NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. CONSOLIDATED FINANCIAL STATEMENTS
.................................
Excel Technology, Inc. and Subsidiaries (the "Company") manufactures
and markets laser systems and electro-optical components primarily for
industrial and scientific applications.
The consolidated balance sheet as of September 28, 2007, the
consolidated statements of income for the three and nine months ended
September 28, 2007 and September 29, 2006 and the consolidated statements
of cash flows for the nine months ended September 28, 2007 and September
29, 2006 have been prepared by the Company and are unaudited. In the
opinion of management, all adjustments (which included only normal
recurring adjustments) have been made which are necessary to present
fairly the financial position, results of operations and cash flows of
the Company at September 28, 2007 and for all periods presented.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and
consequently actual results could differ from those estimates and
assumptions.
For information concerning the Company's significant accounting
policies, reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 2006. While the Company believes that the
disclosures presented are adequate to make the information contained
herein not misleading, it is suggested that these statements be read in
conjunction with the consolidated financial statements and notes included
in the Form 10-K. Results of operations for the period ended September
28, 2007 are not necessarily indicative of the operating results to be
expected for future interim periods or the full year ending December 31,
2007.
The Company's quarterly closing dates end on the Friday prior and
closest to or on the last day of each calendar quarter. The Company's
fiscal year always ends on December 31st.
B. TERMINATED MERGER
.................
On February 20, 2006, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Coherent, Inc. ("Coherent"), and
Spider Acquisition Merger Corporation, a wholly owned subsidiary of
Coherent ("Merger Sub"). Under the Merger Agreement, Merger Sub was to
be merged with and into the Company (the "Merger"), the separate
corporate existence of Merger Sub would cease and the Company would have
continued as the surviving corporation and as a wholly-owned subsidiary
of Coherent.
Pursuant to the Merger Agreement, at the effective time of the
Merger, each issued and outstanding share of common stock of the Company
issued and outstanding would have been automatically converted into the
right to receive $30.00 per share in cash.
The Merger was conditioned upon, among other things, the adoption of
the Merger Agreement by the stockholders of the Company pursuant to
applicable law, the termination or expiration of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and obtaining
material foreign antitrust approvals reasonably determined by Coherent to
be required.
On April 4, 2006, the stockholders of the Company voted to adopt the
Merger Agreement providing for the acquisition of the Company by
Coherent. On May 9, 2006, Coherent, Inc. received U.S. antitrust approval
to acquire the Company. On October 25, 2006, the German Federal Cartel
Office issued a prohibition order on the merger. On November 1, 2006,
the Merger Agreement between the Company and Coherent was terminated. In
connection with the merger, the Company incurred $210 thousand and $2.2
million in merger related expenses, which have been included in the
consolidated statement of income for the three and nine months ended
September 29, 2006, respectively. Such costs, which were previously
separately disclosed as non-operating expense, have been reclassified to
operating expense.
C. ACCOUNTING FOR STOCK-BASED COMPENSATION
.......................................
The Company's stock-based employee compensation plans are described
more fully below. Effective January 1, 2006, the Company adopted the
fair value recognition provisions of SFAS No. 123(R), "Share-Based
Payment" ("SFAS No. 123 (R)"), using the modified prospective transition
method. Under that transition method, compensation expense recognized
for the three and nine months ended September 28, 2007 and September 29,
2006 includes compensation expense for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value determined in accordance with the original provisions of
SFAS No. 123. The fair value of the options was determined at the date
of grant using the Black-Scholes option pricing model and is being
amortized to expense over the options' vesting periods. Stock based
compensation expense for an award with only service conditions that has a
graded vesting schedule is recognized on a straight-line basis over the
requisite service period for the entire award, with such amount
recognized at any date at least equaling the portion of the grant date
fair value of the award that is vested at that date. Stock based
compensation expense for an award that includes a performance condition
that has a graded vesting schedule is recognized on a straight-line basis
over the requisite service period for each separately vesting portion of
the award.
There were no restricted stock grants during the three months ended
September 28, 2007 and 125 thousand shares of restricted stock granted
for the nine months ended September 28, 2007, of which 61 thousand had
vested as of September 28, 2007. At September 28, 2007, 39 thousand
shares of restricted stock vest contingent on attainment of a performance
condition. Of the 61 thousand restricted shares that vested and were
issued to employees during the nine months ended September 28, 2007, 26
thousand were surrendered to the Company to fulfill the employee's
minimum statutory tax withholding obligations of $722 thousand for the
applicable income. The 26 thousand acquired shares were retired. This
net share settlement had no impact on the amount of compensation cost
recognized in respect of these awards. There were no stock option grants
during the nine months ended September 28, 2007. There were no stock
option or other share-based award grants during the nine months ended
September 29, 2006.
The following table illustrates the stock based compensation expense
recorded in the statements of income for the three and nine months ended
September 28, 2007 and September 29, 2006 and the impact on the Company's
income before provision for income taxes, net income and income per share
(In thousands, except per share data).
Three Months Ended
............................
September 28, September 29,
2007 2006
.............. .............
Stock based compensation expense:
Stock options $ 17 $ 18
Restricted stock $ 633 $ 0
Impact on income before provision
for income taxes $ 650 $ 18
Impact on net income $ 422 $ 18
Impact on basic income per common share $ 0.04 $ 0.00
Impact on diluted income per common share $ 0.04 $ 0.00
Nine Months Ended
............................
September 28, September 29,
2007 2006
.............. .............
Stock based compensation expense:
Stock options $ 51 $ 95
Restricted stock $ 2,241 $ 0
Impact on income before provision
for income taxes $ 2,292 $ 95
Impact on net income $ 1,485 $ 95
Impact on basic income per common share $ 0.12 $ 0.01
Impact on diluted income per common share $ 0.12 $ 0.01
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The actual income tax benefit realized for the tax deductions from
stock option exercises for the nine months ended September 28, 2007 and
September 29, 2006 was $488 thousand and $37 thousand, respectively.
There was a $807 thousand tax benefit recognized related to the
compensation expense for share-based payment arrangements for the nine
months ended September 28, 2007, of which $572 thousand related to
restricted stock that vested, resulting in a $235 thousand deferred tax
asset at September 28, 2007. The excess tax benefit associated with
vested restricted stock was $28 thousand for the nine months ended
September 28, 2007. There was no tax benefit recognized on the total
compensation expense for the share-based payment arrangements for the
nine months ended September 29, 2006, as all the related options were
incentive stock options and the tax benefit associated with disqualified
incentive stock options is recognized by the Company only after such
incentive stock options are exercised and disqualified.
The following paragraphs describe each of the Company's stock-based
compensation plans:
In 1990, the Company 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,
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. 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.
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, 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 exercise price per share of incentive stock options must be at least
100% of the 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 market
value on the date of the grant, and for non-incentive stock options such
price may be less than 100% of the 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
September 28, 2007, 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. As of September 28, 2007, options
for the purchase of 10,092 shares were available for future grant under
the 1998 Plan.
In 2004, the Company adopted a stock option plan (the "2004 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 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 market value on the date of the grant, and for non-
incentive stock options such price may be less than 100% of the market
value of the stock on the date of grant. Options granted under the 2004
Plan, which terminates on February 23, 2014, may be exercisable for a
period up to ten years. Through September 28, 2007, all options granted
to employees under the 2004 Plan have exercise prices equal to the market
value of the stock on the date of grant, vest immediately, and expire ten
years from the date of grant. Although there were 445,000 shares of
common stock available for issuance under the 2004 Plan, when the 2006
option plan discussed below was approved, the Company agreed to
discontinue granting options under the 2004 Plan.
In 2006, the Company adopted a stock option / stock issuance plan
(the "2006 Plan"), which provides for an aggregate of up to 750,000
shares of common stock, which may be directly issued to eligible
participants, granted as incentive stock options to employees of the
Company or granted as non-statutory stock options to employees, including
officers and directors of the Company, as well as to certain advisors and
consultants. Shares of common stock issued under the 2006 Plan may, in
the discretion of the Company's Compensation Committee ("the Committee"),
be fully and immediately vested upon issuance or may vest in one or more
installments over the participant's period of service and / or upon
attainment of specified performance objectives. Recipients of common
stock under the stock issuance program have full stockholder rights with
respect to those shares, whether or not their interest in those shares is
vested. The exercise price for the common stock underlying the options
is determined by the Committee, but in no event shall it be less than
100% of the fair market value of the Company's common stock on the date
the option is granted (110% in the case of incentive stock options
granted to optionees who own more than 10% of the voting power of all
classes of stock of the Company). No option granted under the 2006 Plan
may be exercised after the expiration of the option, which may not, in
any case, exceed ten years from the date of grant (five years in the case
of incentive options granted to persons who own more than 10% of the
voting power of all classes of the stock of the Company). Options granted
under the 2006 Plan are exercisable on such basis as determined by the
Committee, and become fully exercisable upon the sale or merger of the
Company, as defined in the 2006 Plan. As of September 28, 2007, no
options were granted and 125 thousand restricted common shares were
awarded under the 2006 Plan.
The following table summarizes activity related to the Company's
stock option / stock issuance plans during the nine months ended
September 28, 2007:
Stock Weighted Stock
Options' Average Options'
Number of Number Weighted Remaining Aggregate
restricted of stock Average Contractual Intrinsic
shares (in options (in Exercise Term (in Value(in
thousands) thousands) Price years) thousands)
.......... ........... ........ ........... ..........
Outstanding at
December 31, 2006 0 1,299 $ 21.51
Granted 125 0 $ 0
Options exercised/
restricted stock
vested (61) (126) $ 12.95
Cancelled 0 (31) $ 32.47
.......... ...........
Outstanding at
September 28, 2007 64 1,142 $ 22.16 5.51 $ 4,382
.......... ...........
.......... ...........
Shares/Options
expected to vest at
September 28, 2007 64 8 $ 20.00 5.41 $ 48
Exercisable at
September 28, 2007 0 1,134 $ 22.17 5.51 $ 4,334
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The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between the Company's
closing common stock price on the last trading day of the third quarter
of 2007 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all
option holders exercised their options on September 28, 2007. This
amount changes based on the fair market value of the Company's common
stock. No options were exercised during the three months ended September
28, 2007. Total intrinsic value of options exercised for the three
months ended September 29, 2006 was $35 thousand. Total intrinsic value
of options exercised for the nine months ended September 28, 2007 and
September 29, 2006 was $1.8 million and $106 thousand, respectively.
As of September 28, 2007, there was $19 thousand of unrecognized
stock-based compensation expense related to non-vested stock options,
which is expected to be recognized over a weighted average period of less
than one year and $1.0 million of unrecognized stock-based compensation
expense related to non-vested restricted stock, which is expected to be
recognized over a weighted average period of approximately one year.
When an option is exercised, the Company issues new shares of common
stock.
In 2007, 15 thousand shares of common stock were used by employees
to exercise options. Such shares, which had a market value of $420
thousand, were retired.
D. INVENTORIES
...........
Inventories are recorded at the lower of cost, on a first-in, first
out basis, or market value. Inventories consist of the following (in
thousands):
September 28, 2007 December 31, 2006
.................. .................
Raw Materials $ 19,176 $ 18,584
Work-in-Process 9,660 9,410
Finished Goods 5,360 4,907
Consigned Inventory 2,373 2,005
.......... ..........
$ 36,569 $ 34,906
.......... ..........
.......... ..........
E. COMPREHENSIVE INCOME
....................
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Comprehensive income is comprised of net income and foreign currency
translation adjustments, amounting in the aggregate to $4.9 million and
$2.2 million for the three months ended September 28, 2007 and September
29, 2006, respectively and $14.5 million and $11.3 million for the nine
months ended September 28, 2007 and September 29, 2006, respectively.
F. ACCRUED WARRANTY COSTS
......................
Quarterly, the Company analyzes its warranty liability for
reasonableness based upon a five-year history of warranty costs incurred,
the nature of the products shipped subject to warranty and anticipated
warranty trends.
Changes in the warranty liability during the nine-month period ended
September 28, 2007 were as follows (In thousands):
Balance at December 31, 2006 $ 754
Provisions for warranties during the nine-
months ended September 28, 2007 569
Costs of warranty obligations during the nine-
months ended September 28, 2007 (494)
......
Balance at September 28, 2007 $ 829
......
......
G. COMMITMENTS AND CONTINGENCIES
.............................
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The Company and its subsidiaries are subject to various claims,
which have arisen in the normal course of business. The impact of the
final resolution of these matters on the Company's results of operations
in a particular reporting period is not known. Management is of the
opinion, however, that the ultimate outcome of such matters will not have
a material adverse effect upon the Company's financial condition or
liquidity.
H. GOODWILL
........
The change in the goodwill balance during the nine months ended
September 28, 2007 is attributable to changes in foreign currency
exchange rates used to translate the goodwill contained in the financial
statements of foreign subsidiaries.
I. TREASURY STOCK
..............
Effective November 1, 2006, the Company's Board of Directors
authorized a stock buy-back program for the repurchase of up to 2,000,000
shares of its common stock. Purchases have occurred and will continue to
occur from time to time in open market transactions or privately
negotiated transactions at the Company's discretion, including the
quantity, timing and price thereof. During the nine months ended
September 28, 2007, the Company repurchased 617,454 shares of common
stock for $15.9 million. As of September 28, 2007, the Company had
repurchased 696,954 shares of common stock under the program.
J. DEFERRED COMPENSATION
.....................
The Company has a deferred compensation plan whereby certain
compensation earned by a participant can be deferred and, if funded, the
related assets are placed in an employee benefit trust, also known as a
"rabbi trust." Under the deferred compensation plan, the participant may
choose from several investment designations. At September 28, 2007, the
Company had $1.5 million of accrued deferred compensation, which was
funded and the related assets are included in non-current assets on the
balance sheet.
K. INCOME TAXES
............
On January 1, 2007, the Company adopted FASB Interpretation No.
("FIN") 48, Accounting for Uncertainty in Income Taxes-an interpretation
of SFAS No. 109. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of an income tax position taken or
expected to be taken in an income tax return. FIN 48 provides that
unrecognized tax benefits should be based on the facts, circumstances and
information available at each balance sheet date and that subsequent
changes in judgment should be based on new facts and circumstances and
any resulting change in the amount of unrecognized tax benefit should be
accounted for in the interim period in which the change occurs. The
adoption of FIN 48 had no impact on the Company's consolidated financial
statements.
As of January 1, 2007, the aggregate amount of unrecognized tax
benefit included in liabilities was $1.8 million which, if recognized,
would affect the effective tax rate, and includes accrued interest for
tax positions which either do not meet the more-likely-than-not
recognition threshold or where the tax benefit is measured at an amount
less than the tax benefit claimed or expected to be claimed on an income
tax return. At January 1, 2007, accrued interest on uncertain tax
positions was approximately $180 thousand.
As of September 28, 2007, there were no significant changes to the
Company's unrecognized income tax benefit which was recorded as of
January 1,2007, except a reduction of $259 thousand, including the
related accrued interest, for the expiration of certain statute of
limitations.
Interest expense related to income tax liabilities recognized in
accordance with the provisions of FIN 48 is included in income tax
expense, consistent with the Company's historical policy.
With a few exceptions, the Company is no longer subject to federal,
state or local income tax audits by taxing authorities for years before
2004. The most significant jurisdictions in which the Company is
required to file income tax returns include the state of California,
Massachusetts and New York. The Company is currently being audited by
the Internal Revenue Service for the tax year ended December 31, 2005.