follows: Basis of Presentation ..................... The consolidated financial statements include the accounts of Excel Technology, Inc. (Excel) and its wholly-owned subsidiaries: Continuum Electro-Optics, Inc. (Continuum); Excel Technology Japan Holding Company Ltd. (Excel Japan); Synrad, Inc. (Synrad); Photo Research, Inc. (Photo Research); Excel Technology Europe GmbH (previously named Quantronix GmbH); Cambridge Technology, Inc. (Cambridge); Quantronix Corporation (Quantronix); Baublys- Control Laser Corporation (Baublys-Control Laser); Control Systemation, Inc. (CSI); The Optical Corporation (TOC); Quantronix International Corporation (a Foreign Sales Corporation); and Excel Technology Asia Sdn. Bhd. (Excel Asia). All material intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition ................... The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as amended. SAB 101 requires that four basic criteria must be met before revenue can be recognized: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the fee is fixed and determinable; and 4) collectibility is reasonably assured. The provisions of SAB 101 were adopted by the Company effective January 1, 2000. The Company's revenues are generated from the following: 1)product sales, including product upgrades and replacement part sales; 2) maintenance agreements; and 3) agreements for services to be rendered. For services rendered, customers are billed and revenues are recognized as the related services are performed. The Company's product lines principally consist of laser-based systems and electro-optical components used in a wide range of applications by different types of end-users and are often used as sub-assemblies required for end products manufactured by the customer. Revenue relating to these products is recognized upon transfer of title to the customer, which is generally upon shipment. Related shipping and handling costs are included in cost of sales and services. With respect to maintenance agreements, revenue is recognized and customers are generally billed on a monthly or quarterly basis over the term of the agreement. The Company manufactures one product called a Photomask Defect Repair System ("DRS"). These are very large, highly complex machines. The terms of sale with respect to these items require that the Company perform installation due to the technical expertise required. Due to the post-shipment installation obligations with respect to the DRS's, the Company defers revenue recognition on the sale of DRS's until it has substantially satisfied its post-shipment obligations. Cash and Equivalents .................... Cash and equivalents of $11.8 million and $16.2 million at December 31, 2002 and 2001, respectively, consist of demand deposits with banks and highly liquid money market funds. The Company considers investments with maturities of three months or less when purchased to be cash equivalents. Inventories ........... Inventories consist of material, labor and overhead and are stated at the lower of weighted average cost or market. Weighted average cost approximates actual cost on a first-in, first-out basis. On a quarterly basis, the Company compares the amount of the inventory on hand and under commitment with its latest forecasted requirements to determine whether write-downs for excess or obsolete inventory are required. Although the write- downs for excess or obsolete inventory reflected in the Company's consolidated balance sheet at December 31, 2002 and 2001 are considered adequate by the Company's management, there can be no assurance that these write-downs will prove to be adequate over time to cover ultimate losses in connection with the Company's inventory. Accounts Receivables .................... The Company is required to estimate the collectibility of its trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 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. Goodwill represents the excess of cost over fair value of net assets of businesses acquired and is evaluated annually for impairment. Prior to 2002, goodwill was amortized on a straight-line basis over periods ranging from 15 to 20 years. Research and Development Costs .............................. Research and development costs include material and labor associated with company-sponsored projects. Such costs are expensed as incurred. Long-Lived Assets ................. The Company reviews long-lived assets for impairment when circumstances indicate 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 amounts 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. Warranty Reserve ................ The Company analyzes its warranty reserve for reasonableness on an annual basis. Based upon a three-year history of warranty expense incurred, the Company believes that the carrying amounts of its warranty reserve at December 31, 2002 and 2001 are reasonable. Changes in the liability for product warranty in 2002 were as follows: Balance at January 1, 2002 $ 400,619 Warranties issued during 2002 389,353 Settlements made during 2002 (365,637) Warranty liabilities assumed in acquisition (1) 555,820 ......... Balance at December 31, 2002 $ 980,155 ......... ......... (1) Assumed in the acquisition of Continuum (see Note 2) 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. Foreign Currency Translation ............................ The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with Financial Accounting Standards Board ("FASB") Statement No. 52, "Foreign Currency Translation." All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The resulting cumulative translation adjustment of approximately $549 thousand and ($1.1 million) at December 31, 2002 and 2001, respectively, is reflected as accumulated other comprehensive income (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 net transaction gains (losses) of $332 thousand, ($7 thousand) and ($177 thousand) for the years ended December 31, 2002, 2001 and 2000, respectively, which is reflected in other (income) expense in the consolidated statements of income. Earnings Per Share .................. The Company presents two earnings per share ("EPS") amounts, basic and diluted. Basic EPS is calculated based on net income and the weighted-average number of common shares outstanding during the reported period. Diluted EPS includes the effect of potentially dilutive securities, using the treasury stock method, on weighted-average shares outstanding. Fair Value of Financial Instruments ................................... The recorded amounts of the Company's cash and equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short-term nature of these items. Use of Estimates ................ The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentration of Credit Risk ............................ Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of its holdings of cash and equivalents and accounts receivable. Cash and equivalents are deposited with high credit quality financial institutions. Concentration of credit risk with respect to accounts receivable is limited due to the Company's large number of customers and their dispersion throughout the United States, Europe and Asia. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Accounting for Stock-Based Compensation ....................................... At December 31, 2002, the Company has two stock-based employee compensation plans, which are more fully described in Note 9. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market values of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" to stock-based employee compensation. Year ended December 31, 2002 2001 2000 ........... ........... ........... Net income, as reported $ 8,512,359 $ 5,938,488 $15,650,978 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,064,550) (1,497,545) (1,448,514) ........... ........... ........... Proforma net income $6,447,809 $ 4,440,943 $14,202,464 ........... ........... ........... ........... ........... ........... Earnings per share: Basic - as reported $0.72 $0.50 $1.35 ..... ..... ..... Basic - proforma $0.55 $0.38 $1.22 ..... ..... ..... Diluted - as reported $0.71 $0.50 $1.30 ..... ..... ..... Diluted - proforma $0.54 $0.37 $1.18 ..... ..... ..... Accumulated Other Comprehensive Income (Loss) ............................................. Accumulated other comprehensive income (loss) ("comprehensive income (loss)") refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive income (loss) but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The Company's comprehensive income (loss) is composed of unrealized gains and losses on foreign currency translation adjustments. New Accounting Pronouncements ............................. On January 1, 2002, the Company adopted SFAS No. 141 "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. Identifiable intangible assets with determinable useful lives will continue to be amortized. In 2002, the Company completed its initial assessment, as of January 1, 2002, of the assets impacted by the adoption of SFAS 142, and its annual assessment as of December 31, 2002. Based upon such reviews, no impairment to the carrying value of goodwill was identified, and the Company ceased amortizing goodwill effective January 1, 2002 (see Note 5). In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated retirement costs. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has adopted both SFAS 143 and SFAS 144 on January 1, 2002. These statements did not materially impact the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This pronouncement is effective for exit or disposal activities that are initiated after December 31, 2002, and requires these costs to be recognized when the liability is incurred and not at project initiation. The Company does not expect this statement to have a material impact on its financial statements. (2) Acquisitions ............ On October 1, 2002, the Company, through a newly formed wholly- owned subsidiary, Continuum Electro-Optics, Inc., acquired substantially all of the assets and properties ("Assets") of Hoya Photonics, Inc., d/b/a Continuum, and Hoya Photonics' wholly-owned subsidiaries, Continuum Electro-Optics GmbH, Continuum France EURL and Hoya Continuum Corporation (collectively, "Continuum"), relating to the business of developing, manufacturing and marketing pulsed lasers and related accessories for the scientific and commercial marketplaces (the "Business of the Scientific Division"), for $11.2 million in cash, including approximately $500 thousand in transaction costs, and the assumption of trade payables, accrued expenses and other specified liabilities. The acquisition was accounted for as a purchase and, accordingly, acquired assets and liabilities are recorded at their fair values, and the operating results of Continuum have been included in the Company's consolidated results of operations since the date of acquisition. The final purchase price allocation of the Continuum business resulted in the following condensed balance of assets acquired and liabilities assumed: Continuum Final Purchase Price Allocation ............... Receivables $ 3,406,380 Inventories 4,637,301 Property, plant and equipment 235,587 Other assets 473,982 Goodwill *7,262,516 ........... Total assets acquired 16,015,766 Accounts payable 2,215,223 Other current liabilities 2,608,816 ........... Total liabilities assumed 4,824,039 ........... Net assets acquired $11,191,727 ........... ........... (*) Approximately $7.3 million is expected to be deductible for tax purposes. Prior to the acquisition, the Company had not participated in the high-energy pulsed-laser market. The Company believes that the purchase of Continuum provides the Company with a foundation upon which to build. It is anticipated that the addition of this technology, coupled with its tenability will significantly increase the Company's ability to provide broad-based, cost effective solutions for customers in the industrial and scientific markets. In addition, Quantronix and CSI are expected to contribute to and benefit from Continuum's technology. The acquisition also expands the Company's global presence as it has locations in the United States, Japan, Germany and France. Pro-forma results of operations assume the acquisition of Continuum had been made at the beginning of 2001 and reflect the historical results of operations of the purchased business adjusted for the effects of reduced interest income, amortization expense and income tax expense. Year ended December 31, ............................. 2002 2001 ............ ............ Net sales and services $111,838,481 $111,792,288 Net income 7,612,884 4,036,966 Basic earnings per common share $0.65 $0.34 Diluted earnings per common share $0.63 $0.34 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 2001, or the results that may occur in the future. On August 31, 2002, the Company, through a newly formed wholly- owned subsidiary, Excel Japan, acquired all of the issued and outstanding shares of OptoFocus Corporation ("OptoFocus"), a distribution organization representing the Company's Quantronix product line in Japan, for approximately $272 thousand in cash (including acquisition related expenses). The purchase price was determined by arms length negotiations between the Company and OptoFocus. The acquisition was accounted for as a purchase and, accordingly, acquired assets and liabilities are recorded at their fair values, and the operating results of OptoFocus have been included in the Company's consolidated results of operations since the date of acquisition. The final purchase price allocation of the OptoFocus business resulted in approximately $719 thousand in total assets acquired and approximately $447 thousand in total liabilities acquired. If the acquisition of OptoFocus had taken place at the beginning of 2001, it would not have had a material impact on the Company's consolidated results of operations as presented. On July 1, 2000, Excel Europe, a subsidiary of the Company, acquired substantially all of the assets and certain liabilities of Baublys GmbH ("Baublys"), a company engaged in the manufacturing and sale of customized laser systems and engraving machines. The purchase price, including additional costs directly related to the acquisition, amounted to $4.5 million and was internally funded using the Company's own cash. The acquisition has been accounted for as a purchase and, accordingly, the operating results of Baublys have been included in the Company's consolidated results of operations since the date of acquisition. The goodwill, approximating $3.5 million, was being amortized on a straight-line basis over 15 years. In accordance with the provisions of SFAS 142, effective January 1, 2002 the Company ceased amortizing the goodwill associated with this acquisition, which at such time had a carrying value of approximately $3.2 million. (3) Inventories ........... Inventories consist of the following: December 31, ............................... 2002 2001 ............. ............. Raw materials $ 11,677,730 $ 10,028,445 Work-in-process 7,670,186 5,590,729 Finished goods 4,277,708 3,001,963 Consigned inventory 855,740 598,558 ............. ............. $ 24,481,364 $ 19,219,695 ............. ............. ............. ............. (4) Property, Plant and Equipment ............................. Property, plant and equipment at cost consists of the following: December 31, ............................ Useful life 2002 2001 ........... ............. ............. Land 0 $ 4,236,056 $ 4,236,056 Buildings 30 years 19,006,533 17,363,772 Leasehold improvements Lease term 1,390,476 1,368,053 Fixtures and computer equipment 3-8 years 4,763,843 4,381,915 Machinery and equipment 4-8 years 9,178,008 7,492,334 Laboratory equipment 4-8 years 3,892,493 3,222,932 ............. ............. 42,467,409 38,065,062 Less accumulated depreciation and amortization 14,685,389 11,939,715 ............. ............. $ 27,782,020 $ 26,125,347 ............. ............. ............. ............. Depreciation and amortization expense aggregated approximately $2.7 million, $2.4 million and $2.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. (5) Goodwill ........ The change in the net carrying amount of goodwill for the year ended December 31, 2002 is as follows: December 31, 2002 ................. Goodwill, net, beginning of year $22,120,116 Acquisition of Continuum 7,262,516 Acquisition of OptoFocus 0 ................. Goodwill, net, end of year $29,382,632 ................. ................. The following table provides proforma disclosure of net income and diluted earnings per common share for the years ended December 31, 2001 and 2000, as if goodwill had not been amortized: Year ended December 31, ............................. 2001 2000 ............ ............ Reported net income $ 5,938,488 $ 15,650,978 Amortization 1,458,639 1,336,575 ............ ............ Adjusted net income $ 7,397,127 $ 16,875,553 ............ ............ ............ ............ Reported diluted earnings per common share $0.50 $1.30 Amortization per common share and common share equivalent $0.12 $0.10 ..... ..... Adjusted diluted earnings per common share $0.62 $1.40 ..... ..... ..... ..... (6) Income Taxes ............ Pre-tax income for the years ended December 31, 2002, 2001, and 2000 was comprised of domestic income of $13.6 million, $10.4 million and $24.0 million, respectively, and foreign losses of $876 thousand, $1.2 million, and $52 thousand, respectively. The provision for income taxes consists of: Year ended December 31, ..................................... 2002 2001 2000 ........... ........... ........... Current: Federal $ 2,951,768 $ 1,763,497 $ 7,467,742 State and local 373,219 648,539 840,861 Foreign 50,668 0 0 ........... ........... ........... 3,375,655 2,412,036 8,308,603 ........... ........... ........... Deferred: Federal 817,000 826,000 (4,900) ........... ........... ........... $ 4,192,655 $ 3,238,036 $ 8,303,703 ........... ........... ........... ........... ........... ........... The current provision for income taxes includes a tax benefit of $391 thousand for 2002, $394 thousand for 2001 and $196 thousand for 2000 for utilizing Federal net operating loss carryforwards. The effective income tax rate differed from the statutory Federal income tax rate due to the following items: Year ended December 31, ..................................... 2002 2001 2000 ........... ........... ........... Taxes at statutory Federal income tax rate $ 4,446,755 $ 3,120,018 $ 8,402,255 State income taxes, net of Federal benefit 242,593 428,036 546,560 Non-deductible amortization of goodwill 0 96,400 96,400 ETI/Foreign Sales Corporation benefit (833,216) (582,024) (893,485) Change in valuation allowance 589,000 357,000 53,100 Other (252,477) (181,934) 98,873 ........... ........... ........... $ 4,192,655 $ 3,238,036 $ 8,303,703 ........... ........... ........... ........... ........... ........... The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2002 and 2001 are as follows: December 31, ............................... 2002 2001 ............ ............. Deferred tax assets: Excess of tax over financial statement basis of inventory $ 614,000 $ 610,000 Allowance for doubtful accounts 105,000 155,000 Accrued warranty costs 103,000 103,000 Other accrued expenses 246,000 244,000 Benefits of U.S. net operating loss carryforwards 583,000 974,000 Benefits of foreign net operating loss carryforwards 1,635,000 1,046,000 Plant and equipment depreciation 304,000 186,000 ............ ............. Total deferred tax assets 3,590,000 3,318,000 Less valuation allowance (1,935,000) (1,346,000) ............ ............. 1,655,000 1,972,000 ............ ............. Deferred tax liabilities: Goodwill amortization (767,000) (267,000) ............. ............. Total deferred tax liabilities (767,000) (267,000) ............. ............. Net deferred tax assets $ 888,000 $ 1,705,000 ............. ............. ............. ............. At December 31, 2002, Excel has available net operating loss carryforwards ("NOL's"), expiring in 2005 through 2007, of approximately $1.3 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, 2002, Quantronix and its subsidiaries have available for tax purposes utilizable NOL's of approximately $450 thousand 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 $1.1 million as a result of the change in ownership from the merger with Excel. While management believes that the Company's deferred tax assets 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 make 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 $1.9 million, as of December 31, 2002. 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, ............................... 2002 2001 ............. ............. Salaries, wages, commissions and bonuses $ 2,345,027 $ 1,395,650 Accrued vacation/holiday/sick pay 926,303 672,354 Accrued accounts payable 159,681 756,363 Customer deposits 1,926,683 612,781 Accrued royalties payable 147,427 101,530 Warranty reserve 980,155 400,619 Unearned service contract revenue 214,535 146,845 Professional fees payable 340,553 276,412 Income taxes payable 1,734,353 760,615 Other 2,266,774 1,998,124 ............. ............. $ 11,041,491 $ 7,121,293 ............. ............. ............. ............. (8) Line of Credit .............. On July 23, 1998, the Company entered into a credit facility with The Bank of New York 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, at the Company's election, 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 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. As of December 31, 2002 and 2001, the Company had no borrowings outstanding. (9) Stockholders' Equity .................... Stock Option Plans .................. In 1990, Excel adopted a stock option plan (the "Plan") which provided for the granting of incentive stock options and non- incentive 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. Options granted under the Plan, which terminated on July 30, 2000, may be exercisable for a period of up to ten years. Through December 31, 2002, all options granted to employees 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 an exercise price equal to 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 non-incentive 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, the option price must be at least 110% of the fair market value on the date of the grant, and for non-incentive 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, 2002, all options granted to employees 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. 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, 1999 894,692 $ 7.70 Granted 407,000 $ 25.16 Exercised (433,764) $ 7.48 Cancelled (87,752) $ 7.12 ............. Outstanding at December 31, 2000 780,176 $ 17.00 Granted 55,000 $ 19.71 Exercised (4,244) $ 7.00 Cancelled (10,620) $ 10.63 ............. Outstanding at December 31, 2001 820,312 $ 17.31 Granted 457,000 $ 15.32 Exercised (41,320) $ 12.05 Cancelled (165,108) $ 23.90 ............. Outstanding at December 31, 2002 1,070,884 $ 15.65 ............. ............. At December 31, 2002, 2001 and 2000, a total of 561,294, 410,342 and 200,809 options were exercisable at weighted average exercise prices of $15.33, $14.81 and $13.26, respectively, and options for the purchase of 147,050, 452,050 and 543,452 common shares were available for future grants under the 1998 plan, respectively. The options outstanding as of December 31, 2002 are summarized in ranges as follows: Weighted Number of average Exercise options contractual Options price outstanding remaining life Excercisable .......... ............ .............. ............ $ 6.50 9,334 5.81 years 9,334 $ 7.00 259,850 5.03 years 236,960 $ 13.06 62,200 6.48 years 44,200 $ 15.15 393,000 9.13 years 40,000 $ 16.66 52,000 9.78 years 0 $ 19.71 45,000 8.29 years 41,000 $ 24.63 199,500 7.23 years 139,800 $ 29.00 50,000 7.42 years 50,000 ......... ....... 1,070,884 561,294 ......... ....... ......... ....... Other ..... No warrants were available for exercise during 2002 and 2001. In 2000, 23,000 warrants were exercised. Shares Reserved for Issuance ............................ At December 31, 2002, the Company had reserved, authorized and unissued 1,217,934 common shares for the following purposes: Shares ....... 1990 Stock option plan 237,934 1998 Stock option plan 980,000 Stock-Based Compensation ........................ The per share weighted-average fair value of stock options and warrants granted during 2002, 2001 and 2000 was $15.32, $9.33 and $11.99, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2002- expected dividend yield of 0%, risk free interest rates of 4.0% and 2.6%, expected stock volatility of 56% and expected life of approximately 4.0 years; 2001- expected dividend yield of 0%, risk free interest rate of 4.9%, expected stock volatility of 55% and an expected option life of approximately 4.0 years; 2000- expected dividend yield of 0%, risk free interest rate of 6.3%, expected stock volatility of 53% and an expected option life of approximately 4.0 years. (10) Earnings Per Share .................. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations: ..................2002................ Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. ......... Basic EPS $ 8,512,359 11,792,350 $0.72 Effect of Dilutive Securities: Stock Options 278,672 ............. Diluted EPS $ 8,512,359 12,071,022 $0.71 ........... ............. ......... ........... ............. ......... ..................2001................ Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. ......... Basic EPS $ 5,938,488 11,761,911 $0.50 Effect of Dilutive Securities: Stock Options 215,937 ............. Diluted EPS $ 5,938,488 11,977,848 $0.50 ........... ............. ......... ........... ............. ......... .................2000................. Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. ......... Basic EPS $15,650,978 11,597,102 $1.35 Effect of Dilutive Securities: Stock Options and Warrants 457,074 ............ Diluted EPS $15,650,978 12,054,176 $1.30 ........... ............. ......... ........... ............. ......... There were 294,500, 460,500, and 407,000 unexercised stock options not included as part of the diluted EPS calculations for 2002, 2001 and 2000, respectively, because they would have been antidilutive for the periods presented. (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. (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 $ 387 thousand, $404 thousand and $423 thousand in 2002, 2001 and 2000, respectively. (13) Commitments and Contingencies ............................. Operating Leases ................ The Company and its subsidiaries lease certain buildings, vehicles and equipment under non-cancelable operating leases. At December 31, 2002, the future minimum lease payments under non- cancelable operating leases are as follows: 2003 $ 1,488,871 2004 802,635 2005 666,918 2006 458,712 2007 279,041 Thereafter 244,910 ............ $ 3,941,087 ............ ............ Rent expense approximated $957 thousand, $2.1 million, and $1.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. Employment and Consulting Agreements .................................... Excel has entered into employment agreements with certain key executives that provide for severance upon termination without cause, aggregating approximately $1.5 million. (14) Foreign and Domestic Operations and Export Sales ................................................ The Company operates in one business segment which designs, develops, manufactures and markets laser systems and electro- optical components. Information concerning foreign and domestic operations and export sales is as follows: As of or the year ended December 31, 2002 2001 2000 ............ ............ ............ Net sales and services to unaffiliated customers: United States operations $ 67,731,476 $ 67,260,948 $ 91,018,082 European operations 23,307,720 20,073,323 15,809,484 Asian operations 3,474,285 1,158,017 892,834 ............ ............ ............ $ 94,513,481 $ 88,492,288 $107,720,400 ............ ............ ............ ............ ............ ............ Operating income (loss): United States operations $ 13,479,327 $ 9,774,458 $ 23,120,998 European operations (1,600,173) (1,242,962) (98,690) Asian operations 313,332 71,799 129,907 ............ ............ ............ $ 12,192,486 $ 8,603,295 $ 23,152,215 ............ ............ ............ ............ ............ ............ Identifiable assets: United States operations $ 96,577,557 $ 85,552,201 $ 83,448,272 European operations 16,667,458 16,175,597 14,853,942 Asian operations 5,478,634 777,223 683,455 ............ ............ ............ $118,723,649 $102,505,021 $ 98,985,669 ............ ............ ............ ............ ............ ............ In determining operating income (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, 2002, 2001 and 2000, the Company had foreign and export sales of approximately $59.2 million, $51.3 million and $56.1 million, representing 63%, 58% and 52%, 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 2002, 2001 and 2000. No accounts receivable from a customer exceeded five percent of the Company's total accounts receivable at December 31, 2002. One customer accounted for 5.8% of the Company's total accounts receivable at December 31, 2001. (15) Related Party Transactions .......................... Two directors of the Company also provide services to the Company as legal counsel. During 2002, 2001 and 2000, the Company paid approximately $388 thousand, $55 thousand and $174 thousand, respectively, for legal services rendered by the respective law firms that the directors represent. Schedule II ........... EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2002, 2001 and 2000 Column A Column B Column C Column D Column E ................ .......... ................. ............ .......... Balance at Additions charged (Deductions) Balance at beginning to cost and additions - end of Description of period expenses describe period ................ .......... ................. ............ .......... Allowance for doubtful accounts: Year ended December 31,: 2002 $ 717,000 $ 313,800 $ (37,800)(1) $ 993,000 2001 $ 559,000 $ 336,000 $(178,000)(1) $ 717,000 2000 $ 464,000 $ 191,000 $(173,000)(1) $ 559,000 $ 77,000(2) (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 is 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, 2002. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 is 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, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 is 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, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 is 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, 2002. ITEM 14. CONTROLS AND PROCEDURES Within 90 days prior to the date of filing this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the CEO/CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's CEO/CFO concluded that the Company's disclosure controls and procedures are effective in timely alerting him to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. Subsequent to the date of the Company's evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. PART IV ....... ITEM 15. EXHIBITS, FINANCIAL STATEMENT, 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): Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Earnings for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedule (included in Part II Item 8)* Schedule ........ II Valuation and Qualifying Accounts 3. Exhibits included herein: See Exhibit Index below for exhibits filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. Current Report on Form 8-K, filed November 25, 2002, relating to the transaction between the Company and Hoya Photonics, Inc. and its related subsidiaries. ..................................... * 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. 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 By: /s/ Antoine Dominic ................................ Antoine Dominic, Chief Executive Officer Date: March 18, 2003 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 Chairman of the Board ..................... and Director March 18, 2003 J. Donald Hill /s/ Antoine Dominic Chief Executive Officer, March 18, 2003 ..................... President, Chief Operating Officer, Antoine Dominic and Director (Principal Executive Officer and Principal Financial and and Accounting Officer) /s/ Steven Georgiev Director March 18, 2003 ..................... Steven Georgiev /s/ Howard S. Breslow Director March 18, 2003 ..................... Howard S. Breslow /s/ Joseph J. Ortego ..................... Director March 18, 2003 Joseph J. Ortego CERTIFICATION I, Antoine Dominic, certify that: 1. I have reviewed this annual report on Form 10-K of Excel Technology, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Antoine Dominic ........................... Antoine Dominic, President, Chief Executive Officer, and Chief Operating Officer (Principal Accounting Officer) Dated: March 17, 2003 INDEX TO EXHIBITS Exhibit Number Document ........ ......... 2 Asset Purchase Agreement, dated as of October 11, 2002, by and among Continuum Electro-Optics, Inc. (formerly Excel Continuum Corporation), Hoya Photonics, Inc., et. al. Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed November 25, 2002. 3.1 Restated Certificate of Incorporation dated November 13, 1990, as amended. Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-39375. 3.2 By-Laws, as amended. Incorporated by reference to the Company's Registration Statement on Form S-4, File No. 33-47440. 4 Specimen Certificate for Company's Common Stock. Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-39375. 10.1 1990 Stock Option Plan, as amended. Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-52612. 10.2 Employment Agreement, dated as of October 10, 2000, between the Company and J. Donald Hill (Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000), as amended by letter agreement, dated October 3, 2002* 10.3 Employment Agreement, dated as of October 10, 2000, between the Company and Antoine Dominic. Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 10.4 1998 Stock Option Plan. Incorporated by reference to 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. 10.5 Loan Agreement, dated as of July 20, 1998, by and among the Company and The Bank of New York. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 21 List of subsidiaries.* 23 Consent of Ernst & Young LLP* 99 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * filed herewith EXHIBIT 10.2 AMENDMENT TO EMPLOYMENT AGREEMENT EXCEL TECHNOLOGY, INC. 41 RESEARCH WAY EAST SETAUKET, NY 11733 As of October 3, 2002 Mr. J. Donald Hill Re: Employment Agreement .................... Dear Don: Reference is made to the employment agreement (the "Employment Agreement"), dated as of October 10, 2000, by and between you and Excel Technology, Inc. (the "Corporation"). Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Employment Agreement. For good and valuable consideration, the receipt of which is hereby acknowledged, the Corporation hereby agrees to the following amendments to the Employment Agreement: (a) the Base Salary is decreased to $175,000 per annum for the remainder of the Employment Period and (b) the non-accountable automobile allowance shall be increased to $2,000 per month. Except as amended or modified herein, the Employment Agreement shall remain in full force and effect. If the foregoing is in accordance with your understanding, kindly sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become part of the Employment Agreement and binding between us. Sincerely, EXCEL TECHNOLOGY, INC. By: /s/ Antoine Dominic ................... Antoine Dominic AGREED AND ACCEPTED: /s/ J. Donald Hill .................... J. Donald Hill EXHIBIT 21 LIST OF SUBSIDIARIES Name of Subsidiary: Incorporated in: ......................... ................ Cambridge Technology, Inc. Massachusetts Continuum Electro-Optics, Inc. (d/b/a "Continuum") Delaware Control Laser Corporation (d/b/a "Baublys-Control Laser") Florida Control Systemation, Inc. Delaware Excel Technology Services Company Delaware Quantronix Corporation Delaware Quantronix International Corp. (1) Barbados Photo Research, Inc. Delaware Synrad, Inc. Washington The Optical Corporation California Excel Technology Asia Sdn. Bhd. Malaysia Excel Technology Europe GmbH Germany Baublys GmbH (2) Germany Excel Technology France S.A.S. (2) France Excel Technology Japan Holding Co., Ltd. Japan Excel Technology Japan K.K. (3) Japan (1) A wholly-owned subsidiary of Quantronix Corporation (2) A wholly-owned subsidiary of Excel Technology Europe GmbH (3) A wholly-owned subsidiary of Excel Technology Japan Holding Co., Ltd. EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-71122) pertaining to the Excel Technology, Inc. 1990 Stock Option Plan, the Registration Statement (Form S-3 No. 33-34523) of Excel Technology, Inc. and in the related Prospectus, and the Registration Statement (Form S-8 No. 33-35934) pertaining to the Excel Technology 1998 Stock Option Plan of our report dated January 22, 2003, with respect to the consolidated financial statements and schedule of Excel Technology, Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young ................. Melville, New York March 18, 2003 EXHIBIT 99 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Antoine Dominic, Chief Executive Officer and Chief Financial Officer of Excel Technology, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15. U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 18, 2003 /s/ Antoine Dominic ................................. Antoine Dominic, President, Chief Executive Officer, and Chief Operating Officer (Principal Accounting Officer)