WASHINGTON,Washington, D.C. 20549---------------- FORMForm 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31,1999 COMMISSION FILE NO.2002Commission File No. 333-71449
GSI Lumonics Inc.(Exact(Exact name of registrant as specified in its charter)NEW BRUNSWICK, CANADA 38-1859358 (Jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 105 SCHNEIDER ROAD, KANATA, ONTARIO, CANADA K2K 1Y3 (Address of principal executive offices) (Zip Code) (613) 592-1460 (Registrant's
98-0110412 (State or other jurisdiction
of incorporation or organization)(I.R.S. Employer
Identification No.)39 Manning Road
Billerica, Massachusetts, USA
(Address of principal executive offices)01821
(Zip Code)(978) 439-5511
(Registrant’s telephone number, including area code)---------------- SECURITIES REGISTERED PURSUANT TO SECTIONSecurities Registered Pursuant to Section 12(b)
OF THE ACT:of the Act:NoneSECURITIES REGISTERED PURSUANT TO SECTIONSecurities Registered Pursuant to Section 12(g)
OF THE ACT: COMMON STOCK, NO PAR VALUEof the Act:Common Stock, no par value(Title of
Each Classclass)Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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]þ NO[_]oIndicate 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'sregistrant’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]þOn
February 29, 2000, 34,546,875March 3, 2003, 40,787,457 shares of the Common Stock of GSI Lumonics Inc. were issued and outstanding.Non-affiliates of the registrant held 27,532,855 shares having anThe aggregate market value ofU.S. $691,762,982the voting and non-voting Common Stock held by non-affiliates of GSI Lumonics Inc., based on the closing price of the shares onNasdaqthe NASDAQ National Market onFebruary 29, 2000March 3, 2003 of U.S.$25.125. DOCUMENTS INCORPORATED BY REFERENCE$4.48, was approximately U.S.$137,935,646 (assumes officers, directors, and all shareholders beneficially owning 5% or more of the outstanding Common Stock are affiliates).Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Securities Exchange Act of 1934). YES þ NO o
Documents Incorporated by Reference
Portions of the
Registrant'sregistrant’s Proxy Statement for the Annual Meeting of Stockholders to be heldMay 8, 2000June 24, 2003 are incorporated by reference in Part III of this Form 10-K. With theReport. Other documentsexception of the portions of the registrant’s Proxy Statement expressly incorporated into this Form 10-K by reference,are listed intheExhibit Index.registrant’s Proxy Statement shall not be deemed filed as part of this Form 10-K. TABLE OF CONTENTSGSI LUMONICS INC.
Annual Report - Form 10-KTABLE OF CONTENTS
Item No. Page No. PART I....................................................................... 3 ITEMIItem 1. BUSINESS OFBusiness of GSI LUMONICS INC........................................ 3 Overview.......................................................... 3 Corporate History................................................. 3 Industry Overview................................................. 4 Corporate Strategy................................................ 5 ProductsLumonics Inc.2 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5. Market for Registrant’s Common Stock and Services............................................. 6 Customers......................................................... 9 Marketing, SalesRelated Stockholder Matters16 Item 6. Selected Financial Data 16 Item 7. Management’s Discussion and Customer Support............................. 9 Competition........................ .............................. 10 Manufacturing...................... .............................. 10 ResearchAnalysis of Financial Condition andDevelopment........... .............................. 11 PatentsResults of Operations18 Item 7A. Quantitative and Intellectual Property.. .............................. 11 Human Resources.................... .............................. 11 ITEM 2. PROPERTIES.......................................................... 12 ITEM 3. LEGAL PROCEEDINGS................................................... 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 14Qualitative Disclosures About Market Risk38 Item 8. Financial Statements and Supplementary Data 39 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 71 PART III Item 10. Directors and Executive Officers Of The Registrant.............................. 14of the Registrant71 Item 11. Executive Compensation 73 Item 12. Security Ownership of Certain Beneficial Owners and Management 73 Item 13. Certain Relationships and Related Transactions 73 Item 14. Controls and Procedures 73 PART II...................................................................... 16 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................................ 16 Market Information................................................ 16 Currency Prices................................................... 16 Holders........................................................... 16 Dividends......................................................... 17 ITEM 6. SELECTED FINANCIAL DATA............................................. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 19 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 27 AUDITORS' REPORT.................................................. 28 CONSOLIDATED BALANCE SHEETS....................................... 29 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY................... 30 CONSOLIDATED STATEMENTS OF OPERATIONS............................. 31 CONSOLIDATED STATEMENTS OF CASH FLOWS............................. 32 Notes to ConsolidatedIVItem 15. Exhibits, Financial Statements........................ 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................ 52 PART III..................................................................... 52 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISRANT................... 52 ITEM 11. EXECUTIVE COMPENSATION.............................................. 52 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT....... 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 52 PART IV...................................................................... 53 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..... 53Statement Schedules and Reports on Form 8-K74 Signatures 77 2As used in this report, the terms
"we," "us," "our," "GSI Lumonics"“we,” “us,” “our,” “GSI Lumonics” and the"Company"“Company” mean GSI Lumonics Inc. and its subsidiaries, unless the context indicates another meaning.The following trademarks and trade names of GSI Lumonics are used in this report:
WaferMark(R)WaferMark®,LightWriter(R)Super SoftMark®,ScreenCut(R)DrillStar®,ICMARKII(TM)WavePrecisionTM,LuxStar(R)M430TM,Laserdyne(R)GMAXTM,Xymark(R)TrimSmartTM,LaserMark(R) QuantArray(R)CSP300TM, JK SeriesTM andScanArray(R)Sigma SeriesTM.Special Note Regarding Forward-Looking Statements Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. In making these forward-looking statements, which are identified by words such as "will", "expects", "intends", "anticipates" and similar expressions, the Company claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. The Company does not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements.1
PART I
ITEM 1. BUSINESS OF GSI LUMONICS INC.
Item 1. Business of GSI Lumonics Inc. Overview
We design, develop, manufacture and market components, lasers and laser-based advanced manufacturing systems
and componentsas enabling tools for a wide range ofapplications,applications. Our products allow customers to meet demanding manufacturing specifications, includingcutting, drilling, welding, marking, micro-machining, inspection,device complexity andoptical detectionminiaturization, as well as advances in materials andtransmission.process technology. Major markets fortheseour products include the medical, automotive, semiconductorelectronics, automotive, medical/biotechnologyandtelecommunicationselectronics industries. In addition, we sell our products and services to other markets such as light industrial and aerospace.Recent Developments
On March 31, 2003, we filed with the
aerospaceSecurities andpackaging industries.Exchange Commission a registration statement on Form S-4, which contains a proxy circular-prospectus in connection with our annual and special meeting of shareholders scheduled for June 24, 2003. Among the proposals to be considered at the meeting is the approval of a plan of arrangement (“Arrangement”), the principal effect of which will be to restructure the Company as a publicly traded U.S. domiciled corporation. Pursuant to the Arrangement, GSLI Corp, a newly formed Delaware corporation (GSI Delaware), will become our publicly traded holding company. The Arrangement will also involve both a reverse stock split (consolidation) of our outstanding common shares and a reorganization of our authorized share capital. If the Arrangement is approved and becomes effective, our shareholders will become stockholders of GSI Delaware, subject to the right of Canadian resident shareholders to elect, for tax reasons particular to Canadian residents, to receive new shares of GSI Canada which will be exchangeable for, and have substantially the same economic rights as, shares of GSI Delaware (the Exchangeable Shares).The majority of our operations and all executive management are located in the United States. We have minimal assets and operations in Canada. The Arrangement would align our jurisdiction of incorporation with the primary location of our assets, management and business. The Company also believes that its opportunities for access to the capital markets will be greater if it is a publicly traded, U.S. domiciled corporation. Additionally, we are concerned that the continuation of our business as a publicly traded, New Brunswick corporation may result in our being classified as a “passive foreign investment company” for United States federal income tax purposes, which could have adverse consequences for United States holders of our shares and, as a result, have an adverse impact on the market price of our shares. Completion of the Arrangement would permanently eliminate the risk that our U.S. shareholders could hold stock in a passive foreign investment company. See “Risk Factors — Passive Foreign Investment Company.”
The Arrangement has been designed to maintain our results of operations, existing net operating losses and asset values without causing any material United States or Canadian federal income tax consequences to the Company. The day-to-day operations of the Company will not materially change as a result of the completion of the Arrangement. In addition, the Arrangement has been structured so that it will be a non-taxable event for United States tax purposes to United States holders receiving shares of GSI Delaware’s common stock in exchange for their existing common shares and a non-taxable event for Canadian tax purposes to Canadian residents validly electing to receive Exchangeable Shares and to remain shareholders of GSI Canada. The Arrangement will result in the realization for Canadian tax purposes of any accrued capital gain or loss, as the case may be, for Canadian residents to the extent they receive shares of GSI Delaware common stock upon completion of the Arrangement.
The foregoing discussion is qualified by and subject to, the more detailed information on the Arrangement, including the applicable reasons, mechanics, effects and risks associated with the Arrangement, contained in the proxy circular-prospectus we filed with the Securities and Exchange Commission.
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Corporate History
GSI Lumonics Inc., a New Brunswick, Canada corporation, is the product of a merger of equals between General Scanning Inc. and Lumonics Inc. that was
incorporated in 1970 forcompleted on March 22, 1999. Our shares trade on The NASDAQ Stock Market® under thepurpose of producing lasers for scientificsymbol GSLI andresearch applications. We first became a public company in 1980, and our common shares were listedon The Toronto Stock Exchangeuntil 1989. In 1989, allunder the symbol LSI. Immediately following the merger, the General Scanning shareholders and the Lumonics shareholders each, as a group, owned approximately half ofourthe combined company’s commonshares were acquired by a wholly owned subsidiary of Sumitomo Heavy Industries, Ltd., and we ceased to be a public company. On September 28, 1995, we again became a public company, and our shares were listed on The Toronto Stock Exchange. At December 31, 1999, Sumitomo owned 17.7% of our outstandingshares.General Scanning Inc. was incorporated in 1968 in Massachusetts. In its early years, General Scanning developed, manufactured and sold components and subsystems for high-speed
micropositioningmicro positioning of laser beams. Starting inthe mid-to-late 1980s,1989, General Scanning began manufacturing complete laser-based advanced manufacturing systems for the semiconductor and electronicsmarketsmarkets.Lumonics Inc., incorporated in 1970 in Canada, initially produced lasers for scientific and research applications. By the 1980s, the company was developing, manufacturing and selling laser-based, advanced manufacturing systems for electronics, semiconductor, and general industrial applications.
During the past two years, we have consolidated facilities and operations with the purpose of more tightly focusing activities on our three major business segments: Components, Lasers, and Laser Systems. We manage the Company within these three major business segments. All of these segments share some common characteristics and incorporate similar core technologies and competencies. There are important distinguishing factors, however, such as products and services, distribution channels, customers, production processes and operational economics, that we believe require different perspectives.
Components Group The Company’s component products are designed and manufactured at our facilities in Billerica, Massachusetts, Nepean, Ontario and Moorpark, California and are sold directly, or, in some territories, through distributors, to original equipment manufacturers (“OEMs”). Products include optical scanners and subsystems used by OEMs for applications in materials processing, test and measurement, alignment, inspection, displays, imaging, graphics, vision, rapid prototyping, and medical use such as dermatology and ophthalmology. The Components Group also manufactures printers for certain medical end products such as defibrillators, patient care monitors and cardiac pacemaker programmers, as well as film imaging subsystems for use in CAT scans and magnetic resonance imaging systems. Under the trade name, WavePrecision, we also manufacture precision optics supplied to OEM customers for applications in aerospace and semiconductor. Typical selling prices for Components products range from $200 to $4,000. Major markets are medical, semiconductor, and electronics, light industrial and aerospace.
Laser Group The Company designs and manufactures a
numberwide range ofotherlasers at our Rugby, United Kingdom facility for sale in the merchant market to end-users, OEMs and systems integrators. We also use some of these products in the Company’s own laser systems. The Laser Group also derives significant revenues from providing parts and technical support for lasers in its installed base at customer locations. These lasers are primarily used in material processing applicationssuch as(cutting, welding and drilling) in light automotive, electronics, aerospace,assemblymedical andmedical recordinglight industrial markets. The lasers are sold worldwide directly in North America andimaging. On March 22, 1999, LumonicsEurope, andGeneral Scanning completed a merger of equalsthrough distributors in Japan, Asia Pacific andcontinued as a New Brunswick corporation under the name GSI Lumonics Inc. Our shares commenced trading on the Nasdaq National Market and continued to trade on The Toronto Stock Exchange. Immediately following the merger, the General 3Scanning shareholders and the Lumonics shareholders each, as a group, owned approximately 50%China. Sumitomo Heavy Industries (a significant shareholder of thecombined company's common shares. Industry Overview Laser-based systemsCompany) is our distributor in Japan. Specifically, our pulsed and continuous wave Nd:YAG lasers are used inmany differenta variety of medical, light automotive and industrial settings. Typical selling prices for lasers range from $40,000 to $180,000.
Laser Systems Group The Company’s laser systems are designed and manufactured at our Wilmington, Massachusetts facility and are sold directly, or, in some territories, through distributors, to end users, usually semiconductor integrated device manufacturers and electronic component and assembly manufacturers. The Laser Systems
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Group also derives significant revenues from servicing systems in its installed base at customer locations. System applications include laser repair to improve yields in the production of dynamic random access memory chips (“DRAMs”), permanent marking systems for silicon wafers and individual dies for traceability and quality control, circuit processing systems for linear and mixed signal devices, as well as for certain passive electronic components, and printed circuit boards (“PCB”) manufacturing systems for via hole drilling, solder paste inspection and component placement inspection. Typical selling prices for suchas material processing, medical therapy, instrumentation, research, telecommunications, optical storage, entertainment, image recording, inspection, measurement and control, bar-code scanning and other end uses. Industrial laserslaser systems range from $100,000 to $1.5 million.Industry Overview
Lasers are generally used in
the machine-tool,a growing number of applications in industries, such as medical, automotive, consumer products and aerospace, as well as in semiconductor and electronics industries.WeIn the long term, subject to market cycles, we expect capital equipment expenditures for laser processing to increase as the result of the advantages offered by lasers over other more traditional technologies. First, the laser is an enabling technology, which allows processing of materials for applications not otherwise possible, such as hermetically sealing implantable defibrillators. In many cases the laser affords higher speed, greater throughput and increased flexibility.We see the principal market drivers for our businesses to be:
• advances in materials and process technology that are creating new opportunities for laser processing as the enabling technology; • the continuing development of medical devices, automotive components, consumer products, semiconductor, and electronic components that require new manufacturing technology; and • the replacement of older, less flexible mechanical and electrical manufacturing tools by laser technology.
Components Group The Components Group benefits from having a broad product portfolio serving many different markets and customers. This has enabled sales to be less cyclical than the overall laser equipment market. The scanning components and multi-axis scan heads service many varied laser OEM applications. Strategies Unlimited (a research unit of PennWell) has forecasted that these laser equipment market applications (medical, material processing and instrumentation) are projected to increase for 2003 by 5% to 12% over 2002 levels. Our printer products service the critical care medical equipment market. Most medical OEM programs run multiple years and help maintain stability of this product line. Our precision optics products are used by OEMs in aerospace and semiconductor industries. Sales of precision optics to telecommunication applications fell significantly in 2001 and 2002 due to overcapacity in that industry resulting from over-investment in telecom infrastructure in prior years.
The Components business benefits from being less cyclical, primarily by serving several diverse markets, and as well as lower operating costs for distribution and product support required by OEM customers.
Laser Group Although the overall laser market is growing, the rate varies according to laser type, end user industry and geography. For individual sub-segments, growth projections range from single digits to midteens. For our served market sectors, we project overall market growth in 2003 of about 5%. Additionally, we expect our recently introduced new products in the third quarter of 2002 will improve our penetration into new and existing customers.
The laser market we serve is expanding in line with the growth of overall industrial capital equipment. Our broad range of customers reduces the cyclical impact of individual industry cycles. Major markets served include automotive components, electronics, aerospace, medical and light industrial.
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We have seen increased activity recently in areas such as Japan, Asia-Pacific and China. Developing infrastructure in China for economic growth is leading to increased demand for lasers as new manufacturing businesses are created.
Laser Systems Group Our laser systems are sold primarily into the semiconductor and
electronics industry, fueled by demand for computers, cellular phones and communications devices, to stimulate demand for laser-based systems. Dataquest, an independent market research company, estimates that capital spending by the semiconductor industry will grow from $33.9 billion in 1999 to $74.9 billion in 2002, representing a compound annual growth rate of 30.2%. Industrial users of lasers generally demand high-speed, highly durable laser sources which have reliable output power. These lasers must be easily and flexibly integrated into the customers' production process. Lasers are used for four main material processing applications: cutting, drilling, welding and marking. Laser Cutting. Laser cutting is fast, flexible and high-precision, as it can be used to cut complex contours on flat, tubular and three-dimensional materials.electronic markets. Thelaser source can be easily programmed by a computerized numerical controller and is able to process many different kinds of materials such as steel, aluminum, brass, copper, wood, glass, ceramics and plastics at various thicknesses. Additionally, laser cutting technology is a non-contact, no-wear process which is easy to integrate into an automated production line. Principal markets for laser cutting are the semiconductor, electronics, automotive and aerospace industries. Laser Drilling. Lasers drill holes at production rates that are difficult to achieve using conventional processes. In industrial applications, lasers drill virtually all types of metals, nonmetals, organic graphite-reinforced composites, and metal matrix composites. Hole shape and size can be controlled by the laser system software to produce round, oval or rectangular holes. In electronics applications, blind micro via drilling is best accomplished with lasers. These holes measure from 25 to 250 microns and are drilled into printed circuit boards at a speed of up to 1,800 holes per second. End user applications for these boards include cellular phones, pagers, base stations, automotive components and other devices. Laser welding. Laser welding is non-contact, easy to automate, provides high process speed and results in narrow-seamed, high quality welds which require little, if any, post-processing machining. Because there is low heat input into the material being processed and therefore minimal part damage or distortion, parts can be accurately machined before welding. Additionally, because laser welding is non-contact based, the process is not subject to tool wear. As with lasers used for cutting applications, lasers can be used to weld a wide variety of materials of different thickness. Principal markets served are electronics, medical, automotive and aerospace. Laser marking. With the increasing need for source traceability, component identification, and product tracking as a means to reduce product liability and prevent falsification, industrial manufacturers are increasingly demanding variable code marking systems capable of applying serialized alphanumeric, graphic or bar code identifications directly onto their manufactured components. Laser marking offers several advantages which are desirable in industrial applications. Lasers can mark a wide variety of metal and non-metal (for example, wood, glass and plastics) surfaces at high speeds without contact by changing the surface structure of the material or by engraving. Laser marking systems are reliable, flexible, fast, produce permanent marks and, because they are computer controlled, may be easily integrated into the customer's production process. Given that laser marking is contact-free, it does not subject the item being marked to any mechanical stress. Principal applications for laser marking have been in thesemiconductor and electronics industriesas well as automotive industry. In the semiconductor and electronics industries, lasersareused to mark electrical components such as contactors and relays, and assembled components such as integrated circuits, printed circuit boards and keyboards. With the increase in marking speed in recent years, laser marking of integrated circuits has decreased in 4cost, improving the price and performance characteristics of this technology and therefore increasingly displacing alternative methods such as ink-based marking installations. Corporate Strategy We intend to accelerate growth and increase market share. The key elements of our strategy include: . Invest in laser-based technologies, products and capabilities which position us as one of the leading competitors in markets that offer strong profitable growth opportunities, specifically semiconductor, electronics and automotive; . Concentrate on high value-added systems that have a global market; . Enhance our capabilities to supply parts on precision optical components used in dense wavelength division multiplexing for the fiber optic telecommunications networks; . Further strengthen our competencies in technology, manufacturing and distribution; and . Acquire complementary products and. Consistent with our strategy, we plan to divest product lines that are no longer strategic. These actions will allow us to redirect capital to opportunities in our strategic markets including semiconductor, electronics, automotive and telecommunications. We are considering alternatives for our nonstrategic product lines, including a product line that serves the medical market. In 2000, we plan to take specific actions to strengthen our position in our strategic markets: . Semiconductors. We are developing and plan to introduce, in the second half of 2000, a new technology platform for memory repair, an application for our manufacturing systems. We estimate the market for memory repair systems is between $80 million and $100 million of which we currently have less than a 15% share. . Electronics. We plan to enhance our market position in printed circuit board manufacturing processes, including solder paste inspection, via drilling and thick film trimming by investing significantly in research and development. We believe that demand for products such as telecommunications equipment, cell phones and pagers will drive demand for our newly developed products. . Automotive. We believe that new manufacturing techniques in the automotive industry are well suited to the use of our high power laser technology. Applications such as welding dissimilar materials, welding aluminum, cutting hydroformed parts and welding tailored blanks are gaining acceptance with automotive manufacturers. We are currently developing the next generation of high power laser systems for introduction in late 2000 to serve this market. . Telecommunications. With the recent acceleration in the construction of fiber optic networks, demand for our precision optic products has increased significantly. In 1999, we began to enhance our capability to supply precision optical components used in dense wavelength division multiplexing for fiber optic telecommunication networks. 5PRODUCTS AND SERVICES Semiconductor Market Our laser systems are used in numerous production process steps within the semiconductor industry, which ischaracterized by ever increasing demands on throughput, reduced device size and increased device complexity, performance, traceability and quality. Semiconductor and electronic devices are used in a variety of products includingautomotiveelectronics, consumer products, personal computers, communications products, appliances and medical instruments.These markets have historically been subject to economic fluctuations due to the substantial capital investment required in those industries. In the past, this has led to significant short-term over- or under-capacity. The current downturn in demand, which began in mid 2001, for capital equipment in our major markets is due to the downturn in general economic conditions, combined with our customers’ current excess of manufacturing capacity and their customers’ excess inventories of components. Historically, when the economy improves, excess inventories are consumed and excess capacity is absorbed, eventually leading to renewed orders for capital equipment.
During the current business down cycle, both the semiconductor and electronics industries have undergone significant restructuring which may affect the historical cycle. Four major factors have combined to radically alter both industries:
• the number of producers in each has reduced; • absence of capacity increases; • equipment throughput has increased; • pressure for lower prices due to more competition. The number of active producers of DRAM’s has declined in the past three years due to consolidation caused by the economics of the marketplace. In Japan alone, which led the world in DRAM production through the last business cycle, the number of manufacturers has declined from six to one. Presently, after the consolidations, the capacity utilization in the industry is still low. Similarly, the electronics manufacturing services sector (“EMS”) has consolidated with excess capacity. As a result, capital equipment purchasing in the industries has declined dramatically since 2000 due to this overcapacity situation.
Currently, equipment is procured primarily for technology changeover, as opposed to increasing capacity. In the past, upcycles were fueled by additions of capacity to meet increased demand for chips. The absence of demand for more capacity in semiconductors is due, in large part, to the saturation in the end markets for products such as computers, mobile telephones and other wireless devices. Production of PCBs is similarly affected.
Equipment now being provided has higher throughput at relatively the same or lower price than the prior generation. Further, the transition from 200 millimeter to 300 millimeter wafers in the production of DRAM’s produces twice as many chips on a single wafer. Combined, these two factors reduce the number of systems required and, hence, the overall available market.
Based on these factors, we have not been planning for a strong recovery in this business sector, but have restructured our Laser Systems business to become profitable at a lower revenue level and continue to focus on new technology and applications to improve opportunities for growth and profitability.
Corporate Strategy
We believe our product lines are complementary and share the same underlying core competencies. Broadly, our strategy is to exploit our expertise in precision control of laser power and micro-positioning, in
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optimizing laser/material interaction and in developing new lasers for high precision processing. Accordingly, the key elements of our overall corporate strategy include:
• invest in laser-based technologies, products and capabilities which position us as one of the leading companies in markets that offer strong profitable growth opportunities; • increase market penetration through expanded product offerings of the Components and Laser businesses; • explore opportunities in emerging markets and industries that would benefit from our technology; • continue to develop new laser systems for our leading customers; and • acquire complementary products and technologies. Consistent with our strategy, in 1999-2001 we divested certain product lines that were not strategic, thereby allowing us to redirect resources to opportunities in our strategic markets.
In 2002, we took specific actions to strengthen our position in each of our three business segments.
Components Group We increased market share in medical printing products with a design win with a major medical device OEM. We re-designed and introduced, in concert with a leading OEM, our GMAX multi-axis scan head. We also developed and commenced implementation of a new strategy to leverage our engineering developments in laser systems by introducing to the OEM market some of the key modules of our Laser Systems business. We have redirected our precision optics business away from its primary focus in telecommunications into new opportunities in laser, scientific, aerospace and other opportunities for custom optics.
Laser Group We focused our activity into a number of market segments where the clear benefits of laser processing match with the segment’s attributes of process speed, consistency, cost of application and value added by the laser process. We have developed a number of new products, which offer competitive price and processing performance in current and near future industrial markets. Our lasers produce high quality, repeatable cuts, welds or holes in products where laser processing is the key value-adding step. We released four new models of our continuous wave JK Series lasers which feature our patented super-modulation capability, which allows for dramatically improved processing at reduced power levels while reducing heat input and operating costs by giving process engineers control of key factors. In addition, four JK700TR pulsed lasers were introduced into the market in the fourth quarter of 2002.
We work extensively with major customers to qualify our products into their production processes. Combining this with our service, technical and spares support ensures a longer-term business partnership with our customers.
Laser Systems Group We became a qualified vendor at six major DRAM manufacturers for the M430, our new technology platform for memory yield enhancement, which was introduced in the latter part of 2001. We completed the 300 millimeter SECS GEM (Semiconductor Equipment Communication Standard Generic Equipment Model) factory automation interface for wafer and die marking products, and we are in alpha test for memory yield improvement. We introduced the CSP 300, the industry’s first production system for die marking chip-scale packages (“CSP”) on 300 millimeter wafers. Marking of CSPs is critical for both manufacturing process traceability and product identification. We believe the use of CSPs, which are small (down to sub-1mm in size), packageless IC devices, in next-generation end-user products, such as smart phones and advanced PDAs, is expected to grow as functionality increases and product form factors shrink in size. We also released the TrimSmart EP1000 laser trimmer for adjusting embedded passive components within the inner layers of multi-layer PCBs. This process change is in the early stages of development by leading-edge manufacturers of
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PCBs. This will allow for greater functionality to be attained within a smaller PCB size — a key market driver for the next-generation of personal, portable electronic devices.Products and Services
Our revenues in 2002 were derived from the following business segments, in millions of US dollars:
Segment Revenue Components group $ 70.5 Laser group 23.7 Laser systems group 65.9 Other and intra-segment eliminations (1.0 ) Total $ 159.1
Components Group Scanning Components and Subsystems. We produce optical scanners and scanner subsystems, which include optics, software and control systems. These are used by the Company in some of its laser systems and by our customers in a variety of applications including materials processing, test and measurement, alignment, inspection, displays, imaging, graphics, vision, rapid prototyping, and medical applications such as dermatology and ophthalmology.
Printer Products. We produce a variety of printing products, primarily for medical applications. These printers are used in end products such as defibrillators, patient care monitors, and cardiac pacemaker programmers. They provide a permanent record of a patient’s condition during critical medical care.
Film Imaging Systems. We produce laser imaging and digitizing subsystems to process data sets from computer-assisted tomography, magnetic resonance imaging or nuclear medicine equipment. This application of lasers for imaging directly on film requires precise micro-positioning for pixel placement and adjustable contrast range. This process replaces traditional chemical development of photographic films.
Precision Optical Components. Our specialty and precision optical components are sold under the trade name WavePrecision. We specialize in complex, tight tolerance optical components and subassemblies for aerospace and semiconductor. Unique product features include polishing to sub-ängstrom tolerances and proprietary coating techniques.
Laser Group We manufacture lasers for the light automotive, electronics, aerospace, medical and light industrial markets for advanced manufacturing applications. Our lasers can be controlled and directed with precision and used in a wide spectrum of applications. Lasers offer lower production costs, fast solutions and flexibility on the production line. Our JK Series laser systems incorporate advanced solid-state laser technology to produce efficient, reliable, dependable and accurate production systems. These systems operate at uniform energy density, offer improved process efficiency and require less energy. These systems use our patented power supply, allowing a wide range of applications, including drilling cooling holes in jet engine turbo fans. They also permit high speed, repetitive processing which maximizes production rates. Our JK Series can be readily linked with robotics systems to provide manufacturers with a flexible production tool.
JK Series continuous wave Nd:YAG lasers. We produce a range of 400W-2000W average power continuous wave Nd:YAG lasers for welding, cutting, and drilling. Applications range from high speed welding of fuel injectors and sensors to cutting car and truck chassis members.
Pulsed Nd:YAG lasers. We produce a range of 50W-100W pulsed Nd:YAG spot and seam welding lasers and the JK Series of pulsed Nd:YAG lasers for welding, cutting, and drilling in the 150W to 600W range. Applications include disc drives, cardiac pacemakers and mobile telephone batteries.
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Sigma Series Nd:YLF. We produce a range of continuous wave lasers up to 7W for silicon processing and electronic PCB manufacturing applications.
Excimer Lasers for materials processing. We produce high repetition rate and high energy industrial Excimer lasers with power ranges from 10W-80W with integrated cryogenic gas processing for extended gas lifetimes. Applications include marking, remote sensing, surface structuring and polymer processing.
CO2 Lasers for marking and coding. We produce a laser marking/coding system in addition to a 45-75W range of pulsed CO2 lasers for high precision machining of non-metallic workpieces and a 200W high power pulsed CO2 laser for large area ablative machining.
Laser Systems Group Our laser systems are used in several production process steps within the semiconductor industry and in the production of electronic components and assemblies.
Laser Trim and Test Systems. These systems enable production of electronic circuits by precisely tuning, with a laser, the performance of linear and mixed signal devices. Tuning is accomplished by adjusting various component parameters with selective laser cuts, while the circuit is under test, thereby achieving the desired electrical performance. These systems combine material handling, test stimulus, temperature control and laser trim subsystems to form turnkey production process packages. Applications include power management, data conversion, sensors, RF, precision analog devices used in the mobile communication market, as well as automotive electronics.
Permanent Marking Systems. We provide products to support the product marking requirements of the semiconductor industry. WaferMark laser systems are used for the marking of silicon wafers at the front end of the semiconductor manufacturing process, aiding process control and device traceability. These systems incorporate advanced robotics and proprietary Super SoftMark process control technology to provide debris free marking of high-density silicon wafers along automated production lines. We also supply systems for
diemarkingofthe individual dies on wafers. Our automated wafer marking system supports individual bare die traceability marks. The system incorporates a tightly coupled vision system for automated wafer identification and mark alignment on each die. Complete system operation is managed with software for intuitive process monitoring and automated wafer map downloading through a single graphical user interface.Additional semiconductor deviceOur systems are used in the silicon foundry, the wafer fab and in the back-end die markingcapabilities, such as in-tray marking of integrated circuits, are supported by our HM, LM, and LightWriter series of laser marker products.process.Memory Repair Systems. Dynamic random access memory chips (“DRAM”) are critical components in the active memory portion of computers and a broad range of other digital electronic products. First-pass manufacturing yields are typically low at the start of production of a new generation of higher capacity memory devices. Laser processing is used to raise production yields to acceptable economic levels. Our memory repair laser systems allow semiconductor manufacturers to effectively disconnect defective or redundant circuits in a memory chip with accurately positioned and power modulated laser pulses.
This improvesShrinking DRAM die-density to tight circuit pitches below two microns requires systems, such as ours, to operate with exceptional accuracy of less than 0.2 micron while processing at a rate of 30,000 circuits per second. As a point of reference, theyielddiameter ofusable components per treated wafer, effectively lowering the cost per unit produced. Electronics Market Producersa human hair is greater than 100 microns.The producers of electronic components and assemblies, particularly surface mount technology assemblies, have a number of our laser systems available to support their process requirements. Features of these systems include precision laser spot size, laser power control, high-speed parts handling, and applications adaptability.
Printed Circuit Board Processing Systems.Our laser systems are used in various process steps in the production of printed circuit boards and flex circuits.
Via drilling. Our
GS series ofDrillStar products, whichisare capable of drilling micro vias at very high speeds in every type of material commonly used for printed circuit board fabrication, supports the miniaturization trend within the industry.Our ScreenCut systems are used for cutting stencils as an alternative or, in some cases, a complement to the traditional photochemical machining process.8
Surface Mount Measurement Systems. Our surface mount measurement products are also used in the manufacture of printed circuit board assemblies. In the manufacture process, surface-mount solder, in paste form, is stenciled onto the circuit board with a screen printer, and components are then placed in their respective positions on the board by automated equipment. Our systems use our patented three-dimensional scanning laser data acquisition technology to inspect either solder paste depositions or component placement accuracy.
6Thick Film Laser Processing Systems. Our laser systems are used in the production of thick film resistive components for surface mount technology electronic circuits, known as chip resistors, as well as more general-purpose hybrid thick film electronic circuits.
Permanent Marking Systems. We offer a broad lineThese systems optimize the operating parameters oflaser marking systems for printed circuit boardsRF devices, sensors, resistor networks and otherelectronic components. These systems place permanent high-contrast marks in any combinationdevices.Customers
Many of
text, barcodes, or 2D cell codes on even the highest density circuit boards using an industry standard interface. We manufacture many other component marking systems which have found wide acceptance in the electronics market. Among the features offered by these systems are speed, accuracy, power control, wide field marking and application specific control software. Welding Systems. Our laser welding systems produce welds that would be difficult or impossible for conventional welding systems to produce. The system's low heat input avoids damage or distortion to surrounding components. In addition,ourproprietary control software promotes reliable laser output and consistent weld quality. Our laser welding systems, with laser beams deliverable through flexible fiber optics, are used in the electronics industry for welding micro components in the manufacture of televisions, computers, hard disk drives and related applications. Metrology Systems. Our metrology products are automated, non-contact, dimensional coordinate measurement systems which provide micron-accurate measurements of component parts and assemblies for electronics, telecommunications and computer manufacturers. Automotive, Aerospace and Other Industrial Markets We manufacture laser systems for the automotive, aerospace and other industrial markets for advanced manufacturing applications including cutting, drilling, welding, scribing and machining. Our laser systems can be controlled and directed with precision and used in a wide spectrum of applications. Lasers offer lower production costs, fast solutions and flexibility on the production line. In addition to lasers, systems may include precision optics, fiber optics, control software, robotics, machine vision, motion control and parts handling. Welding, Cutting and Drilling Systems. Our AM Series of high power solid-state laser systems produce continuous and modulated power with throughput speeds and power flexibility to achieve cutting and high speed, deep penetration welding in reflective materials. These systems are often integrated with customers' robotic systems in various applications, including: . processing of dissimilar materials such as zinc coated materials and aluminum in the automotive industry, including welding aluminum, cutting hydroformed parts and welding tailored blanks; . processing reflective and difficult materials in the manufacture of airframes and turbines in the aerospace industry; and . deep penetration welding for energy and petrochemical applications. Our JK Series laser systems incorporate advanced solid-state laser technology to produce efficient, reliable, dependable and accurate production systems. These systems operate at uniform energy density, offer improved process efficiency and require less energy. These systems use our patented power supply, allowing a wide range of applications, including drilling cooling holes in jet engine turbo fans and welding automotive parts such as ignition components, fuel injector assemblies and smog detection sensors. They also permit high speed, repetitive processing which maximizes production rates. Our JK Series can be readily linked with robotics systems to provide manufacturers with a flexible production tool. Our Laserdyne systems provide fully integrated motion and laser control on multi-axis, articulated machines. These systems incorporate proprietary control software and permit high speed, precision processing of large parts where the workpiece cannot be in motion during processing. Our Laserdyne systems are used in the manufacture and 7repair of jet aircraft engines, and the trimming of aerospace and automobile stampings and other large formed parts. They can also be integrated with automated guided vehicles and conveyor systems. Permanent Marking Systems. Our LaserMark and HM systems provide marking capabilities for automotive, aerospace and other industrial markets. Optical and Other Components Telecommunications. We design and manufacture precision optical components used in dense wavelength division multiplexing technology for increasing the bandwidth of fiber optic networks. These networks have been used mostly for `long-haul' inter-city applications and, more recently, over short-range `metro' applications using optical add drop multiplexing. Our products select, shift or interleave very precise wavelengths of light, thereby increasing the bandwidth and efficiency of dense wavelength division multiplexing systems. These products require highly precise polishing and measurement technology to produce these components to exacting specifications that are critical to their performance. Specialty Optical Components. Our specialty optical components are used primarily for high performance lasers used in lithography, industrial processing and medical applications. Scanning Components and Subsystems. We produce optical scanners, scanner subsystems, and diode-pumped solid state lasers. These are used in a variety of applications including materials processing, test and measurement, alignment, inspection, displays, graphics, vision, rapid prototyping, and medical applications such as dermatology and ophthalmology. Other Markets and Products Biotechnology. Our laser-based fluorescence imaging systems address a great variety of microarray applications including gene expression, genotyping, mapping, high-throughput screening and drug discovery. The ScanArray biochip analysis system measures the fluorescent intensity at each DNA grid spot facilitating, at high speed, the analysis of the expression level of a particular gene. Printing Products. We produce a variety of printing products. Thermal printers are used in end products such as defibrillators, patient care monitors, and cardiac pacemaker programmers. We also produce specialty printing products. Film Imaging Systems. We produce laser imaging and digitizing equipment for use with data sets from computer assisted tomography, magnetic resonance imaging or nuclear medicine equipment. Package Coding. Our Xymark systems provide marking for packaging, medical devices, pharmaceuticals and other consumer products. Depending on the application, a variety of laser marking techniques, including steered beam, dot matrix, and flash, are used to apply laser marks on a wide variety of metals, plastics, paper and ceramics at high speed, without contact or ink. These systems are reliable, flexible, and adaptable and allow the user to incorporate off-the-shelf graphics and font software. 8Customers We have over 1,000customersmany of whomare among the largest global participants in their industries. Many of our customers participate in several market segments.TheseDuring 2002, our largest customer accounted for 8.5% of our total sales and our top 28 customersinclude:accounted for 50% of our total sales. During 2001, our largest customer accounted for 6% of our total sales and the top 36 customers accounted for 50% of our total sales. The increase in concentration from 2001 to 2002 is due in part to the decline in sales volume in the end-user systems business relative to the OEM based components business.
Semiconductor Electronics Automotive Other - -------------------------------- ----------------------- ----------------------- -----------------------Anadigics A.T.&S. Audi 3M Analog Devices Bosch Chrysler AB Dick Cypress Semiconductor Celestica Ford Bell Helicopter Dominion Semiconductor Ericsson General Motors Boeing Flip Chip Semiconductor Hadco Harley Davidson Cardiac Pacemakers IBM Hewlett Packard Honda Ciba Intel IBM Magna Corning Maxim Jabil Circuits Magnetti-Marelli General Electric Micron Kyocera Pico Industrial Tools Gillette Mitsubishi Lucent Tower Automotive Glaxo Motorola Matsushita Toyota Kodak National Semiconductor Motorola TRW Automotive Lockheed Powerchip Semiconductor Nippon Denso Medtronic Samsung Nortel Northrop Grumman Texas Instruments Philips Pratt & Whitney Toshiba SDL Rolls Royce Seagate Vickers SGS Thomson Siemens Toshiba VishayMarketing, Sales and
Customer SupportDistributionWe believe that our marketing, sales and customer support organizations are important to our long-term growth and give us the ability to respond rapidly to the needs of our customers. Our product line managers have worldwide responsibility for determining product strategy based on their knowledge of the industry, customer requirements and product performance. These managers have direct contact with customers and, working with the sales and customer service organizations, develop and implement strategic and tactical plans aimed at serving the needs of existing customers as well as identifying new opportunities based on the
market'smarket’s medium-to-long term requirements.WeComponents are sold worldwide, mostly through direct sales, as well as through distributors to OEMs. There are direct application engineering centers located in Billerica, Massachusetts, Munich, Germany and Tokyo, Japan to support pre- and post-sales of our products. The Components Group does not field service/repair its products, but relies, instead, on return-and-repair, given the relatively small physical size of the products sold and fundamental nature of the products.
Lasers are sold worldwide, either directly or through distributors to end-users, OEMs and systems integrators in North America and Europe, and through distributors in Japan, Asia-Pacific and China. Sumitomo Heavy Industries (a significant shareholder of the Company) is our distributor in Japan. Our worldwide network of integrators are also an active sales channel offering complete turn key solutions to customers demanding single point responsibility. Significant revenues are derived from providing parts and technical support for lasers in our installed base.
Laser Systems are sold directly, or, in some territories, through distributors, to end users, usually semiconductor integrated device manufacturers and electronic component and assembly manufacturers. Our worldwide advanced manufacturing systems sales activities are directed from the
United States. Sales management for components is basedproduct business unit sites inMassachusetts.North America, Europe, Japan and Asia Pacific. Field offices are located close to keycustomerscustomers’ manufacturing sites to maximize sales and support effectiveness. Significant revenues are provided from servicing systems in our installed base at customer locations. In Europe, we maintain offices in the United Kingdom, Germany, France and Italy, and in the Asia-Pacific region, in Hong Kong, Japan, Korea, Malaysia, the Philippines, Singapore and Taiwan.Our direct sales organization is augmented by selected independent distributors and agents who sell our products in areas such as Eastern Europe, People's Republic of China, Australia and Latin America. We provide 24-hour, 365-day-a-year service support to our advanced manufacturing systems customers. Our service support organization is based in Livonia, Michigan; Munich; and Hong Kong for the North American, European, and Asia-Pacific regions, respectively. This support includes field service personnel who reside close to concentrations of customer sites. These field service and in-house technical support personnel receive ongoing training with respect to our laser-based systems, maintenance procedures, laser-operating techniques and processing technology. Many of our distributors also provide customer service and support. In order to minimize disruption to9
customers' manufacturing operations, we provide same or next day delivery of replacement parts worldwide from three regional replacement parts logistics centers.Competition
We face substantial competition in
severaleach of our markets from both established competitors and potential new market entrants. Significant competitive factors include product functionality, performance, size, flexibility,cost,price, market presence, customer satisfaction, customer support capabilities,andbreadth of productline.line, technology and intellectual property. We believe that we compete favorably on the basis of each of these factors. Competition for our products is concentrated in certain markets and fragmented in others.In laser-based processing systems for the semiconductor and electronics markets, we compete primarily with a few large companies such as Electro Scientific Industries and NEC. In laser-based marking systems there are several significant competitors such as Excel Technology and Rofin-Sinar as well as a large number of smaller companies that compete with us on a limited geographic, industry-specific or application-specific basis. In automotive and industrial markets, we compete with Trumpf-Haas, Prima, Robomatix, and Unitek. In other markets, we compete with CTI, a unit of Excel Technology, in scanning components and with several companies in optical components. We also compete with manufacturers of non-laser products in applications such as welding, drilling, cutting and marking. We believe that, as industries continue to modernize, seek to reduce production costs and require more precise and flexible manufacturing, the features of laser-based systems will become more desirable than systems incorporating conventional manufacturing techniques and processes.We expect our competitors to continue to improve the design and performance of their products. There is a risk that our competitors will develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new processes or technologies will emerge that render our products less competitive or obsolete. Increased competitive pressure could lead to lower prices for our products, adversely affecting
business.our sales and profitability.
Components Group In component markets, we compete primarily with Cambridge Technology, Inc., a unit of Excel Technology, in scanning components, and Scanlabs, Gmbh for scanning subsystems. Most of our competition for printer products comes from make/buy decisions by the medical OEMs. Competition in precision optics is rather fragmented among numerous suppliers.
Laser Group In the laser markets which we serve, we compete primarily with Trumpf-Haas, Rofin-Sinar, NEC, Coherent, Spectra Physics, LambdaPhysik, Unitek-Miyachi and Lasag.
Laser Systems Group In laser-based processing systems for the semiconductor and electronics markets, we compete primarily with companies such as NEC, Electro Scientific Industries, Hitachi, Rofin-Sinar, EO Technics, CyberOptics and Innolas.
Manufacturing
We perform internally those manufacturing functions that enable us to add value and to maintain control over critical portions of the production
process andprocess. To the extent practical, we outsource other portions of the production process.This approach has ledDuring the last year, we continued tochanges in our manufacturing organization as we moveredirect attention from the management of internal production processes to the management of supplier quality and production. The retained internal activity is focused on module integration and testing, with particular emphasis on ourcustomers'customers’ applications. We believe we achieve a number of competitive advantages from this integration, including the ability to achieve lower costs and higher quality, bring new products and product enhancements more quickly and reliably to market, and produce sophisticated component parts not available from other sources.We manufacture our Components at
eleven facilities: four near Boston,facilities in Billerica, Massachusetts,one eachNepean, Ontario and Moorpark, California, our Lasers inArizona, California,Rugby, United Kingdom andMinnesota, two near Ottawa, Canada, and twoLaser Systems inthe United Kingdom.Wilmington, Massachusetts. Each of our manufacturing facilities has co-located manufacturing, manufacturing engineering, marketing and product design personnel. We believe that this organizational proximity greatly accelerates development and entry into production of new products and aids economical manufacturing.ManyMost of our products are manufactured under ISO 9001 certification.We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used on our premises. We believe we are in material compliance with these regulations and have obtained all necessary environmental permits to conduct our business.
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Research and Development
We
devote significant resourcescontinue to make a strong commitment to research and development for core technology programs directed at creating new products, product enhancements and new applications for existing products, as well as funding research intoformativefuture market opportunities.TheEach of the markets we serveareis generally characterized by rapid technological change and product innovation. We believe that continued timely development of new products and product enhancements to serve both existing and new markets is necessary to remain competitive.We carry out our research and development activities
in multipleat the manufacturing locationsaround the world.cited above. We also maintain links with leading industrial, government and university research laboratories worldwide. We work closely with customers and institutions to develop new or extended applications of our technology.We maintain significant expertise and continue to advance our capabilities in the
followingcoretechnologies: Lasers: both gastechnologies listed below.
Components Group Optical Components: high precision servomechanisms and
solid-state, designed to produce efficient, reliable and accurate laser sources inoptical scanners, typically associated with a broadrangespectrum ofconfigurationslaser systems.Precision Subsystems:OEM laser and thermal imaging subsystems for
material processingmedical and industrial applications.Precision Optics:design and manufacturing process capability for production of laser quality lenses, mirrors of high dynamic rigidity, high performance mirrors and lens coatings.
Mechanics:
Laser Group Lasers:both gas and solid-state, designed to produce efficient, reliable and accurate lasers in a broad range of configurations for material processing applications.
Laser Beam Deliveries:design and manufacture of
large laser-based advancedfiber optic beam deliveries and focus heads for integration into complex manufacturing systems either by integrators or end-users.Laser Control Software and
small precision servo mechanisms and optical scanners, typically associated with a broad spectrumSystems Interfaces:development of laser control systems and interfaces for integrating our lasers into customers manufacturing systems.
Laser Systems Group Electronics:design of wide bandwidth power amplifiers and high signal-to-noise ratio and low thermal drift signal detection circuits; design and manufacture of analog servo controllers with low electromagnetic interference circuitry.
Software:development of real-time control of servomechanisms, process system control and machine interfaces.
Inspection:design of non-contact measurement probes, systems and related software.
Systems Design and Integration:
leveraging our core technologies to producecreation of highly efficient and effective application-specific manufacturing solutions typically based on lasers and their interaction with materials including integration with robotics systems.Sources of Supply
We depend on limited source suppliers that could cause substantial manufacturing delays and additional cost if a disruption of supply occurs. We obtain some components from a single source. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products. If suppliers or subcontractors experience difficulties that result in a reduction or interruption in supply to us, or fail to meet any of our manufacturing requirements, our business would be harmed until we are able to secure
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alternative sources. These components and manufacturing services may not continue to be available to us at favorable prices, if at all.
Components Group We manufacture some of our own machined parts. We purchase fully-functional electronics as well as certain key components, such as laser diodes, from external sources.
Laser Group We design and assemble our lasers. Supply of our proprietary parts comes from both internal sources, as well as a network of specialist, qualified suppliers predominantly located in North America and the United Kingdom. We purchase certain critical parts from single sources to ensure quality and consistency.
Laser Systems Group We purchase certain major subsystems, such as lasers, motion stages, certain vision systems, fully-functional electronics and frames and racks, from the merchant market. Our optics components are sourced both internally by manufacture and externally by purchase in the merchant market. In some cases, upper level assemblies and, in some cases, entire systems are outsourced to Electronic Manufacturing Services companies.
Patents and Intellectual Property
Our intellectual property includes copyrights, patents, proprietary software, technical know-how and expertise, designs, process techniques and inventions. We own
85113 United States and5273 foreign patents; in addition, applications are pending for4359 United States and89122 foreign patents. We have alsobeen licensedobtained licenses under a number of patents in the United States and foreigncountries.countries and may require licenses under additional patents. There can be no assurance as to the degree of protection offered by these patents or as to the likelihood that patents will be issued for pending applications.We also rely on a combination of copyrights and trade secret
protection forlaws and restrictions on access to protect ourconfidentialtrade secrets and proprietaryinformation.rights. We routinely enter into confidentiality agreements with our employees and consultants. There is a risk that these agreements will not provide meaningful protection of our proprietary information in the event of misappropriation or disclosure.11Human Resources
At December 31,
1999,2002, we had1,581793 employees in the following areas:
Number of employees Percentage --------- ----------Production and operations ....................... 565 36% Customer service ................................ 204 13% Sales, marketing and distribution ............... 314 20% Research and development ........................ 299 19% Administration .................................. 199 12% ----- ----- Total ........................................ 1,581 100% ===== =====
Number of Employees Percentage Production and operations 316 40 % Customer service 154 19 % Sales, marketing and distribution 119 15 % Research and development 102 13 % Administration 102 13 % Total 793 100 % The loss of key personnel could negatively impact our operations. Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed.
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Government Regulation
Our laser products sold in the United States are classified as laser products under applicable rules and regulations of the Center for Devices and Radiological Health (“CDRH”) of the U.S. Food and Drug Administration. A similar classification system is applied in the European markets.
Such regulations generally require a self-certification procedure pursuant to which a manufacturer must file with the CDRH with respect to each product incorporating our laser device, periodic reporting of sales and purchases and compliance with product labeling standards. The Company’s laser products can result in injury to human tissue if misused. We believe that our laser products are in substantial compliance with all applicable laws for the manufacture of laser devices.
Other
Information concerning product lines, backlog, working capital and research and development expenses
and seasonalitymay be found insection seven,Item 7, Management Discussion and Analysis. Information about geographic segments may be found in note1814 to the financial statements.ITEMWebsite and Access to Financial Filings
We maintain a website with the address of www.gsilumonics.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our proxy statements, registration statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. Our SEC filings are also available over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file by visiting the SEC’s public reference rooms in Washington, D.C. and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms.
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. In making these forward-looking statements, which are identified by words such as “will”, “expects”, “intends”, “anticipates” and similar expressions, the Company claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. The Company does not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements.
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Item 2.
PROPERTIESPropertiesThe principal owned and leased properties of GSI Lumonics and its subsidiaries are listed in the table below.
APPROXIMATE OWNED/ LOCATION PRINCIPAL USE SQUARE FEET LEASED - -------- ------------- ----------- ------Kanata, Ontario, Canada Principal corporate executive offices; 75,000 Owned Manufacturing, R&D, Marketing, Sales Nepean, Ontario, Canada Manufacturing, R&D, Marketing, Sales 41,000 Owned (two sites) Maple Grove, MN, USA Manufacturing, R&D, Marketing, Sales 104,000 Leased; expires in 2004 Watertown, MA, USA Manufacturing, R&D, Marketing, Sales 84,000 Owned Billerica, MA, USA Manufacturing, R&D, Marketing, Sales 80,000 Leased; expires in 2008 with two 5-year renewal options Wilmington, MA, USA Manufacturing, R&D, Marketing, Sales 78,000 Leased; expires in 2007 with two 5-year renewal options Bedford, MA, USA Manufacturing, R&D, Marketing, Sales 51,000 Leased; expires in 2003 with one (currently unoccupied) 3-year renewal option Oxnard, CA, USA Manufacturing, R&D, Marketing, Sales 44,000 Leased; expires in 2004 with (operations discontinued; 9,000 square option to purchase feet used for sales and administration) Simi Valley, CA, USA Manufacturing, R&D, Marketing, Sales 40,000 Owned Livonia, MI, USA Customer Support and Logistics Center 30,000 Leased; expires in March 2000 Ann Arbor, MI, USA R&D, Marketing, Sales 16,000 Leased; expires in 2001 with two 3-year renewal options Rugby, England Manufacturing, R&D, Marketing, Sales 113,000 Owned Hull, England Manufacturing, R&D, Marketing, Sales 35,000 Leased; expires in 2002 Munich, Germany Customer Support and Logistics Center 29,000 Leased; expires in 2013 with option to renew
Current Approximate Location Principal Use Segment Square Feet Owned/ Leased Facilities Used in Current Operations Billerica, Massachusetts, USA Manufacturing, R&D, Marketing, Sales, Corporate 1, 4 90,000
(two sites)Leased; one expires in 2008 with two 5-year renewal options; one expires in 2006 Ottawa (Nepean),
Ontario, CanadaManufacturing, R&D, Marketing, Sales 1 24,000 Owned Moorpark, California, USA Manufacturing, R&D, Marketing, Sales 1 49,000
(three sites)Leased; two leases expire in 2005 with one 5-year renewal option; one lease expires in 2004 Rugby, United Kingdom Manufacturing, R&D, Marketing, Sales 2 113,000 Owned; approximately 10% of the space is subleased through 2012 Wilmington, Massachusetts, USA Manufacturing, R&D, Marketing, Sales 3 78,000 Leased; expires in 2007 with two 5-year renewal options Farmington Hills, Michigan, USA Partially occupied by Customer Support and Sales 2, 3 56,000 Leased; expires in 2003 with three 1-year renewal options Munich, Germany Partially occupied Customer Support, Logistics, Sales and Applications Engineering 1, 2, 3 29,000 Leased; expires in 2013 with option to renew Excess or Unoccupied Facilities Ottawa (Kanata), Ontario, Canada Currently unoccupied and offered for sale 4 75,000 Owned Ottawa (Nepean), Ontario, Canada Currently unoccupied and offered for sale 4 17,000 Owned; sale agreement signed in March 2003 Ottawa (Nepean), Ontario, Canada Subleased effective March 2002 4 10,000 Leased; expires in 2006 Maple Grove, Minnesota, USA Currently unoccupied 4 104,000 Leased; expires in 2003 with three 1-year renewal options The facilities house the segments as indicated by the numbers below. Facilities are not dedicated to just one segment:
1 — Components Group
2 — Laser Group3 — Laser Systems Group4 — CorporateAdditional sales, service and logistics sites are located in France, Italy, Hong Kong,
Italy,Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan andTaiwan.Shanghai. These additionalmarketing and salesoffices are in leased facilities occupying approximately42,00026,000 square feet in the aggregate.The Company will soon occupy a 56,000We reduced the amount of space occupied by these worldwide sales, service and logistic sites from 44,000 squarefoot facilityfeet at the end of 2001.14
Because of the exit activities described in
Farmington Hills, Michigan which willnote 11 to the consolidated financial statements during fiscal 2002, we no longer operate out of our former sites in Kanata, Ontario and one of our sites in Nepean, Ontario.We believe the productive capacity of the remaining facilities to be
subject to a five year lease commitment,both suitable andas a result, will closeadequate for thefacilities in Ann Arbor, Michigan and Livonia, Michigan. 12ITEM 3. LEGAL PROCEEDINGSrequirements of our business.
Item 3. Legal Proceedings Electro Scientific Industries, Inc. v. GSI Lumonics Inc. et al.On March 16, 2000, Electro Scientific Industries, Inc. filed an action for patent infringement in the United States District Court for the Central District of California against
usthe Company and Dynamic Details Inc., an unrelated partywhothat is one ofourthe Company’s customers. Electro Scientificallegesalleged thatwe offerthe Company offered tosell,sell and import into the United Statesourthe GS-600 high speed laser drilling system and that Dynamic Detailspossessespossessed andusesused a GS-600 System. It furtherallegesalleged that DynamicDetails'Details’ use ofourthe GS-600 laser systeminfringes oninfringed ElectroScientific'sScientific’s U.S. patentnumber5,847,960 and thatwe havethe Company had actively induced the infringement of, and contributorily infringed,onthe patent. Electro Scientificseekssought an injunction, unspecified damages, trebling of those damages, and attorney fees.Electro Scientific Industries, Inc. v. General Scanning Inc. In September 1998, the United States District Court for the Northern District of California granted Electro Scientific's motions for summary judgment against General Scanning in this case on a claim of patent infringement and on the issue of whether Electro Scientific committed inequitable conduct by intentionally failingGSI Lumonics indemnified Dynamic Details with respect tocite prior art to the U.S. Patent Office in connection with one of its patents. The court denied our motion for summary judgment that the patents are invalid due to prior art. During March 1999, the Court granted Electro Scientific's motion for partial summary judgment that upgrade kits, sold by General Scanning for 1.3 micron laser wavelength memory repair, infringe the patents in suit. In April 1999, a federal court jury issued a verdict that Electro Scientific's patent no. 5,473,624 was invalid, and that Electro Scientific's patent no. 5,265,114 was valid, and awarded a $13.1 million damage judgment against us. In July 1999, the court refused Electro Scientific's requests to increase damages awarded by the jury in April, and for attorney fees, but granted interest on the damages. We have recorded a provision during the three months ended April 2, 1999 of approximately $19 million to reflect the amount of the damages awarded plus accrued interest and related costs. The court also affirmed the jury's decision to invalidate one of the two patents asserted by Electro Scientific in the case. We have appealed the decisions on infringement, the validity of the second patent, which was not overturned, and the award of damages. We were required to post an unsecured bond with the court in order to proceed with the appeal. No date has been set for arguments. Robotic Vision Systems, Inc. v. View Engineering, Inc. This action involves a complaint by Robotic Vision Systems, Inc. alleging infringement of a patent by View Engineering, Inc., our wholly owned subsidiary. The matter was tried before a judge sitting inthese allegations. On August 14, 2001, the United States District Court for the Central District of Californiain November 1999,granted the Company’s motion for summary judgment of non-infringement andwe are currently awaitingdenied Electro Scientific’s motion for summary judgment of infringement. In thecourt's decision. Robotic Vision alleges infringement relating to lead inspection machines formerly sold by View and seeks damages of $60.5 million. We believeruling, the Court concluded that the GS-600 system did not literally infringe the asserted claimsin this action are without meritof the alleged Electro Scientific patent, nor did it infringe under the doctrine of equivalents. On September 7, 2001, Electro Scientific appealed the District Court’s decision on the summary judgment motions andare vigorously defendingoral arguments were heard on May 7, 2002. On October 7, 2002, theproceedings. If we lose on one or moreCourt ofthese claims there could be a material adverse effect on our operating results and/or financial condition. GSI Lumonics Inc. v. BioDiscovery, Inc. On December 10, 1999 we filed suit inAppeals vacated theUnited Statessummary judgment ruling of non-infringement of the District Court and remanded the matter back to the District Court for additional claim construction. In November 2002, theDistrict of Massachusetts seeking a declarationCompany reached an agreement with Electro Scientific Industries Inc. and Dynamic Details pursuant to which the case was dismissed without prejudice. In connection with the agreement, the Company paid Electro Scientific Industries an amount thatour QuantArray Microarray Analysis Software doeswas notinfringe any copyright owned by BioDiscovery, Inc. or its president. BioDiscovery, Inc. is a manufacturer of microarray quantification software under the name ImaGene(R). We had previously distributed ImaGene(R) software under a non-exclusive arrangement with BioDiscovery, but subsequently developed our own software when BioDiscovery refused to develop necessary enhancements to stay abreast of industry trends, especially in the field of multi-channel scanning. On December 21, 1999, BioDiscovery's president responded to our action for declaratory judgment by filing a separate suit in the United States District Court for the Southern District of California, alleging that we reverse engineered his software, and additionally sued us for copyright infringement. We have appliedmaterial to theCalifornia court to seekCompany’s results of operations or financial position.Other.As the
prompt dismissal of the California action in favor of our prior pending action. In the matter before the United States District Court for the District of Massachusetts, the court denied BioDiscovery's president's motion to dismiss andCompany hasscheduled the trial for May 2000. We believe that the claim in this action is without merit. Potential Claim. Indisclosed since 1994, a party has commenced legal proceedings in the United States against a number of U.S. manufacturing companies, including companies that have purchased systems fromus.GSI Lumonics. The plaintiff in the proceedings has alleged that13certain equipment used by these manufacturers infringes patents claimed to be held by the plaintiff. We areWhile the Company is not a defendant in any of theproceedings. However,proceedings, several ofourthe Company’s customers have notifiedusthe Company that, if the party successfully pursues infringement claims against them, they may requireusthe Company to indemnify them to the extent that any of their losses can be attributed to systemswesold tothem. We dothem by the Company. The Company does not believe that the outcome of these claims will have a material adverse effecton us,upon the Company, but thereis a riskcan be no assurance thattheseany such claims, or any similar claims,maywould not have a material adverse effecton ourupon the Company’s financial condition or results of operations.ITEMThe Company is also subject to various legal proceedings and claims, which arise, in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon the Company’s financial conditions or result of operations but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon the Company’s financial position or results of operations.
15
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable Executive OfficersSubmission of Matters to a Vote of Security HoldersNo matters were submitted to a vote of security holders during the
Registrant The following table sets forth the names, ages and positions of the current executive officers of the Company as at March 15, 2000, and the principal occupations held by each person named for at least the past five years. Executive officers serve at the pleasure of the Board of Directors.
NAME AGE POSITION WITH GSI LUMONICS ---- --- --------------------------Charles D. Winston 58 President and Chief Executive Officer Desmond J. Bradley 43 Vice President, Finance and Chief Financial Officer Patrick D. Austin 48 Vice President, Sales, Advanced Manufacturing Systems John W. George 57 Vice President, Customer Support, Advanced Manufacturing Systems Michael R. Kampfe 50 Vice President, Operations, Advanced Manufacturing Systems Felix Stukalin 39 Vice President, Components Linda Palmer 48 Vice President, Human Resources Kurt A. Pelsue 46 Vice President, Technology Victor H. Woolley 58 Vice President, Business DevelopmentCharles D. Winston has served as Chief Executive Officer of GSI Lumonics since March 1999 and as President since November, 1999. He previously served as President and Chief Executive Officer of General Scanning commencing in September 1988. Mr. Winston served as a Director of General Scanning from 1989 until the merger. Desmond J. Bradley has held his current position since October 1994. From September 1993 until October 1994, Mr. Bradley was Vice President, Finance and Administration of Lumonics. Prior to September 1993, he was Vice President, Laser Products Division. Patrick D. Austin has held his current position since March 1999, and has served as Vice President, Sales since January 1996. Prior to that time he was Vice President, Market Development of Lumonics and prior to October 1992 was Vice President, Laser Marking Division. John W. George has held his position since March 1999, and has served as Vice President, Customer Support since January 1997. Prior to that time he was Director, North American Service. Michael R. Kampfe assumed his current role in March 1999. From 1996 to 1999, he was Vice President and General Manager of General Scanning's optical scanning products division, and from 1990 through 1996 he served as Vice President and General Manager of General Scanning's laser graphics division. Mr. Kampfe joined General Scanning in 1984. 14Felix Stukalin was appointed Vice President, Components in February 2000. He joined General Scanning in 1994 as Director of Engineering, Components and assumed the position of General Manager in July 1999. Linda Palmer assumed her current role inquarter ended December1999, having served as the Vice President of Integration from March 1999 through December 1999. She had been General Scanning's Vice President of Human Resources since joining General Scanning in 1996. Prior to that time, Ms. Palmer served as Director of Human Resources of Analog Devices. Kurt A. Pelsue assumed his current position in March 1999, having served since 1997 as Vice President, Corporate Engineering for General Scanning. Prior to that time, Mr. Pelsue held numerous senior level engineering assignments within General Scanning. He joined the firm in 1976. Victor H. Woolley assumed his current role in March 1999, having served as Chief Financial Officer, Treasurer and Clerk of General Scanning since August 1995. From 1986 to 1995, Mr. Woolley was Vice President and Chief Financial Officer of Sepracor Inc., a drug development company. 1531, 2002. PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters Market Information
GSI LumonicsThe Company’s common stock, no par value, trades on The
NasdaqNASDAQ StockMarket(R)Market® under the symbol GSLI and on The Toronto Stock Exchange(the "TSE")under the symbol LSI. Prior to the 1999 merger,Lumonics'Lumonics’ common stock was traded on The Toronto Stock Exchange under the symbol LUM beginning September 29, 1995. From May 1989 to September 28, 1995the Company's Common StockLumonics’ common stock was not publicly traded.The following table sets forth, for the periods indicated, the high and low closing prices per share of the common stock as reported by
NasdaqThe NASDAQ Stock Market® in U.S. dollars andthe TSEThe Toronto Stock Exchange in Canadian dollars.
NASDAQ TORONTO STOCK EXCHANGE PRICE RANGE PRICE RANGE US$ CDN$ HIGH LOW HIGH LOW ---- --- ---- ---Fiscal year 1999: First Quarter ............ $ 6.813 $ 4.500 $ 10.50 $ 6.75 Second Quarter ........... 4.750 3.250 7.00 5.00 Third Quarter ............ 6.875 4.063 10.25 5.95 Fourth Quarter ........... 11.250 4.188 16.20 7.60 Fiscal year 1998: First Quarter ............ -- -- $ 27.00 $ 21.50 Second Quarter ........... -- -- 23.00 11.80 Third Quarter ............ -- -- 13.75 7.55 Fourth Quarter ........... -- -- 8.75 6.75Currency Prices The following table sets forth in Canadian dollars the exchange rates of the Canadian dollar to the United States dollar, determined based upon publicly available information from the Federal Reserve Bank of New York for the calendar years 1999 and 1998. For example, on December 31, 1998, one US dollar bought 1.5375 Canadian dollars.
1999 1998 -------------- ---------------High ....................................... Cdn$1.5302 Cdn$1.5770 Low......................................... 1.4440 1.4075 End of Period............................... 1.4440 1.5375 Average (1)................................. 1.4827 1.4898(1) The average of the exchange rate on the last business day of each month during the applicable period.
NASDAQ Stock Toronto Stock Market® Exchange Price Range Price Range US$ Cdn$ High Low High Low Fiscal year 2002: First Quarter $ 10.78 $ 7.80 $ 17.20 $ 12.50 Second Quarter 11.22 6.88 17.80 10.49 Third Quarter 8.46 4.71 13.06 7.50 Fourth Quarter 6.89 3.65 10.90 5.90 Fiscal year 2001: First Quarter $ 13.31 $ 7.28 $ 20.00 $ 11.59 Second Quarter 11.01 6.69 16.75 10.68 Third Quarter 9.25 6.18 14.40 9.77 Fourth Quarter 8.90 6.58 14.16 10.28 Holders
On
February 29, 2000,March 3, 2003, there were approximately149144 holders of record of Common Stock. Since many of the shares of Common Stock are registered in"nominee"“nominee” or"street" name,“street” names, the Company estimates that the total number of beneficial owners is considerably higher.16Dividends
The Company has never paid cash dividends on its Common Stock. The Company currently intends to reinvest its earnings for use in the business and does not expect to pay cash dividends in the foreseeable future. Subject to the provisions of the Canada-US Income Tax Convention (the
"Convention"“Convention”), Canadian withholding tax at a rate of 25% will be payable on dividends paid or credited, or deemed to be paid or credited, byGSI Lumonicsthe Company to a US holder onGSI Lumonicsthe Company’s common shares. Under the Convention, the withholding tax rate isgenerallyreduced to 15%, or if the US holder is a corporation that owns 10% or more ofGSI Lumonicsthe Company’s voting stock, to 5%.17ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data This section presents our selected
historicalconsolidated financialdata. Youdata prepared in accordance with U.S. GAAP for the five fiscal years ended December 31, 2002. The information set forth should be read carefully in conjunction with the consolidated financial statements,included in this report,including the notes to the consolidated financialstatements.16
statements, and the management’s discussion and analysis included in this report. The selected consolidated data in this section is not intended to replace the consolidated financial statements.We derived the consolidated statement of operations data for the years ended December 31, 1999, December 31, 1998 and December 31, 1997 and the consolidated balance sheet data as of December 31, 1999 and December 31, 1998 from the audited consolidated financial statements in this report. Those consolidated financial statements were audited by Ernst & Young LLP, our independent auditors. We derived the consolidated statement of operations data for the years ended December 31, 1996 and December 31, 1995 and consolidated balance sheet data as of December 31, 1996 and December 31, 1995 from audited consolidated financial statements that are not included in this report.On March 22, 1999, Lumonics and General Scanning completed a merger of equals. We recorded this transaction as a purchase for accounting purposes. Accordingly, the consolidated financial statements exclude the results of General Scanning before the merger date and therefore do not provide meaningful year-to-year comparative information.
Note 2 to the consolidated financial statements includes, for illustrative purposes, unaudited pro forma information as if the merger had occurred January 1, 1998.Results for 1999 reflect $34.5 million of restructuring and acquired in-process research and development expenses related to the merger. Commencing in the first quarter of 2002, we classified technical support and service management costs as selling, general and administrative expenses. In prior years, we classified these costs as cost of goods sold and such costs have been reclassified in the comparative statement of operations for each year except 1998. The data was not available to make the reclassification for 1998, because this was pre-merger, as noted above, and information was not kept in the same manner or on the same systems; therefore 1998 is not comparable to the other years.
Years Ended December 31, 2002 2001 2000 1999 1998 (In thousands except per share amounts) Sales $ 159,070 $ 247,904 $ 373,864 $ 274,550 $ 144,192 Gross profit 49,194 85,782 131,471 99,957 40,673 Operating expenses: Research and development 20,444 25,634 33,931 28,700 12,985 Selling, general and administrative 55,483 73,815 87,459 68,833 38,191 Amortization of purchased intangibles 5,135 5,226 4,851 4,070 861 Acquired in-process research and development — — — 14,830 — Restructuring and other, net 5,427 2,782 7,196 19,631 2,022 Loss from operations (37,295 ) (21,675 ) (1,966 ) (36,107 ) (13,386 ) Other income (expense) 590 (797 ) 77,009 (1,223 ) 2,210 Income (loss) before income taxes (36,705 ) (22,472 ) 75,043 (37,330 ) (11,176 ) Income tax provision (benefit) (8,981 ) (7,774 ) 29,666 (2,556 ) (3,260 ) Net income (loss) for the year $ (27,724 ) $ (14,698 ) $ 45,377 $ (34,774 ) $ (7,916 ) Net income (loss) per common share: Basic $ (0.68 ) $ (0.36 ) $ 1.19 $ (1.14 ) $ (0.46 ) Diluted $ (0.68 ) $ (0.36 ) $ 1.13 $ (1.14 ) $ (0.46 ) Weighted average common shares outstanding (000s) 40,663 40,351 38,187 30,442 17,079 Weighted average common shares outstanding and dilutive potential common shares (000s) 40,663 40,351 40,000 30,442 17,079
December 31, 2002 2001 2000 1999 1998 (In thousands) Working capital $ 172,135 $ 224,787 $ 190,935 $ 103,727 $ 85,977 Total assets 297,088 336,687 434,949 289,722 159,642 Long-term liabilities, including current portion 6,004 4,736 8,524 9,898 7,082 Total stockholders’ equity 254,481 282,330 289,267 171,730 120,757 17
Years ended December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- --------- (in thousands except per share amounts)CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales ................................................................. $ 274,550 $ 144,192 $177,328 $153,367 $ 125,268 Gross profit .......................................................... 95,777 40,673 65,922 60,999 48,031 Operating expenses: ResearchItem 7. Management’s Discussion and development ............................................. 28,700 12,985 11,993 11,872 7,068 Selling, generalAnalysis of Financial Condition andadministrative .................................. 64,653 38,191 37,591 32,999 28,385 AmortizationResults oftechnology and other intangibles ..................... 4,070 861 400 381 384 Acquired in-process research and development ......................... 14,830 -- -- -- -- Restructuring and other charges ...................................... 19,631 2,022 -- -- -- Foreign exchange, interest and gain on sales of assets ............... (1,223) 2,210 1,048 634 (854) --------- --------- -------- -------- --------- Income (loss) before income taxes ..................................... (37,330) (11,176) 16,986 16,381 11,340 Income tax provision (benefit) ........................................ (2,556) (3,260) 5,074 4,635 3,304 --------- --------- -------- -------- --------- Net income (loss) for the year ........................................ $ (34,774) $ (7,916) $ 11,912 $ 11,746 $ 8,036 ========= ========= ======== ======== ========= Net income (loss) per common share: Basic ................................................................ $ (1.14) $ (0.46) $ 0.75 $ 0.83 $ 0.70 Diluted .............................................................. $ (1.14) $ (0.46) $ 0.72 $ 0.78 $ 0.65 ========= ========= ======== ======== ========= Weighted average common shares outstanding ............................ 30,442 17,079 15,989 14,077 11,521 Weighted average common shares outstanding and dilutive potential Common shares ........................................................ 30,442 17,079 16,454 15,079 12,457 December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- --------- (in thousands)BALANCE SHEET DATA: Working capital ....................................................... $ 103,727 $ 85,977 $110,895 $ 71,981 $ 58,087 Total assets .......................................................... 289,722 159,642 189,180 135,602 122,802 Long-term liabilities, including current portion ...................... 10,022 7,082 9,239 13,820 19,367 Total shareholders' equity ............................................ 171,730 120,757 133,623 88,345 69,442Operations18ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read this discussion together with the consolidated financial statements and other financial information included in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in the forward-looking statements. Please see the
"Special“Special Note RegardingForward-Looking Statements"Forward Looking Statements” elsewhere in this report.Overview
We design, develop, manufacture and market components, lasers and laser-based advanced manufacturing systems
and componentsas enabling tools for a wide range ofapplications,applications. Our products allow customers to meet demanding manufacturing specifications, includingcutting, welding, drilling, marking, micro-machining, inspection,device complexity andoptical detectionminiaturization, as well as advances in materials andtransmission. Marketsprocess technology. Major markets fortheseour products include the medical, automotive, semiconductorelectronics, automotive, medical/biotechnologyandtelecommunicationselectronics industries. In addition, we sell our products and services to other markets such as light industrial and aerospace.We completed a merger of equals with General Scanning, Inc. on March 22, 1999. The merger transaction has been accounted for as a purchase for accounting purposes and, accordingly, the
aerospaceoperations of General Scanning, Inc. have been included in the consolidated financial statements from the date of merger.Business Environment
Several significant markets for our products, have been in severe decline for the past two years. Specifically they are the semiconductor, electronics and
packagingtelecommunications industries. Our sales of systemssales depend onfor semiconductor and electronics applications and precision optics for telecommunications have declined. The continued downturn in demand for capital equipment in ourcustomers'major markets, which commenced in mid 2001 and continues to the present, is due to the downturn in general economic conditions, combined with our customers’ current excess of manufacturing capacity and their customers’ excess inventories of components. In response to the business environment, we have taken the following measures.During fiscal 2000 and 2001, we accomplished the major portion of a strategic repositioning of the Company through a series of steps, including:
• Divestitures and one acquisition; • Rationalization for excess capacity at our Rugby, United Kingdom facility and three leased facility locations in the United States and Germany; and • Restructuring of the Company’s United Kingdom operation and worldwide distribution system related to high-power laser systems for certain automotive applications. These actions allowed us to redirect capital
expenditures which are affectedto opportunities in our strategic markets including semiconductor, electronics and telecommunications.During 2002, additional cost reduction measures were taken as a result of the continued weak business conditions. We closed the facility in Kanata, Ontario and transferred its operations to Rugby, United Kingdom and Wilmington, Massachusetts. Additionally, we downsized manufacturing operations in Nepean, Ontario. Company-wide, we reduced our headcount by 29% since the end of 2001 and continued the consolidation of excess space. We maintained our strong cash position during this difficult period. We ended the year with no bank debt. We initiated the process of organizing our business
cycles in the markets they serve.around our three segments: Components; Lasers; and Laser Systems.Results of Operations for Fiscal Years Ended December 31,
1999, 19982002, 2001 and19972000Commencing in the first quarter of 2002, we classified technical support and service management costs as selling, general and administrative expenses. In prior years, we had classified these expenses as cost of goods sold, and such costs have been reclassified in the results of operations below to be comparable with current
18
year presentation. The following table sets forth items in the consolidated statement of operations as a percentage of sales for the periods indicated:
Year ended December 31, ------------------------------------- 1999 1998 1997 ------------ ----------- ----------Sales............................................... 100.0% 100.0% 100.0% Cost of goods sold.................................. 65.1 71.8 62.8 Gross profit........................................ 34.9 28.2 37.2 Research and development............................ 10.5 9.0 6.8 Selling, general and administrative................. 23.5 26.5 21.2 Amortization of technology and other intangibles.... 1.5 0.6 0.2 Acquired in-process research and development........ 5.4 -- -- Restructuring and other changes..................... 7.2 1.4 -- ------ ----- ----- Income (loss) from operations....................... (13.2) (9.3) 9.0 Interest income, net................................ -- 1.1 0.6 Gain on sale of assets.............................. 0.6 -- -- Foreign exchange translation gains (losses)......... (1.0) 0.4 -- ------ ----- ----- Income (loss) before income taxes................... (13.6) (7.8) 9.6 Income tax provision (benefit)...................... (0.9) (2.3) 2.9 ------ ----- ----- Net income (loss)................................... (12.7)% (5.5)% 6.7% ====== ===== =====19
Year Ended December 31, 2002 2001 2000 Sales 100.0 % 100.0 % 100.0 % Cost of goods sold 69.1 65.4 64.8 Gross profit 30.9 34.6 35.2 Operating expenses: Research and development 12.9 10.3 9.1 Selling, general and administrative 34.9 29.8 23.5 Amortization of purchased intangibles 3.2 2.1 1.3 Restructuring and other 3.4 1.1 1.9 Operating expenses 54.4 43.3 35.8 Loss from operations (23.5 ) (8.7 ) (0.6 ) Gain (loss) on sale of assets and investments — (1.9 ) 20.5 Other income (expense) (0.3 ) — — Interest income, net 1.3 1.7 0.9 Foreign exchange transaction gains (losses) (0.5 ) (0.1 ) (0.8 ) Income (loss) before income taxes (23.0 ) (9.0 ) 20.0 Income tax provision (benefit) (5.6 ) (3.1 ) 7.9 Net income (loss) (17.4 )% (5.9 )% 12.1 % 2002 Compared to 2001
Sales by Segment.The following table sets forth sales in millions of dollars by our business segments for 2002 and 2001. The information was not available and impracticable to
ourobtain to reclassify 2000 results into these new segments. In 2000, there were other businesses and product lines that were subsequently divested or discontinued that do not conform to the new segments, as such the information would not be comparable. Information for 2000 by segment is not presented.
2002 2001 Sales Sales Components group $ 70.5 $ 88.7 Laser group 23.7 39.1 Laser systems group 65.9 124.0 Other and intra-segment eliminations (1.0 ) (3.9 ) Total $ 159.1 $ 247.9 The sales for 2002 decreased by $88.8 million or 36% compared to 2001. The divestiture of certain product lines accounted for $12.0 million of this reduction. But, the primary
marketsreason for1999, 1998the decline remains the deep recession in the market for semiconductor and1997.electronic capital equipment, as well as optical telecommunications components, which began midway through 2001. The sales have now stabilized at a level of approximately $40.0 million per quarter since the third quarter of 2001.
1999 1998 1997 -------------------------------- --------------------------------- ------------------ INCREASE INCREASE (DECREASE) (DECREASE) % OF OVER % OF OVER % OF SALES TOTAL PRIOR YEAR SALES TOTAL PRIOR YEAR SALES TOTAL ----- ----- ---------- ----- ----- ---------- ----- -----Semiconductor............. $ 34.5 13% 146% $ 14.0 10% (63)% $ 38.1 21% Electronics............... 67.9 25 120 30.8 21 11 27.7 16 Automotive................ 12.0 5 (12) 13.6 9 (27) 18.7 11 Aerospace................. 15.0 5 15 13.1 9 (26) 17.7 10 Packaging................. 11.9 4 (12) 13.5 9 (1) 13.7 8 Components................ 33.4 12 351 7.4 5 28 5.8 3 Medical/Biotechnology..... 50.3 18 1,098 4.2 3 20 3.5 2 Emerging.................. 10.3 4 (32) 15.1 11 (13) 17.3 10 Parts and service......... 39.3 14 21 32.5 23 (7) 34.8 19 ------ --- ----- ------ --- ---- ------ --- Total..................... $274.6 100% 90% $144.2 100% (19)% $177.3 100% ====== === ===== ====== === ==== ====== ===The sales in the Components segment decreased in 2002 by $18.2 million compared to 2001. The weakness in the telecommunications market sector was the primary cause for the decline. Sales
by Market. Our results of operations arefrom the product lines linked to that sector accounted for a combined $9.6 million in sales reduction. Other factors were a $6.1 million reduction in the Optical Scanning product line affected byexternal factors that impactthemarkets in which we compete. Sales to Japandownturn of the semiconductor19
industry and theAsia-Pacific region were impactedmarket for laser ophthalmology equipment and $1.8 million decline in our GMAX product line affected bythe financial crisis that occurred therea slow down inthe fall of 1997Europe andthe effects which extended into 1999. Japan suffered a recession during the same period, brought about partly by the financial crisis.North America. Discontinued product lines contributed another $0.7 million in sales decrease against 2001.The
semiconductor equipment business was in a recession from mid-1998 through the first quarter of 1999. In 1999,salesincreased by 90% due primarily to the merger and improved market conditions in the second halfof theyearLaser group declined by $15.4 million or 39% below 2001 results. The decline insome of our markets. Product prices in some of our markets faced increased competitive pressures during 1999, particularly in the first half of the year, and had a negative effect on reported gross profit. Sales in 1998 declined 19% overallrevenue was due to asharp decline incombination of repositioning thesemiconductor market as well as declinesbusiness out of26% in thehigh power automotivemarket and 27% in the aerospace market. The increase in sales during 1999 to the semiconductor industry was due primarily to the merger between Lumonics and General Scanning. The decline experienced in the semiconductor market during 1997 continued through 1998 andlasers into1999. Excess capacity in semiconductor fabrication plants worldwide resulted in a 63% decline in 1998 semiconductor sales relative to 1997. The semiconductor market is cyclical, and the downturn in the industry slowed demandlower power lasers forour products through this period. The semiconductor equipment market, however, has been on a slow recovery as reflected in quarterly improvements in sales during 1999. Sales to the electronics market grew in each quarter in 1999. This increase was due primarily to the success of the new GS-600 systems for drilling micro vias, or precise holes, and increased demand for trim and test systems. During 1998, sales to the electronics market increased by 11% over 1997, as a result primarily of increased demand for systems from the printed circuit board industry, particularly the GS-600. During 1999, sales to the automotive market declined 12% following a decline of 27% in 1998, each due to lower capital spending by automotive companies. The increased sales to the aerospace market in 1999 were due primarily to the merger. Sales to the aerospace market declined by 26% during 1998, due primarily to a decreased demand for systems from the aerospace sector in North America. In addition, sales in 1997 were unusually high because we delivered a $3.5 million order representing the largest advanced laser-based systems we have ever built. Packaging market sales declined in 1999 by 12% compared to 1998. Sales in this market sector were not affected significantly by the merger. Packaging market sales were essentially flat during 1998 compared to 1997. Component sales increased in 1999 due primarily to the merger. Sales to themedical andbiotechnologyother markets,increased in 1999 due primarily to the merger and the increased market acceptance of ScanArray systems. 20Sales of systems to our emerging product markets declined in 1999 due to a decline in consumer products sales and a further decline in sales to the nuclear energy industry. During 1998, in aggregate dollars, sales to the emerging products component and medical and biotechnology markets were essentially flat. Parts and service full year sales increased 21% for 1999, with about half of the increase due to the merger. The remaining increase reflects customers' increased utilization of existing installed systems,as well as theimprovementintroduction ofpartsa new family of products. Our JK series andservice supportExcimer laser product lines accounted for $10.8 million or 70% of theformer General Scanning systems. Largelysales decline in this segment against 2001. Excimer laser sales declined as a result of theslowdowncollapse of the telecommunications market. Discontinued product lines accounted for $1.4 million of the 2002 sales decline.The sales of Laser Systems have suffered the most with a $58.1 million or 47% decline from 2001. Our Trim & Test, WaferMark and DrillStar product line sales decreased by combined $57.9 million. This was partially offset by the continuous market acceptance of our Memory Repair product line with gains of $10.9 million over 2001. Discontinued and divested product lines accounted for $10.0 million of the 2002 sales decline.
The reduction in
the semiconductor market in 1998, partsOther andservice revenues declined by 7% relativeIntra-segment eliminations of $2.9 million is due to theprevious year.reduced sales activities among our three groups.Sales by Region.We distribute our systems and services via our global sales and service network and through third-party distributors and agents. Our sales territories are divided into the following regions: the United States; Canada; Latin and South America; Europe, consisting of Europe, the Middle East and Africa; Japan; and Asia-Pacific, consisting of ASEAN countries, China and other Asia-Pacific countries. Revenues are attributed to these geographic areas on the basis of the bill to customer location. Not infrequently, equipment is sold to large international companies, which may be headquartered in Asia-Pacific, but the sales of our systems are billed and shipped to locations in the United States. These sales are therefore reflected in United States totals in the table below. The following table
belowshows sales in millions of dollars to each geographic region for1999, 19982002, 2001 and1997.
1999 1998 1997 -------------------------------- --------------------------------- ------------------ INCREASE INCREASE (DECREASE) (DECREASE) % OF OVER % OF OVER % OF SALES TOTAL PRIOR YEAR SALES TOTAL PRIOR YEAR SALES TOTAL ----- ----- ---------- ----- ----- ---------- ----- -----United States............... $143.0 52% 133% $ 61.3 42% (33)% $ 91.8 52% Canada...................... 10.8 4 30 8.3 6 (14) 9.7 6 Latin and South America..... 1.6 -- 167 0.6 -- (63) 1.6 1 Europe...................... 65.3 24 62 40.4 28 21 33.4 19 Japan....................... 32.6 12 104 16.0 11 (19) 19.8 11 Asia-Pacific................ 21.3 8 21 17.6 13 (16) 21.0 11 ------ --- --- ------ --- ---- ------ --- Total..................... $274.6 100% 90% $144.2 100% (19)% $177.3 100% ====== === === ====== === ==== ====== ===Sales increases2000.
2002 2001 2000 % of % of % of Sales Total Sales Total Sales Total United States 94.7 59 % $ 119.3 48 % $ 177.8 48 % Canada 1.9 1 11.4 5 20.2 5 Latin and South America 1.2 1 0.9 — 5.5 1 Europe 25.8 16 50.7 20 72.0 19 Japan 23.5 15 41.0 17 58.2 16 Asia-Pacific, other 12.0 8 24.6 10 40.2 11 Total $ 159.1 100 % $ 247.9 100 % $ 373.9 100 % The significant downturn in
1999economic conditions that commenced in 2001, especially in the global semiconductor, electronics and telecom industries, continues to impact sales in all of our geographic regions. The 2002 sales decline of 20.6% in the United States was not as marked as the percent decline in other regions,were duebecause there was a relatively moderate sales decline of 23% in the Components sales segment, whose products are sold predominately in the US, and there was a $6.4 million sales increase in the US in Memory Repair over 2001. Sales from the Components segment and Memory Repair accounted for, respectively, $52.7 million or 56%, and $12.5 or 13% of the sales recorded in the United States in 2002. Other products sold in the United States recorded a combined 40% decline in 2002. The decline in Canada in 2002 compared to 2001 relate primarily to themerger. Economic conditionsdownturn of the optics and telecommunication market sectors. Europe, Japan and Asia Pacific all suffered from the downturn in the semiconductor and electronics markets. In 2000, all geographic regions had relatively strong sales. This was especially true for Japanhave depressed our salesand Asia Pacific, which experienced recovery inthat country during2000 after thepast few years. Beforefinancial crisis and economic downturn of themerger, the Japanese market was served primarily by our largest distributor and significant shareholder, Sumitomo Heavy Industries, Ltd., which accounted for $11.7 million of 1999 sales, $15.5 million of 1998 sales and $18.9 million of 1997 sales. In October 1999, we purchased part of this distribution business from Sumitomo to broaden our direct sales and service in Japan.1990s.20
Backlog.We define backlog as unconditional purchase orders or other contractual agreements for products for which customers have requested delivery within the next twelve months. Backlog was
approximately $83 million on December 31, 1999 compared to $29 million on December 31, 1998. On a pro forma basis, as if the merger had occurred at the beginning of the fiscal period, backlog was $59$42.0 million at December 31,1998.2002, compared to $50.0 million at December 31, 2001 and $119.0 million at December 31, 2000.Gross
Profit Margin.Profit.Gross profitmarginwas34.9%30.9% in1999, 28.2%2002 and 34.6% in1998 and 37.2% in 1997.2001. Gross profitmarginin19992002 continued to suffer from the economic downturn. The gross profit as a percentage of sales in 2002 decreased compared to 2001 primarily because of a decline in equipment revenue and price concessions aimed at reducing equipment inventory, a $1.2 million reduction in the capitalization of overhead into inventory, and additional inventory provisions of $3.7 million. Although the $3.7 million inventory provision wasaffectedthe same in absolute dollars as the provision in 2001, since the 2002 sales were lower, this provision lead to a lower gross profit percent in 2002 as compared to 2001.Commencing in the first quarter of 2002, we classified technical support and service management costs as selling, general and administrative expenses. In prior years, we classified these costs as cost of goods sold. As such we have reclassified in the comparative statement of operations $5.3 million in 2002 and $5.1 million in 2001 from cost of goods sold to selling, general and administrative expenses. This new presentation is now consistent with industry standards. The reclassification was prepared on a consolidated basis only and is not available by
increased sales of higher margin products, varying levels of capacity utilization at our manufacturing plants and warranty settlements on large custom systems and printers. Gross profit margin in 1998 was lower due to declines in sales of higher margin products, lower capacity utilization, cost overruns on large and custom systems and costs associated with consolidating facilities.segment.Research and Development Expenses.Research and
developmentDevelopment (R&D) expensesnet of government assistance,for19992002 were10.5%12.9% of sales or$28.7$20.4 million,(excluding the $14.8 million merger related in-process research and development charge),comparedwith 9.0%to 10.3% of sales or$13.0$25.6 million in1998 and 6.8% of sales or $12.02001.The R&D expenses in Components were $4.4 million in
1997.2002 compared to $6.3 million in 2001. Theincreasedecrease in1999 wasR&D expenses of $1.9 million in 2002 is due primarily to a $1.3 million reduction in projects related to themerger. During 1999, researchtelecommunications market.The R&D expenses in the Laser Group were $2.8 million in 2002 compared to $3.0 million in 2001. The modest reduction in R&D spending in 2002 in spite of lower sales confirm the Company’s commitment to grow the equipment sales in this segment.
The R&D expenses in Laser Systems were $12.4 million in 2002 compared to $16.4 million in 2001. The decrease of $4.0 million in 2002 reflects the completion of major projects and
development activities focusedthe impact of initiatives undertaken by the Company to focus our spending onproducts targetedkey potential growth areas.R&D expenses of $0.8 million in 2002 compared to none in 2001 were recorded at the
electronics, semiconductor, biotechnology, aerospace and automotive markets. During 1998, research and development activities focused on products targetedcorporate level. These expenses are mostly in support of our patent application management. In 2001 similar expenses were recorded at theaerospace and electronics markets. 21factory level. Selling, General and Administrative Expenses.Selling,
generalGeneral andadministrativeAdministrative (SG&A) expenses decreased to23.5%$55.5 million or 34.9% of sales in1999 due primarily2002 compared tooperating efficiencies realized$73.8 million or 29.8% of sales in 2001. As a result of lower sales, cost reduction measures and mandatory shut down days, quarterly spending in 2002 continued to decline. SG&A spending in the fourth quarter of 2002 was $2.8 million lower than the spending during the fourth quarter of 2001. Significant headcount reductions took place during the year with headcount on December 31, 2002 for SG&A at 221 compared to 321 at the same time in 2001. SG&A cost reductions are however not declining as fast as our sales resulting in an increase in the SG&A to sales ratio fromthe merger2000 to 2002. We expect to continue to review andincreased sales. In 1998,possibly reduce SG&A expenses. The impact of continued cost cutting efforts was partially offset by significant legal costs and expenses associated with two lawsuits that were settled indollar terms,2002.As noted above, in 2002 certain technical support and service management costs were reclassified to selling, general and administrative expenses
were essentially the same as 1997.from cost of goods sold. As this was done on a consolidated basis, it is not possible to breakdown SG&A expenses by segment.Amortization of
Technology and OtherPurchased Intangibles.Amortization oftechnologypurchased intangibles was $5.1 million in 2002 compared to $5.2 million in 2001. This slight decrease in the amortization in 2002 as compared to 2001 is due to the write-down of certain intangibles that occurred at the end of 2001.21
Restructuring and Other.As described in note 11 to the consolidated financial statements, we recorded restructuring charges in the years ended December 31, 2002, and 2001 as follows:
In connection with a restructuring plan to align the Company’s manufacturing costs and operating expenses with the prevailing economic environment, the Company recorded a pre-tax restructuring charge of $2.3 million in the fourth quarter of 2002. The Company downsized manufacturing operations in its Nepean, Ontario facility to focus on its core optics business. As a result, we incurred $0.6 million of expense for severance and benefits for the termination of approximately 41 employees. The Company also wrote-off approximately $0.2 million of excess fixed assets and wrote-down one of the Nepean buildings by $0.2 million to its estimated fair market value. Additionally, we recorded charges of approximately $0.8 million for the leased facilities in Munich, Maple Grove, MN and Farmington Hills, Michigan. The Company took a further write-down of $0.3 million on the buildings in Kanata, Ontario and Rugby, United Kingdom. Also, a $0.1 million write-off for fixed assets in Kanata was recorded. The Company also reviewed the provision that it had recorded in 2000 related to residual value guarantees on the Maple Grove and Farmington Hills facilities and increased it by $0.1 million.
The above charges were in addition to the restructuring charges recorded in the first half of 2002. The Company consolidated its Electronics systems business from its facility in Kanata, Ontario into the Company’s existing systems manufacturing facility in Wilmington, Massachusetts and transferred its laser business from the Company’s Kanata, Ontario facility to its existing facility in Rugby, United Kingdom. In addition, the Company closed its Kanata, Ontario facility. Restructuring provisions, totaling $2.7 million during the first quarter of fiscal 2002, relate to severance and benefits of $2.2 million for the termination of approximately 90 employees, $0.3 million for the write-off of furniture, equipment and system software, and $0.2 million for plant closure and other
intangibles increasedrelated costs. During the second quarter of fiscal 2002, the Company recorded additional restructuring charges of $1.4 million related to1.5%cancellation fees on contractual obligations ofsales or $4.1$0.3 million and a write-down of land and building in1999 as a resultKanata, Ontario and Rugby, United Kingdom ofamortizing intangible assets acquired in$0.8 million, and also leased facility costs of $0.3 million at themerger. RestructuringFarmington Hills andOther Charges.Oxnard locations.During
1999, we tookthe fourth quarter of fiscal 2001, a charge of$19.6$3.4 million was recorded to accrueforemployee severance of $0.9 million for approximately 35 employees at our Farmington Hills and Oxnard locations, leasedfacilityfacilities costs of $1.8 million associated with restructuring for excess capacity at five leased locations in the United States, Canada, andrelated costsGermany and write-down of leasehold improvements and certain equipment of $0.7 million associated with theclosureexiting ofour plantleased facilities.Other includes a net benefit of $0.7 million from settlement of two lawsuits during 2002 and royalty income of $0.3 million. As more fully described in
Oxnard, California and other facilities worldwide. These costs resulted from restructuring and integrationnote 11 to the consolidated financial statements, during the fourth quarter ofoperations following2001, themerger. The Oxnard manufacturing operation shutdown was completed during December 1999. Other integration activities included incurring exit costs for some product lines, reducing redundant resources worldwide, and abandoning redundant sales and service facilities. The remaining accrual is $10.1 million at December 31, 1999. During 1998, we tookCompany recorded arestructuring chargereduction of$2.0 million for severance costs associated withpurchased intangibles related to technologies no longer adownsizingpart ofour global workforce. Acquired In-Process Research and Development Costs. During 1999, we wrote off $14.8 million of in-process research and development costs acquiredthe business in themerger.amount of $1.8 million. Also, during 2001, the Company recorded a benefit of $0.3 million related to royalties earned on the divested OLT precision alignment system product line and adjusted an accrual related to litigation and recorded a benefit of $1.6 million.Gain (Loss) on Sale of Assets and Investments. During 2001, we sold our investment in shares of PerkinElmer, Inc. for a loss of $4.8 million. There were no such items in 2002.
Interest Income.
Net interestInterest income was$0.1$2.7 million in19992002 comparedwith $1.6to $5.1 millionor 1.1% of salesin1998 and $1.0 million or 0.6% in 1997.2001. The decrease innetinterest income in19992002 was due tohigher average debt balances and lower average cash and investments balancescontinuous declines in interest rates.Interest Expense.Interest expense was $0.7 million in 2002 compared to
1998.$0.9 million in 2001. Theincreasedecrease in1998interest expense in 2002 was due to lower balances of debt in 2002 than 2001. By the end of December 2002, the Company had no bank debt.Other Expense.In 2002, we recorded a
resultwrite-down ofinterest accrued for a full year onapproximately $0.6 million related to an investment in OpNet Partners. See note 10 to theinvestment of proceeds received from the public issuance of two million shares in May 1997, which raised $35.7 million.financial statements.Income Taxes.The effective tax rate
of recoveryfortaxes for 19992002 was6.8%24.5% of income before taxes, comparedwith an effective rate of recovery of 29.2% for 1998. In 1997, we hadto an effective tax rate of29.9%.34.6% for 2001. Ourrecovery ratetax rates in1999 reflects2002 and 2001 reflect thenon-deductibility for tax purposes of acquired in-process research and development costs arising from the merger and the non-recognition offact that we do not recognize22
the tax benefit from losses in certain countries where future use of the losses isuncertain. Our 29.2% recovery rate in 1998 derives primarily from our abilityuncertain and other non-deductible costs. The Company believes it is more likely than not that the remaining deferred tax assets will be realized principally through future taxable income and carry backs tocarry back current losses against prior year profits to recover taxes paidtaxable income in prior years.In addition,If the Company does not return to profitability, we may be at risk to take further write-downs in ourannual effectivedeferred taxrate is generally less than the Canadian statutory tax rate as tax rates in many of the countries where we operate are lower than the Canadian statutory rate.assets.Net Income (Loss).
TheAs a result of the forgoing factors, net loss during19992002 was$34.8$27.7 million, compared with a net loss of$7.9$14.7 million in19982001.2001 Compared to 2000
Sales.The total sales for 2001 at $247.9 million were $126.0 million or 34% below the total sales achieved in 2000. The divestiture and discontinuation of certain product lines during 2000 and early 2001 accounted for approximately $78.0 million or 62% of the 2001 sales decline over 2000. The significant downturn in the markets we serve, especially in the semiconductor and electronics markets accounted for the balance of the 2001 sales decline as compared to the prior year.
Gross Profit.Gross profit was 34.6% in 2001 and 35.2% in 2000. Gross profit in 2001 decreased compared to 2000 as a
net incomeresult of$11.9the economic downturn, and fixed manufacturing and service overhead costs, which were not reflective of the lower sales volumes during the period. This was partially offset by lower inventory loss provisions in 2001 compared to 2000. In the fourth quarter of 2000, the Company wrote off $8.5 million of AM series inventory related to high power lasers for the auto industry that we discontinued and evaluated other inventory that resulted in a $10.5 million increase in inventory provision.Research and Development Expenses.Research and Development (R&D) expenses were 10.3% of sales or $25.6 million in
1997.2001 and 9.1% of sales or $33.9 million in 2000. During 2001 and 2000, R&D activities focused on products targeted at the electronics, semiconductor and telecommunications markets. Thenet loss during 1999 wasspending reduction in 2001 compared to 2000 is due primarily toone-time restructuring and acquired in-process research and development charges relateda decision to focus R&D spending on core technologies combined with themerger offsetdivestitures of certain product lines inpart by improved operating margins. The net loss in 1998 was due primarily to decreased sales volumes, gross margin erosion and downsizing activities. 22Quarterly Results of Operations The following tables present unaudited quarterly data for the quarters ended December 31, 1999, October 1, 1999, July 2, 1999 and April 2, 1999. We believe this information is helpful in isolating ongoing trends in our business from the effects of the merger. This information has been presented on the same basis as the audited consolidated financial statements appearing elsewhere in this report. Revenues from operations for any quarter are not necessarily indicative of the results to be expected for the entire fiscal year or for any future period. Our quarterly operating results are subject to fluctuation due to a variety of factors, some of which are outside of our control. Accordingly, you should not rely on our results for any past quarter as an indication of future performance. Generally, our sales are higher in the second and fourth quarters of the year. This table reflects all adjustments, consisting only of all normal recurring accruals, necessary in the view of management to fairly present results of operations.
Three months ended ---------------------------------------------------- December 31, October 1, July 2, April 2, 1999 1999 1999 1999 ------- ------- -------- -------- (In thousands except per share amounts)QUARTERLY STATEMENT OF OPERATIONS DATA: Sales .................................................. $88,667 $78,041 $ 69,248 $ 38,594 Gross profit ........................................... 34,394 30,488 23,376 7,519 Operating expenses: Research and development .............................. 8,676 8,104 8,584 3,336 Selling, general and administrative ................... 17,931 17,704 18,521 10,497 Amortization of technology and other intangibles ...... 1,251 1,251 1,251 317 Acquired in-process research and development .......... -- -- -- 14,830 Restructuring and other charges ....................... -- -- -- 19,631 Foreign exchange, interest and gain on sale of assets . 182 512 (64) 593 ------- ------- -------- -------- Income (loss) before income taxes ...................... 6,354 2,917 (4,916) (41,685) Income taxes provision (benefit) ....................... 2,115 874 (1,174) (4,371) ------- ------- -------- -------- Net income (loss) ...................................... $ 4,239 $ 2,043 $ (3,742) $(37,314) ======= ======= ======== ======== Net income (loss) per common share: Basic ................................................. $ 0.12 $ 0.06 $ (0.11) $ (1.94) Diluted ............................................... $ 0.12 $ 0.06 $ (0.11) $ (1.94) ======= ======= ======== ======== Weighted average common shares outstanding ............. 34,222 34,173 34,167 19,204 Weighted average common shares outstanding and dilutive potential common shares ....................... 35,755 35,085 34,167 19,204(1) Includes General Scanning from March 22, 1999, the date of the merger of General Scanning and Lumonics. 23
Three months ended ------------------------------------------------ December 31, October 1, July 2, April 2, 1999 1999 1999 1999 ----- ----- ----- ----- (millions) QUARTERLY REVENUES BY MARKET:Semiconductor .............. $12.5 $ 9.3 $ 9.0 $ 3.7 Electronics ................ 26.1 16.1 15.7 10.0 Automotive ................. 4.9 3.4 2.1 1.6 Aerospace .................. 1.4 5.7 6.0 1.9 Packaging .................. 2.3 4.0 2.4 3.2 Components ................. 10.3 11.5 7.9 3.7 Medical/Biotechnology ...... 17.9 14.6 14.6 3.2 Emerging ................... 1.5 3.3 2.8 2.7 Parts and services ......... 11.8 10.1 8.8 8.6 ----- ----- ----- ----- Total .................. $88.7 $78.0 $69.3 $38.6 ===== ===== ===== =====- ------------------ (1) Includes General Scanning from March 22, 1999, the date of the merger of General Scanning and Lumonics. Beginning in 1999, financial conditions in Japan and the Asia-Pacific region began to improve. During the first half of 1999, the semiconductor equipment industry emerged from a recession. Activity increased in the front end of the fabrication process resulting in an increase in orders for wafer marking. Inthe second half of 2000 as well as Laserdyne and Custom Systems in 2001.Selling, General and Administrative Expenses.Selling, General and Administrative (SG&A) expenses decreased to $73.8 million or 29.8% of sales in 2001 compared to $87.5 million or 23.5% of sales in 2000. The quarterly spending rate in 2001 was $3.5 million lower in the fourth quarter of 2001 compared to the first quarter due to the impact of lower sales, discontinued product lines, cost reduction measures and mandatory factory shut down days.
Amortization of Purchased Intangibles.Amortization of purchased intangibles increased to $5.2 million in 2001 from $4.9 million in 2000. The increase in amortization from 2000 to 2001 is a result of amortizing intangible assets acquired from the acquisition of General Optics, which was partially offset by a reduction in amortization due to the sale of Life Sciences in October 2000.
Restructuring and Other.As described in note 11 to the consolidated financial statements, we recorded restructuring charges in the years ended December 31, 2001 and 2000 as follows:
During the fourth quarter of fiscal 2001, a charge of $3.4 million was recorded to accrue employee severance of $0.9 million for approximately 35 employees at our Farmington Hills and Oxnard locations, leased facilities costs of $1.8 million associated with restructuring for excess capacity at five leased locations in the United States, Canada, and Germany and write-down of leasehold improvements and certain equipment of $0.7 million associated with the exiting of leased facilities.
During the fourth quarter of fiscal 2000, a charge of $12.5 million was recorded to accrue employee severance of $1.0 million for approximately 50 employees and other exit costs of $3.8 million for the Company’s United Kingdom operation and worldwide distribution system related to high-power laser systems for certain automotive applications. Costs of $7.7 million associated with restructuring for excess capacity at three leased facility locations in the United States and Germany were also accrued. The Company also recorded a non-cash write-down of land and building in the United Kingdom of $2.0 million. Compensation
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expense of $0.6 million arising on the acceleration of options upon the sale of businesses during the yearactivity increasedwas also charged to restructuring. In addition, an inventory write-down to net realizable value of $8.5 million was recorded in cost of goods sold related to theback endhigh-power laser system product line. The Company recorded a reversal ofthe fabrication process resulting in increased sales of laser markers. Electronic equipment demand was stirred by consumer demand for cellular phones. Late in the fall, activity increased in the auto industry as shown by a $12 million order we received from Tower Automotive to be delivered during 2000. Our sales were $88.7$0.5 million in the fourth quarter of1999 compared to $78.0 million2001 for costs that will not be incurred.As more fully described in
the third quarter of 1999, an increase of 14%. The increase in sales quarter to quarter was due primarily to increased levels of orders and revenues from the semiconductor and electronics market. For the three months ended December 31, 1999, sales to these two markets totaled $38.6 million, compared to $25.4 million for the three months ended October 1, 1999. Sales in the third quarter of 1999 were $78.0 million compared to $69.3 in the second quarter of 1999, an increase of 13%. The increase in sales quarter to quarter was due primarily to increased orders from the components market. For the three months ended October 1, 1999, salesnote 11 to thecomponents markets totaled $11.5 million compared to $7.9 million for the three months ended July 2, 1999. Sales in the second quarter of 1999 were $69.3 million compared to $38.6 million in the first quarter of 1999, an increase of 80%. The increase in sales quarter to quarter was due primarily to the merger. Gross profit margins were 38.8% inconsolidated financial statements, during the fourth quarter of1999, 39.1%2001, the Company, recorded a reduction of purchased intangibles related to technologies no longer a part of the business in thethird quarter, 33.8%amount of $1.8 million. We also recorded a benefit of $0.3 million related to royalties earned on the sale of the OLT precision alignment system product line and adjusted an accrual related to litigation and recorded a benefit of $1.6 million. During 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of OLT precision alignment system product line and $2.7 million received for licensing some of the Company’s technology.Gain (Loss) on Sale of Assets and Investments. During 2001, we sold our investment in shares of PerkinElmer, Inc. for a loss of $4.8 million. During 2000, we sold the net assets of the Life Sciences business for a non-operating gain of $73.1 million and the operating assets of other product lines including View Engineering metrology product line, fiber-optics operations in Phoenix, Arizona and package coding product line in Hull, United Kingdom for a net gain of $1.3 million. We also sold two facilities in the
second quarterUnited States for a net gain of $2.4 million. There were no such items in 2002.Interest Income.Interest income was $5.1 million in 2001 and
19.5%$4.8 million in 2000. The increase in interest income in 2001 was due to an increased average cash and investment balance compared to 2000 and due to the sale of the Company’s holding of PerkinElmer, Inc. stock and reinvestment of proceeds into short-term investments.Interest Expense.Interest expense was $0.9 million in 2001 compared to $1.5 million in 2000. The decrease in interest expense in 2001 was due to lower balances of debt in 2001 as compared to 2000.
Income Taxes.The effective tax rate for 2001 was 34.6% of income before taxes, compared to an effective tax rate of 39.5% for 2000. Our tax rates in 2001 and 2000 reflect the fact that we do not recognize the tax benefit from losses in certain countries where future use of the losses is uncertain and other non-deductible costs.
Net Income (Loss).As a result of the forgoing factors, net loss during 2001 was $14.7 million, compared with a net income of $45.4 million in 2000.
Critical Accounting Policies and Estimates
Our consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the
first quarter.application of our accounting policies that currently affect our financial condition and results of operations.Revenue Recognition. We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, risk of loss has passed to the customer and collection of the resulting receivable is probable. We design, market and sell our products as standard configurations. Accordingly, customer acceptance provisions for standard configurations are generally based on seller-specified criteria, which we demonstrate prior to shipment. Revenue on new products is deferred until we have established a track record of customer acceptance on these new products. When customer-specified objective criteria exist, revenue is deferred until customer acceptance if we cannot demonstrate the system meets these specifications prior to shipment. Should management determine that these customer acceptance provisions are not met for certain future transactions, revenue recognized for any reporting period could be affected.
Stock Based Compensation. We recognize compensation expense for stock options under the intrinsic value method, as allowed in APB 25. At this time, the Company does not intend to include stock based compensation expense directly in the results of operations, except as required under APB 25, but to disclose
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the pro-forma effects of stock based compensation in the notes to the financial statements. If the accounting rules change to require the expensing of all stock based compensation, then our results of operations would be lower. See note 7 to the financial statements included in this form 10-K for the disclosure of the effects of stock based compensation.Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventory.We write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Sales volumes have been adversely impacted by the general economic downturn, and the semiconductor, electronics, and telecommunication industries downturn in particular, and inventory has been affected accordingly. We have been implementing a program to reduce our inventory to desired levels. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Warranties.We provide for the estimated costs of product warranties at the time revenue is recognized. Our estimate of costs to service the warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty liability would be required.
Restructuring.During fiscal year 2002, 2001 and 2000, we recorded significant reserves in connection with our restructuring programs. These reserves include estimates pertaining to employee separation costs and the settlements of contractual obligations resulting from our actions. Some of these accruals relate to costs of excess leased facilities that are under long-term leases. Our estimate of the reserve is based on estimates of market value of leased buildings, where we have made residual value guarantees, or of office rental rates in the future in various markets and the time required to sublease the space, both of which are subject to many variables, such as economic conditions and amount of space available in the market. Additionally, our restructuring reserve includes estimates to reduce owned buildings to market value. We are trying to sell these buildings, but there are many factors that could affect the fair market value or final value that we receive in any sale, as such there may be adjustments to our reserves. Although we do not anticipate significant changes, the actual costs may differ from these estimates.
Deferred Taxes.As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets totaling $17.2 million within our December 31, 2002 consolidated balance sheet, after providing a valuation allowance of $22.6 million, as presented in note 9 to the consolidated financial statements.
We assess the likelihood that our deferred tax assets will be recovered. To the extent that we believe that future recovery is not likely, we must establish a valuation allowance. To the extent we establish or increase a valuation allowance, we must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The
gross profit marginCompany has provided a valuation allowance against losses in the parent company and subsidiaries with an inconsistent history of taxable income and loss due to the uncertainty of their realization. In addition, the Company has provided a valuation allowance on foreign tax credits, due to the uncertainty of generating foreign earned income to claim the tax credits. In the event that actual results differ from our estimates of future taxable income, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could impact our financial position and results of operations.Intangible Assets.In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated future operating results, cash flows, planned uses of technology and other factors to
25
determine the fair value of the respective assets. During the fourth quarterreflected increased warranty expense accrued related to emerging market products. This factor outweighedof 2002, we reviewed thebenefits from improved product mixintangible assets for potential impairment, andhigher capacity utilization. Third quarter gross profit margin increased, benefiting from a more favorable product mix, volume leverage and consolidation of manufacturing operations. Second quarter gross profit margin reflecteddetermined that there was no adjustment needed. During thefirst fullfourth quarter ofcombined General Scanning2001, we determined that the carrying value of our intangible assets was no longer fully recoverable based on these factors. As a result, we recognized an impairment charge of $1.8 million in 2001. If our estimates or their related assumptions change in the future, we may require adjustments to the carrying value of the remaining assets.Pension Plan.The Company’s United Kingdom subsidiary maintains a defined benefit pension plan, whose membership was closed effective 1997. At year-end 2002, because of significant declines in the stock market and
Lumonics resultslow interest rates, the market value of the plan assets was approximately $5.0 million less than the projected benefit obligation.The accounting rules applicable to our pension plan require amounts recognized in financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. A significant element in determining our pension income or pension expense is the expected return on plan assets. We have assumed, based on the type of securities in which the plan assets are invested and the
favorable mixlong-term historical returns ofrelatively high margin systems from General Scanning's product line. Gross profit marginthese investments, that the long-term expected return on pension assets will be 7% and its assumed discount rate will be 6%. Given our pension plan’s current under-funded status, absent improved market conditions, we will be required to increase cash contributions to our pension plan in future years. Further declines in thefirst quarter reflected reduced sales volumes, pricing pressures, inventory provisionsstock market and lower rates of return could increase our required contributions.Since the market value of our pension assets at year-end 2002 was less than the accumulated pension benefit obligation, the Company recorded a $3.9 million non-cash charge to other comprehensive income in stockholders’ equity and an
unfavorable product mix, related primarilyaccrued long-term pension liability. This charge toour operations priorequity did not affect net loss. The charge will only be reversed when the value of the pension assets exceed the accumulated pension benefit obligation as of a future measurement date.In December 2002, the Company notified plan participants it would no longer be sponsoring the final salary plan. Consultations are being held, during which benefits continue to accrue. No final decision has been made by the
mergerPension Plan Trustees. Any possible curtailment and or plan settlement inMarch 1999.future years may impact future financial position and operating results.Liquidity and Capital Resources
CashAt December 31, 2002, the Company had lines of credit denominated in US and
cash equivalents totaled $25.3Canadian dollars with Fleet National Bank (“Fleet”), Bank One and Canadian Imperial Bank of Commerce (“CIBC”) and letters of credit (“LC”) with National Westminster Bank (“NatWest”), for a total amount of available credit of $12.1 million versus $32.4 million at December 31,19992001. The Company’s agreement with Fleet provides for an $8.0 million line of credit and its agreement with CIBC provides for a $4.0 million line of credit. The previous $13.0 million line of credit with CIBC expired on June 28, 2002, and the new CIBC credit facility eliminated the Company’s requirement to meet certain financial covenants which were required under the previous credit facility. NatWest provides a $0.1 million bank guarantee for LC used for VAT purposes in the United Kingdom. Marketable securities totaling $14.5 million have been pledged as collateral for the Fleet and CIBC credit facilities under security agreements. The line of credit with Fleet expires on June 28, 2003. In addition to the customary representations, warranties and reporting covenants, the borrowings under the Fleet credit facility require the Company to maintain a quarterly minimum tangible net worth of $200.0 million. The line of credit with CIBC was reviewed by the Company and a decision to cancel the line of credit was conveyed to CIBC prior to December 31, 2002. By giving CIBC appropriate advance notice, the Company initiated its right to cancel the line of credit at any time at no cost, excluding breakage fees relating to the used and outstanding amounts under fixed loan instruments, which we do not expect to be material. The line of credit with CIBC should be eliminated by the end of the first quarter in 2003. The Company also cancelled its credit facility with Bank One on December 20, 2002 without paying any breakage fees. North American inventories and receivables were pledged as collateral for the Bank One credit facility. Bank One continues to work on the release of all liens and obligations associated with the facility.26
At December 31, 2002, the Company has approximately $12.1 million denominated in Canadian dollars and US dollars that are available for general purposes, under the credit facilities discussed above. Of the available $12.1 million, $7.7 million was in use at December 31, 2002, consisting of $3.8 million committed at Fleet Bank for use in foreign exchange transactions, $2.9 million in Rugby, U.K. under the CIBC credit facilities and approximately $0.8 million of bank guarantees and outstanding letters of credit under the CIBC credit facility and $0.1 million with NatWest. Though the Fleet Bank amount of $3.8 million is committed for support of foreign currency hedging contracts and not available, it is not considered used for the purpose of calculating interest payments. At December 31, 2002, the aggregate unused portion of credit available under the credit facilities amounts to $4.4 million. The CIBC credit facility is currently a demand facility with interest based on the prime rate. The Fleet line of credit is due on demand and bears interest based on either prime or LIBOR depending on the borrowing notification period. This resulted in an effective average rate of 1.79% for fiscal 2002.
The Company used $19.3 million in cash during 2002 to close the year on December 31, 2002 with cash and cash equivalents of $83.6 million compared to
$24.2$103.0 million at December 31,19982001 and$56.8$113.9 million at December 21, 2000. In addition, short-term investments were $29.0 million a decrease of $14.5 million compared to 2001. Long-term investments for 2002 totaled $37.4 million. Short-term, long-term and other investments consist principally of commercial paper, governments, short-term corporate debt, and banker’s acceptances with original maturities greater than three months. The total of cash, cash equivalents and investments at December 31,1997.2002 was $150.0 million.During
1999,2002, we generated $11.7 million in cash from operating activities. The net loss, after adjustments for non-cash items, resulted in a use of cash of $10.0 million in 2002. Accounts receivable, inventories and other current assets generated a further $29.8 million, which was offset by current liabilities using $8.1 million. During 2001, we used$4.4$17.5 million in operating activities. Net income, after adjustment for non-cash items, generated cash of $12.8 million in 2001. Accounts receivable, inventories and other current assets generated a further $57.4 million, which was more than offset by current liabilities using $87.7 million. During 2000, we used $10.2 million in operating activities. The net loss, after adjustment for non-cash items, resulted in the use of cash of$6.7$19.9 million in1999.2000. Accounts receivable, inventories and other current assets used a further$14.4$28.4 million, which was24more than offset by inventories, other current assets andcurrent liabilities providing$16.7$38.1 million.In 1998During 2002, we used
$6.9 million to fund operations. In 1998, the net loss of $7.9 million, after adjustment for non-cash items, resulted in the use of cash of $3.3 million in 1998. Accounts receivable provided $14.4 million in cash during the year, offset by an $8.3 million increase in inventory and a reduction of $6.4 million in accounts payable and other current liabilities. During 1997, a net $5.3 million was used in operating activities, including $21.0 million in non-cash working capital, consisting mainly of an increase in accounts receivable from shipments late in the fourth quarter. In 1999, we used $0.9$23.8 million in investing activities, including$7.3$132.9 million of purchases of short-term and long-term investments and $110.0 million of maturities of short and long-term investments. Investment in property, plant and equipment, net of disposals, used $3.0 million in cash and other assets generated $2.0 million. During 2001, investing activities provided $12.4 million, including $109.4 million of purchases and$8.2$85.8 million of maturities of short-term investments. We generated $38.5 million from the sale of our investment in Perkin Elmer Inc. and $7.3 million from the sale of our Laserdyne and Custom Systems product lines to Laserdyne Prima (see note 2 to the consolidated financial statements for details of both transactions). Investment in property, plant and equipment used $8.6 million in cash and other assets used $1.2 million. Duringthe year, we2000, investing activities provided $35.8 million, including $57.7 million of purchases and $45.0 million of maturities of short-term investments. We generated$3.9$65.0 million from the sale of business assets and invested$6.2$10.1 million in property, plant and equipment.At the date of merger, General Scanning added $4.7 million in cash and cash equivalents, offset by merger costs of $3.3 million.The acquisition ofthe Sumitomo distribution business added $0.1General Optics used $7.1 million incash, offset by $0.4 million cash to acquire the company. In 1998, we used a total of $11.3 million in cash in investing activities. These activities included $43.5 million of purchases of short-term investments, $47.1 million of maturities of short-term investments, $13.6 million in capital expenditures and $1.2 million to acquire Meteor Optics Inc. Capital expenditures in 1998 included $6.3 million to complete the expansion of manufacturing facilities in Rugby, England that began in 1997 and approximately $1.5 million to purchase and equip a second optics facility in Nepean, Canada. Cash flows used in investing activities totaled $9.3 million in 1997, including $80.2 million of purchases of short-term investments, $79.4 million of maturities of short term investments, and $8.7 million in capital expenditures. Capital expenditures included $4.2 million of costs incurred in the expansion and modernization of the facility in Rugby, England and $4.5 million invested in machinery and equipment at other locations.cash.Cash flow
provided byused in financing activities was$5.4$8.2 million for the year ended December 31,19992002 compared tocash used in financing activities of $10.6$6.3 millionin 1998for the year ended December 31, 2001 and$42.8$62.7 million that was provided by financing activities for the year ended December 31, 2000. We made net repayments of bank indebtedness during 2002 of $6.4 million compared to $4.1 million in1997.2001, and a scheduled payment of $3.0 million on long-term debt in 2002 as compared to $4.0 million in 2001. These were partially offset by $1.2 million received in 2002 and $1.8 million received in 2001 from the exercise of stock options and issuance of shares under the employee stock purchase plan. The net increase in cash in19992000 relates primarily toa $7.5$68.3 millionincrease in bank indebtedness less $2.6 million of payments of long-term debt. Changes during 1998 were due primarily to $7.9 million reduction in bank indebtedness, $2.3 million used to repay long-term debt and $0.6 million used to repurchase and cancel 94,900 common shares. Changes during 1997 were due primarily to $7.7 million increase in bank indebtedness, $2.5 million used to repay long-term debt, $35.7 million raised throughnet proceeds received from a public offering of24.3 million common shares,and $1.9$8.7 million raised from the exercise of stockoptions. Term loans from Sumitomo madeoptions and decrease in1990bank indebtedness and1991 are repayablelong-term debt of $14.2 million.27
The Company’s final salary defined benefit pension plan in
10 equal semi-annual installments, which commenced in April 1996. We made two payments in 1999 totaling $2.6 million and two payments in 1998 totaling $2.3 million. At December 31, 1999, Sumitomo debt, which is due in 2000, was $3.9 million. In addition, we have a loan balancethe United Kingdom had an excess of$1.5 million, also due in 2000, under a mortgage on property in California. We have credit facilitiesprojected benefit obligation over the fair market value of plan assets of approximately$40$5.0 milliondenominated in Canadian dollars, U.S. dollars, British pounds and Japanese yen (1998--$20 million). Actual bank indebtedness is due on demand and bears interest based on prime which resulted in an effective average rate of 4.98% in 1999 (1998--7%). Asat December 31,1999, we had unused2002. GSI Lumonics’ funding policy is to fund pensions andavailable demand linesother benefits based on widely used actuarial methods as permitted by regulatory authorities. These factors are subject to many changes, including the performance ofcredit amountinginvestments of the plan assets. Because of the current underfunding and potential changes in the future, the Company may have to increase payments to fund the pension plan.The following summarizes our contractual obligations at December 31, 2002, and the effect such obligations are expected to have on liquidity and cash flow in future years.
Contractual Obligations
Payments Due by Period Total 1st Year 2-3 Years 4-5 Years After 5 Years ($000s) Operating leases(2) $ 13,814 $ 3,549 $ 4,625 $ 3,146 $ 2,494 Unconditional purchase obligations 10,518 10,168 350 — — Other long-term obligations(1) 2,318 189 376 374 1,379 Total Contractual Cash Obligations $ 26,650 $ 13,906 $ 5,351 $ 3,520 $ 3,873
(1) See note 6 to the consolidated financial statements. (2) See note 12 to the consolidated financial statements. We lease certain equipment and facilities under operating lease agreements that expire through 2013. The Company leases two facilities (Maple Grove, Minnesota and Farmington Hills, Michigan) under operating lease agreements that expire in 2003, where at the end of the initial lease term, these leases require the Company to renew the lease for a defined number of years at the fair market rental rate or purchase the property at the fair market value. The lessor may sell the facilities to a third party but the leases provide for a residual value guarantee of the first 85% of any loss the lessor may incur on its $19.1 million investment in the buildings, which may become payable by the Company upon the termination of the transaction, or the Company may exercise its option to purchase the facilities for approximately
$19$19.0 million. As of December 31, 2002, residual value guarantees in connection with these leases totaled approximately $16.0 million. Upon termination of the leases, the Company expects the fair market value of the leased properties to reduce substantially the payment under the residual value guarantees. During the fourth quarter of fiscal 2000, the Company took a charge of $6.0 million(1998--$9 million). Accounts receivable and inventories have been pledged as collateralassociated with restructuring for excess capacity at the two leased facility locations, including the estimated residual value guarantees. In the fourth quarter of 2002, the Company took an additional restructuring charge of $0.1 million to increase the reserve for thebank indebtedness under general security agreements.decline in the estimated market values of the underlying buildings. Theborrowings require ustotal expected value of the buildings at the end of the leases may vary, depending on whether or not the buildings are leased at time of sale and whether the buildings are sold to a buyer/ owner or to an investor. The Company will incur other costs such as lease and sales commissions. If market values for the two facilities were to decrease by 10%, our required provision would change by approximately $1.0 million. The lease agreement requires, among other things, the Company to maintain specified quarterly financial ratios and conditions.WeAs of March 29, 2002, the Company was in breach of the fixed charge coverage ratio, but on April 30, 2002, the Company entered into a Security Agreement with the Bank of Montreal (“BMO”) pursuant to which the Company deposited with BMO and pledged approximately $18.9 million as security in connection with the operating leases discussed above in exchange for a written waiver from BMO and BMO Global Capital Solutions for any Company defaults of or obligations to satisfy the specified financial covenants relating to the operating lease agreements until June 30, 2003. This item is included on the balance sheet in long-term investments.The Company only uses derivatives for hedging purposes. The following is a summary of the Company’s risk management strategies and the effect of these strategies on the Company’s consolidated financial statements. The Company has instituted a foreign currency cash flow hedging program to manage exposures to changes in foreign currency exchange rates associated with forecasted sales transactions. Currency forwards
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and swaps arecurrentlyused to fix the cash flow variable of local currency costs or selling prices denominated incompliancecurrencies other than the functional currency. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer intended or expected to occur, and any previously unrealized hedging gains or losses recorded in other comprehensive income are recorded to earnings immediately. Earnings impacts for all designated hedges are recorded in the consolidated statement of operations generally on the same line item as the gain or loss on the item being hedged. The Company records all derivatives at fair value as assets or liabilities in the consolidated balance sheet, withthose ratiosclassification as current or long-term depending on the duration of the instrument.At December 31, 2002, the Company had eleven foreign exchange forward contracts to purchase $16.9 million U.S. dollars and
conditions.one currency swap contract valued at $8.7 million U.S. dollars with an aggregate fair value loss of $0.5 million after-tax recorded in accumulated other comprehensive income and maturing at varying dates in 2003. At December 31, 2001, the Company had eight foreign exchange forward contracts to purchase $17.8 million U.S. dollars and one foreign exchange option contract to purchase $6.5 million U.S. dollars and an aggregate fair value gain of $0.8 million and maturing at various dates in 2002. At December 31, 2000, the Company had four foreign exchange contracts to purchase $6.5 million with a fair value loss of $164 thousand that matured and was recognized in earnings during the first quarter of 2001.Our future liquidity and cash requirements will depend on numerous factors, including, but not limited to, the level of sales we will be able to achieve in the future, the introduction of new products and potential acquisitions of related businesses or technology. We believe that existing cash balances, together with cash generated from operations and available bank lines of credit, will be sufficient to satisfy anticipated cash needs to fund working capital and investments in facilities and equipment for the next two years.
Currency Exchange Matters We have substantial sales and expenses in currencies other than U.S. dollars. As a result we have exposure to foreign exchange fluctuations, which may be material. 25Update On Year 2000 Compliance We have not experienced material problems related to the Year 2000.We are not aware of any events that could trigger a significant cash payment, except for items already accrued in the financial statements or noted above.Related Party Transactions
The Company had the following transactions with related parties. The Company recorded $2.3 million as sales revenue from Sumitomo Heavy Industries, Ltd., a significant shareholder in the year ended December 31, 2002 (2001 – $4.2 million; 2000 – $10.2 million) at amounts and terms approximately equivalent to third party transactions. Transactions with Sumitomo are at normal trade terms. Receivables from Sumitomo of $0.5 million and $0.6 million as at December 31, 2002 and 2001, respectively, are included in accounts receivable on the balance sheet.
On February 23, 2000, the Company entered into an Agreement with V2Air LLC relating to the use of the LLC aircraft for Company purposes. The V2Air LLC is owned by the Company’s President and Chief Executive Officer, Charles D. Winston. Pursuant to the terms of the Agreement, the Company is required to reimburse the V2Air LLC for certain expenses associated with the use of the aircraft for Company business travel. During the most recently completed fiscal year, the Company reimbursed V2Air LLC approximately $145 thousand (2001 – $150 thousand) under the terms of such Agreement.
In January of 2001, the Company made an investment of $2.0 million in a technology fund, managed by OpNet Partners, L.P. During 2002, the Company received approximately $1.4 million of the investment. In the second quarter of 2002, the Company wrote-down the investment by $0.2 million to its estimated fair market value and wrote-off the remainder of the investment of $0.4 million in the fourth quarter of 2002. Richard B. Black, a member of the Company’s Board of Directors, is a General Partner for OpNet Partners, L.P.
On April 26, 2002, the Company entered into an agreement with Photoniko, Inc, a private photonics company in which one of the Company’s directors, Richard B. Black, was a director and stock option holder. As of August 16, 2002, Mr. Black was no longer a director or stock option holder of Photoniko, Inc. Under the agreement, the Company provided a non-interest bearing unsecured loan of $75 thousand to Photoniko, Inc. to fund designated business activities at Photoniko, Inc. in exchange for an exclusive 90 day period to evaluate potential strategic alliances. In accordance with the terms of the agreement and the promissory note which
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was signed by Photoniko, Inc. on April 26, 2002, the loan was to be repaid in full to the Company no later than August 28, 2002, but still remains outstanding. The Company has provided a full reserve for this receivable.Recent Pronouncements
Business Combinations On January 1, 2002, the Company implemented, on a prospective basis, Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinations (“SFAS 141”). As a result, all business combinations initiated in the future will be accounted for under the purchase method. Also, SFAS 141 does not permit the Company to recognize an assembled workforce asset. Therefore, the Company reallocated its assembled workforce asset with a cost of $2.8 million and a net carrying value of $2.0 million at January 1, 2002 to other remaining long-lived assets arising from the merger with General Scanning Inc. in 1999, including $1.4 million to developed technology, $0.5 million to property, plant and equipment and $0.1 million to trademarks and trade names. The adoption of SFAS 141 did not have any other material impact on the Company’s financial position or cash flows. It will accelerate amortization by $0.6 million per year for 2002 and 2003 and reduce amortization thereafter.
Intangible Assets On January 1, 2002, the Company implemented, on a prospective basis, SFAS No. 142,Goodwill and Other Intangible Assets(“SFAS 142”). As a result, intangible assets with finite useful lives must now be amortized over their estimated lives to their estimated residual values and be reviewed for impairment according to SFAS 144. Goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The adoption of SFAS 142 did not have a material impact on the Company’s financial position, as it does not possess goodwill or intangible assets with indefinite lives. It also did not have a material impact on the Company’s results of operations or cash flows.
Impairment or Disposal of Long-Lived Assets On January 1, 2002, the Company adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“SFAS 144”). SFAS 144 applies to all long-lived assets, including discontinued operations, and develops one accounting model for long-lived assets to be disposed of by sale. SFAS 144 supersedes SFAS 121, and the accounting and reporting provisions of APB No. 30,Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB 30”), for the disposal of a segment of a business. The adoption of SFAS 144 did not have a material impact on the Company’s financial position, results of operations or cash flows. During 2002 as a result of restructuring actions, the Company wrote-down fixed assets by approximately $1.1 million (see note 11 to the financial statements).
Costs Associated with Exit or Disposal Activities In July 2002, SFAS No. 146Accounting for Costs Associated with Exit or Disposal Activities(“SFAS 146”) was issued. SFAS 146 requires that a liability for costs associated with exit or disposal activities be recognized and measured initially at fair value only when the liability is incurred. SFAS 146 will be effective for exit or disposal activities initiated after December 31, 2002, and had no impact on the Company’s financial statements in 2002, but will impact the accounting treatment of future exit or disposal activities should they occur.
Guarantor’s Accounting for Guarantees In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation). The Interpretation will significantly change current practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in the Interpretation, which are not included in a long list of exceptions, are required to be initially recorded at fair value, which is different from the general
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current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. The Interpretation also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor’s having to make payments under the guarantee is remote. The initial recognition and initial measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Accounting for guarantees issued prior to December 31, 2002 should not be revised or restated. As discussed in Note 12 to the consolidated financial statements, the Company has two existing operating lease agreements with terms that include residual value guarantees totaling approximately $16.0 million.
Stock Based Compensation Transition and Disclosure In December 2002, SFAS No. 148 (“SFAS 148”),Accounting for Stock-Based Compensation-Transition and Disclosurewas issued to amend SFAS No. 123,Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 will not have a material impact on our financial position, results of operations, or cash flows, because the Company will continue to follow the guidance of APB 25 in recognizing stock compensation expense. The Company will comply with the new disclosure requirements in the financial statement for the first quarter of 2003.
Risk Factors
The risks presented below may not be all of the risks that we may face. These are the factors that we believe 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 our business and financial performance. The industry in which we compete 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.
Passive Foreign Investment Company. Under United States tax laws, United States investors who hold stock in a “passive foreign investment company” (PFIC) may be subject to adverse tax consequences. Any non-U.S. corporation may be classified as a PFIC if 75% or more of its gross income in any year is considered passive income for United States tax purposes. For this purpose, passive income generally includes interest, dividends and gains from the sale of assets that produce these types of income. In addition, a non-U.S. corporation may be classified as a PFIC if the average percentage of the fair market value of its gross total assets during any year that produced passive income, or that were held to produce passive income, is at least 50% of the fair market value of its gross total assets.
We believe that GSI Canada is not a PFIC. However, it currently holds a relatively large amount of cash and investments that are passive assets and produce passive income. In addition, the fair market valuation of its non-passive assets is uncertain because it depends, in part, on the valuation of its goodwill or going concern value. One indicator of the amount of goodwill is GSI Canada’s stock price, which is currently near its historic low. Should this situation continue and if the Arrangement described in this Proxy Circular-Prospectus is not completed, United States holders could be considered to hold shares in a PFIC by the end of our 2003 fiscal year.
All gains recognized on the disposition of PFIC shares by a U.S. shareholder are taxable as ordinary income. Additionally, at the time of disposition, the U.S. shareholder incurs an interest charge. The interest is computed at the rate for underpayments of tax, generally as though the gain had been included in the U.S. shareholder’s gross income ratably over the period the U.S. shareholder held the PFIC’s stock, but
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payment of the resulting tax had been delayed until the sale or distribution. Similar rules apply to “excess distributions.” An excess distribution is a current year distribution received by a U.S. shareholder on PFIC stock, to the extent the distribution exceeds his or her ratable portion of 125% of the average amount so received during the three preceding years. The portion of an actual distribution that is not an excess distribution is not taxed under the excess distribution rules, but rather is treated as a distribution subject to the normal tax rules. Moreover, in general, the rules allowing for nonrecognition of gain or loss on dispositions of stock in corporate reorganizations do not apply to stock of a PFIC. However, under proposed regulations issued by the Internal Revenue Service (IRS), a transfer of PFIC stock to a U.S. person that otherwise would qualify for nonrecognition of gain will continue to qualify if:
• the basis of the stock that is the subject of the disposition, in the hands of its actual owner immediately after the transfer, is no greater than the basis of such stock in the hands of its actual owner immediately before the transfer; • the U.S. transferee’s holding period for the transferred stock is at least as long as the holding period of the shareholder immediately before the transfer; and • the aggregate ownership of the shareholder and the U.S. transferee immediately after the transfer (determined without regard to stock held by the U.S. transferee prior to the transfer) is the same as or greater than the shareholder’s proportionate ownership immediately before the transfer. A U.S. shareholder may avoid the effect of the forgoing rules if he or she makes a “qualified electing fund” election or a “mark-to-market election,” but then becomes subject to the special rules that apply to such elections.
In addition to being advisable from a number of other business perspectives, we believe the Arrangement is advisable because if successfully implemented it would eliminate the possibility that United States holders would be considered to own shares in a PFIC for U.S. tax purposes. In the event the Arrangement is not completed, there may be other possible alternatives for reducing the risk that United States holders would be considered to own shares in a PFIC. These alternatives all involve reducing the percentage of GSI Canada’s passive assets and include purchasing non-passive assets or making a distribution to shareholders. The Board believes that these other alternatives are materially less desirable to GSI Canada and its shareholders than the Arrangement. Among other things, these alternatives would not provide permanent protection from the PFIC risk, and GSI Canada would be required to continually monitor the PFIC risk and take actions in an effort to avoid PFIC status that otherwise might not be in the best interests of GSI Canada and its shareholders. Moreover, we cannot provide any assurances that such alternatives will ultimately be available or, if implemented, would solve the PFIC concern on either an interim or long-term basis. As discussed above, GSI Canada’s classification as a PFIC could have a material adverse effect on United States holders of its shares, and, in turn, an adverse impact on the market value of GSI Canada’s shares.
Each U.S. holder of GSI Canada common shares is urged to consult his own tax advisor to discuss the potential consequences to such holder of GSI Canada’s being classified as a PFIC before or within one year of the Arrangement.
Economic Slowdown. We are in a broad-based economic slowdown affecting most technology sectors and semiconductors and electronics in particular. As a result, many of our customers
having relatedcontinue to order low quantities and, in some cases, to defer orders into future periods. A large portion of our sales is dependent on the need for increased capacity or replacement of inefficient manufacturing processes, because of the capital-intensive nature of our customers business. These also tend to lag behind in an economic recovery longer than other businesses. Because it is difficult to predict how long this slowdown will continue, we may not be able to meet anticipated revenue levels on a quarterly or annual basis.Recent Operating Losses. We have experienced recent operating losses and may not return to profitability. We experienced operating losses in all four quarters of 2002 and the second half of 2001. As a result, for the years ended December 31, 2002 and 2001, we reported operating losses of approximately $27.7 million and $14.7 million, respectively. If our revenues do not meet the levels that we anticipate, or if our costs and expenses exceed our expectations, we will again sustain losses and the price of our common stock may decline as a result.
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Deferred Taxes. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Our ability to recover deferred tax assets of $17.2 million at December 31, 2002 depends primarily upon the Company’s ability to generate profits in the United States tax jurisdiction. If actual results differ from our plans or we do not achieve profitability, we may be required to increase the valuation allowance on our tax assets by increasing expenses, which may have a negative result on our operations.
Customers’ Cyclical Fluctuations. Our business depends substantially upon capital expenditures particularly by manufacturers in the semiconductor, electronics, machine tool and automotive industries. These industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market. Semiconductor manufacturers, for example, may contribute to these cycles by misinterpreting the conditions in the industry and over- or under-investing in semiconductor manufacturing capacity and equipment. In 2000, semiconductor manufacturers invested heavily in manufacturing capacity, which contributed to the severe and declining investments in 2001 and 2002. The timing, length and severity of these cycles are difficult to predict. For the foreseeable future, our operations will continue to depend upon capital expenditures in these industries, which, in turn, depend upon the market demand for their products. Our net sales and results of operations may be materially adversely affected if downturns or slowdowns in the semiconductor, electronics, machine tool and automotive industries occur in the future.
Ability to Respond to Demand Fluctuations. During a period of declining demand, we must be able to quickly and effectively reduce expenses while continuing to motivate and retain key employees. Our ability to reduce expenses in response to any downturn is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements. In addition, the long lead-time for production and delivery of some of our products creates a risk that we may incur expenditures or purchase inventories for products which we cannot sell. During a period of increasing demand and rapid growth, we must be able to quickly increase manufacturing capacity to meet customer demand and hire and assimilate a sufficient number of qualified personnel. Our inability to ramp up in times of increased demand could harm our reputation and cause some of our existing or potential customers to place orders with our competitors rather than us.
Quarterly Fluctuations in Operations. Our revenues and net income, if any, in any particular period may be lower than revenues and net income, if any, in a preceding or comparable period. Factors contributing to these fluctuations, some of which are beyond our control, include:
• fluctuations in our customers’ businesses; • demands for our customers’ products incorporating our products; • timing and recognition of revenues from customer orders;
• timing and market acceptance of new products or enhancements introduced by us or our competitors; • availability of components from our suppliers and the manufacturing capacity of our subcontractors; • timing and level of expenditures for sales, marketing and product development; and
• changes in the prices of our products or of our competitors’ products. We derive a substantial portion of our sales from products that have a high average selling price and significant lead times between the initial order and delivery of the product. We may receive one or more large orders in one quarter from a customer and then receive no orders from that customer in the next quarter. As a result, the timing and recognition of sales from customer orders can cause significant fluctuations in our operating results from quarter to quarter. If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, our common stock price may decline as a result.
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Gross profits realized on product sales vary depending upon a variety of factors, including production volumes, the mix of products sold during a particular period, negotiated selling prices, the timing of new product introductions and enhancements and manufacturing costs.
A delay in a shipment, or failure to meet our revenue recognition criteria, near the end of a fiscal quarter or year, due, for example, to rescheduling or cancellations by customers or to unexpected difficulties experienced by us, may cause sales in a particular period to fall significantly below our expectations and may materially adversely affect our operations for that period. Our inability to adjust spending quickly enough to compensate for any sales shortfall would magnify the adverse impact of that sales shortfall on our results of operations.
As a result of these factors, our results of operations for any quarter are not necessarily indicative of results to be expected in future periods. We believe that fluctuations in quarterly results may cause the market prices of our common stock, on the NASDAQ and the Toronto Stock Exchange, to fluctuate, perhaps substantially.
Dependence on Resellers, Distributors and OEMs. We sell some of our products through resellers, distributors and original equipment manufacturers. Reliance upon third party distribution sources subjects us to risks of business failure by these individual resellers, distributors and OEMs, and credit, inventory and business concentration risks. In addition, our net sales depend in part upon the ability of our OEM customers to develop and sell systems that incorporate our products. Adverse economic conditions, large inventory positions, limited marketing resources and other factors affecting these OEM customers could have a substantial impact upon our financial results. No assurances can be given that our OEM customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our financial condition or results of operations.
Proprietary Rights. Our future success depends in part upon our intellectual property rights, including trade secrets, know-how and continuing technological innovation. There can be no assurance that the steps we take to protect our intellectual property rights will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. We currently hold 113 United States and 73 foreign patents. In addition, we have filed 59 United States and 122 foreign patent applications, which are under review by the patent authorities. There can be no assurance that other companies are not investigating or developing other technologies that are similar to ours, that any patents will issue from any application filed by us or that, if patents do issue, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights thereunder will provide a competitive advantage to us.
Infringement Claims. From time to time we receive notices from third parties alleging infringement of such parties’ patent or other proprietary rights by our products. While these notices are common in the laser industry and we have in the past been able to develop non-infringing technology or license necessary patents or technology on commercially reasonable terms, there can be no assurance that we would in the future prevail in any litigation seeking damages or expenses from us or to enjoin us from selling its products on the basis of such alleged infringement, or that we would be able to develop any non-infringing technology or license any valid and infringed patents on commercially reasonable terms. In the event any third party made a valid claim against us or our customers for which a license was not available to us on commercially reasonable terms, we would be adversely affected. Our failure to avoid litigation for infringement or misappropriation of propriety rights of third parties or to protect our propriety technology could result in a loss of revenues and profits.
Competition. The industries in which we operate are highly competitive. We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products. Furthermore, competition in our markets could intensify, or our technological advantages may be reduced or lost as a result of technological advances by our competitors. There can be no assurance that we will successfully differentiate our current and proposed products from the products of our competitors or that the market place will consider our products to be superior to competing products. Because many of the components required to develop and produce a laser-
34
based marking system are commercially available, barriers to entry into this market are relatively low, and we expect new competitive product entries in this market. To maintain our competitive position in this market, we believe that we will be required to continue a high level of investment in engineering, research and development, marketing and customer service and support. There can be no assurance that we will have sufficient resources to continue to make these investments, that we will be able to make the technological advances necessary to maintain our competitive position, or that our products will receive market acceptance. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share, and an inability to generate cash flows that are sufficient to maintain or expand our development of new products.Reliance on Key Personnel. Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. The loss of key personnel could negatively impact our operations. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed.
Rapid Technological Change and Market Acceptance. The markets for our products experience rapidly changing technologies, evolving industry standards, frequent new product introductions, changes in customer requirements and short product life cycles. To compete effectively we must continually introduce new products that achieve market acceptance. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and potential customer requirements. Developing new technology is a complex and uncertain process requiring us to be innovative and to accurately anticipate technological and market trends. We may have to manage the transition from older products to minimize disruption in customer ordering patterns, avoid excess inventory and ensure adequate supplies of new products. The introduction by us or by our competitors of new and enhanced products may cause our customers to defer or cancel orders for our existing products, which may harm our operating results. We may not successfully develop, introduce or manage the transition to new products. Failed market acceptance of new products or problems associated with
systemnew product transitions could harm our business.Research and Development. We are active in the research and development of new products
manufacturedand technologies. Our research and development efforts may not lead to the successful introduction of new or improved products. The development byus.others of new or improved products, processes or technologies may make our current or proposed products obsolete or less competitive. Our ability to control costs is limited by our need to invest in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase further in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.In addition, we may encounter delays or problems in connection with our research and development efforts. Product development delays may result from numerous factors, including:
• changing product specifications and customer requirements; • difficulties in hiring and retaining necessary technical personnel; • difficulties in reallocating engineering resources and overcoming resource limitations; • changing market or competitive product requirements; and • unanticipated engineering complexities. 35
New products often take longer to develop, have fewer features than originally considered desirable and achieve higher cost targets than initially estimated. There may be delays in starting volume production of new products and new products may not be commercially successful. Products under development are often announced before introduction and these announcements may cause customers to delay purchases of existing products until the new or improved versions of those products are available. Delays or deficiencies in development manufacturing, delivery of or demand for new products or of higher cost targets could have a negative affect on our business, operating results or financial condition.
Acquisitions. We have made, and continue to pursue, strategic acquisitions, involving significant risks and uncertainties. Our identification of suitable acquisition candidates involves risks inherent in assessing the values, strengths, weaknesses, risks and profitability of acquisition candidates, including the effects of the possible acquisition on our business, diversion of our management’s attention and risks associated with unanticipated problems or liabilities. Should we acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing business.
Dependence on Suppliers. We depend on limited source suppliers that could cause substantial manufacturing delays and additional cost if a disruption of supply occurs. We obtain some components from a single source. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products. There can be no assurance that, in the future, our current or alternative sources will be able to meet all of our demands on a timely basis. If suppliers or subcontractors experience difficulties that result in a reduction or interruption in supply to us, or fail to meet any of our manufacturing requirements, our business would be harmed until we are able to secure alternative sources, if any, on commercially reasonable terms. Unavailability of necessary parts or components could require us to reengineer our products to accommodate available substitutions which would increase our costs and/or have a material adverse effect on manufacturing schedules, product performance and market acceptance.
Manufacturing. We assemble our products at our facilities in the United States, Canada and the United Kingdom. If use of any of our manufacturing facilities were interrupted by natural disaster or otherwise, our operations could be negatively affected until we could establish alternative production and service operations. In addition, we may experience production difficulties and product delivery delays in the future as a result of:
• changing process technologies; • ramping production; • installing new equipment at our manufacturing facilities; and • shortage of key components. Operating in Foreign Countries. In addition to operating in the United States, Canada and the United Kingdom, we have sales and service offices in France, Germany, Italy, Japan, Singapore, Hong Kong, Korea, Taiwan, Malaysia and the Philippines. We may in the future expand into other international regions.
Because of the scope of our international operations, we are subject to risks, which could materially impact our results of operations, including:
• foreign exchange rate fluctuations; • longer payment cycles; • greater difficulty in collecting accounts receivable; • use of different systems and equipment; • difficulties in staffing and managing foreign operations and diverse cultures; • protective tariffs; • trade barriers and export/import controls; 36
• transportation delays and interruptions; • reduced protection for intellectual property rights in some countries; and • the impact of recessionary foreign economies. We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation of our products or supplies or gauge the effect that new barriers would have on our financial position or results of operations.
General Economic, Political and Market Conditions. Our business is subject to the effects of general economic and political conditions in the United States and globally. Our revenues and operating results have declined partially due to continuing unfavorable economic conditions as well as uncertainties arising out of the threatened terrorist attacks on the United States, including the potential worsening or extension of the current global economic slowdown, the economic consequences of military action or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:
• the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities; and • the risk of more frequent instances of shipping delays. If the economic and political conditions in the United States and globally do not improve or if the economic slowdown continues to deteriorate, we may continue to experience material adverse impacts on our business, operating results and financial condition.
Compliance with Government Regulations. We are subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health of the United States Food and Drug Administration. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of these regulatory requirements. We are also subject to similar regulatory oversight in certain European markets with comparable enforcement remedies.
Potential Defects. Defects in our products or problems arising from the use of our products together with other vendors’ products may seriously harm our business and reputation. Products as complex as ours may contain known and undetected errors or performance problems. Defects are frequently found during the period immediately following introduction and initial implementation of new products or enhancements to existing products. Although we attempt to resolve all errors that we believe would be considered serious by our customers before implementation, our products are not
aware of any significanterror-free. These errors or performance problems could result inreceiving payments onlost revenues or customerreceivables duerelationships and could be detrimental toYear 2000 problems.our business and reputation generally. In addition, our customers generally use our products together with their own products and products from other vendors. As a result, when problems occur in combined environment, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. To date, defects in our products or those of other vendors’ products with which ours are used by our customers have not had a material negative effect on our business. However, we cannot be certain that a material negative effect will not occur in the future.Controlled Foreign Corporation.A non-U.S. corporation (a “foreign corporation”), such as we are, will constitute a “controlled foreign corporation” or “CFC” for U.S. federal income tax purposes if U.S. shareholders owning (directly, indirectly, or constructively) 10% or more of the foreign corporation’s total combined voting power collectively own (directly, indirectly, or constructively) more than 50% of the total combined voting power or total value of the foreign corporation’s stock.
If we are treated as a CFC, this status should have no adverse effect on any shareholder who does not
awareown (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock37
of GSI Canada. If, however, we are treated as a CFC for an uninterrupted period of thirty (30) days or more during anysignificant vendor performance issues duetaxable year, any U.S. shareholder who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock of GSI Canada on any day during the taxable year and who directly or indirectly owns any stock on the last day of the year in which we are a CFC will have toYear 2000 problems identified.include in its gross income for U.S. federal income tax purposes its pro rata share of the corporation’s “subpart F income” relating to the period during which the corporation is a CFC.In addition, if we were treated as a CFC, any gain realized on the sale of our shares by such a shareholder would be treated as ordinary income to the extent of the shareholder’s proportionate share of the undistributed earnings and profits of the Company accumulated during the shareholder’s holding period of the stock while the Company is a CFC.
If the U.S. shareholder is a corporation, however, it may be eligible to credit against its U.S. tax liability with respect to these potential inclusions foreign taxes paid on the earnings and profits associated with the included income.
We do not believe that we are currently, or have ever been, a CFC. However, no assurances can be given that we will not
experienced significant internal operations problems related to Year 2000. We intend to maintain efforts to identify possible problems related to Year 2000 with internal systems, customersbecome a CFC in the future.Item 7A. Quantitative and
vendors. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQualitative Disclosures About Market RiskInterest Rate Risk.Our exposure to market risk associated with changes in interest rates relates primarily to our cash equivalents, short-term investments and debt
obligationsobligations. As described in note 13 to the consolidated financial statements, at December 31, 2002, the Company had $53.3 million invested in cash equivalents and $66.4 million invested in short-term and other investments. At December 31, 2001, the Company had $79.8 million invested in cash equivalents and $43.5 million invested in short-term to investments. Due to the average maturities and the nature of the investment portfolio, a change in interest rates is not expected to have a material effect on the value of the portfolio. We do not use derivative financial instruments in our investment portfolio. We do not actively trade derivative financial instruments but may use them to manage interest rate positions associated with our debt instruments. We currently do not hold interest rate derivative contracts.Foreign Currency Risk.We have
three such contracts outstanding, two of which convert yen denominated interest on long term debt into U.S. dollar denominated interestsubstantial sales andone contract which converts yen denominated interest on long term debt into Canadian dollar denominated interest. Credit Risk. There is no concentration of credit risk related to our positionexpenses and working capital intrade accounts receivablecurrencies other than U.S. dollars. As a result, we have exposure to foreign exchange fluctuations, which may be material. To reduce theamount due from Sumitomo. Credit risk, with respectCompany’s exposure totrade receivables, is minimized becauseexchange gains and losses, we generally transact sales and costs and related assets and liabilities in the functional currencies of thediversification of our operations, as well as our large customer base and its geographical dispersion. We are exposed to credit-related losses with respect to the positive fair value of our swap contracts described below in the event of non-performance by the two banks acting as counterparties to the swap contracts. We do not expect either counterparty to fail to meet its obligations. Foreign Currency Risk.operations. We have a foreign currency hedging program using currency forwards, currency swaps and currency options to hedge exposure to foreign currencies.The goalThese financial instruments are used to fix the cash flow variable of local currency costs or selling prices denominated in currencies other than thehedging program is to manage risk associated with fluctuations in the value of the foreignfunctional currency. We do not currently use currency forwards or currency options for trading purposes.We currently have three suchAs of December 31, 2002, we had eleven foreign exchange forward contractsoutstanding, two of which convert yen denominated obligations intoto purchase $16.9 million U.S.dollar obligationsdollars and one currency swap contractwhich converts yen denominated obligations intovalued at $8.7 million compared to December 31, 2001, where the Company had eight foreign exchange forward contracts to purchase $17.8 million U.S. dollars and one foreign exchange option contract to purchase $6.5 million U.S. dollars. For December 31, 2002, we recorded an aggregate fair value loss of $0.5 million in accumulated other comprehensive income and maturing at varying dates in 2003. Additionally, the Company’s corporate entity in Kanata, Ontario has a functional currency that differs from its local currency. As a result, the translation from the local currency of Canadiandollar obligations. 26ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAdollars to its functional currency of US dollars is recorded in the results of operations.38
Item 8. Financial Statements and Supplementary Data GSI LUMONICS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITORS' REPORT................................................. 28 CONSOLIDATED BALANCE SHEETS...................................... 29 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.................. 30 CONSOLIDATED STATEMENTS OF OPERATIONS............................ 31 CONSOLIDATED STATEMENTS OF CASH FLOWS............................ 32Auditors’ Report 40 Consolidated Balance Sheets 41 Consolidated Statements of Stockholders’ Equity 42 Consolidated Statements of Operations 43 Consolidated Statements of Cash Flows 44 Notes to Consolidated Financial Statements....................... 33Statements45 27AUDITORS'39
AUDITORS’ REPORT
To the Stockholders of
GSI Lumonics Inc.We have audited the consolidated balance sheets of GSI Lumonics Inc. as of December 31,
19992002 and19982001 and the consolidated statements of operations,stockholders'stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,1999.2002. Our audits also included the financial statement schedule listed at Item1415 of this Form 10-K Annual Report. These financial statements and the schedule are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States and Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
19992002 and19982001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,19992002 in accordance with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.The Company changed its method of accounting for business combinations, goodwill and other intangible assets and impairment or disposal of long-lived assets in 2002, as described in note 1.
On February
11, 2000,21, 2003, we reported without reservation to thestockholdersshareholders on theCompany'sCompany’s consolidated financial statements prepared in accordance withaccounting principlesCanadian generally acceptedin Canada. Ernst & Young LLP Chartered Accountantsaccounting principles.
ERNST & YOUNG LLP Chartered Accountants Ottawa, Canada,February11, 2000 (except21, 2003(except with respect tonote19,15, which isas at March17, 2000)28,2003) 40
GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF(U.S.DOLLARS, EXCEPT SHARE AMOUNTS)GAAP and in thousands of U.S. dollars, except share amounts)
AS OF DECEMBER 31, ------------------------- 1999 1998 --------- ---------ASSETS ------ Current Cash and cash equivalents .................................................... $ 25,272 $ 24,229 Short-term investments (note 15) ............................................. 7,342 8,098 Accounts receivable, less allowance of $3,197 (1998-$311)(notes 3 and 7) ..... 80,448 31,673 Due from related party (note 14) ............................................. 3,235 3,844 Inventories (notes 4 and 7) .................................................. 72,727 44,096 Deferred tax assets (note 13) ................................................ 24,473 3,214 Other current assets (note 6) ................................................ 2,338 5,091 Current portion of swap contracts (note 15) ................................. 1,411 1,076 --------- --------- Total current assets ...................................................... 217,246 121,321 Property, plant and equipment, net of accumulated depreciation of $28,024 (1998 45,278 32,209 - $24,299) (note 5) .......................................................... Long-term portion of swap contracts (note 15) ................................. -- 1,076 Other assets (note 6) ......................................................... 3,851 964 Goodwill and other intangible assets, net of amortization of $8,689 (1998 - 2,953) ....................................................................... 23,347 4,072 --------- --------- $ 289,722 $ 159,642 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness (note 7) ................................................... $ 23,100 $ 7,261 Accounts payable ............................................................. 28,094 5,605 Accrued compensation and benefits ............................................ 13,709 3,456 Other accrued expenses and income taxes ...................................... 43,067 15,481 Current portion of deferred compensation (note 9) ............................ 124 -- Current portion of long-term debt (note 8) ................................... 5,425 3,541 --------- --------- Total current liabilities .................................................. 113,519 35,344 -- 3,541 Long-term debt due after one year (note 8) .................................... Deferred income tax liability (note 13) ....................................... 2,397 -- Deferred compensation, less current portion (note 9) .......................... 2,076 -- --------- --------- Total liabilities .......................................................... 117,992 38,885 Commitments and contingencies (note 17) Stockholders' equity (note 10) Capital stock, no par value; Issued common shares of 34,298,942 ............ 222,865 138,871 (1998 - 17,056,001) Deficit ...................................................................... (44,225) (9,451) Accumulated other comprehensive income ....................................... (6,910) (8,663) --------- --------- Total stockholders' equity ............................................... 171,730 120,757 --------- --------- $ 289,722 $ 159,642 ========= =========
As of December 31, 2002 2001 ASSETS Current Cash and cash equivalents (note 13) $ 83,633 $ 102,959 Short-term investments (note 13) 28,999 43,541 Accounts receivable, less allowance of $2,681 (2001 — $3,034) (notes 4 and 10) 33,793 39,919 Income taxes receivable 8,431 9,224 Inventories (note 3) 39,671 57,794 Deferred tax assets (note 9) 9,763 15,097 Other current assets (note 3) 4,448 8,528 Total current assets 208,738 277,062 Property, plant and equipment, net of accumulated depreciation of $21,453 (2001 — $20,575) (note 3) 26,675 32,482 Deferred tax assets (note 9) 7,443 6,537 Other assets (note 3) 3,360 1,539 Long-term investments (note 13) 37,405 — Intangible assets, net of amortization of $16,217 (2001 — $11,857) (note 3) 13,467 19,067 $ 297,088 $ 336,687 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Bank indebtedness (note 4) $ — $ 6,171 Accounts payable 9,235 10,839 Accrued compensation and benefits 6,523 7,515 Other accrued expenses (note 3) 20,845 25,096 Current portion of long-term debt (note 5) — 2,654 Total current liabilities 36,603 52,275 Deferred compensation (note 6) 2,129 2,082 Accrued minimum pension liability (note 8) 3,875 — Total liabilities 42,607 54,357 Commitments and contingencies (note 12) Stockholders’ equity (note 7) Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 40,785,922 (2001 — 40,556,130) 304,713 303,504 Additional paid-in capital 2,592 2,592 Accumulated deficit (41,270 ) (13,546 ) Accumulated other comprehensive loss (11,554 ) (10,220 ) Total stockholders’ equity 254,481 282,330 $ 297,088 $ 336,687 The accompanying notes are an integral part of these financial
statements 29statements. 41
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS'STOCKHOLDERS’ EQUITY(IN THOUSANDS OF(U.S.DOLLARS, EXCEPT SHARE AMOUNTS)GAAP and in thousands of U.S. dollars, except share amounts)
Accumulated Capital Stock Other ------------------------ Comprehensive Comprehensive # Shares Amount Deficit Income Income Total ------- --------- --------- -------- -------- --------- (000's)BALANCE, DECEMBER 31, 1996 ............... 14,714 $ 101,619 $ (13,360) $ 86 $ 14,138 $ 88,345 ========= Net income ............................... 11,912 11,912 11,912 Issuance of capital stock --public offering (net of issue costs) . 2,000 35,658 35,658 --stock options ........................ 387 1,901 1,901 Foreign currency translation adjustments . (4,193) (4,193) (4,193) ------- --------- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1997 ............... 17,101 139,178 (1,448) (4,107) $ 7,719 133,623 ======== Net loss ................................. (7,916) (7,916) (7,916) Issuance of capital stock --stock options ......................... 50 233 233 Repurchase of capital stock under normal course issuer bid .............. (95) (540) (87) (627) Foreign currency translation adjustments . (4,556) (4,556) (4,556) ------- --------- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1998 ............... 17,056 138,871 (9,451) (8,663) $(12,472) 120,757 ======== Net loss ................................. (34,774) (34,774) (34,774) Issuance of capital stock ................ 17,079 83,528 83,528 --merger with General Scanning Inc. ..... --stock options ......................... 164 466 466 Foreign currency translation adjustments . 1,753 1,753 1,753 ------- --------- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1999 ............... 34,299 $ 222,865 $ (44,225) $ (6,910) $(33,021) $ 171,730 ======= ========= ========= ======== ======== =========
Accumulated Other Capital Stock Additional Retained Comprehensive Comprehensive Paid-In- Earnings Income Income # Shares Amount Capital (Deficit) (Loss) Total (Loss) (000’s) 34,299 $ 222,865 $ — $ (44,225 ) $ (6,910 ) $ 171,730 Net income 45,377 45,377 $ 45,377 Issuance of capital stock — public offering 4,300 70,137 70,137 — stock options 1,564 8,665 8,665 Unrealized loss on equity securities, net of tax of $2,905 (5,395 ) (5,395 ) (5,395 ) Compensation expense 759 759 Foreign currency translation adjustments (2,006 ) (2,006 ) (2,006 ) 40,163 301,667 759 1,152 (14,311 ) 289,267 37,976 Net loss (14,698 ) (14,698 ) (14,698 ) Issuance of capital stock — stock options 344 1,503 1,503 — employee stock purchase plan 51 334 334 Other (2 ) — — Tax benefit associated with stock options 1,433 1,433 Cumulative effect of change in accounting policy for cash flow hedges (164 ) (164 ) (164 ) Realized loss on derivative instruments designated and qualifying as foreign currency cash flow hedging instruments, net of tax of $0 164 164 164 Unrealized gain on cash flow hedging instruments, net of tax of $567 793 793 793 Unrealized gain on equity securities, net of tax of $1,221 2,269 2,269 2,269 Reclassification adjustment for loss on sale of equity securities, net of tax of $1,683 3,126 3,126 3,126 Translation loss on liquidation of a subsidiary, net of tax of $0. 723 723 723 Stock-based compensation 400 400 Foreign currency translation adjustments (2,820 ) (2,820 ) (2,820 ) 40,556 303,504 2,592 (13,546 ) (10,220 ) 282,330 (10,607 ) Net loss (27,724 ) (27,724 ) (27,724 ) Issuance of capital stock — stock options 133 648 648 — employee stock purchase plan 97 561 561 Unrealized gain on investments, net of tax of $0 312 312 312 Realized gain on cash flow hedging instruments, net of tax of $567 (793 ) (793 ) (793 ) Unrealized loss on cash flow hedging instruments, net of tax of $0 (521 ) (521 ) (521 ) Additional minimum pension liability, net of tax of $0 (3,875 ) (3,875 ) (3,875 ) Foreign currency translation adjustments 3,543 3,543 3,543 40,786 $ 304,713 $ 2,592 $ (41,270 ) $ (11,554 ) $ 254,481 $ (29,058 ) The accompanying notes are an integral part of these financial
statements 30statements. 42
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF(U.S.DOLLARS, EXCEPT SHARE AMOUNTS)GAAP and in thousands of U.S. dollars, except per share amounts)
Year ended December 31, ---------------------------------------- 1999 1998 1997 --------- --------- -------- (note 2)Sales ...................................................... $ 274,550 $ 144,192 $177,328 Cost of goods sold ......................................... 178,773 103,519 111,406 --------- --------- -------- Gross profit ............................................... 95,777 40,673 65,922 Operating expenses: Research and development ................................. 28,700 12,985 11,993 Selling, general and administrative ...................... 64,653 38,191 37,591 Amortization of technology and other intangibles ......... 4,070 861 400 Acquired in-process research and development (note 2) .... 14,830 -- -- Restructuring and other charges (note 16) ................ 19,631 2,022 -- --------- --------- -------- Income (loss) from operations .............................. (36,107) (13,386) 15,938 Gain on sale of assets (notes 2 and 10) .................. 1,599 -- -- Interest income, net ..................................... 89 1,578 1,048 Foreign exchange transaction gains (losses) .............. (2,911) 632 -- --------- --------- -------- Income (loss) before income taxes .......................... (37,330) (11,176) 16,986 Income taxes provision (benefit) ........................... (2,556) (3,260) 5,074 --------- --------- -------- Net income (loss) .......................................... $ (34,774) $ (7,916) $ 11,912 ========= ========= ======== Net income (loss) per common share: Basic .................................................... $ (1.14) $ (0.46) $ 0.75 Diluted .................................................. $ (1.14) $ (0.46) $ 0.72 Weighted average common shares outstanding (000's) ......... 30,442 17,079 15,989 Weighted average common shares outstanding and dilutive potential common shares (000's) ........................... 30,442 17,079 16,454
Year Ended December 31, 2002 2001 2000 Sales $ 159,070 $ 247,904 $ 373,864 Cost of goods sold (note 11) 109,876 162,122 242,393 Gross profit 49,194 85,782 131,471 Operating expenses: Research and development 20,444 25,634 33,931 Selling, general and administrative 55,483 73,815 87,459 Amortization of purchased intangibles 5,135 5,226 4,851 Restructuring and other, net (note 11) 5,427 2,782 7,196 Total operating expenses 86,489 107,457 133,437 Loss from operations (37,295 ) (21,675 ) (1,966 ) Gain (loss) on sale of assets and investments (note 2) — (4,809 ) 76,786 Interest income 2,744 5,084 4,802 Interest expense (701 ) (897 ) (1,457 ) Foreign exchange transaction losses (825 ) (175 ) (3,122 ) Other expense (note 10) (628 ) — — Income (loss) before income taxes (36,705 ) (22,472 ) 75,043 Income tax provision (benefit) (note 9) (8,981 ) (7,774 ) 29,666 Net income (loss) $ (27,724 ) $ (14,698 ) $ 45,377 Net income (loss) per common share: Basic $ (0.68 ) $ (0.36 ) $ 1.19 Diluted $ (0.68 ) $ (0.36 ) $ 1.13 Weighted average common shares outstanding (000’s) 40,663 40,351 38,187 Weighted average common shares outstanding and dilutive potential common shares (000’s) 40,663 40,351 40,000 The accompanying notes are an integral part of these financial
statements 31statements. 43
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF(U.S.DOLLARS)GAAP and in thousands of U.S. dollars)
Year ended December 31, -------------------------------------- 1999 1998 1997 -------- -------- --------Cash flows from operating activities: Net income (loss) for the year ........................................... $(34,774) $ (7,916) $ 11,912 Adjustments to reconcile net income (loss) to net cash (used in) operating activities: Acquired in-process research and development ........................... 14,830 -- -- Gain on sale of assets ................................................. (1,599) -- -- Depreciation and amortization .......................................... 15,177 5,600 4,007 Deferred compensation .................................................. 78 -- -- Deferred income taxes .................................................. (1,704) (1,306) (434) Unrealized currency exchange loss ...................................... 1,326 330 241 Changes in current assets and liabilities: Accounts Receivable .................................................... (14,448) 14,408 (23,491) Inventories ............................................................ 6,084 (8,343) (3,654) Other current assets ................................................... 4,540 (3,321) 313 Accounts payable, accrued expenses, and taxes payable .................. 6,073 (6,360) 5,821 -------- -------- -------- Net cash (used in) operating activities .................................. (4,417) (6,908) (5,285) -------- -------- -------- Cash flows from investing activities: Merger with General Scanning Inc. (note 2) ............................. 1,451 -- -- Acquisition of Lumonics Pacific KK (note 2) ............................ (336) -- -- Acquisition of Meteor Optics Inc. (note 2) ............................. -- (1,158) -- Sale of assets ......................................................... 3,940 -- -- Additions to property, plant and equipment, net ........................ (6,219) (13,568) (8,412) Maturity of short-term investments ..................................... 8,208 47,091 79,351 Purchase of short-term investments ..................................... (7,342) (43,522) (80,185) (Increase) in other assets ............................................. (609) (102) (43) -------- -------- -------- Cash (used in) investing activities .................................... (907) (11,259) (9,289) -------- -------- -------- Cash flows from financing activities: Proceeds (payments) of bank indebtedness, net .......................... 7,502 (7,865) 7,741 Payments on long-term debt ............................................. (2,617) (2,325) (2,527) Issue of share capital (net of issue costs) ............................ 466 233 37,560 Repurchase of common shares ............................................ -- (627) -- -------- -------- -------- Cash provided by (used in) financing activities .......................... 5,351 (10,584) 42,774 Effect of exchange rates on cash and cash equivalents .................... 1,016 (3,848) (710) -------- -------- -------- Increase (decrease) in cash and cash equivalents ......................... 1,043 (32,599) 27,490 Cash and cash equivalents, beginning of year ............................. 24,229 56,828 29,338 -------- -------- -------- Cash and cash equivalents, end of year ................................... $ 25,272 $ 24,229 $ 56,828 ======== ======== ========
Year Ended December 31, 2002 2001 2000 Net income (loss) for the year $ (27,724 ) $ (14,698 ) $ 45,377 Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss (gain) on sale of assets and investments 62 5,267 (76,786 ) Translation loss on liquidation of a subsidiary — 723 — Stock-based compensation — 400 759 Reduction of long-lived assets 2,510 2,483 2,137 Depreciation and amortization 10,919 11,918 12,172 Deferred income taxes 4,267 6,688 (3,613 ) Changes in current assets and liabilities: Accounts receivable 9,356 47,083 (14,061 ) Inventories 19,632 8,917 (13,506 ) Other current assets 840 1,403 (844 ) Accounts payable, accruals, and taxes (receivable) payable (8,145 ) (87,662 ) 38,145 Cash provided by (used in) operating activities 11,717 (17,478 ) (10,220 ) Acquisition of businesses, net of cash acquired (note 2) — — (7,138 ) Sale of assets and investments — 45,822 64,962 Additions to property, plant and equipment, net (2,952 ) (8,639 ) (10,142 ) Proceeds from the sale and maturity of short-term and other investments 110,014 85,834 45,031 Purchase of short-term and other investments (132,877 ) (109,355 ) (57,710 ) Decrease (increase) in other assets 1,979 (1,219 ) 838 Cash provided by (used in) investing activities (23,836 ) 12,443 35,841 Payments of bank indebtedness (6,441 ) (4,117 ) (10,131 ) Repayment of long-term debt (3,000 ) (4,000 ) (4,114 ) Issue of share capital (net of issue costs) 1,209 1,837 76,986 Cash provided by (used in) financing activities (8,232 ) (6,280 ) 62,741 Effect of exchange rates on cash and cash equivalents 1,025 416 224 Increase (decrease) in cash and cash equivalents (19,326 ) (10,899 ) 88,586 Cash and cash equivalents, beginning of year 102,959 113,858 25,272 Cash and cash equivalents, end of year $ 83,633 $ 102,959 $ 113,858 The accompanying notes are an integral part of these financial
statements 32statements. 44
GSI LUMONICS INC.
Notes to Consolidated Financial Statements asNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31,1999 (Tabular Amounts2002(U.S. GAAP and tabular amounts inThousandsthousands ofU.s. Dollars Except Share Amounts)U.S. dollars except share amounts)1.
SIGNIFICANT ACCOUNTING POLICIES Nature of operations GSI Lumonics Inc. designs, develops, manufacturesSignificant Accounting Policies
Nature of operations We design, develop, manufacture and
marketsmarket components, lasers and laser-based advanced manufacturing systems as enabling tools for a wide range of applications. Our products allow customers to meet demanding manufacturing specifications, including device complexity andcomponents which are usedminiaturization, as well as advances inapplications such as cutting, welding, drilling, marking, micro-machining, inspection, gene analysismaterials andoptical transmission.process technology. Major markets fortheseour products include the medical, automotive, semiconductor,electronics, automotive, medical/biotechnologyandtelecommunicationselectronics industries. In addition,the Company sellswe sell our products and services to other markets such asthe aerospacelight industrial andpackaging industries.aerospace. TheCompany'sCompany’s principal markets are inthe United States, Canada,North America, Europe, Japan and Asia-Pacific.Basis of presentation and change in reporting currency
Basis of presentation These consolidated financial statements have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the United States, applied on a consistent basis.
Prior to 1998, the Company prepared and filed its consolidated financial statements in Canadian dollars. Basis of consolidation
Basis of consolidation The consolidated financial statements include the accounts of GSI Lumonics Inc. and its
wholly-ownedwholly owned subsidiaries (the"Company"“Company”). Intercompany accounts and transactionsand balancesare eliminated.
Comparative amounts Certain prior year amounts have been
eliminated. On March 22, 1999,reclassified to conform to theCompany completed a merger of equals with General Scanning Inc., Watertown, Massachusetts, a leading manufacturer of laser systems and components, and printers. The merger transaction has been accounted for as a purchase for accounting purposes and accordingly, the operations of General Scanning Inc. have been includedcurrent year presentation in theconsolidatedfinancial statementsfromfor thedateyear ended December 31, 2002. These reclassifications had no effect on the previously reported results ofmerger (see Note 2). Use of estimatesoperations or financial position.
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
datedates of the financial statements and the reported amounts ofrevenuessales and expenses during the reportingperiod.periods. Actual results could differ from those estimates.Cash equivalents
Cash equivalents Cash equivalents are investments held to maturity
and havewith original maturities of three months or less. Cash equivalents,consistconsisting principally of commercial paper, short-term corporate debt, andbanker's acceptances. Cash equivalentsbanker’s acceptances, are stated at amortized cost, which approximatestheirfair value. The Company does not believe it is exposed to any significant credit risk on its cash equivalents.33
Investments Short-term,
Investments Short-termlong-term and other investments consist principally ofbanker'scommercial paper, governments, short-term corporate debt, and banker’s acceptances with original maturities greater than threemonths.months for short-term investments and greater than twelve months for long-term investments. The Company has classified these investments as available-for-sale securitiesand carries themthat are stated at estimated fairvalue.value based upon45
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
market quotes. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a component of accumulated other comprehensive income until realized.
Inventories
Inventories, which include materials and conversion costs, are stated at the lower of cost (primarily first-in, first-out) or market. Market is defined as replacement cost for raw materials and net realizable value for other inventories.
Property,
Plantplant andEquipmentequipmentProperty, plant and equipment are stated at
cost. Thecost and the declining-balance and straight-line methods are used to determine depreciation and amortization overtheestimated usefullives of the owned assets.lives. Estimated useful lives for buildings and improvements range from 5 to 39 years and for machinery and equipment from 3 to 15 years. Leasehold improvements are amortized over the lesser of their useful lives or the lease term, including option periods expected to be utilized.Goodwill and OtherIntangible assets
Intangibles
Goodwill consists of the excess of cost over acquired net identifiableassetsfor business purchase combinations. Other intangiblesincludeassembled workforce,purchased trademarks and tradenames. The amortization period for goodwill and other intangibles is determined on a separate basis for each acquisition. Goodwill and other intangiblesnames, which are amortized on a straight-line basis over periodsrangingfroma minimum of twothree toa maximum often years from the date of acquisition. Patents and purchased technology are stated at cost and are amortized on a straight-line basis over the expected life of the asset, up to1719 years.Impairment of long-lived assets
TheWhen events and circumstances warrant a review, the Company
regularly assessesevaluates therealizabilitycarrying values ofitslong-lived assets and purchased intangibles in accordance withSFASStatement of Financial Accounting Standards No.121,144,Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS 144). The carrying value of a long-lived asset and purchased intangible is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value. Fair value is determined using anticipated discounted cash flows.Revenue recognition
We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, risk of loss has passed to the customer and collection of the resulting receivable is probable. We design, market and sell our products as standard configurations. Accordingly, customer acceptance provisions for
Long-Lived Assets To Be Disposed Of. Basedstandard configurations are generally based onits review,seller-specified criteria, which we demonstrate prior to shipment. Revenue on new products is deferred until we have established a track record of customer acceptance on these new products. When customer-specified objective criteria exist, revenue is deferred until customer acceptance if we cannot demonstrate theCompany expects full recovery. Revenue Recognitionsystem meets these specifications prior to shipment. The Company recognizesrevenuesinstallation revenue when installation has been completed.Revenue associated with service or maintenance contracts is recognized ratably over the life of the contract, which is generally one year.
Product Warranty
We generally warrant our products for a period of up to 12 months for material and labor to repair and service the system. A provision for the estimated cost related to warranty is recorded at the time
of shipment or when services are provided. For certain long-term contracts, revenues and profits are recognized using the percentage-of-completion method. The Company accrues estimated potential product liability and warranty costs, based on the Company's experience, whenrevenue is recognized.Research and Product Development Expense Research and development costs are charged to expense as incurred and are reduced by certain related non-refundable government assistance. 3446
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock
Based Compensationbased compensationThe Company
has elected to continue to apply APB 25 inuses the intrinsic value method for accounting for its stock option plansand immaterial amounts of compensation have been recognized. Foreign Currency Translationas proscribed in APB 25.
Foreign currency translation The financial statements of the parent corporation and its subsidiaries outside the U.S. have been translated into U.S. dollars in accordance with the Financial Accounting Standards Board Statement No. 52, Foreign Currency
Translation.Translation. Assets and liabilities of foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effectaton theperiod-end.balance sheet date. Revenues and expenses are translated at the average exchange rate in effect for the period.TheAccordingly, gains and losses resultingtranslation adjustmentsfrom translating foreign currency financial statements are reported as a separate component of other comprehensive income instockholders'stockholders’ equity. Foreign currency transaction gains and losses are included in net income.
Derivative financial instruments As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133,Accounting for Derivative
FinancialInstrumentsForeign exchange forwardand Hedging Activities (SFAS 133), which was issued in June 1998 and its amendments, Statements 137 and 138, issued in June 1999 and June 2000, respectively.As a result, the Company recognizes all derivative financial instruments, such as interest rate swap contracts and
local currency borrowingsforeign exchange contracts, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair value of derivatives usedto reduce the impact of certain foreign currency balance sheet fluctuations and foreign currency denominated sales. Gains and losses from forward contracts that are notas hedges offirm commitmentsthe net investment in foreign operations areaccruedreported in other comprehensive income as part of the cumulative translation adjustment. Changes in fair values of derivatives not qualifying as hedges are reported in income.The Company accounted for the accounting change as a cumulative effect of a change in accounting principle. The Company recorded a transition adjustment loss of $164 thousand in other comprehensive income as a result of adopting SFAS 133. The loss was recognized in earnings during the period ended March 30, 2001, and at
each balance sheet date and included inthat time theConsolidated Statements of Operations asunderlying hedged transactions were realized.Prior to January 1, 2001, the Company used foreign exchange
transactions gains (losses). In certain circumstances, the Company uses currencycontracts and interest rate swap contractsto managefor hedging purposes. For foreign currencyexposuresforward contracts hedging firm commitments, the effects of movements in currency exchange rates on those instruments were recognized when the related operating revenue was recognized. The discounts or premiums on the instruments were amortized to income over the lives of the contracts using the straight-line method. Realized gains and losses were included in other assets and liabilities and recognized in income when the future transaction occurred or at the time the transaction was no longer expected to occur. For interest raterisk. Paymentsswap contracts, payments and receipts under suchswapcontractsarewere recognized as adjustments to interest expense on a basis thatmatchesmatched them with the fluctuations in the interest receipts and payments under floating rate financial assets and liabilities.Income TaxesUnrealized gains or losses on interest rate swap contracts were not recognized in income.47
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income taxes The liability method is used
in accountingto account for income taxes.Under this method, deferredDeferred tax assets and liabilities aredetermined based onrecognized for the future tax consequences of temporary differences between the financialreportingstatement carrying amounts and theincometax bases of assets and liabilities. Deferred tax assets and liabilitiesandare measured usingtheenacted tax ratesand laws that will bein effectwhenfor the year in which the differences are expected toreverse. Recent Pronouncementsbe recovered or settled. A valuation allowance is established to reduce the deferred tax asset if it is “more likely than not” that the related tax benefits will not be realized in the future.
Recent accounting pronouncements
Business Combinations On January 1, 2002, the Company implemented, on a prospective basis, Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinations (“SFAS 141”). As a result, all business combinations initiated in the future will be accounted for under the purchase method. Also, SFAS 141 does not permit the Company to recognize an assembled workforce asset. Therefore, the Company reallocated its assembled workforce asset with a cost of $2.8 million and a net carrying value of $2.0 million at January 1, 2002 to other remaining long-lived assets arising from the merger with General Scanning Inc. in 1999, including $1.4 million to developed technology, $0.5 million to property, plant and equipment and $0.1 million to trademarks and trade names. The adoption of SFAS 141 did not have any other material impact on the Company’s financial position or cash flows. It will accelerate amortization by $0.6 million per year for 2002 and 2003 and reduce amortization thereafter.
Intangible Assets On January 1, 2002, the Company implemented, on a prospective basis, SFAS No. 142,Goodwill and Other Intangible Assets(“SFAS 142”). As a result, intangible assets with finite useful lives must now be amortized over their estimated lives to their estimated residual values and be reviewed for impairment according to SFAS 144. Goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The adoption of SFAS 142 did not have a material impact on the Company’s financial position, as it does not possess goodwill or intangible assets with indefinite lives. It also did not have a material impact on the Company’s results of operations or cash flows.
Impairment or Disposal of Long-Lived Assets On January 1, 2002, the Company adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“SFAS 144”). SFAS 144 applies to all long-lived assets, including discontinued operations, and develops one accounting model for long-lived assets to be disposed of by sale. SFAS 144 supersedes SFAS 121, and the accounting and reporting provisions of APB No. 30,Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB 30”), for the disposal of a segment of a business. The adoption of SFAS 144 did not have a material impact on the Company’s financial position, results of operations or cash flows. During 2002 as a result of restructuring actions, the Company wrote-down fixed assets by approximately $1.1 million (see note 11).
Costs Associated with Exit or Disposal Activities In July 2002, SFAS No. 146Accounting for Costs Associated with Exit or Disposal Activities(“SFAS 146”) was issued. SFAS 146 requires that a liability for costs associated with exit or disposal activities be recognized and measured initially at fair value only when the liability is incurred. SFAS 146 will be effective for exit or disposal activities initiated after December 31, 2002, and had no impact on the
48
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s financial statements in 2002, but will impact the accounting treatment of future exit or disposal activities should they occur.
Guarantor’s Accounting for Guarantees In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation). The Interpretation will significantly change current practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in the Interpretation, which are not included in a long list of exceptions, are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. The Interpretation also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor’s having to make payments under the guarantee is remote. The initial recognition and initial measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Accounting for guarantees issued prior to December 31, 2002 should not be revised or restated. As discussed in Note 12 to the consolidated financial statements, the Company has two existing operating lease agreements with terms that include residual value guarantees totaling approximately $16 million.
Stock Based Compensation Transition and Disclosure In December
1999,2002, SFAS No. 148 (“SFAS 148”),Accounting for Stock-Based Compensation-Transition and Disclosurewas issued to amend SFAS No. 123,Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to theSecuritiesfair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement 123 to require more prominent andExchange Commission released Staff Accounting Bulletin #101 on revenue recognition which ismore frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective forour currentfiscalyear. We believe this bulletinyears ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 will not have asignificantmaterial impact on ourreported sales. Comparative Figures Certain comparative figures have been reclassified from statements previously presented to conform to the presentationfinancial position, results ofthe 1999 financial statements. 2. MERGER AND ACQUISITIONS AND DISPOSITIONS On March 22, 1999,operations, or cash flows, because the Companycompleted a mergerwill continue to follow the guidance ofequalsAPB 25 in recognizing stock compensation expense. The Company will comply withGeneral Scanning Inc., Watertown, Massachusetts, a leading manufacturer of laser systems and components, and printers. Undertheterms of the merger, GSI stockholders received 1.347 shares of common stocknew disclosure requirements in the financial statement for the first quarter of 2003.
2. Business Combinations and Divestitures
Purchases On September 21, 2000, the Company
in exchange for each common share of GSI stock they held. Lumonics shareholders continued to hold shares of Lumonics Inc., which, following the merger, was renamed GSI Lumonics Inc. Immediately following the merger each group of shareholders owned 35approximately 50% of theacquired all outstanding shares ofthe Company.General Optics, Inc. (“General Optics”), a privately held precision optics company located in Moorpark, California. Themergerpurchase price of $13.5 million was comprised of cash of $6.9 million paid on closing, note payable valued at $6.4 million, discounted at an imputed interest rate of 6.23%, and costs of acquisition of $0.2 million. The note payable was settled in two installments, due September 21, 2001 and 2002. The transaction has been accounted for as a purchase and, accordingly, the operations of GeneralScanningOptics have been included in the consolidated financial statements from the date ofmerger. Cash flow impactacquisition. The excess of$1,451 thousand fromfair value of net identifiable tangible assets acquired over theGSI merger is cash acquired of $4,719 thousand, less merger costs of $3,268 thousand. The aggregatepurchase priceof $84 millionwasallocatedrecorded as acquired technology toGeneral Scanning net identifiable assets, based on estimated fair values, as follows:
Shares purchased (a) ...................... $ 83,074 Options purchased (b) & (c) ............... 917 -------- Total purchase price ...................... $ 83,991 ======== Current assets, including cash of $4,719 .. 69,883 Fixed assets .............................. 16,110 Acquired technology (d) ................... 20,017 Other identified intangible assets (e) .... 4,804 Other long term assets (f) ................ 3,949 Deferred taxes, net ....................... 14,676 Current liabilities ....................... (55,440) Long term debt ............................ (28) Deferred compensation, net of $117 current portion ................................... (2,005) Transaction costs ......................... (2,805) In-process research and development (g) ... 14,830 -------- $ 83,991 ========(a) 17,079,475 common shares of GSI Lumonics Inc. valued at US$4.864 per share, in exchange for all 12,679,640 General Scanning outstanding shares of common stock, on the basis of an exchange ratio of 1.347 shares of GSI Lumonics Inc. for each share of General Scanning common stock. The total value assigned to these issued shares is $83,074 thousand. Issue and registration costs of $463 thousand were charged against capital stock; (b) 2,051,903 GSI Lumonics Inc. stock options valued at US$0.443 per share option, total $909 thousand, in exchange for 1,523,314 General Scanning outstanding stock options; (c) 70,717 GSI Lumonics Inc. stock options valued at US$0.11 per share option, total $8 thousand, in exchange for 52,500 General Scanning outstanding stock warrants; (d) Acquired technology of $20 million results from an appraisal of General Scanning intangible assets and is beingbe amortizedon a straight line basisover its estimated useful life of60 months; (e) Assembled workforce of $3.4 million and trademark and trade name of $1.4 million result from an appraisal of General Scanning intangible assets and are being amortized on a straight-line basis over a ten year period; (f) Other long term assets includes a note receivable from Robotic Vision Systems, Inc. (RVSI) of $2,250 thousand, 271,493 shares of RVSI common stock valued at $764 thousand, and other deposits of $935 thousand; (g) Acquired in-process research and development of $14.8 million charged against income in 1999 results from an appraisal of General Scanning intangible assets. The purchase price allocation and intangible valuation was based on management's estimates of the after-tax net cash flows, and differs from preliminary estimates in interim statements. Specifically, the valuation gave consideration to the following: a) a fair market premise, excluding any Company-specific considerations which could result in estimates of investment value for the subject assets; b) comprehensive due diligence concerning all potential intangible assets including trademarks, trade names, patents, copyrights, non-compete agreements, assembled workforce, customer relationships, and sales channel; c) the value of acquired existing technology, which was specifically addressed, with a view toward ensuring the relative allocations to existing technology and in-process research and development were consistent with the relative contributions of each to the final product; and d) the allocation to in-process research and development, based on a calculation that considered only the efforts completed as of the merger date, and only the cash flow associated with the completed efforts for one generation of the products currently being developed. 36As shown above, the Company recorded a one-time charge of $14.8 million in 1999 for purchased in-process research and development related to thirty in-process projects. The charge is related to the portion of the value of these projects, excluding the contribution of existing technology, that were not yet technically feasible, had no alternative future use and for which successful development was uncertain. Management's conclusion that the in-process development effort had no alternative future use was reached in consultation with engineering personnel from both GSI and Lumonics. To conform with United States generally accepted accounting principles and to reflect the purchase accounting method used to transact the merger, results for the first 11 weeks of 1999 and all of 1998 are those of Lumonics only. Therefore, the results of 1998 and 1997 do not provide a meaningful basis for comparison with 1999, although they are provided in the financial statements attached. The following pro forma results of operations have been prepared using the purchase method of accounting as if the merger had occurred at the beginning of each fiscal period.
Pro forma combined (unaudited) Year ended December 31, ---------------------------- 1999 1998 --------- ---------Sales ................................................. $ 295,009 $ 325,109 ========= ========= Net loss .............................................. $ (41,726) $ (11,233) ========= ========= Net loss per common share: Basic ............................................ $ (1.22) $ (0.33) Diluted .......................................... $ (1.22) $ (0.33) Weighted average common shares outstanding ............ 34,177 34,030 Weighted average common shares outstanding and dilutive potential common shares .............................. 34,177 34,030On October 4, 1999 the Company acquired all outstanding shares of Lumonics Pacific KK, a subsidiary of Sumitomo Heavy Industries Ltd. of Tokyo Japan. The purchase price of $1,305 thousand was comprised of a cash consideration of $439 thousand (cash flow impact of $336 thousand is net of $103 thousand in cash acquired) that was paid upon closing, and debt of $866 thousand, plus agreed interest. The debt will be settled in two equal installments, the first due April 4, 2000, and the second on October 4, 2000 and is included in other accrued expenses and income taxes as at December 31, 1999. This transaction has been accounted for as a purchase. In June 1998, the Company acquired, for cash consideration of $1,158 thousand, all outstanding shares of Meteor Optics Inc., a fiber-optics manufacturer based in the United States. This transaction has been accounted for as a purchase. Net tangible assets had no significant value, and the purchase price has been allocated to goodwill and is being amortized over10 years.In December, 199949
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Divestitures On April 2, 2001, the Company completed the sale of
the OLT precision alignment system product line to Virtek Vision International Inc. (Virtek) of Waterloo, Ontario. Under the terms of the sale, GSI Lumonics received cash of $2,366 thousand as well as a 10% royalty on Virtek's sales of these systems to the aerospace industry for three years in exchange for theoperating assets of theOLTLaserdyne and Custom Systems productline.lines for cash proceeds of approximately $7.3 million. Sales for these product lines were $3 million and $24.3 million for the years ended December 31, 2001 and December 31, 2000, respectively.On October 1, 2000, the Company sold the net assets of its Life Sciences business to Packard BioScience Company (“Packard”) for $39.3 million in cash and approximately 4.5 million shares of Packard common stock valued at $43.3 million based on an independent valuation of the stock at the date of closing. The Life Sciences business comprised working capital of approximately $3.5 million and fixed and other intangible assets of approximately $1.2 million. The Company recorded a non-operating gain of $73.1 million ($47.3 million after tax), or $1.24 per share, as a result of this transaction. Sales for the Life Sciences business for the nine months ended September 30, 2000 were $13.1 million and for the year ended December 31, 1999 were $13.8 million. On November 13, 2001, Packard was acquired by PerkinElmer, Inc. As a result, the shares of Packard owned by GSI Lumonics were converted into the right to receive 0.311 of a share of PerkinElmer, Inc. at the quoted market value of $27.285 per share. The Company sold these shares on November 19, 2001 for proceeds of $38.5 million and recorded a loss of $4.8 million.
During the third quarter of 2000, the Company sold two facilities in the United States for $12.5 million cash and recorded a net gain of
$699 thousand on this$2.4 million.During the second quarter of 2000, the Company sold operating assets of its View Engineering metrology product line, fiber-optics operations in Phoenix, Arizona and package coding product line in Hull, United Kingdom for an aggregate of $13.0 million cash and recorded a net gain of $1.3 million.
3. Supplementary Balance Sheet Information
The following tables provide the details of selected balance sheet items as at December 31:
Inventories
2002 2001 Raw materials $ 16,380 $ 29,779 Work-in-process 7,468 8,028 Finished goods 11,114 12,918 Demo inventory 4,709 7,069 Total inventories $ 39,671 $ 57,794
Property, Plant and Equipment, net
2002 2001 Cost: Land, buildings and improvements $ 12,102 $ 18,167 Machinery and equipment 36,026 34,890 Total cost 48,128 53,057 Accumulated depreciation (21,453 ) (20,575 ) Net property, plant and equipment $ 26,675 $ 32,482 50
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Assets
2002 2001 Short term other assets: Note receivable $ 563 $ 1,125 Investment (note 10) — 1,500 Prepaid expenses and other 3,885 5,903 Total $ 4,448 $ 8,528 Long term other assets: Investment (note 10) $ — $ 500 Note receivable — 563 Deposits and other 425 476 Facilities available for sale (note 11) 2,935 — Total $ 3,360 $ 1,539 The note receivable bears interest at the prime rate and will be received in quarterly installments of $0.3 million, ending in June 2003.
At December 31, 2002, the Company had two facilities that were classified as available for sale. One is a 75,000 square foot facility in Kanata, Ontario and the other is a 17,000 square foot facility in Nepean, Ontario. Both of these facilities became available for sale
during December 1999. 3. ACCOUNTS RECEIVABLE Accounts receivable include unbilled receivables on long-term contractsin 2002, as a result of$0 (1998 - $5,531 thousand)restructuring actions that occurred (Note 11).374. INVENTORIES Inventories consist ofThese buildings are recorded at their estimated fair market value (approximately $2.2 million for thefollowing:
December 31, ---------------------- 1999 1998 -------- --------Raw materials........................... $26,011 $ 9,123 Work-in-process......................... 17,005 14,062 Finished goods.......................... 29,711 20,911 ------- ------- Total inventories....................... $72,727 $44,096 ======= =======5. PROPERTY, PLANT AND EQUIPMENT Property, plantKanata property andequipment consists of the following:
December 31, ----------------------- 1999 1998 -------- --------Cost: Land, buildings and improvements........ $ 36,435 $ 26,290 Machinery and equipment................. 36,867 30,218 -------- -------- Total cost.............................. 73,302 56,508 Accumulated depreciation................ (28,024) (24,299) -------- -------- Net property, plant and equipment....... $ 45,278 $ 32,209 ======== ========6. OTHER ASSETS Other$0.7 million for Nepean).Intangible assets consist of the following:
December 31, 2002 December 31, 2001 Accumulated Accumulated Cost Amortization Cost Amortization Patents and acquired technology $ 28,660 $ (15,850 ) $ 27,174 $ (10,809 ) Assembled workforce — — 2,814 (786 ) Trademarks and trade names 1,024 (367 ) 936 (262 ) Total cost 29,684 $ (16,217 ) 30,924 $ (11,857 ) Accumulated amortization (16,217 ) (11,857 ) Net intangible assets $ 13,467 $ 19,067 Amortization of intangible asset expense subsequent to December 31, 2002 is:
2003 $ 5,135 2004 1,970 2005 1,137 2006 1,137 2007 1,137 Thereafter 2,951 Total amortization expense $ 13,467 51
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, -------------------------- 1999 1998 ---------- ---------Short term other assets: ------------------------ Income tax recoverable.................. $ - $3,201 Prepaid expenses........................ 2,338 1,890 Total................................... $2,338 $5,091 ====== ====== Long term other assets: ----------------------- Note receivable......................... $2,250 $ - Deferred income taxes................... - 912 Deposits and other...................... 1,601 52 ------ ------ Total................................... $3,851 $ 964 ====== ======Other Accrued Expenses 387. BANK INDEBTEDNESS
2002 2001 Accrued warranty $ 3,383 $ 4,027 Deferred revenue 3,404 2,148 Accrued restructuring (note 11) 8,790 8,827 Other 5,268 10,094 Total $ 20,845 $ 25,096 Accrued Warranty
Year Ended December 31, 2002 2001 Balance at the beginning of the period $ 4,027 $ 7,107 Charged to costs and expenses 5,624 9,551 Use of provision (6,358 ) (12,507 ) Foreign currency exchange rate changes 90 (124 ) Balance at the end of the period $ 3,383 $ 4,027 4. Bank Indebtedness
At December 31, 2002, the Company had lines of credit denominated in US and Canadian dollars with Fleet National Bank (“Fleet”), Bank One and Canadian Imperial Bank of Commerce (“CIBC”) and letters of credit (“LC”) with National Westminster Bank (“NatWest”), for a total amount of available credit of $12.1 million versus $32.4 million at December 31, 2001. The Company’s agreement with Fleet provides for an $8.0 million line of credit and its agreement with CIBC provides for a $4.0 million line of credit. The previous $13.0 million line of credit with CIBC expired on June 28, 2002, and the new CIBC credit facility eliminated the Company’s requirement to meet certain financial covenants which were required under the previous credit facility. NatWest provides a $0.1 million bank guarantee for LC used for VAT purposes in the United Kingdom. Marketable securities totaling $14.5 million have been pledged as collateral for the Fleet and CIBC credit facilities under security agreements. The line of credit with Fleet expires on June 28, 2003. In addition to the customary representations, warranties and reporting covenants, the borrowings under the Fleet credit facility require the Company to maintain a quarterly minimum tangible net worth of $200.0 million. The line of credit with CIBC was reviewed by the Company and a decision to cancel the line of credit was conveyed to CIBC prior to December 31, 2002. By giving CIBC appropriate advance notice, the Company initiated its right to cancel the line of credit at any time at no cost, excluding breakage fees relating to the used and outstanding amounts under fixed loan instruments, which we do not expect to be material. The line of credit with CIBC should be eliminated by the end of the first quarter in 2003. The Company also cancelled its credit facility with Bank One on December 20, 2002 without paying any breakage fees. North American inventories and receivables were pledged as collateral for the Bank One credit facility. Bank One continues to work on the release of all liens and obligations associated with the facility.
At December 31, 2002, the Company has approximately $12.1 million denominated in Canadian dollars and US dollars that are available for general purposes, under the credit facilities discussed above. Of the available $12.1 million, $7.7 million was in use at December 31, 2002, consisting of $3.8 million committed at Fleet Bank for use in foreign exchange transactions, $2.9 million in Rugby, U.K. under the CIBC credit facilities and approximately $0.8 million of bank guarantees and outstanding letters of credit under the CIBC
52
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
credit facility and $0.1 million with NatWest. Though the Fleet Bank amount of $3.8 million is committed for support of foreign currency hedging contracts and not available, it is not considered used for the purpose of calculating interest payments. At December 31, 2002, the aggregate unused portion of credit available under the credit facilities amounts to $4.4 million. The CIBC credit facility is currently a demand facility with interest based on the prime rate. The Fleet line of credit is due on demand and bears interest based on either prime or LIBOR depending on the borrowing notification period. This resulted in an effective average rate of 1.79% for fiscal 2002.
The Company had a line of credit at December 31, 2001 of approximately
$40$32.4 millionwhich arethat was denominated in Canadian dollars, US dollars,Pound sterlingBritish Sterling and Japaneseyen (1998 - $20 million). Actual bank indebtedness isYen. The line of credit available for general purposes was $32.4 million. As at December 31, 2001, there was an outstanding balance of approximately $6.2 million under the line of credit and outstanding letters of credit and other discretionary lines of $4.9 million. The line of credit was due on demand andbearsbore interest based on prime, which resulted in an effective average rate4.98%of 1.68% for fiscal1999 (1998--7%). As at December 31, 1999,2001. Borrowings were limited to theCompany had unusedsum of eligible accounts receivable under 90 days andavailable demand lines of credit amounting to approximately $19 million (1998 - $9 million).North American inventories. Accounts receivable and inventorieshave beenwere pledged as collateral for the bank indebtedness under general security agreements.The borrowings require, among other things, the Company to maintain specified financial ratios and conditions.Asatof December 31,1999,2001, the Company was incompliance with those ratios and conditions. 8. LONG-TERM DEBT Current Portionbreach of one of the financial covenants, the interest coverage ratio, for which no borrowings were made under the facility. The bank issued a waiver of this non-compliance, which would have allowed the Company to draw on the line of credit if needed.5. Long-term Debt
There was no long-term debt
Long-termat December 31, 2002. In 2001, long-term debt includes amortgagenote payable with a face value of $3.0 million (2000 — $7.0 million), non-interest bearing, to the former shareholders of General Optics. The note payable was discounted at10-3/8% interest, assumed as part of the merger with General Scanning Inc., collateralized by the related land and building, maturing in March 2000, at which time the remaining principal of $1,508 thousand will be payable. The Company has a long-term loan from Sumitomo Heavy Industries, Ltd., a significant shareholder, all of which is repayable in Japanese yen. The relevant foreign exchange rates were:
December 31, ------------------------------ 1999 1998 ------------- -------------$1 Canadian = Japanese yen................................ 70.3 73.8 $1 US = Japanese yen...................................... 102.1 113.0The Company has entered into currency andan imputed interest rateswap contracts which oblige it to pay Canadian dollarsof 6.23% andreceive Japanese yen, and pay U.S. dollars and receive Japanese yen,was settled onthe dates principal and interest payments are due. The terms of these contracts are described in Note 15. Long term debt is comprised of:September 21, 2002.
1999 1998 ------- -------Sumitomo Heavy Industries, Ltd., Japanese yen term loans, interest payable semi-annually at 5.43% with semi-annual principal payments, maturing October 31, 2000..................... $ 3,917 $ 7,082 Silicon Valley Bank, mortgage principal due March 1, 2000........... 1,508 - Less current portion................................................ (5,425) (3,541) ------- ------- Total............................................................. $ - $ 3,541 ======= =======Total cash interest paid on all long-term debt during the year ended December 31,
19992002 was$1,155 thousand (1998 - $899 thousand; 1997 - $1,112 thousand)$0.3 million (2001 — $0.5 million; 2000 — $1.2 million).9. DEFERRED COMPENSATION6. Deferred Compensation
Certain officers and employees
may deferhave deferred payment of a portion of their compensation until termination of employment or later. Interest on the outstanding balance is credited quarterly at the prime rate, which averaged8.01%4.7% during the year ended December 31,1999.2002 (2001 — 6.9%). The portion of deferred compensation estimated to be due within one year is included incurrent liabilities. 3910. STOCKHOLDERS' EQUITYaccrued compensation and benefits.7. Stockholders’ Equity
Capital stock The authorized capital of the Company consists of an unlimited number of common shares without nominal or par value.
Accumulated Other Comprehensive IncomeDuring 2001, the Company reduced its common shares outstanding for 2,309 shares that were not claimed since the merger.53
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated other comprehensive loss The
Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130") effective January 1, 1998. SFAS No. 130 requires that all non-owner changes in equity, such asfollowing table provides thechange in foreign currency translation adjustments, be separately classified in the financial statements and that the accumulated balance of other comprehensive income be reported separately from deficit in the equity section of the balance sheet. Any unrealized holding gains and losses on securities held available-for-sale are excluded from earnings and reported as a componentdetails of accumulated other comprehensiveincome until realized, in accordance with SFAS 115. During 1999, the Company sold securities held for sale and the realized gain of $900 thousand has been included in the results of operations. Accumulated other comprehensive incomeloss atend of year includes only unrealized foreign currency translation gains and losses. Net Income (Loss) Per Common ShareDecember 31;
2002 2001 Unrealized gain on investments (net of tax of $0) $ 312 $ — Unrealized gain (loss) on cash flow hedging (net of tax of $0 for 2002 and $567 for 2001) (521 ) 793 Accumulated foreign currency translations (7,470 ) (11,013 ) Additional minimum pension liability (net of tax of $0) (3,875 ) — Total $ (11,554 ) $ (10,220 )
Net income (loss) per common share Basic income (loss) per common share was computed by dividing net income (loss) by the
weighted averageweighted-average number of common shares outstanding during the year. For diluted income per common share, the denominator also includes dilutive outstanding stock options and warrants determined using the treasury stock method. As a result of the net losses for the years ended December 31, 2002 and 2001, the effect of converting options and warrants was antidilutive.Common and common equivalent share disclosures are:
Year Ended December 31, 2002 2001 2000 (In thousands) Weighted average common shares outstanding 40,663 40,351 38,187 Dilutive potential common shares — — 1,813 Diluted common shares 40,663 40,351 40,000 Options and warrants excluded from diluted income per common share as their effect would be antidilutive 3,676 3,633 252
Year ended December 31, ------------------------------------------ 1999 1998 1997 --------- --------- ---------Weighted average common shares outstanding 30,442 17,079 15,989 Dilutive potential common shares.......... - - 465 ----------- ----------- ----------- Diluted common shares..................... 30,442 17,079 16,454 =========== =========== =========== Options and warrants excluded from diluted income per common share as their effect would be anti-dilutive.... 3,978 2,004 290 =========== =========== ===========Shareholder rights plan Shareholder Rights PlanOn April 12, 1999, the Board of Directors adopted a Shareholders Rights Plan (the
"Plan"“Plan”). Under this Plan one Right has been issued in respect of each common share outstanding as of that date and one Right has been and will be issued in respect of each common share issued thereafter. Under the Plan, each Right, when exercisable, entitles the holder to purchase from the Company one common share at the exercise price of Cdn$200, subject to adjustment and certain anti-dilution provisions (the"Exercise Price"“Exercise Price”). At the annual meeting of the shareholders held on May 9, 2002, the shareholders adopted a resolution to approve the continued existence of the Plan.The Rights are not exercisable and cannot be transferred separately from the common shares until the
"Separation Time"“Separation Time”, which is defined as the eighth business day (subject to extension by the Board) after the earlier of (a) the"Stock“Stock AcquisitionDate"Date” which is generally the first date of public announcement that a person or group of affiliated or associated persons (excluding certain persons and groups) has acquired beneficial ownership of 20% or more of the outstanding common shares, or (b) the date of commencement of, or first public announcement of the intent of any person or group of affiliated or associated persons to commence, a Take-over Bid. At such time as any40person or group of affiliated or associated persons becomes an "Acquiring Person"“Acquiring Person” (a"Flip-In Event"“Flip-In Event”), each Right shall constitute the right to purchase from the Company that number of common shares having an aggregate Market Price on the date of the Flip-In Event54
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equal to twice the Exercise Price, for the Exercise Price (such Right being subject to anti-dilution adjustments).
So long as the Rights are not transferable separately from the common shares, the Company will issue one Right with each new common share issued. The Rights could have certain anti-takeover effects, in that they would cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors.
Stock Options The Company has stock option plans providing for the issue of options to purchase the Company's common shares. Outstanding options vest over periods of one to four years beginning on the date of grant. The options expire over a period of two to seven years beginning at the date of grant. Of the 4.7 million (1998 - 3.7 million) options authorized under these plans, 408,178 (1998 - 103,425) options were available for grant as at December 31, 1999. The 1995 Stock Option Plan (the "1995 Plan"), as amended, provides for the issuance of nonqualified and incentive stock options to purchase up to 2,906,000 shares of the Company's common stock, of which 408,178 were available for future grant at December 31, 1999. Under this plan, options are granted at the closing price of the Company's common shares on the Toronto Stock Exchange or in lieu thereof, Nasdaq, on the trading date of the grant. The exercise period of each option is determined by the Compensation Committee but may not exceed 10 years. The Company's 1994 Stock Option Plan has terminated; however, options to purchase 247,325 shares of common stock were outstanding under the 1994 Plan at December 31, 1999.
Stock options In conjunction with the merger with General Scanning, Inc., the Company adopted outstanding options held by employees under nonqualified and incentive stock options plans of General Scanning and issued 2,051,903 stock options of the Company in exchange.
In July 1999, the Company offered employee option holders an exchange of one option for each two options outstanding with exercise prices over US$9.00 or Cdn$13.32. Under this exchange 281,483 options with exercise price of US$4.63 or Cdn$6.95 per share were granted with new vesting schedule, and 562,966 options were cancelled. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, which defines a fair value based method of accounting for employee stock options or similar equity instruments. The Company has elected to continue to apply APB 25 in accounting for its stock option plans, and immaterial amounts of compensation have been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts below. Because the method of accounting under SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation costs may not be representative of that to be expected in future years. 41
1999 1998 1997 ----------- ------------ -----------Net income (loss): As reported......................... $(34,774) $(7,916) $11,912 Pro forma........................... $(36,117) $(8,976) $11,145 Basic net income (loss) per share: As reported......................... $ (1.14) $ (0.46) $ 0.75 Pro forma........................... $ (1.19) $ (0.53) $ 0.70 Diluted income (loss) per share: As reported......................... $ (1.14) $ (0.46) $ 0.72 Pro forma........................... $ (1.19) $ (0.53) $ 0.68The fair value of options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 ---------- ---------- ------------Risk-free interest rate........... 6.7% 4.6% 5.8% Expected dividend yield........... - - - Expected lives upon vesting....... 1.0 years 1.2 years 1.8 years Expected volatility............... 60% 40% 30% Weighted average fair value per share............................. $1.85 $1.00 $3.76Stock option activity for the years endedAt December 31,1999, 1998 and 1997 is presented below.
Options Weighted Avg. (thousands) Exercise Price ------------ ---------------Outstanding at December 31, 1996....... 951 $ 5.71 Granted................................ 833 18.40 Exercised.............................. (387) 4.91 Canceled............................... (76) 0.34 ------ ------ Outstanding at December 31, 1997....... 1,321 13.15 Granted................................ 879 5.16 Exercised.............................. (50) 4.72 Canceled............................... (146) 15.63 ------ ------ Outstanding at December 31, 1998....... 2,004 9.11 Exchanged in merger with General 2,123 9.86 Scanning............................... Granted................................ 1,627 4.61 Exercised.............................. (164) 3.36 Canceled............................... (1,612) 12.66 ------ ------ Outstanding at December 31, 1999....... 3,978 $ 6.71 ====== ====== Exercisable at December 31, 1999....... 1,165 $ 7.64 ====== ======42The following summarizes outstanding and exercisable2002, optionsoutstanding on December 31, 1999:
Options Outstanding Exercisable Options ----------------------------------------- -------------------------- Number Weighted Weighted Number of Weighted of Average Average Options Average Range of Options Remaining Exercise Exercisable exercise Exercise prices (000's) Life Price (000's) Price --------------- ------- ---- ----- ------- -----$ 1.75 to $ 3.75 370 4.9 years $ 2.83 281 $ 2.56 $ 4.25 to $ 4.50 809 9.0 years $ 4.41 111 $ 4.46 $ 4.60 to $ 5.00 1,175 4.3 years $ 4.75 211 $ 4.85 $ 5.01 to $10.00 871 4.6 years $ 6.15 242 $ 8.00 $ 10.40 to $19.70 753 6.8 years $16.40 320 $14.79 -------- ----- 3,978 1,165 ======== =====Repurchaseto purchase 630,677 shares of commonshares On April 29, 1998,stock remained outstanding under theBoard of Directors authorized a program to repurchase up to 5% of its issued and outstanding common shares. Pursuant to provisions of the Agreement and Plan of Merger withassumed General Scanning, Inc., the Company suspended its repurchase program in October 1998. During 1998, the Company repurchased 94,900 common shares for approximately $627 thousand. Warrantsstock option plans. Inconjunction with the merger with General Scanning Inc.addition, the Company adopted outstanding warrants for the purchase of common stock issued to non-employee members of the General Scanning, Inc. Board of Directors. The warrants are subject to vesting as determined by a committee of the Board of Directors at the date of grant and expire ten years from the date of grant. During the year ended December 31,1999,2002, none were granted,exercisedcancelled orcancelled.exercised. At December 31,1999, 70,7182002, 51,186 warrants, of which57,248all are exercisable, remain outstanding at prices ranging from$1.75$9.65 to $15.41 per share.11. DEFINED CONTRIBUTION PLANSThe warrants are included in the stock option activity table in this note.Lumonics Inc. had three (3) stock option plans in existence for key employees and for directors prior to the merger with General Scanning, Inc., known as the May 1994 Executive Management Plan (“May 1994 Plan”), the September 1994 Key Employee and Director Plan (“September 1994 Plan”) and the 1995 Stock Option Plan (“1995 Option Plan”). Outstanding options under these three plans vest over periods of one to four years beginning on the date of grant. The options expire over a period of two to ten years beginning at the date of grant. With respect to the May 1994 Plan, a total of 700,000 options were authorized for issuance under the plan and at December 31, 2000, there were no options outstanding under the plan. With respect to the September 1994 Plan, a total of 1,094,000 options were authorized for issuance under the plan and at December 31, 2000, there were no options outstanding under the plan. All outstanding options under the May 1994 Plan and the September 1994 Plan expired on September 14, 2001. No additional options will be granted under the May 1994 Plan or the September 1994 Plan. With respect to the 1995 Option Plan, a total of 4,906,000 options have been authorized for issuance under the plan.
The 1995 Option Plan referenced above, which was established in September 1995 by Lumonics Inc. for the benefit of employees (including contract employees), consultants, and directors of the Company, remained in place following the merger with General Scanning, Inc. in 1999 and as of the date of this Form 10-K, is the only Company stock option plan under which new options may be granted. Subject to the requirements of the 1995 Option Plan, the Compensation Committee or in lieu thereof, the Board of Directors, has the authority to select those directors, consultants, and employees to whom options will be granted, date of the grant, the number of options to be granted and other terms and conditions of the Options. The exercise price of options granted under the 1995 Option Plan must be equal to the closing price of the Company’s common shares on The Toronto Stock Exchange, or in lieu thereof, The NASDAQ Stock Market®, on the day immediately preceding the date of grant. The exercise period of each option is determined by the Compensation Committee but may not exceed 10 years from the date of grant. The 1995 Option Plan initially authorized the issuance of a maximum of 406,000 options to purchase common shares. This authorization was increased to: 1,906,000 on May 6, 1997, 2,906,000 on May 11, 1999, and 4,906,000 on May 8, 2000; with all such increases being approved by the shareholders. Currently, a maximum of 4,906,000 options to purchase common shares are permitted to be issued under the 1995 Option Plan. The Compensation Committee has the power to amend, modify, or terminate the 1995 Option Plan provided that optionee’s rights are not materially adversely affected and subject to any approvals required under the applicable
55
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
regulatory requirements. At December 31, 2002, 424,801 (2001 — 626,113) options were available for grant under the 1995 Option Plan.
In July 1999, the Company offered employee option holders an exchange of one option for each two options outstanding with exercise prices over US$9.00 or Cdn$13.32. Under this exchange 243,597 options with exercise price of US$4.63 or Cdn$6.95 per share, the then-current market price of the stock, were granted with a new vesting schedule, and 487,194 options were cancelled. The Company is accounting for the replacement options as variable from July 1, 2000, in accordance with Financial Accounting Standard Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25, until the options are exercised, forfeited or expire unexercised. Because the market price of the Company’s stock has decreased since July 1, 2000, there was no material impact on its financial position and results of operations.
During 2001, the Company accelerated vesting of certain options and recorded compensation expense of $0.2 million (2000 — $0.6 million) in results of operations.
Stock option activity for the years ended December 31, 2002, 2001 and 2000 is presented below.
Weighted Options Avg. Exercise (thousands) Price Outstanding at December 31, 1999 3,978 $ 6.71 Granted 1,037 18.99 Exercised (1,564 ) 5.54 Forfeited (366 ) 8.30 Outstanding at December 31, 2000 3,085 11.20 Granted 1,835 9.37 Exercised (344 ) 4.38 Forfeited (943 ) 12.61 Outstanding at December 31, 2001 3,633 10.45 Granted 736 8.58 Exercised (133 ) 4.78 Forfeited (560 ) 11.81 Outstanding at December 31, 2002 3,676 $ 10.11 Exercisable at December 31, 2002 1,686 $ 10.22 56
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes outstanding and exercisable options outstanding on December 31, 2002:
Options Outstanding Exercisable Options Number Weighted Weighted Number of Weighted of Average Average Options Average Range of Options Remaining Exercise Exercisable Exercise Exercise Prices (000’s) Life Price (000’s) Price $ 1.75 to $ 4.63 667 3.5 years $ 4.41 571 $ 4.41 $ 4.68 to $ 8.27 222 4.3 years $ 7.31 95 $ 6.39 $ 8.35 to $ 8.90 505 5.1 years $ 8.41 16 $ 8.81 $ 8.93 to $ 8.93 886 4.3 years $ 8.93 223 $ 8.93 $ 8.98 to $14.66 799 4.9 years $ 11.65 446 $ 13.05 $14.85 to $20.31 597 3.9 years $ 18.65 335 $ 18.37 3,676 1,686 Options outstanding include 221,771 options denominated in Canadian dollars with a weighted average exercise price of $16.09 Canadian.
Employee Stock Purchase Plan At the Annual General Meeting of Stockholders on May 8, 2001, the Stockholders approved the adoption of the Employee Stock Purchase Plan (the “Purchase Plan”). A total of 300,000 common shares have been reserved for issuance under the Purchase Plan. The Company will make open market purchases and/or issue treasury common shares to satisfy employee subscriptions under the Purchase Plan. Under the terms of the Purchase Plan, employees can choose to have up to 7% of their base earnings withheld to purchase the Company’s common stock. The Purchase Plan provides for consecutive offering periods during which payroll deductions may be accumulated for the purchase of common shares. The initial offering period commenced on July 1, 2001 and ended on December 31, 2001. Thereafter, each offering period will continue for a period of six months following commencement, as determined by the Compensation Committee. The purchase price per share at which shares will be sold in an offering period under the Purchase Plan is the lower of 85% of the Fair Market Value of a common share at the beginning of the offering period or 85% of the Fair Market Value of a common share at the end of the offering period. Fair Market Value, as defined
contribution employee savings plans in Canada,by theUnited Kingdom,Purchase Plan, is the weighted average sale price of the shares for the five (5) day period preceding the grant date and theUnited States. Inexercise date. During theUnited States,two offerings in the period ended December 31, 2002, 95,269 shares were issued under the Purchase Plan at an average cost of $5.89 per share (2001 — 51,529 with average cost of $6.48).
Pro forma stock based compensation Had compensation cost for the Company’s stock option plans and employee stock purchase plan
is governed bybeen determined consistent with SFAS No. 123, theprovisionsCompany’s net income and earnings per share would have been reduced to the pro forma amounts below.
2002 2001 2000 Net income (loss): As reported $ (27,724 ) $ (14,698 ) $ 45,377 Pro forma $ (31,336 ) $ (17,832 ) $ 42,520 Basic net income (loss) per share: As reported $ (0.68 ) $ (0.36 ) $ 1.19 Pro forma $ (0.77 ) $ (0.44 ) $ 1.11 57
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2002 2001 2000 Diluted income (loss) per share: As reported $ (0.68 ) $ (0.36 ) $ 1.13 Pro forma $ (0.77 ) $ (0.44 ) $ 1.07 The fair value of
Section 401(k)options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000 Risk-free interest rate 3.1 % 4.1 % 5.1 % Expected dividend yield — — — Expected lives upon vesting 1.0 years 1.0 years 1.0 years Expected volatility 67 % 70 % 100 % Weighted average fair value per share $ 5.27 $ 4.82 $ 12.48 The fair value of the
Internal Revenue Codeemployees’ purchase rights underwhich contributions may be made by its United States employees.the employee stock purchase plan was estimated using the Black-Scholes option-model with the following assumptions: dividend yield of nil (2001 — nil); an expected life of 6 months (2001 — 6 months); expected volatility of 67% (2001 — 70%); and risk-free interest rate of 1.75% (2001 — 3.45%). TheCompany matches the contributionsweighted-average fair value ofparticipating employees on the basis of the percentages specifiedthose purchase rights granted ineach plan. Company matching contributions to the plans during 1999 were $2.3 million (1998 - $1.1 million; 1997 - $0.9 million)2002 was $3.71 (2001 — $2.98).12. DEFINED BENEFIT PENSION PLAN
8. Employee Benefit Plans
Defined Benefit Pension Plan The
Company'sCompany’s subsidiary in the United Kingdom maintains a pension plan, known as the GSI Lumonics Ltd.UKUnited Kingdom PensionScheme.Scheme Retirement Savings Plan. The plan has two components: the Final Salary Plan, which is a defined benefit plan, and the Retirement Savings Plan, which is a defined contribution plan. Effective April 1997, membership to the Final Salary Plan was closed. Benefits under this plan are based on the employees’ years of service and compensation. GSI Lumonics’ funding policy is to fund pensions and other benefits based on widely used actuarial methods as permitted by regulatory authorities. Themost recentfunded amounts reflect actuarialvaluationassumptions regarding compensation, interest and other projections. The assets of this plan consist primarily of equity and fixed income securities of U.K. and foreign issuers.In December 2002, the Company notified plan participants that it no longer wants to sponsor the final salary plan. Consultations are underway and the final outcome of these matters has not yet been determined.
Pension and other benefit costs reflected in the consolidated statements of operations are based on the projected benefit method of valuation. Within the consolidated balance sheet, pension plan benefit liabilities are included in accrued compensation and benefits.
The net periodic pension cost for the defined benefit pension plan was
performeddetermined asat November 30, 1997. The extrapolation as at December 1, 1999 indicates the actuarial present value of the accrued pension benefits and the net assets available to provide for these benefits, at market value, were asfollows:43
1999 1998 --------------- ---------------Pension fund assets ........................................ 13,700 12,000 Accrued pension benefits ................................... 13,700 9,500
2002 2001 2000 Service cost — benefits earned $ 216 $ 393 $ 442 Interest cost on projected plan benefits 837 827 847 Premiums and expenses 135 151 149 Expected return on plan assets (814 ) (873 ) (945 ) Net Periodic Pension Cost $ 374 $ 498 $ 493 58
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assumptions used to develop the actuarial present value of the accrued pension benefits (obligations) were as follows:
1999 1998 --------- --------Discount rate .................................................... 6.5% 8.5% Compensation increases rate ...................................... 5.5% 6.5% Investment returns assumption .................................... 6.5% 8.5% Average remaining service life of employees ...................... 18 years 18 years
2002 2001 Discount Rate 6.0 % 7.0 % Rate of Compensation Increase 3.0 % 4.0 % Long-Term Rate of Return on Plan Assets 7.0 % 7.0 % The estimates are based on actuarially computed best estimates of pension asset long-term rates of return and long-term rate of obligation escalation. Variances between these estimates and actual experience are amortized over the
employees'employees’ average remaining service life.Pension expenseThe most recent actuarial valuation of the plan was performed as at November 30, 2000. The extrapolation as at December 31 indicates the actuarial present value of the pension benefit obligation; the net assets available to provide for these benefits, at market value; and the funded status of the plan were as follows:
2002 2001 Projected benefit obligation at beginning of year $ 11,633 $ 12,917 Service cost 216 393 Interest cost 837 827 Plan participants’ contributions 158 118 Actuarial changes in assumptions and experience 2,205 (1,345 ) Benefits paid (278 ) (922 ) Foreign currency exchange rate changes 1,345 (355 ) Projected benefit obligation at end of year $ 16,116 $ 11,633 Market value of plan assets at beginning of year $ 11,270 $ 12,917 Actual return on plan assets (1,642 ) (569 ) Employer contributions 625 180 Plan participants’ contributions 158 118 Benefits paid (278 ) (922 ) Foreign currency exchange rate changes 1,029 (358 ) Other (82 ) (96 ) Market value of plan assets at end of year $ 11,080 $ 11,270 Excess of projected benefit obligation over plan assets $ 5,036 $ 363 Unrecognized actuarial gain (loss) (4,823 ) 126 Net amount recognized $ 213 $ 489 Amount recognized in the balance sheet consists of: Accrued compensation and benefits $ 213 $ — Accrued minimum pension liability 3,875 — Accumulated other comprehensive loss (3,875 ) — Net amount recognized $ 213 $ 489 59
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Defined Contribution Plans The Company has defined contribution employee savings plans in Canada, the United Kingdom, and the United States. In the United States, the provisions of Section 401(k) of the Internal Revenue Code under
this plan during fiscal 1999 was $520 thousand (1998 - $670 thousand; 1997 -$500 thousand)which its United States employees may make contributions govern the plan. The Company matches the contributions of participating employees on the basis of percentages specified in each plan. Company matching contributions to the plans were $1.9 million in 2002 (2001 — $2.4 million; 2000 — $2.7 million).13. INCOME TAXES9. Income Taxes
Details of the income tax provision (benefit) are as follows:
1999 1998 1997 ------- ------- -------Current Canadian ................. $ 724 $ 1,687 $ 2,513 International ............ (1,576) (3,641) 2,995 ------- ------- ------- (852) (1,954) 5,508 Deferred Canadian ................. (2,084) (247) 384 International ............ 380 (1,059) (818) ------- ------- ------- (1,704) (1,306) (434) ------- ------- ------- Income tax provision (benefit) $(2,556) $(3,260) $ 5,074 ======= ======= =======
2002 2001 2000 Current Canadian $ (2,676 ) $ (1,575 ) $ 2,197 International (10,572 ) (12,887 ) 31,082 (13,248 ) (14,462 ) 33,279 Deferred Canadian 1,942 (1,123 ) 4,089 International 2,325 7,811 (7,702 ) 4,267 6,688 (3,613 ) Income tax provision (benefit) $ (8,981 ) $ (7,774 ) $ 29,666 The income tax provision (benefit) reported differs from the amounts computed by applying the Canadian rate to income (loss) before income taxes. The reasons for this difference and the related tax effects are as follows:
1999 1998 1997 -------- ------- -------Expected Canadian tax rate ................................... 44.6% 44.6% 44.0% Expected income tax provision (benefit) ...................... $(16,649) $(4,984) $ 7,474 Non-deductible research and development and other expenses ... 4,325 -- -- International tax rate differences ........................... 3,461 (97) (868) Losses and temporary timing differences the benefit of which has not been recognized ................................... 5,374 1,377 577 Previously unrecognized losses and timing differences ........ (569) (161) (807) Settlement of Canadian and foreign tax matters ............... -- (423) Other items .................................................. 1,502 605 (879) -------- ------- ------- Reported income tax provision (benefit) ...................... $ (2,556) $(3,260) $ 5,074 ======== ======= =======44
2002 2001 2000 Expected Canadian tax rate 38.6 % 41.7 % 44.0 % Expected income tax provision (benefit) $ (14,168 ) $ (9,370 ) $ 33,019 Non-deductible expenses 195 2,782 2,885 International tax rate differences (141 ) (788 ) (3,632 ) Losses and temporary differences the benefit of which has not been recognized 6,176 1,222 3,554 Previously unrecognized losses and temporary differences (873 ) (2,162 ) (6,549 ) Other items (170 ) 542 389 Reported income tax provision (benefit) $ (8,981 ) $ (7,774 ) $ 29,666 60
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and tax reporting purposes. Significant components of the
Company'sCompany’s deferred tax assets and liabilities as at December 31 are as follows:
1999 1998 -------- --------Deferred tax assets Operating tax loss carryforwards .......... $ 12,468 $ 6,539 Compensation related deductions ........... 2,312 -- Tax credits ............................... 2,431 582 Restructuring and other accrued liabilities 13,452 1,312 Deferred revenue .......................... 1,834 1,231 Inventory ................................. 3,702 734 Other ..................................... 227 535 -------- -------- Total deferred tax assets .................... 36,426 10,933 Valuation allowance for deferred tax assets .. (9,756) (5,731) -------- -------- Net deferred tax assets ...................... 26,670 5,202 -------- -------- Deferred tax liabilities Book and tax differences on fixed assets .. 824 1,076 Intangibles ............................... 3,770 -- -------- -------- Net deferred income tax asset ................ $ 22,076 $ 4,126 ======== ========
2002 2001 Deferred tax assets Operating tax loss carryforwards $ 18,943 $ 11,556 Compensation related deductions 1,769 1,690 Tax credits 4,990 4,525 Restructuring and other accrued liabilities 5,092 5,916 Deferred revenue 543 690 Inventory 4,397 8,918 Tax effect of UK pension liability 1,162 — Book and tax differences on fixed assets 488 1,103 Intangibles 1,811 286 Share issue costs 575 962 Total deferred tax assets 39,770 35,646 Valuation allowance for deferred tax assets (22,564 ) (13,445 ) Net deferred tax assets 17,206 22,201 Deferred tax liabilities Unrealized gain on hedging activities — 567 Intangibles — — Net deferred income tax asset $ 17,206 $ 21,634 Allocated as follows: Net deferred income tax asset — short-term 9,763 15,097 Net deferred income tax asset — long-term 7,443 6,537 Net deferred income tax asset $ 17,206 $ 21,634 The Company has provided a valuation allowance of $22.6 million against losses in the parent company and subsidiaries with an inconsistent history of taxable income and loss due to the uncertainty of their realization. In addition, the Company has provided a valuation allowance on
net operating loss carryforwards andforeign tax credits,related to its wholly-owned subsidiary, View Engineering, Inc.,due to the uncertainty oftheir realizability as a result of limitations on their utilizationgenerating foreign earned income to claim the tax credits. The Company believes it is more likely than not that the remaining deferred tax assets will be realized principally through future taxable income and carry backs to taxable income inaccordance with certain US tax laws and regulations.prior years.As at December 31,
1999,2002, the Company had losscarryforwardscarry forwards of approximately$34$57.6 million available to reduce futureyears'years’ income for tax purposes. Of this amount, approximately$8.5$1.7 million expiresby the end of 2005between 2003 anda further $7.52006, $13.6 million expiresby the end of 2019, with the remainderin 2007, $9.4 million expires between 2020 and 2022 and $32.9 million can be carried forward indefinitely.Undistributed earnings of the
Company'sCompany’s foreign subsidiaries amounted to approximately$3,133 thousand$53.6 million at December 31,1999.2002. The Company has not recorded a provision for withholding tax on undistributed earnings of foreign subsidiaries, as the Company currently has no plans to repatriate those earnings. Determination of the amount of unrecognized deferred tax liabilities is not practicable because of the complexities associated with its hypothetical calculation.Income taxes paid during
19992002 were$810 thousand (1998 - $2,316 thousand; 1997 - - $2,531 thousand)$1.7 million (2001 — $33.3 million; 2000 — $4.3 million).14. RELATED PARTY TRANSACTIONS In addition to matters discussed elsewhere, the61
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Related Party Transactions
The Company had the following transactions with related parties. The Company recorded $2.3 million as sales revenue from Sumitomo Heavy Industries, Ltd., a significant shareholder
of $11.7 millionin thetwelve monthsyear ended December 31,1999 (1998 - $15.52002 (2001 — $4.2 million;1997 $18.92000 $10.2 million) at amounts and terms approximately equivalent to third party transactions. Transactions with Sumitomo are at normal trade terms.The balance sheet reflects receivablesReceivables from Sumitomo of $0.5 million and $0.6 million asdue from related party. 4515. FINANCIAL INSTRUMENTS Short-term Investments Atat December 31,1999,2002 and 2001, respectively, are included in accounts receivable on the balance sheet.On February 23, 2000, the Company
had $7,342 thousand invested in short-term investments denominated in both U.S.entered into an Agreement with V2Air LLC relating to the use of the LLC aircraft for Company purposes. The V2Air LLC is owned by the Company’s President andCanadian dollars with maturity dates between January 13, 2000 and February 23, 2000. At December 31, 1998, the Company had $8,098 thousand invested in short-term investments denominated in Canadian dollars. Derivative Financial Instruments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and lossesChief Executive Officer, Charles D. Winston. Pursuant tooffset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company is in the process of quantifying the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of or method of adoption of SFAS 133. The Company does not actively trade derivative financial instruments but uses them to manage foreign currency and interest rate positions associated with its debt instruments. The terms of these derivative contracts matchthe terms of theunderlying debt instrumentsAgreement, the Company is required to reimburse the V2Air LLC for certain expenses associated with the use of the aircraft for Company business travel. During the most recently completed fiscal year, the Company reimbursed V2Air LLC approximately $145 thousand (2001 — $150 thousand) under the terms of such Agreement.In January of 2001, the Company made an investment of $2.0 million in a technology fund, managed by OpNet Partners, L.P. During 2002, the Company received approximately $1.4 million of the investment. In the second quarter of 2002, the Company wrote-down the investment by $0.2 million to its estimated fair market value and
are generally usedwrote-off the remainder of the investment of $0.4 million in the fourth quarter of 2002. Richard B. Black, a member of the Company’s Board of Directors, is a General Partner for OpNet Partners, L.P.On April 26, 2002, the Company entered into an agreement with Photoniko, Inc, a private photonics company in which one of the Company’s directors, Richard B. Black, was a director and stock option holder. As of August 16, 2002, Mr. Black was no longer a director or stock option holder of Photoniko, Inc. Under the agreement, the Company provided a non-interest bearing unsecured loan of $75 thousand to
reduce financing costs.Photoniko, Inc. to fund designated business activities at Photoniko, Inc. in exchange for an exclusive 90 day period to evaluate potential strategic alliances. In accordance with the terms of the agreement and the promissory note which was signed by Photoniko, Inc. on April 26, 2002, the loan was to be repaid in full to the Company no later than August 28, 2002, but still remains outstanding. The Companycurrentlyhasthree such contracts outstanding, twoprovided a full reserve for this receivable.11. Restructuring and other
Year Ended December 31, 2002 2001 2000 Restructuring charges $ 6,448 $ 3,380 $ 15,147 Reversal of restructuring charges — (450 ) (5,006 ) Other — reduction of purchased intangibles — 1,759 — Other — royalties (276 ) (348 ) (275 ) Other — legal settlements (745 ) (1,559 ) (2,670 ) Total restructuring and other $ 5,427 $ 2,782 $ 7,196
Restructuring charges
2002 In connection with a restructuring plan to align the Company’s manufacturing costs and operating expenses with the prevailing economic environment, the Company recorded a pre-tax restructuring charge of
which convert yen denominated debt$2.3 million in the fourth quarter of 2002. The Company downsized manufacturing operations in its Nepean, Ontario facility toU.S. dollar denominated debtfocus on its core optics business. As a result, we incurred $0.6 million of expense for62
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
severance and
one contract which converts a yen denominated debt into Canadian dollars. SFAS No. 107, Disclosures About Fair Valuebenefits for the termination ofFinancial Instruments, requires disclosureapproximately 41 employees. The Company also wrote-off approximately $0.2 million of excess fixed assets and wrote-down one of theyear-endNepean buildings by $0.2 million to its estimated fair market value. Additionally, we recorded charges of approximately $0.8 million for an adjustment to earlier provisions for the leased facilities in Munich, Maple Grove, Minnesota and Farmington Hills, Michigan. The Company took a further write-down of $0.3 million on the buildings in Kanata, Ontario and Rugby, United Kingdom. Also, a $0.1 million write-off for fixed assets in Kanata was recorded. The Company also reviewed the provision that it had recorded in 2000 related to residual value guarantees on the Maple Grove and Farmington Hills facilities and increased it by $0.1 million.The above charges were in addition to the restructuring charges recorded in the first half of 2002. The Company consolidated its Electronics systems business from its facility in Kanata, Ontario into the Company’s existing systems manufacturing facility in Wilmington, Massachusetts and transferred its laser business from the Company’s Kanata, Ontario facility to its existing facility in Rugby, United Kingdom. In addition, the Company closed its Kanata, Ontario facility. Restructuring provisions, totaling $2.7 million in the first quarter of 2002, relate to severance and benefits of $2.2 million for the termination of approximately 90 employees, $0.3 million for the write-off of furniture, equipment and system software, and $0.2 million for plant closure and other related costs. During the second quarter of fiscal 2002, the Company recorded additional restructuring charges of $1.4 million related to cancellation fees on contractual obligations of $0.3 million and a write-down of land and building in Kanata, Ontario and Rugby, United Kingdom of $0.8 million, and also leased facility costs of $0.3 million at the Farmington Hills and Oxnard locations.
At December 31, 2002, the net book value of
significant financial instruments, including debt. The Company believes, based upon current terms, that the carrying value of its debt approximates its fair value.
December 31, --------------------- 1999 1998 ------ ------Long term debt, including current portion: Sumitomo Heavy Industries, Ltd., Japanese yen term loans...... $3,917 $7,082 Favorable value of swaps: To convert 100 million yen (1998 - 200 million yen) to U.S. $683, (1998 - U.S. 1,365), semi-annual interest at the six-month LIBOR less 1.56%................................ 296 406 To convert 150 million yen (1998 - 300 million yen) to Canadian $1,163 (1998 - Cdn $2,326), semi-annual interest at the three month bankers acceptance rate less 1.62%......................................................... 669 1,136 To convert 150 million yen (1998 - 300 million yen) to U.S. $1,023 (1998 - U.S. $2,046), interest payable semi-annually at 8.20%........................................ 446 610 ------ ------ Favorable Value of swaps ..................................... 1,411 2,152 ------ ------ Economic Value ............................................... $2,506 $4,930 ====== ======The Company is exposed to credit-related losses with respect to the positive fair value of the swap contractstwo facilities, one inthe event of non-performance by the Canadian Imperial Bank of CommerceKanata, Ontario and theIndustrial Bankother in Nepean, Ontario, were reclassified as held for sale and included in other assets (note 3).Cumulative cash draw-downs of
Japan as counterparties. The Company does not expect any counterparties to fail to meet their obligations. 46Asapproximately $2.1 million and non-cash draw-downs of $1.8 million have been applied against the provisions taken in 2002, resulting in a remaining provision balance of $2.5 million at December 31,1999 and 1998,2002.
2001 During the
Company had no foreign exchange forward contracts. 16. RESTRUCTURING AND OTHER CHARGES Afourth quarter of fiscal 2001, a charge of$19.6$3.4 million wastaken during the three months ended April 2, 1999recorded to accrue employee severance of$5.6$0.9 million for approximately 35 employees at our Farmington Hills and Oxnard locations, leasedfacility and relatedfacilities costs of$4$1.8 million associated with restructuring for excess capacity at five leased locations in the United States, Canada, and Germany and write-down of leasehold improvements and certain equipment of $0.7 million associated with theclosureexiting of leased facilities.Cumulative cash draw-downs of approximately $2.4 million and non-cash draw-downs of $0.7 million have been applied against the
plantprovision, resulting inOxnard, Californiaa remaining provision balance of $0.3 million as at December 31, 2002.
2000 During the fourth quarter of fiscal 2000, a charge of $12.5 million was recorded to accrue employee severance of $1.0 million for approximately 50 employees and
redundant facilities worldwide, andother exit costs of$10$3.8 million for the Company’s United Kingdom operation and worldwide distribution system related to high-power laser systems for certain automotive applications; costs of $7.7 million associated with restructuring for excess capacity at three leased facility locations in the United States andintegrationGermany were also accrued. The Company also recorded a non-cash write-down ofoperationsland and building in the United Kingdom of $2.0 million. Compensation expense of $0.6 million arising on the acceleration of options upon the sale of businesses during the year was also charged to restructuring. In addition, an inventory write-down to net realizable value of $8.5 million was recorded in cost of goods sold related to the high-power laser system product line. The Company recorded a reversal of $0.5 million in the fourth quarter of 2001 for costs that will not be incurred.63
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cumulative cash draw-downs of $6.0 million, reversal of $0.5 million for restructuring costs that will not be incurred and a non-cash draw-down of $2.6 million have been applied against the provision, resulting in a remaining balance of $6.0 million as at December 31, 2002.
The following table summarizes changes in the restructuring provision.
Severance Facilities Other Total (In millions) Provision at December 31, 1999 $ 2.8 $ 3.9 $ 3.4 $ 10.1 Charges during 2000. 1.6 9.7 3.8 15.1 Cash draw-downs 2000. (1.8 ) (1.0 ) (1.5 ) (4.3 ) Reversals during 2000. (0.8 ) (2.3 ) (1.9 ) (5.0 ) Non-cash draw-down 2000. (0.6 ) (2.0 ) — (2.6 ) Provision at December 31, 2000 1.2 8.3 3.8 13.3 Charges during 2001. 0.9 2.5 — 3.4 Cash draw-downs 2001. (1.2 ) (1.6 ) (3.8 ) (6.6 ) Reversals during 2001. — (0.5 ) — (0.5 ) Non-cash draw-down 2001. — (0.7 ) — (0.7 ) Provision at December 31, 2001 0.9 8.0 — 8.9 Charges during 2002. 2.8 3.1 0.5 6.4 Cash draw-downs 2002. (2.5 ) (1.6 ) (0.5 ) (4.6 ) Non-cash draw-down 2002. — (1.9 ) — (1.9 ) Provision at December 31, 2002 $ 1.2 $ 7.6 $ — $ 8.8
Other During 2002, the Company recorded a net benefit of $0.7 million related to two litigation settlements. During 2002, the Company earned $0.3 million in royalties related to OLT precision alignment product line that was divested.
During the fourth quarter of 2001, the Company recorded a reduction of purchased intangibles related to technologies no longer a part of the business in the amount of $1.8 million in accordance with the policy described in note 1. The Company performed an assessment of the carrying values of intangible assets, including trademark and trade names, assembled workforce and developed technology, recorded in connection with its merger of equals with General Scanning, Inc. in 1999. The assessment was performed in light of the abandonment of certain technologies in 2001 that had been in development or production since the date of the merger and also the significant economic downturn. As a result of the
merger.assessment, it was determined that a portion of the intangible assets no longer had value and should be written-down to reflect the lower carrying value. TheOxnard manufacturing operations shut down was completed during December 1999. Other integration activities included exit costsCompany has determined that the remaining intangible asset balances at that time would continue to be amortized on a straight-line basis over the remaining useful lives established at the time of the related acquisition, as the remaining useful lives of these intangible assets has not changed.During 2001, the Company recorded a benefit of $0.3 million related to royalties earned on the sale of the OLT precision alignment system product line and adjusted an accrual related to litigation with Electro Scientific Industries, Inc. and recorded a benefit of $1.6 million. On April 18, 2001, the U.S. Court of Appeals for
some product lines, reducing redundant resources worldwide, and abandoning redundant sales and service facilities. During 1999, severance was paid to 130 employees in various locations worldwide. Actual coststhe Federal Circuit affirmed the judgment of the U.S. District Court foremployee severance for some activities have been less than estimated intheaccrual due to redeploymentNorthern District ofpersonnel and voluntary terminations. In addition, some facility exit costs and other integration costs have been less than originally estimated. These reductions are reflectedCalifornia in a$2.1patent infringement action filed by Electro Scientific Industries, Inc.64
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2000, the Company recorded a benefit of $0.2 million
reversal of restructuring charges duringrelated to royalties earned on thethree months ended December 31, 1999. Offsetting this reduction is an additional charge of $2.1 million for leased facilities costs in Oxnard, and elsewhere worldwide, additional employee severance costs worldwide, and other integration costs. The following table summarizes activity during the year ended December 31, 1999.
(in millions) Total Severance Facilities Integration --------- ---------- ----------- ------------Charge during Q1 1999............. $19.6 $ 5.6 $ 4.0 $10.0 1999 Actions...................... (9.5) (2.4) (0.2) (6.9) Reversals during Q4 1999.......... (2.1) (0.8) (1.1) (0.2) Charge during Q4 1999............. 2.1 0.4 1.2 0.5 ----- ----- ----- ----- Accrual remaining December 31, 1999............................ $10.1 $ 2.8 $ 3.9 $ 3.4 ===== ===== ===== =====The remaining accrual is for further reduction of redundant resources worldwide, including severance for approximately 160 employees. It is expected that most actions will be completed by end of 2000, but certain leased facility costs will take longer to resolve due to the naturesale of thelease commitments. 17. COMMITMENTS AND CONTINGENCIESOLT precision alignment system product line and $2.7 million received for licensing some of the Company’s technology.
12. Commitments and Contingencies
Operating leases The Company leases certain equipment and facilities under operating lease agreements that expire through 2013. The facility leases require the Company to pay real estate taxes and other operating costs. For the year ended December 31,
19992002, lease expense was approximately$4,666 thousand (1998 - $1,923 thousand; 1997 - $1,645 thousand)$3.5 million (2001 — $5.6 million, 2000 — $4.7 million).The Company leases two facilities under operating lease agreements that expire in 2003. At the end of the initial lease term, these leases require the Company to renew the lease for a defined number of years at the fair market rental rate or purchase the property at the fair market value. The lessor may sell the facilities to a third party but the leases provide for a residual value guarantee of the first 85% of any loss the lessor may incur on its $19.1 million investment in the buildings, which may become payable by the Company upon the termination of the transaction, or the Company may exercise its option to purchase the facilities for approximately $19.0 million. As of December 31, 2002, residual value guarantees in connection with these leases totaled approximately $16.0 million. Upon termination of the leases, the Company expects the fair market value of the leased properties to reduce substantially the payment under the residual value guarantees. During the fourth quarter of fiscal 2000, the Company took a charge of $6.0 million associated with restructuring for excess capacity at the two leased facility locations, including the estimated residual value guarantees. In the fourth quarter of 2002, the Company took an additional restructuring charge of $0.1 million to increase the reserve for the decline in the estimated market values of the underlying buildings. The total expected value of the buildings at the end of the leases may vary, depending on whether or not the buildings are leased at time of sale and whether the buildings are sold to a buyer/owner or to an investor. The Company will incur other costs such as lease and sales commissions. The lease agreement requires, among other things, the Company to maintain specified quarterly financial ratios and conditions. As of March 29, 2002, the Company was in breach of the fixed charge coverage ratio, but on April 30, 2002, the Company entered into a Security Agreement with the Bank of Montreal (“BMO”) pursuant to which the Company deposited with BMO and pledged approximately $18.9 million as security in connection with the operating leases discussed above in exchange for a written waiver from BMO and BMO Global Capital Solutions for any Company defaults of or obligations to satisfy the specified financial covenants relating to the operating lease agreements until June 30, 2003. This item is included on the balance sheet in long-term investments. The table of future minimum operating lease payments below excludes any payments relating to these guarantees.
Minimum lease payments under operating leases expiring subsequent to December 31,
19992002 are:
2003 $ 3,549 2004 2,474 2005 2,151 2006 1,608 2007 1,538 Thereafter 2,494 Total minimum lease payments $ 13,814 65
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has sublease agreements on certain leased facilities and will receive $1.4 million from 2003 to 2012.
2000 ................................... $ 4,849 2001 ................................... 4,041 2002 ................................... 3,327 2003 ................................... 2,595 2004 ................................... 2,535 Thereafter.............................. 7,602 ------- Total minimum lease payments............ $24,949 =======Recourse receivables 47Recourse receivablesIn Japan, where it is customary to do so, the Company discounts certain customer notes receivable at a bank with recourse. The
Company'sCompany’s maximum exposure was$2,961 thousand$1.4 million at December 31,1999.2002 (2001 — $0.6 million). The book value of the recourse receivables approximates fair value. During1999,2002, the Company received cash proceeds relating to the discounted receivables of$6,661 thousand. Legal proceedings and disputes A provision of $19$5.7 millionwas recorded during(2001 — $9.8 million). Recourse receivables are included in accounts receivable on thethree months ended April 2, 1999 to accrue damages and legal fees, through to appeal, relating tobalance sheet.
Legal proceedings and disputes Electro Scientific Industries, Inc. v.
General Scanning Inc., USDC Case No. C-96-4628, and is reflected as a reduction in net assets acquired at the time of merger. In October 1998 the U.S. District Court for the Northern District of California issued a decision on motions for summary judgment in an action filed against General Scanning Inc. for alleged patent infringement concerning U.S. Patent Nos. 5,265,114 and 5,473,624. The Court granted Electro Scientific's motions for summary judgment on infringement and on the issue of whether Electro Scientific committed inequitable conduct by intentionally failing to cite prior art to the U.S. Patent Office in connection with one of its patents. The Court denied General Scanning Inc.'s motion for summary judgment that the Electro Scientific patents are invalid due to prior art. During March 1999, the Court granted Electro Scientific's motion for partial summary judgment that upgrade kits, sold by General Scanning for 1.3 micron laser wavelength memory repair, infringe the Electro Scientific patents in suit. The referenced patents cover the use of 1.32 micron wavelength lasers in the repair of memory chips and semiconductors with imbedded memory. In April 1999 a federal court jury issued a verdict that Electro Scientific's patent 5,473,624 was invalid, and that Electro Scientific's patent 5,265,114 was valid, and awarded a $13.1 million damage judgment. A federal district court judge ruled on several post-trial matters in July 1999. The Court refused Electro Scientific's requests to increase damages awarded by the jury in April, and for attorney fees, but granted interest on the damages. The Court also affirmed the jury's decision to invalidate one of the two patents asserted by Electro Scientific in the case. The Company has appealed the decisions on infringement, the validity of the second patent and the award of damages. The Company was required to post an unsecured bond with the court in order to proceed with the appeal. No date has been set for arguments. At GSI Lumonics' request, the U.S. Patent and Trademark Office ("PTO") has agreed to reexamine ESI's Patent No. 5,265,114, indicating in its November 18, 1999 Order that information not previously considered raised "a substantial new question of patentability." The PTO reexamination is a separate proceeding from GSI Lumonics' pending appeal of the ESI judgement. GSI Lumonics intends to present evidence in the reexamination that may invalidate ESI's `114 patent. The outcome is not determinable at this time. Robotic Vision Systems, Inc. v. View Engineering, Inc., USDC Case No. 95-7441. This case involves a patent infringement complaint by Robotic Vision Systems, Inc. ("RVSI") alleging infringement of U.S. Patent No. 5,463,227 by View Engineering, Inc. ("View"), a wholly-owned subsidiary of General Scanning Inc. The matter was tried before a judge sitting in the United States District Court for the Central District of California in November 1999, and the parties are currently awaiting the court's decision. RVSI alleges infringement relating to lead inspection machines formerly sold by View Engineering and seeks damages of $60.5 million. In settlement of separate litigation with RVSI in June 1998, arising from General Scanning Inc.'s acquisition of View in August 1996, General Scanning Inc. agreed not to compete in the field of semiconductor interconnection inspection. During the first six months of 1998, sales by General Scanning Inc. of all products used in semiconductor lead interconnection inspection which involved products relating to the alleged infringement totaled approximately 2% of General Scanning Inc.'s total sales. GSI Lumonics believes that RVSI's claims in the above action are without merit andGSI Lumonics, Inc.is vigorously defending these proceedings. However, if RVSI prevails on one or more of its claims and damages are awarded, there could be a material adverse effect on GSI Lumonics Inc.'s operating results and/or financial condition. The outcome is not determinable at this time. Commencement of Copyright Infringement Declaratory Judgement Action. On December 10, 1999 GSI Lumonics Inc. filed suit in the United States District Court for the District of Massachusetts seeking a declaration that GSI Lumonics' QuantArray Microarray Analysis Software does not infringe any copyright owned by BioDiscovery, Inc. or its president, Soheil Shams. BioDiscovery, Inc. is a manufacturer of microarray quantification software under the name ImaGene(R). GSI Lumonics previously distributed ImaGene(R) software under a non-exclusive arrangement with BioDiscovery, but subsequently developed its own software when BioDiscovery refused to develop necessary 48On March 16, 2000, Electro Scientific Industries, Inc. filed an action for patent infringement in the United States District Court for the Central District of California against the Company and Dynamic Details Inc., an unrelated party enhancements to stay abreast of industry trends, especially in the field of multi-channel scanning. GSI Lumonics felt compelled to file suit to resolve these copyright issues and is confident in its position. On December 21, 1999, BioDiscovery and its President, Soheil Shams, responded to the GSI Lumonics' declaratory judgement action by filing a separate suit in the Federal Court in Los Angeles, CA, alleging that GSI Lumonics reverse engineered software and also sued for copyright infringement. GSI Lumonics has applied to the California court to seek the prompt dismissal of the California action in favor of its prior pending action. In the matter before the United States District Court for the District of Massachusetts, the court denied BioDiscovery's motion to dismiss and has scheduled the trial for May 2000. The outcome is not determinable at this time. Other. As the Company has disclosed since 1994, a party has commenced legal proceedings in the United States against a number of U.S. manufacturing companies, including companies that have purchased systems from GSI Lumonics Inc. The plaintiff in the proceedings has alleged that certain equipment used by these manufacturers infringes patents claimed to be held by the claimant. While GSI Lumonics Inc. is not a defendant in any of the proceedings, several of GSI Lumonics Inc.'s customers have notified GSI Lumonics Inc. that, if the party successfully pursues infringement claims against them, they may require GSI Lumonics Inc. to indemnify them to the extent that any of their losses can be attributed to systems sold to them by GSI Lumonics Inc.. While GSI Lumonics does not believe that the outcome of these claims will have a material adverse effect upon GSI Lumonics, there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon GSI Lumonics' financial condition or results of operations. Risks and Uncertainties The Company has experienced, and may continue to experience, fluctuations in operating results due to a variety of factors, including: the rate of growth of the markets for laser systems and components; industry cycles in target markets; market acceptance of the Company's products and those of its competitors; development and promotional expenses relating to the introductions of new products or new versions of existing products; changes in pricing policies by the Company and its competitors; the timing of the receipt of orders from major customers; the timing of shipments and economic conditions in foreign markets. Certain of the components and materials included in the Company's laser systems and optical products are currently obtained from single source suppliers. There can be no assurance that a disruption of this outside supply would not create substantial manufacturing delays and additional cost to the Company. There is no concentration of credit risk related to the Company's position in trade accounts receivable other than the amount due from Sumitomo Heavy Industries, Ltd., a related party. Credit risk, with respect to trade receivables, is minimized because of the diversification of the Company's operations, as well as its large customer base and its geographical dispersion. 18. SEGMENT INFORMATION GSI Lumonics Inc. designs, develops, manufactures and markets laser-based advanced manufacturing systems and components. The laser systems and components are used in highly automated environments for applications such as cutting, drilling, welding, marking, micro machining, inspection and coding a wide range of products and materials in the automotive, electronics, semiconductor, packaging, medical and aerospace industries. The printers are used in the medical and photo-finishing industries. The Company's principal markets are in the United States, Canada, Europe, Japan and Asia-Pacific. During the three months ended December 31, 1999, the Company re-evaluated its reportable segments and concluded it has one reportable segment. In classifying operational entities into a particular segment, the Company aggregated businesses with similar economic characteristics, products and services, production processes, customers and methods of distribution. 49Geographic Segment Information The Company attributes revenues to geographic areas on the basis of the customer location. Long-lived assets are attributed to geographic areas in which Company assets reside.
Year ended December 31, ----------------------------------------------------------------------- Revenues from external customers: 1999 1998 1997 ------------------- ------------------- ---------------------USA........................... $143,034 52% $ 61,269 42% $ 91,835 52% Canada........................ 10,782 4% 8,264 6% 9,750 5% Europe........................ 65,296 24% 40,427 28% 33,385 19% Japan......................... 32,648 12% 15,987 11% 19,806 11% Latin and South America....... 1,631 0% 657 1% 1,577 1% Asia-Pacific, other........... 21,159 8% 17,588 12% 20,975 12% ----------- ----------- ------------ Total......................... $274,550 100% $144,192 100% $177,328 100% =========== =========== ============ Long-lived assets: US............................ $ 42,424 $ 5,548 $ 5,342 Canada........................ 7,726 9,567 11,307 Europe........................ 17,484 20,848 10,757 Japan......................... 591 - - Asia-Pacific, other........... 400 318 301 ----------- ----------- ------------ Total......................... $ 68,625 $ 36,281 $ 27,707 =========== =========== ============19. SUBSEQUENT EVENTSet al.whothat is one of theCompany'sCompany’s customers. Electro Scientificallegesalleged that the Companyoffersoffered to sell and import into the United Statesourthe GS-600 high speed laser drilling system and that Dynamic Detailspossessespossessed andusesused a GS-600 System.TheyIt furtherallegealleged that DynamicDetails infringes onDetails’ use of the GS-600 laser system infringed ElectroScientific'sScientific’s U.S. patentno.5,847,960 and that the Companyhashad actively induced the infringement of, and contributorily infringed,on,the patent. Electro Scientificseekssought an injunction,anunspecifiedamount ofdamages, trebling of those damages, and attorney fees.The Company intendsGSI Lumonics indemnified Dynamic Details with respect tovigorously defend this claimthese allegations. On August 14, 2001, the United States District Court for the Central District of California granted the Company’s motion for summary judgment of non-infringement andbased on its investigationdenied Electro Scientific’s motion for summary judgment of infringement. In the ruling, the Court concluded that the GS-600 system did not literally infringe the asserted claims of the alleged Electro Scientific patent, nor did it infringe under the doctrine of equivalents. On September 7, 2001, Electro Scientific appealed the District Court’s decision on the summary judgment motions and oral arguments were heard on May 7, 2002. On October 7, 2002, the Court of Appeals vacated the summary judgment ruling of non-infringement of the District Court and remanded the matter back todate, it believesthe District Court for additional claim construction. In November 2002, the Company reached an agreement with Electro Scientific Industries Inc. and Dynamic Details pursuant to which the case was dismissed without prejudice. In connection with the agreement, the Company paid Electro Scientific Industries an amount thatit will prevail. The outcome iswas notdeterminable at this time. 50GSI LUMONICS INC. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Three months ended ----------------------------------------------------------------- December 31, October 1, July 2, April 2, 1999 1999 1999 1999 -------- -------- -------- --------Sales ............................................ $ 88,667 $ 78,041 $ 69,248 $ 38,594 Cost of goods sold ............................... 54,273 47,553 45,872 31,075 -------- -------- -------- -------- Gross profit ..................................... 34,394 30,488 23,376 7,519 Operating expenses: Research and development ....................... 8,676 8,104 8,584 3,336 Selling, general and administrative ............ 17,931 17,704 18,521 10,497 Amortization of technology and other intangibles 1,251 1,251 1,251 317 Acquired in-process research and development ... -- -- -- 14,830 Restructuring and other charges ................ -- -- -- 19,631 -------- -------- -------- -------- Income (loss) from operations .................... 6,536 3,429 (4,980) (41,092) Gain on sale of assets ......................... 1,599 -- -- -- Interest income (expense), net ................. (14) 2 (93) 194 Foreign exchange transaction gains (losses) .... (1,767) (514) 157 (787) -------- -------- -------- -------- Income (loss) before income taxes ................ 6,354 2,917 (4,916) (41,685) Income taxes provision (benefit) ................. 2,115 874 (1,174) (4,371) -------- -------- -------- -------- Net income (loss) ................................ $ 4,239 $ 2,043 $ (3,742) $(37,314) ======== ======== ======== ======== Foreign currency translation adjustments ....... (2) 2,499 (1,462) 718 Change in unrealized gain (loss) on marketable . (380) 58 467 (145) equity securities, net ........................ -- -- -- -- -------- -------- -------- -------- Comprehensive income (loss) ...................... $ 3,857 $ 4,600 $ (4,737) $(36,741) ======== ======== ======== ======== Net income (loss) per common share: Basic .......................................... $ 0.12 $ 0.06 $ (0.11) $ (1.94) Diluted ........................................ $ 0.12 $ 0.06 $ (0.11) $ (1.94) Weighted average common shares outstanding (000's) 34,222 34,173 34,167 19,204 Weighted average common shares outstanding and dilutive potential common shares (000's)......... 35,755 35,085 34,167 19,204The quarterly amounts differ frommaterial to the Company’s results of operationspublishedor financial position.Other.As the Company has disclosed since 1994, a party has commenced legal proceedings in
interimthe United States against a number of U.S. manufacturing companies, including companies that have purchased systems from the Company. The plaintiff in the proceedings has alleged that certain equipment used by these manufacturers infringes patents claimed to be held by the plaintiff. While the Company is not a defendant in any of the proceedings, several of the Company’s customers have notified the Company that, if the party successfully pursues infringement claims against them, they may require the Company to indemnify them to the extent that any of their losses can be attributed to systems sold to them by the Company. The Company does not believe that the outcome of these claims will have a material adverse effect upon the Company, but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon the Company’s financialreportscondition or results of operations.The Company is also subject to various legal proceedings and claims, which arise in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon the Company’s financial conditions or result of operations but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon the Company’s financial condition or results of operations.
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GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Risks and uncertainties The Company uses financial instruments that potentially subject it to concentrations of credit risk. Such instruments include cash equivalents, securities available-for-sale, trade receivables and financial instruments used in hedging activities. The Company does not believe it is exposed to any significant credit risk on
form 10-Q duethese instruments.Certain of the components and materials included in the Company’s laser systems and optical products are currently obtained from single source suppliers. There can be no assurance that a disruption of this outside supply would not create substantial manufacturing delays and additional cost to the Company.
There is no concentration of credit risk related to the Company’s position in trade accounts receivable. Credit risk, with respect to trade receivables, is minimized because of the diversification of the Company’s operations, as well as its large customer base and its geographical dispersion.
The Company’s operations involve a number of other risks and uncertainties including, but not limited to, the cyclicality of the semiconductor and electronics markets, rapidly changing technology, and international operations.
13. Financial instruments
Cash equivalents, short-term and long-term investments At December 31, 2002, the Company had $53.3 million invested in cash equivalents denominated in U.S. dollars with average maturity dates between January 2, 2003 and March 24, 2003. At December 31, 2001, the Company had $79.8 million cash equivalents denominated in U.S. dollars with average maturities between January 7, 2002 and March 01, 2002.
At December 31, 2002 the Company had $29.0 million in short-term investments and $37.4 million in long-term investments invested in U.S. dollars with maturity dates between January 6, 2003 and November 23, 2004. As discussed in Note 4 to the financial statements, $14.5 million of short-term investments are pledged as collateral for the Fleet and CIBC credit facilities at December 31, 2002 and $18.9 million of the long-term investments is pledged as security for the lease agreements with BMO as described in Note 12 above. At December 31, 2001 the Company had $43.5 million invested in short-term investments denominated in U.S. dollars with maturity dates between January 24, 2002 and May 6, 2002.
Derivative financial instruments The Company only uses derivatives for hedging purposes. The following is a summary of the Company’s risk management strategies and the effect of these strategies on the Company’s consolidated financial statements.
The Company has instituted a foreign currency cash flow hedging program to manage exposures to changes in foreign currency exchange rates associated with forecasted sales transactions. Currency forwards and swaps are used to fix the cash flow variable of local currency costs or selling prices denominated in currencies other than the functional currency. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer intended or expected to occur, and any previously unrealized hedging gains or losses recorded in other comprehensive income are recorded to earnings immediately. Earnings impacts for all designated hedges are recorded in the consolidated statement of operations generally on the same line item as the gain or loss on the item being hedged. The Company records all derivatives at fair value as assets or liabilities in the consolidated balance sheet, with classification as current or long-term depending on the duration of the instrument.
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GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2002, the Company had eleven foreign exchange forward contracts to purchase
accounting$16.9 million U.S. dollars and one currency swap contract fair valued at $8.7 million U.S. dollars with an aggregate fair value loss of $0.5 million after-tax recorded in accumulated other comprehensive income and maturing at varying dates in 2003. At December 31, 2001, the Company had eight foreign exchange forward contracts to purchase $17.8 million U.S. dollars and one foreign exchange option contract to purchase $6.5 million U.S. dollars and an aggregate fair value gain of $0.8 million and maturing at various dates in 2002. At December 31, 2000, the Company had four foreign exchange contracts to purchase $6.5 million with a fair value loss of $164 thousand that matured and was recognized in earnings during the first quarter of 2001.
14. Segment Information
General description During 2002, the Company changed the way it manages its business to reflect a growing focus on its three core businesses: components, lasers and laser systems. In classifying operational entities into a particular segment, the Company aggregated businesses with similar economic characteristics, products and services, production processes, customers and methods of distribution. Segment information for the
merger2001 year has been restated to conform to the current year’s presentation. Segment information for the 2000 year has not been restated because it is impracticable to do so. In 2000, there were other businesses and product lines that have been subsequently divested or discontinued that do not conform to the new segments, as such the information would not be comparable.The Executive Committee (“EC”) has been identified as the chief operating decision maker in assessing the performance of the segments and the allocation of resources to the segments. The EC evaluates financial performance based on measures of profit or loss from operations before income taxes excluding the impact of amortization of purchased intangibles, acquired in-process research and development, restructuring and other, gain (loss) on sale of assets and investments, interest income, interest expense, and foreign exchange transaction losses. Certain corporate-level operating expenses, including corporate marketing, finance, and administrative expenses, are not allocated to operating segments. Intersegment sales are based on fair market values. All intersegment profit, including any unrealized profit on ending inventories, is eliminated on consolidation. The accounting policies of the segments are the same as those described in note 1.
GSI Lumonics operations include three reportable operating segments: the Components segment (Components); the Laser segment (Laser Group); and the Laser Systems segment (Laser Systems).
Components — The Company’s component products are designed and manufactured at our facilities in Billerica, Massachusetts, Nepean, Ontario and Moorpark, California and are sold directly, or, in some territories, through distributors, to original equipment manufacturers (“OEMs”). Products include optical scanners and subsystems used by OEMs for applications in materials processing, test and measurement, alignment, inspection, displays, imaging, graphics, vision, rapid prototyping, and medical use such as dermatology and ophthalmology. The Components Group also manufactures printers for certain medical end products such as defibrillators, patient care monitors and cardiac pacemaker programmers, as well as film imaging subsystems for use in CAT scans and magnetic resonance imaging systems. Under the trade name, WavePrecision, we also manufacture precision optics supplied to OEM customers for applications in aerospace and semiconductor. Major markets are medical, semiconductor, and electronics, light industrial and aerospace.
Laser Group — The Company designs and manufactures a wide range of lasers at our Rugby, United Kingdom facility for sale in the merchant market to end-users, OEMs and systems integrators. We also use some of these products in the Company’s own laser systems. The Laser Group also derives significant revenues from providing parts and technical support for lasers in its installed base at customer locations. These lasers are primarily used in material processing applications (cutting, welding and drilling) in light automotive,
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GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
electronics, aerospace, medical and light industrial markets. The lasers are sold worldwide directly in North America and Europe, and through distributors in Japan, Asia Pacific and China. Sumitomo Heavy Industries (a significant shareholder of the Company) is our distributor in Japan. Specifically, our pulsed and continuous wave Nd:YAG lasers are used in a variety of medical, light automotive and industrial settings.
Laser Systems — The Company’s laser systems are designed and manufactured at our Wilmington, Massachusetts facility and are sold directly, or, in some territories, through distributors, to end users, usually semiconductor integrated device manufacturers and electronic component and assembly manufacturers. The Laser Systems Group also derives significant revenues from servicing systems in its installed base at customer locations. System applications include laser repair to improve yields in the production of dynamic random access memory chips (“DRAMs”), permanent marking systems for silicon wafers and individual dies for traceability and quality control, circuit processing systems for linear and mixed signal devices, as well as for certain passive electronic components, and printed circuit boards (“PCB”) manufacturing systems for via hole drilling, solder paste inspection and component placement inspection.
In 2001, the Company had reported its WavePrecision division as a separate business segment. During 2002, with
General Scanning Inc.restructuring actions taken as a result of the collapse of the telecom market sector, the Company has placed this group in its Components segment. At the end of 2002, WavePrecision did not meet the criteria of a business segment, as defined in SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information.
Segments Information on reportable segments is as follows:
Year Ended December 31, 2002 2001 Components $ 70,436 $ 88,689 Laser Group 23,748 39,119 Laser Systems 65,906 123,969 Intersegment sales elimination (1,020 ) (3,873 ) $ 159,070 $ 247,904 Components $ 16,763 $ 18,603 Laser Group (5,010 ) 4,425 Laser Systems (18,732 ) (23,712 ) (6,979 ) (684 ) Unallocated amounts: Corporate expenses 19,754 12,983 Amortization of purchased intangibles 5,135 5,226 Restructuring and other 5,427 2,782 $ (37,295 ) $ (21,675 ) 69
GSI LUMONICS INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
valuationEC does not review asset information on a segmented basis and the Company does not maintain assets on a segmented basis, therefore a breakdown ofintangibleassetslandby segments is not included.
Geographic segment information The Company attributes revenues to geographic areas on the basis of the customer location. Long-lived assets include property, plant and equipment and intangibles, but exclude other assets, long-term investments and deferred
taxestax assets are attributed to geographic areas in which Company assets reside.
Year Ended December 31, 2002 2001 2000 Revenues from external customers: USA $ 94,654 59 % $ 119,321 48 % $ 177,813 48 % Canada 1,883 1 % 11,410 5 % 20,159 5 % Europe 25,804 16 % 50,745 20 % 71,973 19 % Japan 23,460 15 % 40,956 17 % 58,173 16 % Latin and South America 1,249 1 % 852 0 % 5,563 1 % Asia-Pacific, other 12,020 8 % 24,620 10 % 40,183 11 % Total $ 159,070 100 % $ 247,904 100 % $ 373,864 100 %
As at December 31, 2002 2001 Long-lived assets and goodwill: USA $ 24,158 $ 29,754 Canada 6,625 9,404 Europe 11,540 11,484 Japan 618 686 Asia-Pacific, other 136 221 Total $ 43,077 $ 51,549
15. Subsequent Events On March 28, 2003, a registration statement was
completed at different amounts than estimated resulting in negative goodwillfiled whereby the Company proposed its shareholders consider a Plan of Arrangement which,was allocatedif the Arrangement is approved and becomes effective, would restructure the Company as a publicly traded US domiciled corporation. The Arrangement, if approved, includes a 1 for 2 reverse split whereby two common shares of the Company would be exchanged for one common share of the new, publicly traded US domiciled corporation. These consolidated financial statements do not give effect to thelong term assets.impact of this proposed share consolidation.70
GSI LUMONICS INC.
SUPPLEMENTARY FINANCIAL INFORMATION
(U.S. GAAP and in thousands of U.S. dollars, except share amounts)(Unaudited)
Three Months Ended December 31, September 27, June 28, March 29, 2002 2002 2002 2002 (Unaudited) Sales $ 45,099 $ 37,419 $ 39,664 $ 36,888 Gross profit 13,408 11,310 12,203 12,273 Net income (4,577 ) (5,415 ) (11,112 ) (6,620 ) Net income per common share: Basic $ (0.11 ) $ (0.13 ) $ (0.27 ) $ (0.16 ) Diluted $ (0.11 ) $ (0.13 ) $ (0.27 ) $ (0.16 )
Three Months Ended December 31, September 28, June 29, March 30, 2001 2001 2001 2001 Sales $ 42,378 $ 41,277 $ 76,542 $ 87,707 Gross profit 10,214 10,518 30,917 34,133 Net income (14,575 ) (8,487 ) 3,585 4,779 Net income per common share: Basic $ (0.36 ) $ (0.21 ) $ 0.09 $ 0.12 Diluted $ (0.36 ) $ (0.21 ) $ 0.09 $ 0.12 Subsequent to Q2 2002, the Company made a reclassification of $0.5 million from cost of goods sold to selling, general and administrative expenses, effective for the period ending June 30, 2002. This reclassification did not effect the net loss presented for Q2 2002.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None
PART III
Item 10. Directors and Executive Officers of the Registrant Directors
The
following reconciles net income changes:
Net income (loss) as reported on form 10-Q ............................ $1,999 $(3,786) $(35,491) Less: additional in-process research and development ............. - - (1,830) Less: additional intangibles amortization expense ................ (378) (378) (63) Plus: reduced depreciation expense ............................... 422 422 70 ------ ------- -------- Net income (loss) restated ............................................ $2,043 $(3,742) $(37,314) ====== ======= ========51ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISRANT Directors Theinformation required by this Item with respect to directors iscontained inincorporated herein by reference to theCompany'sCompany’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 24, 2003 (the “2003 Proxy Statement”) filed with the Securities and Exchange Commission pursuant to Regulation 14A.Richard B. Black is President and Chief Executive Officer of ECRM, Inc. (“ECRM”), a manufacturer of laser systems equipment for the printing and publishing industry. He served as Chairman of ECRM until March 2002. Mr. Black also serves as a General Partner for OpNet Partners, L.P., a technology investment fund. He has served as Vice Chairman of Oak Technology, Inc. (Oak) since March 1999 and as President of Oak from January 1998 to March 1999, and has been a director at Oak since 1988. From 1987 to 1997, Mr. Black served as a General Partner for KBA Partners, L.P., a technology venture capital fund. Prior to that time, he served as president and CEO of AM International, Inc., Alusuisse of America, Inc., and Maremont Corporation. In addition to ECRM and Oak, he currently serves as a director of the following companies: Altigen Communications Inc., Applied Optoelectronics, Inc., Gabelli Group Capital Partners, Inc., TREX Enterprises, and Benedetto Gartland, Inc.
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Paul F. Ferrari has been an independent consultant since 1991. Previously, he was Vice President of Thermo Electron Corporation from 1988 to 1991 and was Treasurer of Thermo Electron Corporation from 1967 to 1988. He also served as a director of Thermedics Inc. and ThermoTrex Inc.
Phillip A. Griffiths, Ph.D. is serving as the Director of the Institute for Advanced Study in Princeton, New Jersey, where he is responsible for managing the various research activities of the Institute. Prior to joining the Institute in 1991, Dr. Griffiths was Provost and James B. Duke Professor of Mathematics at Duke University for eight years. He has also taught at Harvard University, Princeton University and the University of California, Berkeley. He currently serves as a Director of Oppenheimer Funds, Inc.
Byron O. Pond has been serving as Chairman and Chief Executive Officer of Amcast Industrial Corp. since April 2002. He joined Amcast in February 2001 as President and Chief Executive Officer. Prior to that time and since 1990, Mr. Pond was a senior executive with Arvin Industries, Inc. serving as its President and Chief Executive Officer from 1993 to 1996 and as its Chairman and Chief Executive Officer from 1996 to 1998. He retired as Chairman of Arvin Industries, Inc. in 1999. He currently serves as a Director of Cooper Tire and Rubber Company and Precision Castparts Corporation.
Benjamin J. Virgilio is currently the President and Chief Executive Officer of BKJR, Inc. of Toronto, Canada and was previously, from July 2000 until February 2001, the Chairman of Robotic Technology Systems, Inc. Mr. Virgilio was the President and Chief Executive Officer of Rea International Inc., an automotive fuel systems manufacturer, from May
8, 2000 (the "2000 Proxy Statement")1995 to July 2000. Prior to May 1995, Mr. Virgilio was a business consultant. Prior to November 1993, he was President andis incorporated herein by reference.Chief Executive Officer of A.G. Simpson Limited.Charles D. Winston served as President and Chief Executive Officer of General Scanning, Inc. beginning in September 1988 and became a member of the Board of Directors in 1989. Mr. Winston became the President, Chief Executive Officer and a member of the Board of Directors of the Company following the merger of General Scanning Inc. and Lumonics Inc. in 1999. Prior to joining General Scanning, Inc., from 1986 to 1988, Mr. Winston was a management consultant. In 1986, Mr. Winston was an officer of Savin Corporation. From 1981 to 1985, he served as a Senior Vice President of Federal Express Corporation.
Executive Officers
The information required by this Item with respect to executive officers is set forth
underbelow.The following table sets forth the
caption "Executive Officers"names, ages and positions of the current executive officers of the Company as at March 16, 2003, and the principal occupations held by each person named for at least the past five years.
Name Age Position with GSI Lumonics Charles D. Winston 62 President and Chief Executive Officer Thomas R. Swain 57 Vice President, Finance and Chief Financial Officer Linda Palmer 51 Vice President, Human Resources Kurt A. Pelsue 51 Vice President, Technology Felix I. Stukalin 41 Vice President, Business Development Charles D. Winston has served as Chief Executive Officer of GSI Lumonics since March 1999 and as President since November 1999. He previously served as President and Chief Executive Officer of General Scanning commencing in
Part ISeptember 1988. Mr. Winston served as a Director ofthis report.General Scanning from 1989 until the merger with Lumonics. Prior to joining General Scanning, from 1986 to 1988, Mr. Winston served as a management consultant. During 1986, Mr. Winston was an officer of Savin Corporation. From 1981 to 1985, he served as a Senior Vice President of Federal Express Corporation.Thomas R. Swain has held his current position of Vice President and Chief Financial Officer since September 2000. Prior to that Mr. Swain served as Director of Real Estate Operation from April 1999 until August 2000. He joined General Scanning in August 1996 with the acquisition of View Engineering and
72
served as Vice President and General Manager, View Engineering Division until December 1997, then served as Vice President of Business Development from January 1998 through March 1999. Prior to its acquisition by General Scanning, Mr. Swain had served as President and Chief Executive Officer of View Engineering.Linda Palmer assumed her current role as Vice President, Human Resources in December 1999 having served as Vice President of Integration from March 1999. She had been General Scanning’s Vice President of Human Resources beginning in 1996. Prior to that time, Ms. Palmer served as Director of Human Resources for Analog Devices.
Kurt A. Pelsue assumed his current position as Vice President, Technology in March 1999. He had served as Vice President, Corporate Engineering for General Scanning from 1997 to 1999. Prior to that time, Mr. Pelsue held numerous senior level engineering assignments within General Scanning. He joined General Scanning in 1976.
Felix I. Stukalin was appointed to his current position of Vice President, Business Development in April 2002. Mr. Stukalin served as Vice President, WavePrecision since March 2000 and Vice President, Components prior to that. He joined General Scanning in 1994 as Director of Engineering for the Components Division and in 1999 was appointed General Manager of that Division.
Reports of Beneficial Ownership
The information required by this
item is contained in the 2000 Proxy Statement andItem is incorporated herein byreference. ITEM 11. EXECUTIVE COMPENSATION The responsereference tothis item is contained intheCompany's 2000Company’s 2003 Proxy Statement filed with the Securities and Exchange Commission pursuant to Regulation 14A.
Item 11. Executive Compensation The information required by this Item is incorporated herein by
reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT The responsereference tothis item is contained intheCompany's 2000Company’s 2003 Proxy Statement filed with the Securities and Exchange Commission pursuant to Regulation 14A.Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by
reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The responsereference tothis item is contained intheCompany's 2000Company’s 2003 Proxy Statement filed with the Securities and Exchange Commission pursuant to Regulation 14A.Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by
reference. 52PARTreference to the Company’s 2003 Proxy Statement filed with the Securities and Exchange Commission pursuant to Regulation 14A.Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, GSI Lumonics management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of effectiveness of disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in our internal controls or other factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
73
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
LIST OF FINANCIAL STATEMENTSList of Financial Statements
The financial statements required by this item are listed in Item 8,
"Financial“Financial Statements and SupplementaryData"Data” herein.LIST OF FINANCIAL STATEMENT SCHEDULESList of Financial Statement Schedules
See
Schedule“Schedule II-Valuation and Qualifying Accounts.” All other schedules are omitted because they are not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto.LIST OF EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.1 Amended and Restated Agreement and PlanList of
Merger, dated as of October 27, 1998, by and amongExhibitsSee the
Registrant, Grizzly Acquisition Corp., New Grizzly Acquisition Corp. and General Scanning Inc. Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules referred to in the Merger Agreement are omitted. The Registrant hereby undertakes to furnish supplementally a copy of any omitted Schedule to the Commission upon request. (4) 3.1Company’s SEC filings on Edgar at: http://www.sec.gov/ for all Exhibits.
Exhibit Number Description 2.1 Amended and Restated Agreement and Plan of Merger, dated as of October 27, 1998, by and among the Registrant, Grizzly Acquisition Corp., New Grizzly Acquisition Corp. and General Scanning, Inc. Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules referred to in the Merger Agreement are omitted. The Registrant hereby undertakes to furnish a supplemental a copy of any omitted Schedule to the Commission upon request.(4) 2.2 Purchase and Sale Agreement and Joint Escrow Instructions, dated as of February 29, 2000, by and between Alexandria Real Estate Equities, Inc., and General Scanning, Inc., including amendments.(8) 2.3 Asset Purchase Agreement, dated as of August 19, 2000, between GSI Lumonics Life Science Trust, GSI Lumonics Trust, Inc. and Packard BioScience Company.(7) 3.1 Certificate and Articles of Continuance of the Registrant dated March 22, 1999.(4) 3.2 By-Law No.1 of the Registrant.(4) 4.1 Line of Credit Agreement between the Registrant and CIBC dated April 8, 1998 and accepted April 15, 1998.(4) 4.2 Rights Agreement, dated as of April 12, 1999 between GSI Lumonics Inc. and Montreal Trust Company of Canada, as Rights Agent.(12) 4.3 1981 Stock Option Plan of GSI.(1) 4.4 1992 Stock Option Plan of GSI.(1) 4.5 1995 Directors’ Warrant Plan of GSI.(1) 4.6 1994 Key Employees and Directors Stock Option Plan of the Registrant.(4) 4.7 1995 Stock Option Plan for Employees and Directors of the Registrant.(6) 4.8 GSI Lumonics Inc. Employee Stock Purchase Plan.(11) 4.9 Restatement of the 1995 Stock Option Plan for Employees and Directors of the Registrant.(13) 4.10 Security Agreement between the Registrant and the Bank of Montreal dated April 30, 2002.(14) 4.11 Waiver to Certain of the Operative Agreements between the Registrant and GSI Lumonics Corporation on one part and BMO Global Capital Solutions and the Bank of Montreal on the other part dated April 30, 2002.(14) 4.12 Loan Agreement among General Scanning Inc., GSI Lumonics Corporation and Fleet National Bank dated June 28, 2002.(14) 4.13 Secured Revolving Time Note between General Scanning Inc. and Fleet National Bank dated June 28, 2002.(14) 74
Exhibit Number Description 4.14 Security Agreement between General Scanning Inc. and Fleet National Bank dated June 28, 2002.(14) 4.15 Credit Line Letter Agreement between the Registrant and Canadian Imperial Bank of Commerce dated June 28, 2002.(14) 4.16 Amendment to Credit Line Letter Agreement between the Registrant and Canadian Imperial Bank of Commerce dated June 28, 2002.(14) 10.1 Lease Agreement between JRF II Associates Ltd. Partnership and Lumonics Corporation dated September 24, 1991.(4) 10.2 Industrial Space Lease between Lumonics Corporation and The Travelers Insurance Company dated March 17, 1992.(4) 10.3 Lease Agreement between Lumonics Corporation and Sisilli dated June 1994.(4) 10.4 GSI Lease dated July 31, 1996, as amended to date, between View Engineering, Inc. and Donald J. Devine as Trustee under the Donald J. Devine Trust Agreement.(2) 10.5 Lease dated July 15, 1997, as amended to date, between GSI and The Wilmington Realty Trust.(3) 10.6 Severance Agreement between the Registrant and Patrick D. Austin dated April 13, 1998.(4) 10.7 Split Dollar Compensation Agreement dated September 13, 1997 between GSI and Charles D. Winston.(3) 10.8 Key Employee Retention Agreement between GSI and Victor H. Woolley, dated May 1, 1997.(4) 10.9 Settlement Agreement dated June 12, 1998 between GSI and Robotic Vision Systems, Inc.(4) 10.10 Severance Agreement between the Registrant and Charles D. Winston dated April 21, 1999.(5) 10.11 Severance Agreement between the Registrant and Kurt Pelsue dated April 21, 1999.(5) 10.12 OEM Supply Agreement between the Registrant and Sumitomo Heavy Industries, Ltd. dated August 31, 1999.(5) 10.18 Employment Agreement between the Registrant and Charles D. Winston dated January 1, 2000.(8) 10.19 Severance Agreement between the Registrant and Thomas Swain dated May 24, 2001.(9) 10.20 Severance Agreement between the Registrant and Charles Winston dated May 24, 2001.(9) 10.21 Severance Agreement between the Registrant and Victor Woolley dated May 24, 2001.(9) 10.22 Severance Agreement between the Registrant and Eileen Casal dated May 24, 2001.(9) 10.23 Severance Agreement between the Registrant and Linda Palmer dated May 24, 2001.(9) 10.24 Severance Agreement between the Registrant and Kurt A. Pelsue dated May 24, 2001.(10) 10.25 Severance Agreement between the Registrant and Alfonso DaSilva dated July 9, 2001.(10) 10.26 Separation Agreement and General Release between the Registrant and Patrick D. Austin dated August 21, 2001.(10) 10.29 Amendment to Employment and Severance Agreements between the Registrant and Charles D. Winston dated February 26, 2002.(13) 10.30 Employment Agreement between the Registrant and Victor H. Woolley dated June 25, 2002.(14) 10.31 Termination Amendment to Severance Agreement between the Registrant and Victor H. Woolley dated June 25, 2002.(14) 10.32 Agreement of Purchase and Sale of property between the Registrant and Marcomm Fibre Optics, Inc. dated March 7, 2003 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Chartered Accountants. 99 Selected Consolidated Financial Statements and Notes in U.S. Dollars and in accordance with Canadian Generally Accepted Accounting Principles. 75
Exhibit Number Description 99.1 Management’s Discussion and Analysis of Financial Condition and Results of Operations — Canadian Supplement. 99.2 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to GSI’s Registration Statement on Form S-1, filed August 11, 1995. (2) Incorporated by reference to GSI’s Annual Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to GSI’s Annual Report on Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to Lumonics’ Registration Statement on Form S-4/ A Amendment No. 2, filed February 11, 1999. (5) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999. (6) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed August 4, 2000. (7) Incorporated by reference to the Company’s Current Report on Form 8-K filed October 16, 2000. (8) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. (9) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2001.
(10) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2001. (11) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed November 16, 2001. (12) Incorporated by reference to the Company’s Registration Statement on Form 8-A filed January 24, 2002. (13) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. (14) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2002. Reports on Form 8-K
• Form 8-K dated November 11, 2002 — Item 9, Regulation FD Disclosure Disclosed, and included as an exhibit, written communication comprised of slides which were provided and disseminated in both written and oral form to participants in a series of investor presentations delivered in Canada by officers of the
Registrant dated March 22, 1999. (4) 3.2 By-Law No.1Company during the week ofthe Registrant. (4) 10.1 Line of Credit Agreement between the Registrant and CIBC dated April 8, 1998 and accepted April 15, 1998. (4) 10.2 Loan Agreement between Sumitomo Heavy Industries, Ltd. and the Registrant dated August 10, 1990. (4) 10.3 Lease Agreement between JRF II Associates Ltd. Partnership and Lumonics Corporation dated September 24, 1991. (4) 10.4 Industrial Space Lease between Lumonics Corporation and The Travelers Insurance Company dated March 17, 1992. (4) 10.5 Lease Agreement between Lumonics Corporation and Sisilli dated June 1994. (4) 10.6 GSI Lease dated July 31, 1996, as amended to date, between View Engineering, Inc. and Donald J. Devine as Trustee under the Donald J. Devine Trust Agreement. (2) 10.7 Lease dated July 15, 1997, as amended to date, between GSI and The Wilmington Realty Trust. (3) 10.8 1998 Management Incentive Plan of the Registrant. (4) 10.9 1998 Executive Management Incentive Plan of the Registrant. (4) 10.10 Severance Agreement between the Registrant and Patrick D. Austin dated April 13, 1998. (4) 10.11 Severance Agreement between the Registrant and John W. George dated April 13, 1998. (4) 10.12 Severance Agreement between the Registrant and Desmond J. Bradley dated April 13, 1998. (4) 10.13 Split Dollar Compensation Agreement dated September 13, 1997 between GSI and Charles D. Winston. (3) 10.14 Key Employee Retention Agreement between GSI and Victor H. Woolley, dated May 1, 1997. (4) 53EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.15 Settlement Agreement dated June 12, 1998 between GSI and Robotic Vision Systems, Inc. (4) 10.16 Severance Agreement between the Registrant and Charles D. Winston dated April 21, 1999. 10.17 Severance Agreement between the Registrant and Michael R. Kampfe dated April 21, 1999. 10.18 Severance Agreement between the Registrant and Kurt Pelsue dated April 21, 1999. 10.19 Severance Agreement between the Registrant and Warren Scott Nix dated October 26, 1999. 10.20 Severance Agreement between the Registrant and Gregory S. Baletsa dated May 18, 1999. 10.21 OEM Supply Agreement between the Registrant and Sumitomo Heavy Industries, Ltd. dated August 31, 1999. 21.1 Subsidiaries of the Registrant. (4) 21.2 Subsidiaries of GSI. (3) 23.1 Consent of Independent Chartered Accountants. 24.1 Powers of Attorney. (4) 99.1 Amended and Restated Stock Option Agreement dated October 27, 1998 by and among GSI, Lumonics and Grizzly Acquisition Corp. (4) 99.2 Stock Option Agreement dated October 27, 1998 by and among GSI and Lumonics. (4) 99.3 Form of Proxy for GSI common stock. (4) 99.4 1981 Stock Option Plan of GSI. (1) 99.5 1992 Stock Option Plan of GSI. (1) 99.6 1995 Directors' Warrant Plan of GSI. (1) 99.7 1994 Executive Management Stock Option Plan of the Registrant. (4) 99.8 1994 Key Employees and Directors Stock Option Plan of the Registrant. (4) 99.9 1995 Employees and Directors Stock Option Plan of the Registrant. (4) - --------- (1) Incorporated by reference to GSI's registration statement on Form S-1, filed August 11, 1995 (33-95718) (2) Incorporated by reference to GSI's Current Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to GSI's Current Report on Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to Lumonics' registration statement on Form S- 4/A Amendment No. 2, filed February 11, 1999 (333-71449) REPORTS ON FORM 8-K On March 9, 2000 the Company filed a Current Report on Form 8-K relating to a private ruling received by the company from the Internal Revenue Service concerning the taxability of the merger transaction for General Scanning Inc. shareholders. 54November 4, 2002. 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, GSI Lumonics Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GSI LUMONICS INC. (Registrant) By: /s/
GSI LUMONICS INC. (Registrant)
By: /s/ CHARLES D. WINSTON
Charles D. Winston President and Chief Executive Officer
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 in the capacities and on the dates indicated.
Name Title Date /s/ CHARLES D. WINSTON
Charles D. WinstonDirector and Chief Executive Officer
(Principal Executive Officer)March 28, 2003 /s/ THOMAS R. SWAIN
Thomas R. SwainVice President Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)March 28, 2003 /s/ RICHARD B. BLACK
Richard B. BlackDirector March 28, 2003 /s/ PAUL F. FERRARI
Paul F. FerrariDirector March 28, 2003 /s/ BYRON O. POND
Byron O. PondDirector March 28, 2003 /s/ BENJAMIN J. VIRGILIO
Benjamin J. VirgilioDirector March 28, 2003 /s/ PHILLIP A. GRIFFITHS
Phillip A. GriffithsDirector March 28, 2003 77
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEYACT OF 2002CERTIFICATION
I, Charles D. Winston,
-------------------------------------------- Charles D. Winston President and Chief Executive Officer 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 in the capacities and on the dates indicated. Name Title Date - -------------------------- --------------------------------- -------------- /s/ Charles D. Winstoncertify that:
1. I have reviewed this annual report on Form 10-K of GSI Lumonics Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ CHARLES D. WINSTON Charles D. Winston Director and Chief Executive Officer Date: March
21, 2000 - -------------------------- Executive Officer Charles D. Winston (Principal Executive Officer) /s/ Desmond J. Bradley28, 200378
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEYACT OF 2002CERTIFICATION
I, Thomas R. Swain, certify that:
1. I have reviewed this annual report on Form 10-K of GSI Lumonics Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ THOMAS R. SWAIN Thomas R. Swain Vice President Finance and Chief Financial Officer Date: March
21, 2000 - -------------------------- Chief Financial Officer Desmond J. Bradley (Principal Financial and Accounting Officer) /s/ Richard Black Director March 21, 2000 - -------------------------- Richard Black /s/ Paul F. Ferrari Director March 21, 2000 - -------------------------- Paul F. Ferrari /s/ Woodie Flowers Director March 21, 2000 - -------------------------- Woodie Flowers /s/ Byron O. Pond Director March 21, 2000 - -------------------------- Byron O. Pond /s/ Benjamin J. Virgilio Director March 21, 2000 - -------------------------- Benjamin J. Virgilio /s/ William B. Waite Director March 21, 2000 - -------------------------- William B. Waite 5528, 2003 79
GSI LUMONICS INC.
SCHEDULE II
-— VALUATION AND QUALIFYING ACCOUNTS
Description BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------------------------------------------------------------------------------------------------------------Year ended December 31, 1997 Allowance for doubtful accounts......... $221 $ 15 $ - $ 45 $ 191 - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998 Allowance for doubtful accounts......... $191 $109 $ - $ (11) $ 311 - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 Allowance for doubtful accounts......... $311 $615 $2,799 * $(528) $3,197 - ----------------------------------------------------------------------------------------------------------------* Increase due to merger with General Scanning Inc. 56
| Balance at | Charged to | Charged | Balance | ||||||||||||||||||
| Beginning | Costs and | to Other | at End | ||||||||||||||||||
| Description | of Period | Expenses | Accounts | Deductions | of Period | ||||||||||||||||
| Year ended December 31, 2000 | |||||||||||||||||||||
| Allowance for doubtful accounts | $ | 3,197 | $ | 935 | $ | — | $ | (1,374 | ) | $ | 2,758 | ||||||||||
| Year ended December 31, 2001 | |||||||||||||||||||||
| Allowance for doubtful accounts | $ | 2,758 | $ | 1,130 | $ | — | $ | (854 | ) | $ | 3,034 | ||||||||||
| Year ended December 31, 2002 | |||||||||||||||||||||
| Allowance for doubtful accounts | $ | 3,034 | $ | 209 | $ | — | $ | (562 | ) | $ | 2,681 | ||||||||||
80