10-K 1 thrtenk.txt 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, 2003 ................. 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 $265,663,185 based on the last sale price of the common stock as reported by NASDAQ on June 30, 2003. 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 February 18, 2004 was: 11,976,436. DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement to be filed in connection with the Registrant's 2004 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 manufactures and markets photonics-based solutions, consisting of laser systems and electro-optical components primarily for industrial and scientific applications. 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. The Company's strategy is to grow internally and through acquisitions of complementary businesses. Historically, the Company has been successful in integrating acquired companies. The following is a history of its acquisitions and new company formations since October 1992: 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. Laser scanners 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 manufacture 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 parts handling workstations for factory automation. CSI is headquartered in a Company-owned facility 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 laser marking and engraving 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 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 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 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. On April 23, 2003, the Company created Excel Laser Technology Private Limited ("Excel SouthAsia JV") based in Mumbai, India as a joint venture for the distribution of certain subsidiary products in Southern Asia. Excel SouthAsia JV will focus on the marketing, sales, installation, applications development and customer service of those products. The Company has a 50% equity ownership interest in the joint venture. In December 2003, the Company acquired D Green (Electronics) Limited ("DGE"). DGE is engaged primarily in the business of developing, manufacturing and marketing power supplies for laser systems. Current Products and Applications ................................. Marking and Engraving Systems ............................. The Company designs, manufactures, and markets industrial, computer- controlled turnkey laser marking/engraving and mechanical marking/engraving and 3D engraving systems, primarily at Baublys-Control Laser. The Company is a leading source of industrial beam-steered laser marking systems and mechanical marking and engraving systems used for coding, marking, engraving, deep engraving and 3D engraving, producing high quality, permanent, high speed marks on most materials. 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, jewelry, consumer/commercial, electronic/semiconductor, medical, mold and die, packaging, tools and tooling, and the trophy and award industries. The Company'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 integrated software allowing for seamless integration into any production process. The laser marking/engraving, deep engraving and 2-1/2 and 3D marking systems include a full product range of CO2, lamp pumped, diode pumped, infrared, frequency doubled, tripled, and quadrupled Nd:YAG and Nd:YLF laser systems including the "Concorde", "Comet", "Icon", "Insignia", "Image", "Aurora", "Accent", "Ultra Power Mark", "Deep Power Engraver", "BL65" and "BL150" Deep engraving systems. The mechanical engraving systems include the "Universal Marking & Engraving Machine", the "Inclined Bed CNC Marking & Engraving Machine", the "Mold Engraving Machine" and the "Table Top Engraving Machine". In 2003, the Company introduced the new Bottle Mold Engraving Systems for engraving non-symmetrical parts, the new Universal Engraving Systems for handling larger components and a new low-cost CO2 marking system, the "Comet". The Company also introduced several new industry specific integrated marking solutions including: the IC-JEDEC Tray Marking Systems, Medical Implant Marking Systems, Chip Capacitor Marking Systems, Catheter Tube Marking Systems, High Contrast Glass Marking Systems and Watch Marking Systems. New software versions were also introduced including the Microsoft(Trademark) XP version of the "InstaMark" Graphics Plus Software and the integrated version of WIN-Laser and LaserFinish for easier creation and decorating (matting and texturing) of coining dies. Laser Micro-machining, Photomask Repair and Automation Systems ............................................................... The Company designs and manufactures laser micro-machining systems, parts handling/automation, systems integration, and software engineering solutions at CSI, the Company's subsidiary based in Orlando, Florida. The Company 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 into the same workstation. The workstation can be taken from a basic XY system with a manually adjustable focusing beam delivery system and enhanced with a variety of options such as XY with a programmable focusing beam delivery system, vision system for part alignment and semi-automatic focusing adjustment, gas assist with programmable pressure regulator and part fixturing. The Company introduced the FA/Lit (Trademark) in 2003, a new product targeted at the integrated circuit ("IC") failure analysis market. This system utilizes a patented process for de-capping, cross-sectioning and performing material characterization (Alpha Spectrometry) on ICs, providing a non-destructive method of removing the mold compound and allowing parts to be tested and visibly inspected. This makes it possible to inspect wire bonds, dies and other internal components, even to the point of doing a wire pull test on die leads. Scanning Acoustic Microscope (SAM), x-ray and other failure analysis analytical instrument images of the internal IC can be imported and used by the FA-Pro software to locate and target defects for analysis. These images are then used to navigate the system directly to the defect. Options available include 3D summation utilizing layer by layer spectral analysis data of the mold compound, color vision system with auto zoom (also used for defect and feature navigation), and even a second femtosecond laser system for detailed die analysis on the ICs. The Company 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. Several updates reflecting current technology have been added to the Company's DRS 855 Photomask Defect Repair System product. In 2004, the Company plans to launch a new Photomask Repair System (Model 860X) to address the current industry requirements. The Company has also introduced a large mask repair tool, the "MRS +1000" system specifically designed for the large LCD mask industry. Other additions to automation products include the L2S2 System for Lead-frame Singulation and the "BOARDmaster" automated PCB Depaneling System. CSI continues to provide automation, software, vision systems and other system integration solutions to Baublys-Control Laser and also actively pursues opportunities in automation, parts handling, systems integration, and software engineering from non-laser marking-related customers. The Company also offers engineered software solutions including database, host communications, factory automation, vision adaptation, and system integration development. CO2 Lasers .......... The Company manufactures a range of sealed CO2 lasers for cutting, marking, drilling, and other machining applications for a variety of materials at Synrad, the Company's subsidiary based in Mukilteo, Washington. The CO2 lasers range in power from 10W to 400W. 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, at the Munich Laser Show, we exhibited a wide range of new products including a unique, fully-integrated 400W laser ("firestar" f400), a single tube (linear polarization) fully-integrated 200W laser ("firestar" f201), and a compact, low cost 30W laser ("firestar" v30). In addition, we extended our "firestar" t-technology to include an 80W laser, available in either air or water-cooled versions. In 2004, we plan to launch our high performance, air-cooled 100W laser ("firestar" t100), along with several new lasers based on our four core technologies. The Company sells CO2 lasers primarily to original equipment manufacturers ("OEMs") and system integrators who incorporate the lasers with suitable motion control 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 software packages. The Company'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. The Company also manufactures the FH-Series of OEM marking-heads which, when configured with its 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) 98, 2000, XP and NT4 platforms. Launched in December 2001, the FH-Series "Smart" marking head allows users to build marking systems that can be operated without a PC. Planned developments of this product line in 2004 include USB and network capable heads. Scanners ........ The Company is a market leader in galvanometer based optical scanners, which are manufactured at Cambridge, the Company's subsidiary based in Cambridge, Massachusetts. This technology is critical to a broad, diversified and growing market of laser based system applications. The breadth of laser applications served by the Company's scanners includes: industrial through consumer product laser marking, ink jet marking replacement, laser machining and welding, high density via hole PCB drilling for the cell phone industry, scanning microscopy for genomic DNA research, drug discovery, laser based biomedical diagnostic instruments, high resolution printing, semiconductor wafer inspection and processing, 2D or 3D imaging, and laser projection and entertainment. The Company is the recognized worldwide technology and market share 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. The Company's strong growth is fueled by its R&D commitment to advancing optical scanner technology and the identification and enabling of new OEM applications in the laser systems market. Its newest model 6200 product line of Optical Scanners with patented optical position detection provides new levels of scanning speed and peak accelerations that have enabled volume application growth in the above markets. The Company's other major galvanometer product line is the unique Moving Coil Optical Scanner with its patented capacitive position detection, whose design was pioneered by the Company for applications requiring the highest levels of scanning accuracy and repeatability. Additionally, the Company provides an extensive line of value-added products such as servo electronics, optics, and mounts for complete scanning subassemblies and solutions. High Power Solid-State Lasers and Ultrafast Lasers .................................................. The Company designs, manufactures, and markets solid-state lasers for science, industry, and OEM uses at Quantronix, a subsidiary of the Company located in East Setauket, New York. 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. The Company's current line of scientific products includes the "Integra", "Integra i", "Titan", "Mercury" and "Odin" Series of ultrafast lasers and amplifiers and the Falcon and Darwin high power green lasers. The Company's ultrafast lasers and amplifiers incorporate a material called Titanium-doped 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. A material's properties to be studied vary over this range. The Company's industrial and OEM solid state lasers offer a variety of high power lamp and diode pumped Nd:YAG and Nd:YLF lasers. These are available in infrared, green, UV, and deep UV wavelengths, which makes them ideal for a wide range of marking and micro-machining applications. The Company's scientific ultrafast lasers and amplifiers are being utilized for ultra-fine micro-machining applications. In addition, the Company launched a series of high-powered multi-wavelength diode and lamp-pumped marking systems. In 2002, the Company started offering a variety of laser options and accessories such as power monitoring systems, beam delivery systems, laser energy controllers, vision systems, pulse shapers, and programmable mode controllers. These options are available with software drivers and can readily be integrated into other laser systems or larger materials processing workstation. High Energy Solid State Pulsed Lasers ..................................... The Company is a leading manufacturer of high energy, solid-state pulsed laser systems which are manufactured at Continuum, the Company's subsidiary located in Santa Clara, California. 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 (LIF) 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. The Company sells its high energy solid state pulsed laser 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 higher 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. These tunable laser systems are required for many spectroscopy applications. 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 and offer turn-key performance in a compact package. Energy outputs range from 0.05 to 0.8 Joules per pulse with wavelength coverage of 1064 nm, 532 nm, 355 nm, 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, the Company 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 1064 nm, 532 nm, 355 nm, and 266 nm. 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. The Company's wavelength tunable product lines, the "Surelite" OPO, the "Panther" (Registered Trademark) EX OPO and the ND 6000 dye laser, produce laser light with wavelengths from 200 nm to 4500 nm, providing researchers with full wavelength coverage over the range of greatest interest for optical spectroscopy. In addition to standard pulsed laser products, the Company offers custom laser solutions to fit precise customer needs. The Company 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, 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. The Company offers custom optics services which incorporate polishing optics to extreme flatness (better than 1/20 wave) with low surface roughness and difficult aspect ratios. The Company 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 ........................... The Company is a world leader and innovator in high precision, state- of-the-art electro-optical instrumentation and systems which are manufactured at Photo Research, the Company's Chatsworth, California subsidiary. 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. The Company 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 optical radiation standards and calibration and measurement services to major manufacturers of instruments, displays, devices and materials. All Photo Research instruments are calibrated to NIST-traceable standards. The Company developed many industry standards, such as Spectra (Registered Trademark) Pritchard Optics, utilized in astronomical and star- simulation measurements. The Company 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 the Company's products are made primarily through foreign equipment distribution organizations, by representatives at Excel Europe, its German subsidiary, Excel Japan, its Japanese subsidiary, Excel Asia, its Malaysian subsidiary and Excel SouthAsia JV, a joint venture. Excel Europe has operations near Munich, Germany; Frankfurt, Germany; Ludwigsburg, Germany and Milan, Italy. Excel Japan has operations in Tokyo, Japan. Excel Asia has operations in Penang, Malaysia. Excel SouthAsia JV has operations in Mumbai, India. 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, the sales territory for Excel Asia is primarily Southeast Asia and the sales territory for Excel SouthAsia JV is primarily South Asia. At Excel Europe, the staff of 100 includes 40 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 26. Excel Asia currently has a staff of 11, 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. Excel SouthAsia JV has a staff of 13. Information concerning foreign and domestic operations and export sales by origin is as follows (in thousands): The year ended December 31, 2003 2002 2001 .......... ........ ......... Net sales and services to unaffiliated customers from: United Stated operations $ 84,393 $ 67,731 $ 67,261 European operations 23,955 23,308 20,073 Asian operations 14,333 3,474 1,158 .......... ........ ......... $ 122,681 $ 94,513 $ 88,492 .......... ........ ......... .......... ........ ......... The following table represents a breakdown between the Company's net sales and services by destination for the years ended December 31, 2003, 2002 and 2001 (in thousands): 2003 2002 2001 ................ ............... ............... Dollars Percent Dollars Percent Dollars Percent ........ ....... ....... ....... ....... ....... To U.S. Customers $ 47,994 39% $35,343 37% $37,225 42% To Non-U.S. Customers 74,687 61% 59,170 63% 51,267 58% ........ .... ....... .... ....... .... TOTAL $122,681 100% $94,513 100% $88,492 100% ........ .... ....... .... ....... .... ........ .... ....... .... ....... .... Of the net sales and services to non-U.S. customers above, net sales and services to customers in Germany accounted for approximately $19.0 and $15.5 million of total consolidated net sales and services for 2003 and 2002, respectively. No other individual foreign country accounted for more than 10% of total consolidated net sales and services in 2003, 2002 or 2001. 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 photonics industry, and specifically for laser and optical products, 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, 2003, 2002, and 2001 were $12.6 million, $9.8 million, and $9.3 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, Clark-MXR, Femtolaser, Thales Laser, Lee Laser, Spectron Lasers, Lightwave Electronics, and Coherent, Inc. Competition for the high energy solid state laser products comes from New Wave Research, Quantel Lasers and Big Sky Lasers, Spectra-Physics, Coherent, Inc., Thales Laser, Amplitide, Spectron Lasers, and Eksma. The Company's marking/engraving systems compete primarily with those manufactured by Rofin-Baasel, Electrox, Alltec, Foba, Laservall, SEI s.p.A., Cheval Frere, Fotona, E.O. Technics, Trumpf-Haas and Hans Laser. 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, FEI, Seiko and Micrion. The market for photomask laser repair systems has been saturated and has experienced rapid advances in the miniaturization of integrated circuits and computers. Competition for sealed carbon dioxide lasers comes from Coherent-DEOS (Bloomfield, CT), Rofin (Hull, UK), ULS (Scottsdale, AZ), and Spectron (Rugby, UK). 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 and there are a number of other small competitors in the international markets. Backlog ....... As of December 31, 2003, the Company had a backlog of firm orders of approximately $36.2 million as compared to a backlog of $34.6 million as of December 31, 2002. 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 Center for Devices and Radiological Health (CDRH) 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, 2003, the Company had 619 full-time employees consisting of 2 executive officers; 22 subsidiary executive officers; 225 scientists, engineering and technical personnel; and 370 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 $48.0 million, $35.3 million and $37.2 million for the years ended December 31, 2003, 2002, and 2001, respectively (approximately 39%, 37% and 42% of total net sales and services, respectively). For the years ended December 31, 2003, 2002, and 2001, the Company had net sales and services to customers in foreign countries amounting to approximately $74.7 million, $59.2 million and $51.3 million, respectively (approximately 61%, 63% and 58%, of total net sales and services, respectively). These sales included sales by Excel Europe, Excel Asia, Excel Japan, and Excel SouthAsia JV, 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. Excel SouthAsia JV focuses on the business of marketing, sales, installation, applications and service of Quantronix, Baublys-Control Laser and CSI products in South Asia. 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 , Excel Japan and Excel SouthAsia JV) at December 31, 2003, 2002 and 2001 primarily include property, plant and equipment and goodwill whose combined carrying amounts were approximately $5.9 million, $4.9 million and $4.1 million, respectively. The carrying amounts of the aforementioned long-lived assets held by the Company's domestic subsidiaries at December 31, 2003, 2002 and 2001 were approximately $52.8 million, $52.7 million and $44.2 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 from 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. At this website, users can access, free of charge, the Company's filings with the SEC and annual, quarterly, and current reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. 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 law and 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 photonics industry, particularly for laser and electro-optical component products, 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, the defense of such claim may be very costly (whether or not the Company is successful in defending such claim). 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 most 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 Longer 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 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 cancellation or postponement of orders Any charges to earnings associated with the foregoing 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 cost more to develop 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 higher development cost, 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. Product Liability Claims. The testing, manufacturing, marketing and sale of laser products subjects the Company to the risk of liability claims or product recalls. Although the Company maintains product liability insurance in the countries in which it conducts business, the Company cannot assure that such coverage is adequate or will continue to be available at affordable rates. Product liability insurance is expensive and may not be available in the future on acceptable terms, if at all. A product recall or successful product liability claim could inhibit or prevent commercialization of the Company's products, impose a significant financial burden on the Company, or both, and could have a material adverse effect on the Company's business and financial condition. ITEM 2. PROPERTIES North America ............. East Setauket, New York ....................... Quantronix 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 and occupies 50% of a building that is approximately 80,000 square feet, which it utilizes for administrative offices, manufacturing, and research and development. In addition, CSI occupies approximately 50% of this building, which it utilizes for all of its 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 $93 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 $307 thousand. 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 $320 thousand. The lease is for a five-year period ending in December 2008. Europe ...... Darmstadt, Germany .................. Excel Europe and its division Quantronix Europe lease approximately 7,800 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 100 thousand euros. The lease expires in May 2005. Munich, Germany ............... Excel Europe maintains a satellite office in Munich, Germany, for Synrad's European sales, marketing and service operation. The office occupies approximately 7,800 square feet of space. The space is leased from an unaffiliated landlord, at an average annual rent of approximately 71 thousand euros. The lease expires in December 2008. 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 146 thousand euros. The lease expires in June 2008. Milan, Italy ............ Excel Europe also maintains a sales and service office near Milan, Italy. The lease provides approximately 750 square feet of office space from an unaffiliated landlord at an approximate annual rent of 8.5 thousand euros. Savigny Sur Orge, France ........................ Excel Europe also maintains a sales and service office in Savigny Sur Orge, France, located outside of Paris. The lease provides approximately 2,800 square feet of office space from an unaffiliated landlord at an approximate annual rent of 30.5 thousand euros. The lease expires in December 2007. Northumberland, United Kingdom .............................. DGE operates out of a facility located in Northumberland, England, which it uses for sales and marketing, manufacturing and administrative offices. The lease is with an unaffiliated landlord at an approximate annual rent of $14 thousand. The lease expires in September 2004. 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. Mumbai, India ............. Excel SouthAsia JV leases 3,600 square feet of various facilities in Mumbai, India from various unaffiliated landlords. The space houses all its operations, administration and sales and marketing. The annual rent is approximately $24 thousand. The leases expire in January 2004, June 2004 and July 2004. 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 Corporation ("Quantronix"), a wholly owned subsidiary of the Company, 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. On December 30, 2003, Positive Light and its parent Coherent, Inc. entered into an agreement with Quantronix and the Company to settle for a nominal amount the pending suit and related disputes. The agreement provides for, among other things, the exchange of full mutual releases, the dismissal with prejudice of the suit, a non-exclusive license to the Company, and a limited covenant not to sue the Company and its affiliates with respect to U.S. Patent Nos. 5,790,303, 6,122,097, and 5,963,363. In November, 2002, Dr. R. Gordon Gould and Patlex Corporation ("Gould/Patlex") filed a lawsuit in the United States District Court for the District of Massachusetts against Great Computer Corp. ("GCC"), a customer of the Company's Synrad, Inc. ("Synrad") subsidiary, for infringement of one of the patents licensed by Gould/Patlex to Synrad. The lawsuit is based upon GCC's incorporation of Synrad's sealed C02 lasers into a system sold by GCC to its customers. In April 2003, GCC attempted to bring Synrad into the case as a cross-defendant, on a variety of indemnification and fraud theories. Because the Court's jurisdiction over the cross-claim was not properly pleaded, Synrad moved to have GCC's cross-claim dismissed. The motion was granted. In view of the District Court's dismissal of GCC's cross-claim against Synrad, Gould/Patlex filed a separate, new action for patent infringement and breach of license agreement and false advertising against Synrad. The case is currently pending in the United States District Court for the District of Massachusetts. Gould/Patlex contends that Synrad has failed to properly pay royalties to Gould/Patlex, which allegation has been denied. As a result, Gould/Patlex purported to terminate the Gould/Patlex - Synrad patent license agreement, thus allegedly converting Synrad's licensed activities into infringing activities. Synrad has denied all of the substantive allegations of Gould/Patlex, and on July 8, 2003 filed counterclaims against Gould/Patlex for breach of contract, wrongful termination of license and violation of Mass. Gen. Laws c. 93A (unfair business practices). During October 2003, the case filed by Gould/Patlex against GCC and Synrad were consolidated and are now pending as a single case in the United States District court for the District of Massachusetts as Case Nos. l:02-civ-12000 PBS and 03-10874 PBS. The cases are now in the fact discovery stage. In order to defeat Synrad's defense that it remained licensed as a subsidiary of the Company, in August, 2003, Gould/Patlex took steps to terminate its patent license agreement with the Company. In response, in September, 2003, the Company filed its own declaratory judgment action, alleging nearly the same claims as Synrad's counterclaims against Gould/Patlex for breach of contract, wrongful termination of license and violation of Mass. Gen Laws c. 93A (unfair business practices). Gould/Patlex has answered and counterclaimed with the same allegations of patent infringement and breach of license agreement and false advertising as were levied against Synrad. The parties have agreed that this case should also be consolidated, at least for discovery purposes. Synrad intends to request consolidation for trial and all other purposes, as well. Synrad believes that it is and has always been in compliance with all terms and conditions of the Gould/Patlex - Synrad patent license agreement, and any errors in royalty calculations which were made in the past were timely corrected after notice, pursuant to the "notice and cure" provisions of the agreement. Efforts to obtain explanations of the reasoned position of Gould/Patlex have been fruitless to date. As a result, it is not possible at this early stage of the case to determine what liability exposure, if any, is faced by Synrad. Synrad continues to operate in accordance with its duties and obligations under its agreement with Gould/Patlex, including the obligation to pay royalties upon its sales of licensed lasers. Synrad intends to vigorously defend the case. In any event, the last-surviving licensed Gould/Patlex patent, which is the subject of the dispute, expires on November 3, 2004, in the event that the case is not resolved before then. However, if the Company were to lose its license, it could have a material impact on the Company's results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ....... ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES 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, 2003 First Quarter $22.44 $17.84 Second Quarter $24.90 $20.31 Third Quarter $28.90 $21.75 Fourth Quarter $33.02 $25.67 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 As of February 18, 2004, there were approximately 718 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, 2003: Equity Compensation Plan Information Number of Number of securities securities to be issued upon Weighted average remaining exercise of exercise price available for outstanding options of outstanding future issuance Plan category (In thousands) options (In thousands) ........................................................................ Equity compensation plans approved by security holders 973 $ 16.56 77 Equity compensation plans not approved by security holders 0 0 0 Total 973 $ 16.56 77 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated statement of operations data for the years ended December 31, 2003, 2002 and 2001, and the consolidated balance sheet data as of December 31, 2003 and 2002, 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, 2000 and 1999, and the selected consolidated balance sheet data as of December 31, 2001, 2000 and 1999, 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 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 per share data) Year Ended December 31, ............................................. 2003 2002 2001 2000 1999 ........ ....... ....... ........ ....... Net sales and services $122,681 $94,513 $88,492 $107,720 $88,943 Net income $ 11,318 $ 8,512 5,938 $ 15,651 $11,552 Net earnings per share Basic $0.95 $0.72 $0.50 $1.35 $1.04 Diluted $0.93 $0.71 $0.50 $1.30 $1.00 Weighted average common and common equivalent shares outstanding Basic 11,853 11,792 11,762 11,597 11,119 Diluted 12,231 12,071 11,978 12,054 11,608 Balance Sheet Data (in thousands) As of December 31, ................................................ 2003 2002 2001 2000 1999 ........ ........ ........ ........ ........ Total assets $133,738 $118,724 $102,505 $ 98,986 $ 79,651 Total liabilities $ 16,466 $ 16,467 $ 10,907 $ 12,544 $ 10,649 Working capital $ 59,540 $ 44,765 $ 42,695 $ 48,584 $ 35,199 Stockholders' equity $117,272 $102,257 $ 91,598 $ 86,442 $ 69,001 Long-term liabilities $ 997 $ 180 $ 0 $ 0 $ 0 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. Overview ........ The Company designs, manufactures and markets a variety of photonics- based solutions primarily consisting of laser systems and electro-optical components for industrial and scientific applications. The company's current range of products include laser marking and engraving systems, laser micro-machining systems, CO2 lasers, optical scanners, high power solid state CW and Q-switched lasers, Ultrafast lasers, high energy solid state pulsed lasers, precision optical components and light and color measurement instruments. The laser and electro-optical industry is subject to intense competition and rapid technological developments. Our strength and success is dependent upon us developing and delivering successful, timely and cost effective solutions to our customers. The Company believes, for it to maintain its performance, it must continue to increase its operational efficiencies, improve and refine its existing products, expand its product offerings and develop new applications for its technology. The Company's strategy is to grow internally and through acquisitions of complementary businesses. Historically the Company has been fairly successful in integrating acquired Companies. Details on our operations are discussed in our MD&A. 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 relevant 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 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 the following 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) services. 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, assuming the other criteria of SAB 101 are met. 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. When a customer pays an annual maintenance fee, it is recorded as deferred revenue and recognized as revenue ratably over the term of the agreement. When a sales arrangement involves multiple elements, such as the sale of products that require installation, training or other services, the Company records deferred revenue for the fair value of the undelivered element and recognizes the revenue when the revenue recognition criteria for that element is met. Fair value is established for an element based on the price when the element is sold separately. The Company manufactures one product called a Photomask Defect Repair System ("DRS") that is a laser-based system 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, customized for each customer and 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 DRS's require that the Company perform installation due to the technical expertise required for this product. Due to the nature of the post-shipment installation obligations with respect to the DRS's, the Company defers revenue recognition on the sale of DRS's until installation has been completed. 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 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), the Company's estimates of the recoverability of amounts due to the Company 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 and historical usage or sales 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, 2003 and 2002 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. In addition, the Company will reduce the carrying value of its finished goods inventory to net realizable value, if the selling price of the product is less than its cost. 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, 2003 and 2002, the Company has approximately $298 thousand and $888 thousand of net deferred tax assets, respectively, related principally to domestic loss carryforwards and inventory basis differences. 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 April 22, 2003, the Financial Accounting Standards Board ("FASB") determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an accounting standard that would become effective in 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. Results of Operations ..................... The following table presents consolidated financial data for the years ended December 31, 2003, 2002 and 2001 (in thousands of dollars and as a percentage of total net sales and services). 2003 2002 2001 .... .... .... Dollars Percent Dollars Percent Dollars Percent ........ ....... ....... ....... ....... ....... Net Sales and Services $122,681 100.0% $94,513 100.0% $88,492 100.0% Cost of Sales and Services 66,346 54.1% 51,851 54.9% 50,518 57.1% ........ ....... ....... ....... ....... ....... Gross Profit / Margin 56,335 45.9% 42,662 45.1% 37,974 42.9% Operating Expenses: Selling and Marketing 16,530 13.5% 12,570 13.3% 11,553 13.1% General and Administrative 11,324 9.2% 8,062 8.5% 7,066 8.0% Research and Development 12,598 10.3% 9,838 10.4% 9,293 10.5% Amortization of Goodwill 0 0 0 0 1,459 1.6% ........ ....... ....... ....... ....... ....... Income from Operations 15,883 12.9% 12,192 12.9% 8,603 9.7% Non-Operating Income (1,049) (0.9%) (513) (0.5%) (573) (0.7%) ........ ....... ....... ....... ....... ....... Income before Provision for Income Taxes 16,932 13.8% 12,705 13.4% 9,176 10.4% Provision for Income Taxes 5,614 4.6% 4,193 4.4% 3,238 3.7% ........ ....... ....... ....... ....... ....... Net Income $ 11,318 9.2% $8,512 9.0% $ 5,938 6.7% ........ ....... ....... ....... ....... ....... ........ ....... ....... ....... ....... ....... Net Sales and Services ...................... Net sales and services for 2003 increased to $122.7 million from $94.5 million in 2002, an increase of $28.2 million or 29.8%. Just over half the increase was attributable to the acquisition of Continuum in October 2002, but the increase also resulted from an entire year's direct sales in 2003 from our subsidiary in Japan, and an increase in scanner and high power solid state laser sales. 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 then new subsidiary in Japan and scanner sales, offset by decreases in sales of marking systems. Gross Margins and Cost of Sales ............................... Gross margins as a percentage of sales in 2003 were 45.9% compared to 45.1% in 2002. Cost of sales and services increased by $14.5 million or 28.0% to $66.3 million in 2003 from $51.9 million in 2002. The increase in gross margins as a percentage of sales and the increase in cost of sales and services from 2002 to 2003 are primarily attributable to the increased sales volume and product mix. 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. Product margins vary from direct sales to distributor sales and also vary among the more than 250 product configurations. Operating Expenses .................. Selling and Marketing Selling and marketing expenses were $16.5 million in 2003 compared to $12.6 million in 2002 and $11.6 million in 2001. The increase of $4.0 million or 31.5% from 2002 to 2003 was primarily attributable to increased direct sales from our subsidiary in Japan and the acquisition of Continuum and increased variable costs, such as commissions, associated with the increased sales levels. 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. Selling and marketing expenses as a percentage of sales were 13.5% in 2003, 13.3% in 2002, and 13.1% in 2001. The changes in selling and marketing expenses as a percentage of sales are primarily attributable to higher marketing and personnel costs associated with the expansion of our sales and marketing efforts. General and Administrative General and administrative expenses were $11.3 million in 2003, as compared with $8.1 million in 2002 and $7.1 million in 2001. The increase of $3.3 million or 40.5% from 2002 to 2003 was primarily attributable to increased legal fees, primarily from patent litigation and the acquisition of Continuum. The increase of $1.0 million or 14.1% from 2001 to 2002 was primarily attributable to the acquisitions of Continuum and OptoFocus. General and administrative expenses as a percentage of sales increased to 9.2% in 2003 as compared to 8.5% in 2002 and 8.0% in 2001. Research and Development Research and development expenses for 2003 were $12.6 million as compared to $9.8 million in 2002 and $9.3 million in 2001. The increase of $2.8 million or 28.0% from 2002 to 2003 was primarily attributable to the acquisition of Continuum and increases in research activities in all our major product lines. 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. Amortization of Goodwill No amortization of goodwill was recorded in 2003 and 2002, as compared to $1.5 million in 2001. Effective January 1, 2002, the Company ceased amortizing its goodwill pursuant to its adoption of SFAS 142. Other Income/Expense No interest expense was recorded for 2003, as there were no borrowings throughout the year, as compared to $8 thousand in 2002 and $30 thousand in 2001. Interest expense decreased by $22 thousand or 73.0% from 2001 to 2002 due to less short-term borrowings by our European subsidiaries. Interest income for 2003 was $148 thousand, as compared to $220 thousand in 2002 and $679 thousand in 2001. The decrease in interest income of $72 thousand or 32.6% from 2002 to 2003 is primarily due to lower interest rates. 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 then new buildings. Other income/expense for 2003 was $896 thousand of income, compared to $301 thousand of income in 2002 and $75 thousand of expense in 2001. The income in 2003 and 2002 was primarily attributable to the recording of foreign currency exchange transaction gains at Excel Europe for the settlement of payables due in U.S. dollars 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 expense recorded in 2001 was primarily the result of foreign currency 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 2003 was $5.6 million, compared to $4.2 million in 2002 and $3.2 million in 2001. The increases of $1.4 million or 33.9% from 2002 to 2003 and $955 thousand or 29.5% from 2001 to 2002 are primarily attributable to higher taxable income. The Company's effective tax rate was 33.2% for 2003, as compared to 33.0% in 2002 and 35.3% in 2001. The Company's effective tax rates were relatively consistent from 2002 to 2003. 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 U.S. export sales. Liquidity and Capital Resources ............................... Cash Flow Overview .................. Cash and cash equivalents increased $13.9 million during the year 2003 to $25.7 million. The increase during the year 2003 was primarily due to the net cash provided by operating activities of $15.4 million and financing activities from the exercise of stock options of $1.4 million offset by net cash used in investing in activities of $3.4 million. The Company also experienced a favorable foreign exchange effect on cash and cash equivalents of $ 500 thousand in 2003. As of December 31, 2003 the Company had no bank debt. At December 31, 2003, the Company had working capital of $59.5 million, including cash and equivalents of $25.7 million, compared to working capital of $44.8 million, including cash and equivalents of $11.8 million, at December 31, 2002. The working capital increased by $14.7 million and cash and equivalents increased by $13.9 million in 2003. Net cash provided by operating activities of $15.4 million for the year ended December 31, 2003 was primarily attributable to net income before the deduction of depreciation and amortization expenses, plus modest increases in net working capital items. Net cash used in investing activities of $3.4 million for the year ended December 31, 2003 was due primarily to the acquisitions of DGE for $910 thousand and capital expenditures of $2.5 million. Net cash provided by financing activities was $1.4 million for the year ended December 31, 2003, resulting from the proceeds received upon the exercise of employee stock options. As of December 31, 2003, the Company's contractual obligations were as follows (in thousands): Contractual Obligations Payments Due by Period ............. ............................................... Less than 1 - 3 3 - 5 More than Total 1 Year Years Years 5 Years ....... ......... ...... ....... ......... Operating Leases $5,624 $1,646 $2,535 $1,379 $64 Line of Credit As of December 31, 2003, the Company has no lines of credit and is currently negotiating a new line of credit that it plans to have in place in the near future. 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 and those 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 secure 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, on terms that are acceptable to the Company or at all. Selected Quarterly Financial Data Unaudited quarterly financial data (in thousands, except per share amounts) for 2003 and 2002 is summarized as follows:
2003 2002 ...................................................................................................... Q1 Q2 Q3 Q4 YEAR Q1 Q2 Q3 Q4 YEAR ........ ........ ........ ........ ....... ........ ........ ........ ........ ....... Net sales and services $ 31,437 $ 31,514 $ 28,690 $ 31,040 $122,681 $ 19,753 $ 22,061 $ 22,898 $ 29,801 $ 94,513 Cost of sales and services 17,129 17,163 15,010 17,044 66,346 10,375 11,729 11,897 17,850 51,851 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Gross profit 14,308 14,351 13,680 13,996 56,335 9,378 10,332 11,001 11,951 42,662 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Operating expenses: Selling and marketing 4,187 4,272 3,949 4,122 16,530 2,762 2,797 2,999 4,012 12,570 General and administrative 2,633 2,724 2,984 2,983 11,324 1,581 1,873 2,146 2,462 8,062 Research and development 3,305 3,131 2,999 3,163 12,598 2,273 2,176 2,334 3,055 9,838 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 10,125 10,127 9,932 10,268 40,452 6,616 6,846 7,479 9,529 30,470 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Income from operations 4,183 4,224 3,748 3,728 15,883 2,762 3,486 3,522 2,422 12,192 Non-operating expenses (income): Interest expense 0 0 0 0 0 2 2 2 2 8 Interest income (24) (32) (38) (54) (148) (59) (67) (73) (21) (220) Minority interest in net loss of subsidiary 0 0 0 (5) (5) 0 0 0 0 0 Other expense (income), net (177) (119) (243) (357) (896) 32 8 (134) (207) (301) ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Income before provision for income taxes 4,384 4,375 4,029 4,144 16,932 2,787 3,543 3,727 2,648 12,705 Provision for income taxes 1,535 1,509 1,370 1,200 5,614 920 1,169 1,230 874 4,193 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Net income $ 2,849 $ 2,866 $ 2,659 $ 2,944 $ 11,318 $ 1,867 $ 2,374 $ 2,497 $ 1,774 $ 8,512 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Basic earnings per common share $ 0.24 $ 0.24 $ 0.22 $ 0.25 $ 0.95 $ 0.16 $ 0.20 $ 0.21 $ 0.15 $ 0.72 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Weighted average common shares outstanding 11,806 11,815 11,864 11,925 11,853 11,773 11,792 11,800 11,804 11,792 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Diluted earnings per common share $ 0.24 $ 0.24 $ 0.22 $ 0.24 $ 0.93 $ 0.16 $ 0.20 $ 0.21 $ 0.15 $ 0.71 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ Weighted average common and common equivalent shares outstanding 12,103 12,178 12,273 12,362 12,231 11,995 12,162 12,114 12,073 12,071 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
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 2003 cash and investment levels, a one-point change in interest rates would not have a material impact on interest income. Foreign Currency 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 61% of total net sales and services in 2003, 63% in 2002 and 58% in 2001. 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 31% of its total net sales and services in 2003, 28% of its total net sales and services in 2002 and 24% in 2001. 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 $845 thousand, $332 thousand and $(7) thousand in 2003, 2002 and 2001, 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 31 to 49. 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, 2003. Page .... Reports of Independent Auditors 29 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2003 and 2002 31 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001 32 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2003, 2002 and 2001 33 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 34 Notes to Consolidated Financial Statements 35 Consolidated Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts 49 ................ Schedules not listed above have been omitted because they are either not applicable or the required information has been given elsewhere in the consolidated financial statements or notes thereto. Independent Auditors' Report ............................ To the Board of Directors and Stockholders Excel Technology, Inc. We have audited the accompanying consolidated balance sheet of Excel Technology, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule for the year ended December 31, 2003. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Excel Technology, Inc. and Subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. /s/ KPMG LLP January 22, 2004 Report of Independent Auditors .............................. To the Board of Directors and Stockholders Excel Technology, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Excel Technology, Inc. and Subsidiaries (the "Company") as of December 31, 2002, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the two years in the period ended December 31, 2002. Our audits also included the 2002 and 2001 activity in 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 the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the 2002 and 2001 activity in 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, 2003 and 2002 (In thousands, except per share amounts) Assets 2003 2002 ...... ......... ......... Current assets: Cash and equivalents $ 25,740 $ 11,822 Accounts receivable, less allowance for doubtful accounts of $1,001 and $993 in 2003 and 2002, respectively 21,917 22,375 Inventories 25,038 24,482 Deferred income taxes 1,289 1,068 Other current assets 1,025 1,305 ......... ......... Total current assets 75,009 61,052 ......... ......... Property, plant and equipment 27,665 27,782 Other assets 415 507 Goodwill 30,649 29,383 ......... ......... Total Assets $ 133,738 $ 118,724 ......... ......... ......... ......... Liabilities and Stockholders' Equity .................................... Current liabilities: Accounts payable $ 4,801 $ 5,245 Accrued expenses and other current liabilities 10,668 11,042 ......... ......... Total current liabilities 15,469 16,287 ......... ......... Deferred income taxes 991 180 Minority interest in subsidiary 6 0 Stockholders' equity: Preferred stock, par value $.001 per share: 2,000 shares authorized, none issued 0 0 Common stock, par value $.001 per share: 20,000 shares authorized, 11,943 and 11,805 shares issued and outstanding in 2003 and 2002, respectively 12 12 Additional paid-in capital 47,514 45,401 Retained earnings 67,613 56,295 Accumulated other comprehensive income 2,133 549 ......... ......... Total stockholders' equity 117,272 102,257 ......... ......... Total Liabilities and Stockholders' Equity $ 133,738 $ 118,724 ......... ......... ......... ......... See Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2003, 2002 and 2001 (In thousands, except earnings per share) 2003 2002 2001 ......... ......... ......... Net sales and services $ 122,681 $ 94,513 $ 88,492 Cost of sales and services 66,346 51,851 50,518 ......... ......... ......... Gross profit 56,335 42,662 37,974 Operating expenses: Selling and marketing 16,530 12,570 11,553 General and administrative 11,324 8,062 7,066 Research and development 12,598 9,838 9,293 Amortization of goodwill 0 0 1,459 ......... ......... ......... 40,452 30,470 29,371 ......... ......... ......... Income from operations 15,883 12,192 8,603 Non-operating expenses (income): Interest expense 0 8 30 Interest income (148) (220) (679) Minority interest in net loss of subsidiary (5) 0 0 Other (income) expense, net (896) (301) 75 ......... ......... ......... Income before provision for income taxes 16,932 12,705 9,177 Provision for income taxes 5,614 4,193 3,239 ......... ......... ......... Net income $ 11,318 $ 8,512 $ 5,938 ......... ......... ......... ......... ......... ......... Basic earnings per common share $0.95 $0.72 $0.50 ..... ..... ..... ..... ..... ..... Weighted average common shares outstanding 11,853 11,792 11,762 ......... ......... ......... ......... ......... ......... Diluted earnings per common share $0.93 $0.71 $0.50 ..... ..... ..... ..... ..... ..... Weighted average common and common equivalent shares outstanding 12,231 12,071 11,978 ......... ......... ......... ......... ......... ......... See Notes to Consolidated Financial Statements.
Excel Technology, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity and Comprehensive Income Years Ended December 31, 2003, 2002 and 2001 (In thousands) Accumulated Additional Other Preferred Stock Common Stock Paid-In Retained Comprehensive Comprehensive Shares Amounts Shares Amounts Capital Earnings Income (Loss) Total Income (Loss) ....... ....... ........ ....... .......... ........ .............. ........ ............. Balances at December 31, 2000 0 $ 0 11,759 $ 12 $ 44,827 $ 41,845 $ (242) $ 86,442 Exercise of common stock options 0 0 5 0 30 0 0 30 Net income for the year 0 0 0 0 0 5,938 0 5,938 $ 5,938 Foreign currency translation adjustment 0 0 0 0 0 0 (812) (812) (812) ............. Comprehensive income 0 0 0 0 0 0 0 0 $ 5,126 ....... ....... ........ ....... .......... ........ .............. ........ ............. ............. Balances at December 31, 2001 0 0 11,764 12 44,857 47,783 (1,054) 91,598 Exercise of common stock options 0 0 41 0 544 0 0 544 Net income for the year 0 0 0 0 0 8,512 0 8,512 $ 8,512 Foreign currency translation adjustment 0 0 0 0 0 0 1,603 1,603 1,603 ............. Comprehensive income 0 0 0 0 0 0 0 0 $ 10,115 ....... ....... ........ ....... .......... ........ .............. ........ ............. ............. Balances at December 31, 2002 0 0 11,805 12 45,401 56,295 549 102,257 Exercise of common stock options 0 0 138 0 1,345 0 0 1,345 Tax benefit from employee stock option exercises 0 0 0 0 768 0 0 768 Net income for the year 0 0 0 0 0 11,318 0 11,318 $ 11,318 Foreign currency translation adjustment 0 0 0 0 0 0 1,584 1,584 1,584 ............. Comprehensive income 0 0 0 0 0 0 0 0 $ 12,902 ....... ....... ........ ....... .......... ........ .............. ........ ............. ............. Balances at December 31, 2003 0 $ 0 11,943 $ 12 $ 47,514 $ 67,613 $ 2,133 $117,272 ....... ....... ........ ....... .......... ........ .............. ........ ....... ....... ........ ....... .......... ........ .............. ........
See Notes to Consolidated Financial Statements. EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2003, 2002 and 2001 (In thousands) 2003 2002 2001 ........ ........ ........ Operating activities: Net income $ 11,318 $ 8,512 $ 5,938 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in net loss of subsidiary (5) 0 0 Depreciation and amortization 2,887 2,746 3,836 Tax benefit from employee stock option exercises 768 0 0 Provision for bad debts 92 314 336 Deferred income taxes 590 817 826 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 743 (2,155) 3,337 Inventories 642 95 90 Other current assets 371 318 (298) Other assets (228) 10 174 Accounts payable (941) (1,590) (428) Accrued expenses and other current liabilities (829) 1,247 (1,075) ........ ........ ........ Net cash provided by operating activities 15,408 10,314 12,736 ........ ........ ........ Investing activities: Cash paid for acquisitions, net of cash acquired (914) (11,255) 0 Purchases of property, plant and equipment (2,450) (4,034) (15,513) ........ ........ ........ Net cash used in investing activities (3,364) (15,289) (15,513) ........ ........ ........ Financing activities: Proceeds from exercise of common stock options and warrants 1,345 498 30 Minority shareholder investment in joint venture 11 0 0 Payments of notes payable 0 0 (15) ........ ........ ........ Net cash provided by financing activities 1,356 498 15 ........ ........ ........ Effect of exchange rate changes on cash and cash equivalents 518 87 (32) ........ ........ ........ Net increase (decrease) in cash and equivalents 13,918 (4,390) (2,794) Cash and equivalents - beginning of year 11,822 16,212 19,006 ........ ........ ........ Cash and equivalents - end of year $ 25,740 $ 11,822 $ 16,212 ........ ........ ........ ........ ........ ........ Supplemental Cash Flow Information .................................. Cash paid for: Interest $ 0 $ 8 $ 33 ..... ..... ..... ..... ..... ..... Income taxes $ 2,312 $ 1,950 $ 3,240 ........ ........ ........ ........ ........ ........ See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (1) Summary of Significant Accounting Policies .......................................... Excel Technology, Inc. and Subsidiaries (the "Company") manufactures and markets laser systems and electro-optical components primarily for industrial and scientific applications. 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), its 50% owned joint venture, Excel Laser Technology Private Limited (Excel SouthAsia JV) 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 GmbH (Baublys); Control Laser Corporation (Control Laser); Control Systemation, Inc. (CSI); The Optical Corporation (TOC); Quantronix International Corporation (a Foreign Sales Corporation); Excel Technology Asia Sdn. Bhd. (Excel Asia); and D Green (Electronics) Limited (DGE). 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 the following 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 Company's revenues are generated from the following: 1) product sales, including product upgrades and replacement part sales; 2) maintenance agreements; and 3) services. 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, assuming the other criteria of SAB 101 are met. 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. When a customer pays an annual maintenance fee, it is recorded as deferred revenue and recognized as revenue ratably over the term of the agreement. When a sales arrangement involves multiple elements, such as the sale of products that require installation, training or other services, the Company records deferred revenue for the fair value of the undelivered element and recognizes the revenue when the revenue recognition criteria for that element is met. Fair value is established for an element based on the price when the element is sold separately. The Company manufactures one product, a Photomask Defect Repair System ("DRS"), which is a very large, highly complex customized machine. The terms of sale with respect to DRS's require that the Company perform installation due to the technical expertise required for this product. Due to the nature of the post- shipment installation obligations with respect to the DRS's, the Company defers revenue recognition on the sale of DRS's until installation has been completed. Cash and Equivalents .................... Cash and equivalents of $25.7 million and $11.8 million at December 31, 2003 and 2002, 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 and historical usage or sales to determine whether write-downs for excess or obsolete inventory are required. In addition, the Company will reduce the carrying value of its finished goods inventory to net realizable value, if the selling price of the product is less than its cost. Accounts Receivable ................... 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. 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. Goodwill and intangible assets with indefinite lives are not amortized but are evaluated annually for impairment. The Company's annual assessment is performed on December 31st of each year. 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, labor and overhead 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 a monthly 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, 2003 and 2002 are reasonable. Changes in the liability for product warranty in 2003 and 2002 were as follows (In thousands): 2003 2002 ...... ...... Balance at January 1 $ 980 $ 401 Provision for warranties during the year 322 389 Settlements made during the year (546) (366) Warranty liabilities assumed in Continuum acquisition 0 556 ...... ...... Balance at December 31 $ 756 $ 980 ...... ...... ...... ...... 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 in effect when such amounts are expected to be 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 $2.1 million and $549 thousand at December 31, 2003 and 2002, respectively, is reflected as accumulated other comprehensive income, 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 $845 thousand, $332 thousand and ($7 thousand) for the years ended December 31, 2003, 2002 and 2001, 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 (stock options), 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, 2003, 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. (In thousands, except per share data) Year ended December 31, 2003 2002 2001 ........ ........ ....... Net income, as reported $ 11,318 $ 8,512 $ 5,938 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,519) (2,064) (1,497) ........ ........ ....... Proforma net income $ 9,799 $ 6,448 $ 4,441 ........ ........ ....... ........ ........ ....... Earnings per share: Basic - as reported $0.95 $0.72 $0.50 ..... ..... ..... Basic - proforma $0.83 $0.55 $0.38 ..... ..... ..... Diluted - as reported $0.93 $0.71 $0.50 ..... ..... ..... Diluted - proforma $0.81 $0.54 $0.37 ..... ..... ..... The per share weighted-average fair value of stock options and warrants granted during 2003, 2002 and 2001 was $9.47, $15.32 and $9.33, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2003- expected dividend yield of 0%, risk free interest rate of 4.0%, expected stock volatility of 50% and expected life of approximately 4.0 years; 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. For purposes of the proforma disclosures, the estimated fair value of the options is amortized to compensation expense over the options vesting periods. New Accounting Pronouncements ............................. On April 22, 2003, the Financial Accounting Standards Board ("FASB") determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an accounting standard that would become effective in 2005. We will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. 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 net income (loss) and unrealized gains and losses on foreign currency translation adjustments. (2) Acquisitions ............ On December 17, 2003, the Company acquired all the outstanding capital stock of D. Green (Electronics) Ltd. ("DGE"), a manufacturer of power supplies for laser systems, which is located in the United Kingdom (UK), for $925 thousand, including $40 thousand of related expenses. The acquisition was accounted for using the purchase method of accounting and, accordingly, the operating results of DGE, which are insignificant compared to those of the Company, have been included in the Company's consolidated results of operations since the date of the acquisition. At the date of acquisition, the fair value of DGE's assets and liabilities assumed were $336 thousand and $193 thousand, respectively. The excess of the purchase price over the fair value of the net assets acquired of $782 thousand was recorded as goodwill. If the acquisition of DGE had taken place at the beginning of 2003, it would not have had a material impact on the Company's consolidated results of operations as presented. On April 23, 2003, the Company incorporated Excel Laser Technology Private Limited based in Mumbai, India as a joint venture for the distribution of certain subsidiary products in South Asia, which will market, sell, install and provide customer service for the Company's products. The Company invested $11 thousand for a 50% equity ownership interest in the joint venture. In accordance with FIN No. 46, "Accounting For Variable Interest Entities," since the joint venture is a variable interest entity and the Company is the primary beneficiary of the joint venture, the Company has consolidated the results of the joint venture with its results and reflected the minority interest in the net loss of the joint venture of $5 thousand in the statement of income. 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 were 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. Goodwill was increased in 2003 by $347 thousand for additional expenses related to the acquisition and an inventory purchase price adjustment. The final purchase price allocation of the Continuum business resulted in the following condensed balance of assets acquired and liabilities assumed (In thousands): Continuum Final ............... Purchase Price Allocation ......................... (In thousands) .............. Receivables $ 3,406 Inventories 4,260 Property, plant and equipment 236 Other assets 474 Goodwill 7,771 .......... Total assets acquired 16,147 Accounts payable 2,215 Other current liabilities 2,721 .......... Total liabilities assumed 4,936 .......... Net assets acquired $ 11,211 .......... .......... Pro-forma results of operations assume the acquisition of Continuum had been made at the beginning of 2002 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 (In thousands, except per share data) ..................................... Net sales and services $ 111,838 Net income 7,613 Basic earnings per common share $0.65 Diluted earnings per common share $0.63 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 2002, 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 Company has retained substantially all of the employees of OptoFocus. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the operating results of OptoFocus, which are insignificant compared to those of the Company, have been included in the Company's consolidated results of operations since the date of the 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 2002, it would not have had a material impact on the Company's consolidated results of operations as presented. (3) Inventories ........... Inventories consist of the following (In thousands): December 31, ................... 2003 2002 ........ ......... Raw materials $ 11,686 $ 11,678 Work-in-process 7,360 7,670 Finished goods 5,116 4,278 Consigned inventory 876 856 ........ ......... $ 25,038 $ 24,482 ........ ......... ........ ......... (4) Property, Plant and Equipment ............................. Property, plant and equipment at cost consists of the following (In thousands): December 31, ................... Useful life 2003 2002 ........... ........ ......... Land 0 $ 4,236 $ 4,236 Buildings 30 years 19,150 19,007 Leasehold improvements Lease term 612 1,390 Fixtures and computer equipment 3-5 years 2,678 4,764 Machinery and equipment 3-5 years 6,542 9,178 Laboratory equipment 3-5 years 3,002 3,892 ........ ......... 36,220 42,467 Less accumulated depreciation and amortization 8,555 14,685 ........ ......... $ 27,665 $ 27,782 ........ ......... ........ ......... Depreciation and amortization expense aggregated approximately $2.9 million, $2.7 million and $2.4 million for the years ended December 31, 2003, 2002 and 2001, respectively. (5) Goodwill ........ The change in the net carrying amount of goodwill for the year ended December 31, 2003 is as follows (In thousands): December 31, 2003 ................. Goodwill, net, beginning of year $ 29,383 Acquisition of DGE 782 Purchase price adjustment, Continuum 377 Additional acquisition costs and other 107 ........ Goodwill, net, end of year $ 30,649 ........ ........ The following table provides proforma disclosure of net income and diluted earnings per common share for the year ended December 31, 2001 as if goodwill had not been amortized (In thousands, except per share data): Reported net income $ 5,938 Amortization 1,459 ....... Adjusted net income $ 7,397 ....... ....... Reported diluted earnings per common share $0.50 Amortization per common share and common share equivalent $0.12 ....... Adjusted diluted earnings per common share $0.62 ....... ....... (6) Income Taxes ............ Pre-tax income for the years ended December 31, 2003, 2002, and 2001 was comprised of domestic income of $16.1 million, $13.6 million and $10.4 million, respectively, and foreign income (losses) of $817 thousand, ($876) thousand, and ($1.2) million, respectively. The provision for income taxes consists of (In thousands): Year ended December 31, ........................... 2003 2002 2001 ........ ........ ....... Current: Federal $ 4,027 $ 2,952 $ 1,763 State and local 321 373 649 Foreign 675 51 0 ........ ........ ....... 5,023 3,376 2,412 ........ ........ ....... Deferred: Federal 591 817 826 ........ ........ ....... $ 5,614 $ 4,193 $ 3,238 ........ ........ ....... ........ ........ ....... The current provision for income taxes includes a tax benefit of $391 thousand for 2003, $391 thousand for 2002 and $394 thousand for 2001 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 (In thousands): Year ended December 31, ........................... 2003 2002 2001 ........ ........ ....... Taxes at statutory Federal income tax rate $ 5,926 $ 4,447 $ 3,120 State income taxes, net of Federal benefit 209 243 428 Non-deductible amortization of goodwill 0 0 96 ETI/Foreign Sales Corporation benefit (704) (833) (582) Change in valuation allowance 65 589 357 Foreign Tax Rate Differential (89) 0 0 Other 207 (253) (181) ........ ........ ....... $ 5,614 $ 4,193 $ 3,238 ........ ........ ....... ........ ........ ....... The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows (In thousands): December 31, ................ 2003 2002 ....... ....... Deferred tax assets: Excess of tax over financial statement basis of inventory $ 788 $ 614 Allowance for doubtful accounts 152 105 Accrued warranty costs 100 103 Other accrued expenses 249 246 Benefits of U.S. net operating loss carryforwards 192 583 Benefits of foreign net operating loss carryforwards 2,000 1,635 Plant and equipment depreciation 181 304 ....... ....... Total deferred tax assets 3,662 3,590 Less valuation allowance (2,000) (1,935) ....... ....... 1,662 1,655 ....... ....... Deferred tax liabilities: Goodwill amortization (1,364) (767) ....... ....... Total deferred tax liabilities (1,364) (767) ....... ....... Net deferred tax assets $ 298 $ 888 ....... ....... ....... ....... At December 31, 2003, Excel has available net operating loss carryforwards ("NOL's"), expiring in 2007, of approximately $600 thousand 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. 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 $2.0 million, as of December 31, 2003. There can be no assurance that the Company will generate sufficient taxable earnings in future years to fully realize recorded tax benefits. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $1.6 million, at December 31, 2003. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. tax liability. (7) Accrued Expenses and Other Current Liabilities .............................................. Accrued expenses and other current liabilities consist of the following (In thousands): December 31, ................ 2003 2002 ....... ....... Salaries, wages, commissions and bonuses $ 1,999 $ 2,345 Accrued vacation/holiday/sick pay 770 926 Accrued accounts payable 186 160 Customer deposits 847 1,927 Accrued royalties payable 119 147 Warranty reserve 756 980 Unearned service contract revenue 459 215 Professional fees payable 511 341 Income taxes payable 3,360 1,734 Other 1,661 2,267 ....... ....... $10,668 $11,042 ....... ....... ....... ....... (8) Line of Credit .............. As of December 31, 2003, the Company has no lines of credit and is currently negotiating a new line of credit and plans to have one in place in the near future. (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, 2003, 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, 2003, 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 of shares Weighted average (In thousands) exercise price .............. ................ Outstanding at December 31, 2000 780 $17.00 Granted 55 $19.71 Exercised (4) $ 7.00 Cancelled (11) $10.63 ..... Outstanding at December 31, 2001 820 $17.31 Granted 457 $15.32 Exercised (41) $12.05 Cancelled (165) $23.90 ..... Outstanding at December 31, 2002 1,071 $15.65 Granted 90 $22.16 Exercised (168) $13.09 Cancelled (20) $22.26 ..... Outstanding at December 31, 2003 973 $16.56 ..... ..... In 2003, 30 thousand shares of common stock held greater than six months were used by an employee to exercise options. Such shares, which had a market value of $854 thousand, were retired. At December 31, 2003, 2002 and 2001, a total of 632 thousand, 561 thousand and 410 thousand options were exercisable at weighted average exercise prices of $16.50, $15.33 and $14.81, respectively, and options for the purchase of 77 thousand, 147 thousand and 452 thousand common shares were available for future grants under the 1998 plan, respectively. The options outstanding as of December 31, 2003 are summarized as follows: Number of Weighted options average Options Exercise outstanding contractual Exercisable price (In thousands) remaining life (In thousands) ........ .............. .............. .............. $ 6.50 2 4.81 years 2 $ 7.00 211 4.06 years 211 $13.06 39 5.48 years 31 $15.15 331 8.13 years 97 $16.66 45 8.79 years 9 $19.71 25 7.30 years 22 $22.16 80 9.39 years 40 $24.63 200 6.23 years 180 $29.00 40 6.42 years 40 ... ... 973 632 ... ... ... ... Shares Reserved for Issuance ............................ At December 31, 2003, the Company had reserved, authorized and unissued 1,049,627 common shares for the following purposes (In thousands): Shares ...... 1990 Stock option plan 196 1998 Stock option plan 854 (10) Earnings Per Share .................. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations (In thousands, except per share amounts): 2003 .................................... Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. ......... Basic EPS $ 11,318 11,853 $0.95 Effect of Dilutive Securities: Stock Options 378 ...... Diluted EPS $ 11,318 12,231 $0.93 ........ ...... ..... ........ ...... ..... 2002 .................................... Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. ......... Basic EPS $ 8,512 11,792 $0.72 Effect of Dilutive Securities: Stock Options 279 ...... Diluted EPS $ 8,512 12,071 $0.71 ........ ...... ..... ........ ...... ..... 2001 .................................... Earnings Shares Per-Share (Numerator) (Denominator) Amount ........... ............. ......... Basic EPS $ 5,938 11,762 $0.50 Effect of Dilutive Securities: Stock Options 216 ...... Diluted EPS $ 5,938 11,978 $0.50 ........ ...... ..... ........ ...... ..... There were 341 thousand, 295 thousand, and 461 thousand unexercised stock options not included as part of the diluted EPS calculations for 2003, 2002 and 2001, 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 million 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 $489 thousand, $387 thousand and $404 thousand in 2003, 2002 and 2001, respectively. (13) Commitments and Contingencies ............................. Indemnifications ................ Currently, the Company has agreed to indemnify two CO2 laser customers from third-party claims against the customer and the costs arising from claims based on, among other matters, allegations that the Company's products infringe a third party's patent rights. The warranty and indemnification do not apply to Company products modified in accordance with customer provided specifications, modified after delivery to the customer or combined with products, components or equipment supplied by a customer or third-party. In the event of an infringement claim, the Company retains the right to procure for the customer the right to continue using the product, replace or modify the product to eliminate the alleged infringement, or if none of these alternatives can be reasonably achieved, the Company may terminate the customer agreement. The number of indemnification contracts with customers in the future could increase and vary depending on the nature of the customer agreements. In addition, the Company may choose to indemnify a customer with no indemnification contract. Such indemnification provisions are accounted for in accordance with SFAS No. 5, "Accounting for Contingencies". For the three years ended December 31, 2003, there have not been any claims under such indemnification provisions, except those disclosed in "Legal Proceedings." Legal Proceedings ................. On May 10, 2002, Positive Light, Inc. ("Positive Light") filed a suit in the District Court for the Northern District of California against Quantronix Corporation ("Quantronix"), a wholly owned subsidiary of the Company, 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. On December 30, 2003, Positive Light and its parent Coherent, Inc. entered into an agreement with Quantronix and the Company to settle for a nominal amount the pending suit and related disputes. The agreement provides for, among other things, the exchange of full mutual releases, the dismissal with prejudice of the suit, a non- exclusive license to the Company, and a limited covenant not to sue the Company and its affiliates with respect to U.S. Patent Nos. 5,790,303; 6,122,097; and 5,963,363. In November, 2002, Dr. R. Gordon Gould and Patlex Corporation ("Gould/Patlex") filed a lawsuit in the United States District Court for the District of Massachusetts against Great Computer Corp. ("GCC"), a customer of the Company's Synrad, Inc. ("Synrad") subsidiary, for infringement of one of the patents licensed by Gould/Patlex to Synrad. The lawsuit is based upon GCC's incorporation of Synrad's sealed C02 lasers into a system sold by GCC to its customers. In April 2003, GCC attempted to bring Synrad into the case as a cross-defendant, on a variety of indemnification and fraud theories. Because the Court's jurisdiction over the cross-claim was not properly pleaded, Synrad moved to have GCC's cross-claim dismissed. The motion was granted. In view of the District Court's dismissal of GCC's cross-claim against Synrad, Gould/Patlex filed a separate, new action for patent infringement and breach of license agreement and false advertising against Synrad. The case is currently pending in the United States District Court for the District of Massachusetts. Gould/Patlex contends that Synrad has failed to properly pay royalties to Gould/Patlex, which allegation has been denied. As a result, Gould/Patlex purported to terminate the Gould/Patlex - Synrad patent license agreement, thus allegedly converting Synrad's licensed activities into infringing activities. Synrad has denied all of the substantive allegations of Gould/Patlex, and on July 8, 2003 filed counterclaims against Gould/Patlex for breach of contract, wrongful termination of license and violation of Mass. Gen. Laws c. 93A (unfair business practices). During October 2003, the case filed by Gould/Patlex against GCC and Synrad were consolidated and are now pending as a single case. The cases are now in the fact discovery stage. In order to defeat Synrad's defense that it remained licensed as a subsidiary of the Company, in August, 2003, Gould/Patlex took steps to terminate its patent license agreement with the Company. In response, in September, 2003, the Company filed its own declaratory judgment action, alleging nearly the same claims as Synrad's counterclaims against Gould/Patlex for breach of contract, wrongful termination of license and violation of Mass. Gen Laws c. 93A (unfair business practices). Gould/Patlex has answered and counterclaimed with the same allegations of patent infringement and breach of license agreement and false advertising as were levied against Synrad. The parties have agreed that this case should also be consolidated, at least for discovery purposes. Synrad intends to request consolidation for trial and all other purposes, as well. Synrad believes that it is and has always been in compliance with all terms and conditions of the Gould/Patlex - Synrad patent license agreement, and any errors in royalty calculations which were made in the past were timely corrected after notice, pursuant to the "notice and cure" provisions of the agreement. Efforts to obtain explanations of the reasoned position of Gould/Patlex have been fruitless to date. As a result, it is not possible at this early stage of the case to determine what liability exposure, if any, is faced by Synrad. Synrad continues to operate in accordance with its duties and obligations under its agreement with Gould/Patlex, including the obligation to pay royalties upon its sales of licensed lasers. Synrad intends to vigorously defend the case. In any event, the last-surviving licensed Gould/Patlex patent, which is the subject of the dispute, expires on November 3, 2004, in the event that the case is not resolved before then. However, if the Company were to lose its license, it could have a material impact on the Company's results of operations. Operating Leases ................ The Company and its subsidiaries lease certain buildings, vehicles and equipment under non-cancelable operating leases. At December 31, 2003, the future minimum lease payments under non-cancelable operating leases are as follows (In thousands): 2004 $ 1,646 2005 1,425 2006 1,110 2007 752 2008 627 Thereafter 64 ........ $ 5,624 ........ ........ Rent expense approximated $1.4 million, $957 thousand, and $2.1 million for the years ended December 31, 2003, 2002 and 2001, 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 conducts its business in the following geographic regions that are aggregated into one reportable segment. The Company provides photonics-based solutions, primarily consisting of laser systems and electro-optical components, in a broad range of commercial, scientific research and semiconductor applications. The Company's product lines have similar long-term economic characteristics and utilize similar manufacturing processes. The Company distributes, sells and services its products to similar customers in all regions. Information concerning foreign and domestic operations and export sales by origin is as follows (In thousands): As of or the year ended December 31, ................................ 2003 2002 2001 .......... ........ ......... Net sales and services to unaffiliated customers: United States operations $ 84,393 $ 67,731 $ 67,261 European operations 23,955 23,308 20,073 Asian operations 14,333 3,474 1,158 .......... ........ ......... $ 122,681 $ 94,513 $ 88,492 .......... ........ ......... .......... ........ ......... Operating income (loss): United States operations $ 15,877 $ 13,479 $ 9,774 European operations (2,057) (1,600) (1,243) Asian operations 2,063 313 72 .......... ........ ......... $ 15,883 $ 12,192 $ 8,603 .......... ........ ......... .......... ........ ......... Identifiable assets: United States operations $ 109,228 $ 96,578 $ 85,552 European operations 17,515 16,667 16,176 Asian operations 6,995 5,479 777 .......... ........ ......... $ 133,738 $118,724 $ 102,505 .......... ........ ......... .......... ........ ......... Identifiable assets are those tangible and intangible assets used in operations in each geographic area. During the years ended December 31, 2003, 2002 and 2001, the Company had foreign and export sales of approximately $74.7 million, $59.2 million and $51.3 million, representing 61%, 63% and 58%, 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 2003, 2002 and 2001. No accounts receivable from a customer exceeded five percent of the Company's total accounts receivable at December 31, 2003 and 2002. (15) Related Party Transactions .......................... During 2003, one director of the Company provided services to the Company as legal counsel, and the Company paid approximately $53 thousand for legal services rendered by the director's law firm. During 2002 and 2001, two directors of the Company provided services to the Company as legal counsel and the Company paid approximately $388 thousand and $55 thousand, respectively, for legal services rendered by the respective directors' law firms. Schedule II ........... EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2003, 2002 and 2001 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 (In thousands): Year ended December 31,: 2003 $ 993 $ 92 $ (84)(1) $ 1,001 2002 $ 717 $ 314 $ (38)(1) $ 993 2001 $ 559 $ 336 $ (178)(1) $ 717 (1) Uncollectible accounts written off, net of recoveries. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by 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. There were no significant changes in the Company's internal control over financial reporting during the quarterly period ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART III ........ ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 is incorporated by reference from 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, 2003. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 is incorporated by reference from 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, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 is incorporated by reference from 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, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 is incorporated by reference from 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, 2003. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this Item 14 is incorporated by reference from 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, 2003. PART IV ....... ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements (included in Part II, Item 8): Reports of Independent Auditors Consolidated Balance Sheets as of December 31, 2003 and 2002 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001. 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 - Filed in the forth quarter of 2003: Form 8-K dated October 14, 2003 Item 7. Financial Statements, Proforma Financial Information and Exhibits Item 12. Results of Operations and Financial Condition ............................... * 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: February 19, 2004 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 February 19, 2004 ..................... J. Donald Hill /s/ Antoine Dominic Chief Executive Officer, President, February 19, 2004 ..................... Chief Operating Officer, and Director Antoine Dominic (Principal Executive Officer and Principal Financial and Accounting Officer) /s/ Steven Georgiev Director February 19, 2004 ..................... Steven Georgiev /s/ Howard S. Breslow Director February 19, 2004 ..................... Howard S. Breslow /s/ Donald Weeden Director February 19, 2004 ...................... Donald Weeden INDEX TO EXHIBITS Exhibit Number Document ...... ........ 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 (Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 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. 21 List of subsidiaries.* 23.1 Consent of KPMG LLP.* 23.2 Consent of Ernst & Young LLP.* 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.* *filed herewith 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 D Green (Electronics) Limited United Kingdom Excel Technology Services Company Delaware Quantronix Corporation Delaware Photo Research, Inc. Delaware Synrad, Inc. Washington The Optical Corporation California Excel Technology Asia Sdn. Bhd. Malaysia Excel Technology Europe GmbH Germany Baublys GmbH (1) Germany Excel Technology France S.A.S. (1) France Excel Technology Japan Holding Co., Ltd. Japan Excel Technology Japan K.K. (2) Japan Excel Laser Technology Private Limited (3) India (1) A wholly-owned subsidiary of Excel Technology Europe GmbH (2) A wholly-owned subsidiary of Excel Technology Japan Holding Co., Ltd. (3) A joint venture in which Excel Technology, Inc. has a 50% equity ownership interest EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Excel Technology, Inc.: We consent to incorporation by reference in the registration statements (No. 33-71122 and 33-35934) on Form S-8 of Excel Technology, Inc. of our report dated January 22, 2004, relating to the consolidated balance sheet of Excel Technology, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for the year then ended, and the related schedule, which report appears in the December 31, 2003 annual report on Form 10-K of Excel Technology, Inc. /s/ KPMG LLP Melville, New York February 12, 2004 EXHIBIT 23.2 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 balance sheet as of December 31, 2002 and the consolidated statements of income, stockholders' equity and comprehensive income and cash flows and the related schedule for each of the two years in the period ended December 31, 2002 of Excel Technology, Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2003. /s/ Ernst & Young LLP Melville, New York February 17, 2004 EXHIBIT 31 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; b) intentionally omitted; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Antoine Dominic ................... Antoine Dominic, President, Chief Executive Officer, and Chief Operating Officer (Principal Accounting Officer) Dated: February 19, 2004 EXHIBIT 32 CERTIFICATION OF PERIODIC REPORT 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, to his knowledge,: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2003 (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: February 19, 2004 /s/ Antoine Dominic ................... Antoine Dominic, President, Chief Executive Officer, and Chief Operating Officer (Principal Accounting Officer) A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.