-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H6Y7PEq9pl0ahUt6EposGdHmgwh/ugbeBJyKuJ6UsbQFYIfPXKpxJ2823h8wfyWg +oHNlASjpWCNlv0RE3VDww== 0000873603-98-000004.txt : 19980327 0000873603-98-000004.hdr.sgml : 19980327 ACCESSION NUMBER: 0000873603-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCEL TECHNOLOGY INC CENTRAL INDEX KEY: 0000873603 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 112780242 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19306 FILM NUMBER: 98573931 BUSINESS ADDRESS: STREET 1: 45 ADAMS AVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162736900 MAIL ADDRESS: STREET 1: 45 ADAMS AVENUE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 .................................. FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 .................................. For the fiscal year ended Commission File Number 0-19306 December 31, 1997 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 (516) 273-6900 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 (Titles of Classes) 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was $118,332,130 based on the average bid and ask price as reported by NASDAQ on March 19,1998. The number of shares of the Registrant's common stock outstanding as of March 18, 1998 was: 11,336,667. DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement to be filed in connection with the Registrant's 1998 Annual Meeting of Stockholders (incorporated by reference under Part III) PART I ...... This Annual Report on Form 10-K (and other reports issued by the Company and its officers from time to time) contain certain statements concerning the Company's future results, future performance, intentions, objectives, plans, and expectations that are or may be deemed to be "forward-looking statements". Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ significantly from the results discussed in the forward looking statements. Such forward looking statements are subject to a number of known and unknown risks and uncertainties that, in addition to general economic and business conditions, could cause the Company's actual result, performance, and achievements to differ materially from those described or implied in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 1. BUSINESS General Excel Technology, Inc. (the "Company") designs, develops, manufactures and markets laser systems and electro-optical components for industry, science, and medicine. The word laser is an acronym for "Light Amplification by Stimulated Emission of Radiation." The essence of the laser is the ability of a photon (light energy) to stimulate the emission of other photons, each having the same wavelength (color) and direction of travel. The laser beam is so concentrated and powerful that it can produce power densities millions of times more intense than that found on the surface of the sun, capable of cutting, welding and marking industrial products, yet can be precisely controlled and directed, capable of performing delicate surgery on humans. Since 1992, the Company has focused its business activities on two basic business strategies: (a) diversification and (b) industry consolidation. Through its diversification strategy, the Company expects to manufacture and market core solid state laser and optical products and systems tailored to a variety of industrial, scientific and medical applications. The Company believes that its acquisition strategy should provide added opportunity for growth. In October 1992, the Company acquired Quantronix Corporation, a Delaware corporation ("Quantronix"), for Common Stock and warrants of the Company valued at approximately $9 million, in a transaction pursuant to which Quantronix became a wholly-owned subsidiary of the Company. The acquisition of Quantronix and its wholly-owned subsidiaries, Control Laser Corporation, located in Orlando, Florida ("Control Laser"), Quantronix GmbH, located in Germany ("Quantronix GmbH"), and The Optical Corporation, located in Oxnard, California ("Optical"), provided the Company with its industrial, scientific and semiconductor product lines, supplemented the Company's dental products and provided the Company with a significant revenue base as well as established manufacturing, engineering, marketing and customer service capabilities. On February 14, 1995, the Company acquired Cambridge Technology, Inc. ("Cambridge"), located in Cambridge, Massachusetts. Cambridge is engaged primarily in the manufacture of laser scanners, essential components to moving a laser beam with precision at a specified speed. These products have both industrial and consumer applications, such as laser marking and etching, high density laser printing and writing, digitized x-ray imaging and entertainment laser light shows and displays. This acquisition allowed the Company to expand into new markets as well as enhance its present market position in the industrial business. The Company acquired all of the outstanding shares of capital stock of Cambridge in exchange for $4.75 million, consisting of $4.5 million in cash (of which $3.5 million was paid on February 14, 1995) and $250 thousand in shares of Common Stock (which was paid on February 14, 1995). Of the balance due, $600 thousand was paid in March 1996 and $400 thousand was paid in February 1997. Pursuant to the acquisition agreement, additional payments were made due to Cambridge meeting certain performance goals during the first two fiscal years after the acquisition. In connection therewith, the Company paid $731 thousand for 1995 and $323 thousand for 1996. On October 2, 1995, the Company acquired the Photo Research Division ("The Photo Research Division") of Kollmorgen Instruments Corporation ("Kollmorgen"). The Photo Research Division is engaged primarily in the business of developing, manufacturing and marketing photometric and spectroradiometer instruments and systems (the "Business"). In accordance with an Asset Purchase Agreement, the Company purchased substantially all of the net assets and properties utilized in connection with the Business, in consideration of $3.5 million in cash. The Company utilized its own cash to finance the acquisition. Subsequently, the Company obtained a $3.5 million five-year term loan, from U.S.Trust (the "Bank"), the proceeds of which were utilized by the Company to replenish its own cash used in financing the acquisition. Excel was organized under the laws of Delaware in 1985. CURRENT PRODUCTS AND APPLICATIONS Industrial .......... Control Laser, the Company's subsidiary located in Orlando, Florida, designs, manufactures and markets industrial laser systems for material marking and engraving. Control Laser contributed approximately 34% of the Company's total sales in 1997. With more than 1,650 systems installed worldwide, including 1,300 in North America, Control Laser had over 40% of the domestic market share in 1997. Control Laser's InstaMark laser systems allow for permanent, high speed, computer-controlled product marking for the aerospace, automotive, medical device, electronic, tooling and consumer industries. Customers include Honeywell, ITT Bosch, Nissan, Ford, Kodak, General Electric and General Motors. Control Laser's marking products can be used manually or can be utilized as part of an automated assembly line system. During 1997, Control Laser introduced a new marking system designed to "mark on the fly" for the packaging industry. Scanners ......... Cambridge, the Company's subsidiary based in Cambridge, Massachusetts, manufactures high speed mirror positioning components and sub-systems used to direct laser energy. Cambridge contributed approximately 18% to the Company's sales in 1997. These optical scanning products are key to a variety of applications where visible or invisible laser energy is positioned quickly and precisely. An increasingly broad base of laser system applications are served, by these products including laser marking, machining, heat treating, welding and cutting, semiconductor wafer inspection and processing, laser entertainment, corporate advertising and a growing number of laser based medical applications, which include digital radiography, skin resurfacing, eye treatment and others. With patented designs, Cambridge is a technology leader in galvanometer-based optical scanning and supports research and development of new applications through a wide range of academic institutions, private firms and government agencies. Semiconductor ............. Quantronix, the Company's subsidiary located in Hauppauge, New York, manufactures and markets Defect Repair Systems (DRS) which are laser based systems for use in semiconductor production. The DRS provides a means to repair defects on the complex photomasks used to produce integrated circuits. A pioneer in this field, Quantronix has provided laser mask repair systems to the industry since 1975. Currently, the DRSII Model 840e system is the industry standard, with over 100 installed Quantronix repair systems in operation. In recognition of the demand for smaller, denser features on next generation integrated circuits, the Company has embarked on a development program to produce the next generation machines (DRS II Model 850) that will support circuit production through the 0.35 microns, 0.25 microns and 0.18 microns design generations, promoting product viability in the future. The initial shipment of a DRSII 850 system took place in November of 1996. The Company is currently working on a new updated machine to be called the DRS II Model 855. The DRSII 850 and DRSII 855 are being developed in close contact with leaders within the semiconductor industry. This Quantronix product line accounted for approximately 10% of the Company's total sales in 1997. Scientific and OEM Products ............................ Quantronix also manufactures and markets solid-state lasers for science, industry and OEM uses. On a worldwide basis, scientific lasers represent one of the most stable and long-established laser markets. Scientific lasers are used by chemists, biologists, physicists and other scientists and engineers. In this market, end-users are generally familiar with the various product specifications, features and reliability, which are the major factors in choosing between competing products. Quantronix's current scientific line includes the Series 4800 Ultrafast Amplifiers and the Series 527 High Power Green pulsed lasers. Quantronix's Ultrafast Amplifiers incorporate a material called Titanium Sapphire ("Ti:Sapphire") which has created opportunities for a greater volume of research than previous materials. Ultrafast Amplifiers deliver high energy short pulses on the picosecond time scale. (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 system utilizes the Nd:YLF laser to produce high energy pulses at a rate of 1kHz (1000 pulses per second). These pulses drive the Ti:Sapphire Amplifier that can then pump other optical systems (also marketed by Quantronix) which deliver tunable light from Ultraviolet to Infrared regions of the spectrum. The material properties to be studied vary over this range. Industrial and OEM markets play host to a number of diversified Nd:YAG lasers. Some of the markets are for diamond drilling, micro- machining and material processing. Recent developments based on the scientific product line have increased Quantronix's high end market share and should enable further applications in material processing. Quantronix 's scientific, industrial and OEM products accounted for approximately 13% to the Company's total 1997 sales. Optical Products ................ Optical, a subsidiary of the Company based in Oxnard, California, specializes in the manufacture of custom precision optical flats used for measurement in optical scanners, laser systems, professional motion picture cameras and other industrial and scientific applications. Optical contributed approximately 3% to the Company's sales in 1997. Light and Color Measurement ........................... Photo Research, the Company's Chatsworth, California subsidiary, is a leader in high precision, state of the art electro-optical instrumentation and systems for light and color measurement. Photo Research contributed approximately 9% to the Company's total 1997 sales. The Spectra product line offers systems to a wide variety of industries for research, quality control and on-line testing. Video Instrumentation provides high resolution CRT and flat panel inspection. The Photo Research Optical Metrology Laboratory is a supplier of and service provider to optical radiation standards, calibration and measurement for major manufacturers of instruments, displays, devices and materials. Spare Parts ........... The Company derives a portion of its revenues from the sale of spare parts and related consumable materials used primarily in its semiconductor, industrial and scientific systems. This operation is based in Hauppauge, New York. Spare parts and consumables include replacement optical elements, lamps and electronic components. This Quantronix product line contributed approximately 10% of the Company's total sales in 1997. Dental Products ............... Quantronix manufactures and markets in its Hauppauge, New York facility, a series of solid-state lasers for the treatment of dental soft tissue. The Quantronix dental product line contributed approximately 3% to the total sales of the Company in 1997. Soft-tissue procedures include treatments of diseased gums, biopsies, control of bleeding and preparation of gums for crown and bridge impressions. Quantronix's existing line of dental laser systems contain Nd:YAG and Ho:YAG lasers in a single unit. The systems utilize a fiber optic cable and a handpiece, are internally air cooled, and can be operated from standard 110 volt electrical outlets. In November 1993, Quantronix received clearance from the German government, under applicable "MedGV" regulations, to market its dental laser system in Germany. In connection therewith, Quantronix has engaged experienced product marketing teams with an established nationwide network in Germany. Quantronix began export of the dental laser to Germany in December 1993. In June 1994, Quantronix introduced a laser based welding system to be used in the fabrication and repair of crowns, bridges, partials, implants and other devices for dental laboratories. Quantronix's laser welding system contains a pulsed Nd:YAG laser with input power of 220 volts AC, 50/60 Hz and 4 kilowatts peak power and 20 watts average power. The dental laser welder was developed in conjunction with several leading dental laboratories in the United States and is capable of directly welding different metals and alloys used in connecting bridges, crowns, loops, clasps, etc. without the need for external soldering materials. The biggest advantages of laser welding, as compared to soldering, are the stronger bonds and reduced labor costs. Marketing and Sales ................... Marketing activities for the Company's product lines include the presentation of its product lines at domestic and international trade shows and advertising. The marketing and sales staff conduct professional meetings, conferences and in-person and telephone sales calls. The Company also engages independent manufacturers' representatives for the sale of its products. Foreign sales of its products are made primarily through foreign equipment distribution organizations and representatives, and by Quantronix GmbH, its German subsidiary. Quantronix GmbH is engaged in the business of marketing, distributing, integrating and servicing laser systems (for industrial, semiconductor, scientific and dental products) manufactured at the Company's Hauppauge, New York and Orlando, Florida facilities. The sales territory covered by Quantronix GmbH is primarily in Europe. The staff of twenty-three includes seven engineers who install and service all products including complex semiconductor, scientific, and other industrial systems. In addition, Quantronix GmbH provides spare parts for its installed base. The following table represents a breakdown between the Company's domestic and foreign revenues for the years ended December 31, 1997, 1996 and 1995 (in thousands of dollars). 1997 1996 1995 Dollars Percent Dollars Percent Dollars Percent ....... ....... ....... ....... ....... ....... DOMESTIC $42,186 64% $37,781 66% $27,513 63% FOREIGN 23,762 36% 19,681 34% 16,401 37% ....... ....... ....... ....... ....... ....... TOTAL $65,948 100% $57,462 100% $43,914 100% ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... Manufacturing ............. The Company assembles its products at its facilities in Hauppauge, New York; Orlando, Florida; Oxnard, California; Cambridge, Massachusetts; and Chatsworth, California. 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, services maintenance contracts and provides customer support services by telephone to customers with operational and service problems. RESEARCH AND DEVELOPMENT Due to the intense competition and rapid technological change in the laser and optical industries, the Company believes that it must continue to improve and refine its existing products and systems and develop new applications for its technology. Research and development expenses for the years ended December 31, 1997, 1996, and 1995 were $4,860,903, $4,406,364 and $3,096,934, 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. In the scientific market, a number of competitors, including Spectra-Physics, Inc. and Coherent, Inc., which are believed to be the industry's two largest companies, produce Ti:Sapphire lasers. The Company's industrial laser products for material marking applications compete primarily with those manufactured by A.B. Laser and Lumonics. 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. Semiconductor products have recently been subject to market saturation conditions and the rapid advances in miniaturization of integrated circuits and computers. These factors are behind the Company's commitment to continue developing its next generation mask repair products. In the dental laser market, the Company competes with several manufacturers including American Dental Technologies. In light and color measurement, the major competitor to the Company's Spectra product is Minolta. Minolta has approximately a 30% to 35% worldwide market share compared with Photo Research's 20% to 25% share. In the on-line video inspection market, the Company is a technical leader with Dynacolor and EeRise as its key competitors. In the laser scanner market, General Scanning, which has an estimated current market share of 50%, is a significant competitor of the Company. This competitor was also one of the Company's largest U.S. customers for scanners in 1997 and 1996. The Company has a significant market presence in Europe and Japan with 50% of laser scanner sales being outside the United States. BACKLOG As of December 31, 1997, the Company had a backlog of firm orders of approximately $14 million as compared to a backlog of $13.5 million as of December 31, 1996. The Company believes that the current backlog will be filled during the present fiscal year. Historically, backlog is shipped within 90 days from the order date. PATENTS AND LICENSES The Company has several United States patents covering a wide variety of its products and has applications pending in the United States patent office. There can be no assurance that any other patents will be issued to the Company or that such patents, if and when issued, will provide any protection or benefit to the Company. Although the Company believes that its patents and its pending patent applications are valuable, the Company does not consider the ownership of patents essential to its business. The Company believes that, in general, the best protection of proprietary technology in the laser industry will come from market position, technical innovation and product performance. There is no assurance that any of these advantages will be realized by the Company. GOVERNMENT REGULATION The Company is subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health of the FDA. Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control, product testing and sales records, to distribute appropriate operating manuals, to incorporate certain design and operating features in lasers sold to end- users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. The Company believes that it is currently in compliance with these regulations. There are two principal methods by which FDA regulated products may be marketed in the United States. One method is an FDA pre-market notification filing under Section 510(k) of the Food, Drug and Cosmetics Act (a "510(k) Application"). Applicants under the 510(k) procedure must demonstrate that the device for which approval is sought is substantially equivalent to devices on the market prior to the Medical Device Amendments of 1976 or devices approved thereafter pursuant to the 510(k) procedure. The review period for a 510(k) Application is 90 days from the date of filing the application. While applications not rejected within the 90-day period are deemed approved, applicants typically defer marketing until a favorable response to the 510(k) Application is received from the FDA. In 1992, the Company's three dental products received 510(k) approval for use in soft tissue applications. The alternate method, where section 510(k) is not available, is to obtain pre-market approval ("PMA") from the FDA. Under the PMA procedure, the applicant must obtain an investigational device exemption before beginning the substantial clinical testing required to determine the safety, efficacy and potential hazards of the product. The preparation of a PMA application is significantly more complex and time consuming than the 510(k) Application. The review period under a PMA application is 180 days from the date of filing but the application is not automatically deemed approved if not rejected during the period and the FDA often responds with requests for additional information or clinical reports. The PMA approval process can take up to several years. The FDA also imposes various requirements on manufacturers and sellers of products under its jurisdiction, such as labeling, manufacturing practices, record keeping and reporting requirements. The FDA also may require post-market testing and surveillance programs to monitor a product's effects. There can be no assurance that the appropriate approvals from the FDA will be granted, that the process to obtain such approvals will not be excessively expensive or lengthy or that the Company will have sufficient funds to pursue such approvals at the time they are sought. The failure to receive requisite approvals for the Company's products or processes, when and if developed, or significant delays in obtaining such approvals, would prevent the Company from commercializing its products as anticipated and would have a materially adverse effect on the business of the Company. FOREIGN REGULATORY REQUIREMENTS Foreign sales of the Company's dental and medical laser systems are or will be subject in each case to approval by the recipient country. Regulatory requirements vary widely among the countries, from electrical approvals to clinical applications similar to the PMA applications filed with the FDA for sales in the United States. The Company has obtained appropriate approvals for its dental products in Japan, Korea and certain European countries including Germany. EMPLOYEES As of December 31, 1997, the Company had 300 full-time employees, consisting of 2 executive officers, 7 subsidiary executive officers, 91 engineering and technical personnel and 200 manufacturing, administrative and sales support personnel. The Company believes that its relations with its employees are satisfactory. None of the Company's employees is represented by a union. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES For the years ended December 31, 1997, 1996 and 1995, the Company had net sales to customers in foreign countries amounting to approximately $23.8 million, $19.7 million and $16.4 million, respectively (approximately 36%, 34% and 37% of total net sales and services, respectively). These sales included sales by Quantronix GmbH, the Company's German subsidiary. Quantronix GmbH buys laser systems, spare parts and related consumable materials from Quantronix and Control Laser, the Company's New York and Florida subsidiaries, for resale to European and other foreign customers, and also furnishes field repair services. See Note 13 of the "Notes to Consolidated Financial Statements." Foreign currency translation for Quantronix GmbH, the Company's subsidiary in Germany, is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, except for property, plant and equipment which is translated at historical rates, while revenues, costs and other expenses are translated at the average exchange rate for the reporting period. The resulting translation adjustment of $(256) thousand and $(78) thousand at December 31, 1997 and 1996, respectively, is included as a component of stockholders' equity. Currency and exchange rate fluctuations from transaction gains and losses resulted in net losses of $167 thousand and $178 thousand for the years ended December 31, 1997 and 1996, respectively, and a net gain of approximately $115 thousand for the year ended December 31, 1995. Such amounts are based upon the accounting treatment of foreign intercompany balances and transaction gains and losses. ITEM 2. PROPERTIES Excel leases approximately 2,900 square feet in New York City from an unaffiliated landlord for its corporate offices. The lease is for a five-year period at an average annual rent of $108,000, and expires in November 2001. Quantronix leases approximately 28,000 square feet in Hauppauge, New York from an unaffiliated landlord for its executive offices and for sales, service and manufacturing. The lease is for a five-year period which ended in November 1997, at an average annual rent of approximately $230,000. Excel's principal executive office is maintained in the Hauppauge facility, where financial and accounting functions of the Company are performed. Quantronix is in the process of constructing its own building, at a cost of approximately $3.7 million, which is scheduled for completion February 28, 1998. Control Laser leases a building containing approximately 50,000 square feet in Orlando, Florida from an unaffiliated landlord, which it utilizes for administrative offices and laser manufacturing operations. Annual rent is approximately $240,000. The lease expires in December 2001. Optical leases a 14,000 square foot building in Oxnard, California from an unaffiliated landlord for manufacturing purposes, at an annual rent of approximately $90,000. The lease term expires in December 1998. Cambridge leases a 17,000 square foot building in Cambridge, Massachusetts from an unaffiliated landlord for manufacturing operations and administrative offices. The lease is for a ten-year period ending in October 2006, at an annual rent of approximately $150,000 through October 2003 and $175,000 from November 2003 through October 2006. Quantronix GmbH leases approximately 7,500 square feet of office space, used for sales and service, in Darmstadt, Germany from an unaffiliated landlord at an average annual rent of approximately $106,000. The lease expires in June 2005. Photo Research leases a 36,000 square foot facility located in Chatsworth, California from an unaffiliated landlord for manufacturing operations and administrative offices, at an annual rent of approximately $480,000. The lease expires in June 1998. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company has disputes that arise in the ordinary course of its business, none of which the Company believes should have a material impact on its business. There are no material pending legal proceedings to which the Company or its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ....... ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "XLTC" since May 1991, the date of the Company's initial public offering, and on the NASDAQ National Market System since October 2, 1992. The following table sets forth the high and low bid quotations reported on NASDAQ for the Common Stock for the periods indicated. Year ended: High Low December 31, 1997 First Quarter 10-1/8 7-1/4 Second Quarter 9-1/4 7-1/2 Third Quarter 13-3/8 8-5/8 Fourth Quarter 15-3/8 8-3/4 December 31, 1996 First Quarter 9-3/8 6-1/2 Second Quarter 11-3/4 7-7/8 Third Quarter 9-5/8 6-3/4 Fourth Quarter 9-1/8 7 The above quotations represent prices between dealers, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions. As of March 18, 1998, there were approximately 926 holders of record of Common Stock. Since many shares are registered in street name, the number of beneficial owners is considerably higher. The Company has never paid cash dividends on its Common Stock. In April 1996 the Company paid a $0.40 per share dividend on its Preferred Stock. In May 1996, the Company exercised its option to redeem all Preferred Shares that were not converted. Therefore, after May 1996, no cash dividends were paid to holders of the Preferred 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, limitations on dividends under the Company's revolving line of credit agreement and the operating and financial condition of the Company. At the present time, the Company's anticipated capital requirements are such that it intends to follow a policy of retaining earnings, if any, in order to finance the development of its business. ITEM 6. SELECTED FINANCIAL DATA The following tables summarize certain consolidated financial data which should be read in conjunction with the reports of the Company's independent auditor and the more detailed consolidated financial statements and notes thereto which appear elsewhere herein. Statement of Operations Data ............................

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ....... The following discussion should be read in conjunction with the consolidated financial statements of the Company and notes thereto set forth elsewhere herein. Summary ....... The Company achieved revenues of approximately $66 million for the year ended December 31, 1997 as compared to approximately $57.5 million and $43.9 million for the years ended December 31, 1996 and 1995, respectively. Earnings (loss) before provision for income taxes were approximately $12.6 million, $7.1 million, and ($1.1) million for the years ended December 31, 1997, 1996 and 1995, respectively. The net earnings (loss) and earnings (loss) per share on a diluted basis were approximately $8.2 million and $0.73 per share in 1997 $4.9 million and $0.50 per share in 1996 and ($1.6) million and ($0.21) per share in 1995. Due to the loss in 1995, common stock equivalents and the conversion of preferred shares were antidilutive and were not included in the diluted earnings per share in 1995. The following table presents consolidated financial data for the years ended December 31, 1997, 1996 and 1995 (in thousands of dollars and as a percentage of total net sales and services.)

Net Sales and Services ...................... Net sales and services for the year ended December 31, 1997 increased to $65.9 million from $57.5 million in 1996 and from $43.9 million in 1995. The increase from 1996 to 1997 of $8.4 million or 14.6 percent was attributable to increased sales of all products with the exception of dental. The increase from 1995 to 1996 of $13.6 million or 31.0 percent was primarily attributable to the inclusion of Photo Research's operations for an entire year (increase of approximately $5 million) and increased sales of industrial and scientific/OEM products, offset in part by reduced medical product revenues. Gross Margins and Cost of Sales ............................... Gross margins as a percentage of sales increased to 49.6 percent from 46.0 percent in 1996 and 43.4 percent in 1995. Cost of sales and services increased to $33.2 million in 1997 from $31.0 million in 1996 and $24.9 million in 1995. The increase in gross margins as a percentage of sales was primarily due to improved efficiencies in manufacturing and product mix. The increase from 1995 to 1996 was primarily due to the inclusion of an entire year of operations of Photo Research which experiences higher gross margins. Operating Expenses .................. Selling and Marketing Selling and marketing expenses increased to $10.6 million in 1997 from $9.7 million in 1996 and $7.2 million in 1995. The increase of 900 thousand or 9.2 percent was primarily attributable to increased sales. Selling and marketing expenses as a percentage of sales increased from 16.4 percent in 1995 to 17.0 percent in 1996 and decreased to 16.1 percent in 1997. The increase of $2.5 million or 34.7 percent from 1995 to 1996 was primarily attributable to the acquisition of Cambridge and Photo Research and increased sales. General and Administrative General and administrative expenses increased to $4.8 million in 1997 from $4.2 million in 1996 and $4.5 million in 1995. The increase in 1997 is primarily due to the added operating expenses associated with opening the New York City office. The decrease of $240 thousand or 5 percent from 1995 to 1996 was due to the one time $300 thousand compensation charge in 1995 related to the resignation of the former Chairman and CEO, partially offset by the addition of Photo Research. General and administrative expenses as a percentage of sales remained the same at 7.3 percent in 1996 and 1997. Research and Development Research and development costs for the year ended December 31, 1997 were 4.9 million as compared to $4.4 million and $3.1 million for the years ended December 31, 1996 and 1995, respectively. The increase from 1996 to 1997 is primarily attributable to increased research and development activity in all products with the exception of dental. The primary reason for the increase of $1.3 million or 42 percent from 1995 to 1996 was due to the inclusion of a full year's R&D for Photo Research and increased R&D efforts in all subsidiaries. Amortization of Goodwill The amortization of the excess of cost over fair value of the net assets of businesses acquired of $370 thousand, $508 thousand and $469 thousand for the years ended December 31, 1997, 1996 and 1995, respectively, was a result of the acquisition of Quantronix in October 1992, Cambridge in February 1995 and Photo Research in October 1995. The increase from 1995 to 1996 was due to the full year of amortization for Photo Research. The decrease in 1997 is primarily a result of a reduction in goodwill due to the establishment of a deferred tax asset in 1996. Litigation Settlement Litigation settlement costs for the year ended December 31, 1995 were $3.4 million of which $2.7 million was for the SBIR settlement with the U.S. Department of Justice and $700 thousand for legal expenses related to the SBIR investigation. Other Income/Expense Interest expense was $160 thousand, $608 thousand and $691 thousand for the years ended December 31, 1997, 1996 and 1995, respectively. Interest expense decreased $448 thousand or 74 percent from 1996 to 1997 due to the Company's prepayment of all its term loans with U.S. Trust and repayment of other long-term debt and notes payable. Interest expense decreased $83 thousand or 12.0 percent from 1995 to 1996 due to the reduced debt level in 1996. The increase in interest income of $578 thousand from $294 thousand in 1996 to $872 thousand in 1997 was due to increased average investments. The decrease in interest income of $102 thousand from $395 thousand in 1995 to $294 thousand in 1996 was due to the reduced average investment levels in 1996 that resulted from prepayments in long- term debt. Other income/expense for the year ended December 31, 1997 was $97 thousand of expense compared to $200 thousand in 1996. The expense was due primarily to foreign exchange losses. The decrease in expense from 1995 to 1996 was primarily due to investment losses in 1995. Liquidity and Capital Resources ............................... Working capital at December 31, 1997 and 1996 was $37.2 million and $17.5 million, respectively. Cash, cash equivalents and investments increased by approximately $13.6 million from December 31, 1996 to December 31, 1997. Such increase is primarily attributable to the proceeds from the exercise of options and warrants of $17.2 million and cash flows from operations of $6.8 million, partially offset by capital expenditures of $3.9 million, repayment of debt of $2.3 million and the purchase of treasury stock of $3.3 million. Increases in accounts receivable and inventory in 1997 were primarily attributable to the Company's increased sales volume. The Company had capital expenditures of approximately $3.9 million for the year ended December 31, 1997 and has plans to expend approximately $2.5 million in 1998. The Company had capital expenditures of $1.6 million for the year ended December 31, 1996. The Company commenced its year 2000 date conversion plans to address all necessary code changes, testing and implementation. Project completion is planned for the beginning of 1999. Management anticipates that the cost of the conversion plan will not be material to the Company's results of operations or liquidity in 1998 or 1999. Management anticipates that the Company's year 2000 date conversion project will be completed on a timely basis. However, there can be no assurance that the systems of other companies which the Company interacts with will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company. On June 30, 1994, the Company entered into a $5 million revolving line of credit agreement with U S Trust, (the "Bank") which matures in March 1998. At December 31, 1997 the Company had no borrowings and had all $5.0 million available for borrowing under the line of credit. On February 14, 1995, the Company acquired all of the outstanding shares of capital stock of Cambridge in exchange for $4.75 million, consisting of $4.5 million in cash (of which $3.5 million was paid on February 14, 1995) and $250 thousand in shares of Common Stock (which was paid on February 14, 1995). On March 31, 1995, the Company borrowed $4.0 million from the Bank, requiring monthly payments of $67 thousand plus interest through April 2000. Such term loan has been fully repaid as of December 31, 1997. Of the balance due, $600 thousand was paid in March 1996 and $400 thousand was paid in February 1997. Pursuant to the acquisition agreement, additional payments were made due to Cambridge meeting certain performance goals during the first two fiscal years after the acquisition. In connection therewith, the Company paid $731 thousand for 1995 and $323 thousand for 1996. On October 2, 1995, the Company acquired substantially all of the net assets and property utilized in connection with the business of Photo Research from Kollmorgen Instruments Corporation for $3.53 million in cash. The Company utilized its own cash to finance the Photo Research acquisition. Subsequently, the Company obtained a $3.5 million five-year term loan from the Bank, which has been fully repaid as of December 31, 1997. As of December 31, 1997, the Company had prepaid all its debt on its term loans with the Bank and has no outstanding long-term debt. In December 1997, the Company purchased 375,000 shares of its common shares as treasury stock. On January 23, 1998 the Board of Directors authorized the Company to repurchase up to 2,000,000 of its common shares in the open market at prevailing market prices. The Company estimates that its current resources and anticipated cash to be generated from operations will be sufficient to meet its cash requirements for at least the next 12 months. In the opinion of management, inflation has not had a material effect on the operations of the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Follow on next page. EXCEL TECHNOLOGY, INC. Index to Consolidated Financial Statements and Financial Statement Schedule filed with the Annual Report of the Company on Form 10-K For the Year Ended December 31, 1997. Page Independent Auditors' Report 19 Consolidated Financial Statements: Balance Sheets as of December 31, 1997 and 1996 20 Statements of Operations for each of the three years in the period ended December 31, 1997. 21 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997. 22 Statements of Cash Flows for each of the three years in the period ended December 31, 1997. 23 Notes to Consolidated Financial Statements. 24-39 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II - Valuation and Qualifying Accounts and Reserves 40 ............. Schedules not listed above have been omitted because they are either not applicable or the required information has been given elsewhere in the consolidated financial statements or notes thereto. Independent Auditors' Report ............................ Board of Directors and Stockholders Excel Technology, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Excel Technology, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Excel Technology, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Jericho, New York January 23, 1998

Exhibit 23 Consent of Independent Auditors ............................... The Board of Directors Excel Technology, Inc. and Subsidiaries We consent to incorporation by reference in the registration statements on Form S-8 (No. 33-71122) and Forms S-3 (No. 33-34523) of Excel Technology, Inc. and subsidiaries of our report dated January 23, 1998, relating to the consolidated balance sheets of Excel Technology, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows and related schedule for the three years ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Excel Technology, Inc. and subsidiaries. KPMG PEAT MARWICK LLP Jericho, New York March 20, 1998 EX-27 2
5 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 6,331,159 2,910,982 14,209,854 4,076,045 11,522,041 9,145,460 254,000 276,000 12,143,140 10,977,407 45,483,534 28,292,389 5,392,955 2,475,586 0 0 59,219,681 39,816,442 8,316,574 10,800,102 0 0 0 0 0 0 11,714 9,189 50,891,393 29,007,151 59,219,681 39,816,442 65,947,896 57,462,263 65,947,896 57,462,263 33,245,432 31,004,440 33,245,432 31,004,440 20,675,461 18,869,158 0 0 159,888 608,349 12,642,782 7,077,528 4,408,085 2,184,702 8,234,697 4,892,826 0 0 0 0 0 0 8,234,697 4,838,553 $0.77 $0.55 $0.73 $0.50

~~-----END PRIVACY-ENHANCED MESSAGE-----~~