UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 333-71449
GSI Lumonics Inc.
(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 telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Title of Each Class
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] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On February 29, 2000, 34,546,875 shares of the Common Stock of GSI Lumonics
Inc. were issued and outstanding. Non-affiliates of the registrant held
27,532,855 shares having an aggregate market value of U.S. $691,762,982 based on
the closing price of the shares on Nasdaq on February 29, 2000 of U.S. $25.125.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 2000 are incorporated by reference in Part III of
the Report. Other documents incorporated by reference are listed in the Exhibit
Index.
GSI LUMONICS INC.
Annual Report - Form 10-K
TABLE OF CONTENTS
PART I....................................................................... 3
ITEM 1. BUSINESS OF GSI LUMONICS INC........................................ 3
Overview.......................................................... 3
Corporate History................................................. 3
Industry Overview................................................. 4
Corporate Strategy................................................ 5
Products and Services............................................. 6
Customers......................................................... 9
Marketing, Sales and Customer Support............................. 9
Competition........................ .............................. 10
Manufacturing...................... .............................. 10
Research and Development........... .............................. 11
Patents 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................. 14
Executive Officers Of The Registrant.............................. 14
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 Consolidated 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..... 53
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As used in this report, the terms "we," "us," "our," "GSI Lumonics" and the
"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), LightWriter(R), ScreenCut(R), ICMARKII(TM), LuxStar(R),
Laserdyne(R), Xymark(R), LaserMark(R) QuantArray(R) and ScanArray(R).
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.
PART I
ITEM 1. BUSINESS OF GSI LUMONICS INC.
Overview
We design, develop, manufacture and market laser-based advanced manufacturing
systems and components for a wide range of applications, including cutting,
drilling, welding, marking, micro-machining, inspection, and optical detection
and transmission. Major markets for these products include the semiconductor,
electronics, automotive, medical/biotechnology and telecommunications
industries. In addition, we sell to other markets such as the aerospace and
packaging industries.
Corporate History
Lumonics Inc. was incorporated in 1970 for the purpose of producing lasers for
scientific and research applications. We first became a public company in 1980,
and our common shares were listed on The Toronto Stock Exchange until 1989. In
1989, all of our common shares 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
outstanding shares.
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 micropositioning of laser beams. Starting in the
mid-to-late 1980s, General Scanning began manufacturing complete laser-based,
advanced manufacturing systems for the semiconductor and electronics markets as
well as a number of other applications such as aerospace, assembly and medical
recording and imaging.
On March 22, 1999, Lumonics and General Scanning completed a merger of equals
and continued 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
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Scanning shareholders and the Lumonics shareholders each, as a group, owned
approximately 50% of the combined company's common shares.
Industry Overview
Laser-based systems are used in many different applications such as material
processing, medical therapy, instrumentation, research, telecommunications,
optical storage, entertainment, image recording, inspection, measurement and
control, bar-code scanning and other end uses.
Industrial lasers are generally used in the machine-tool, automotive,
semiconductor and electronics industries. We expect capital equipment
expenditures by 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.
The laser 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 the semiconductor and
electronics industries, as well as automotive industry. In the semiconductor and
electronics industries, lasers are used 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
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cost, 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.
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PRODUCTS AND SERVICES
Semiconductor Market
Our laser systems are used in numerous production process steps within the
semiconductor industry, which is characterized by ever increasing demands on
throughput, reduced device size and increased device complexity, performance,
traceability and quality. Semiconductor devices are used in a variety of
products including automotive electronics, consumer products, personal
computers, communications products, appliances and medical instruments.
Laser Trim and Test Systems. These systems enable production of electronic
circuits by precisely tuning 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.
Permanent Marking Systems. We provide products to support the product marking
requirements of the semiconductor industry. WaferMark laser systems are used for
marking of silicon wafers at the front end of the semiconductor process, aiding
process control and device traceability. These systems incorporate advanced
robotics and proprietary process control technology to provide debris free
marking of high-density silicon wafers along automated production lines. We also
supply systems for die marking of 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 device marking
capabilities, such as in-tray marking of integrated circuits, are supported by
our HM, LM, and LightWriter series of laser marker products.
Memory Repair Systems. Dynamic random access memory chips 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 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 improves the yield of usable
components per treated wafer, effectively lowering the cost per unit produced.
Electronics Market
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. Our
GS series of products, which is 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.
Surface Mount Measurement Systems. Our surface mount measurement products are
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.
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Thick 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 line of laser marking systems for
printed circuit boards and other electronic components. These systems place
permanent high-contrast marks in any combination 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, our
proprietary 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
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repair 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.
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Customers
We have over 1,000 customers, many of whom are among the largest global
participants in their industries. Many of our customers participate in several
market segments. These customers include:
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
Vishay
Marketing, Sales and Customer Support
We 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's medium-to-long term requirements.
We direct our worldwide advanced manufacturing systems sales activities from
the United States. Sales management for components is based in Massachusetts.
Field offices are located close to key customers to maximize sales and support
effectiveness. 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 to
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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 several markets from both established
competitors and potential new market entrants. Significant competitive factors
include product functionality, performance, size, flexibility, cost, market
presence, customer satisfaction, customer support capabilities and breadth of
product line. 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.
Manufacturing
We perform internally those manufacturing functions that enable us to maintain
control over critical portions of the production process and outsource other
portions of the production process. This approach has led to changes in our
manufacturing organization as we move 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 our 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 at eleven facilities: four near Boston, Massachusetts, one each
in Arizona, California, and Minnesota, two near Ottawa, Canada, and two in the
United Kingdom. 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. Many 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 resources to development programs directed at
creating new products, product enhancements and new applications for existing
products, as well as funding research into formative market opportunities. The
markets we serve are 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 multiple locations
around the world. 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 in the following core technologies:
Lasers: both gas and solid-state, designed to produce efficient, reliable and
accurate laser sources in a broad range of configurations for material
processing 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: design of large laser-based advanced manufacturing systems and
small precision servo mechanisms and optical scanners, typically associated with
a broad spectrum of laser systems.
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 produce
highly efficient and effective application-specific manufacturing solutions
typically based on lasers and their interaction with materials including
integration with robotics systems.
Patents and Intellectual Property
Our intellectual property includes copyrights, patents, proprietary software,
technical know-how and expertise, designs, process techniques and inventions. We
own 85 United States and 52 foreign patents; in addition, applications are
pending for 43 United States and 89 foreign patents. We have also been licensed
under a number of patents in the United States and foreign countries. 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 trade secret protection for our confidential and proprietary
information. 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.
11
Human Resources
At December 31, 1999, we had 1,581 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%
===== =====
Other
Information concerning product lines, working capital, research and
development expenses, and seasonality may be found in section seven, Management
Discussion and Analysis. Information about geographic segments may be found in
note 18 to the financial statements.
ITEM 2. PROPERTIES
The 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
Additional sales, service and logistics sites are located in France, Hong
Kong, Italy, Japan, Korea, Malaysia, the Philippines, Singapore, and Taiwan.
These additional marketing and sales offices are in leased facilities occupying
approximately 42,000 square feet in the aggregate. The Company will soon occupy
a 56,000 square foot facility in Farmington Hills, Michigan which will be
subject to a five year lease commitment, and, as a result, will close the
facilities in Ann Arbor, Michigan and Livonia, Michigan.
12
ITEM 3. LEGAL PROCEEDINGS
Electro Scientific Industries, Inc. v. GSI Lumonics, Inc. 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
us and Dynamic Details Inc., an unrelated party who is one of our customers.
Electro Scientific alleges that we offer to sell, sell and import into the
United States our GS-600 high speed laser drilling system and that Dynamic
Details possesses and uses a GS-600 System. It further alleges that Dynamic
Details' use of our GS-600 laser system infringes on Electro Scientific's U.S.
patent number 5,847,960 and that we have actively induced the infringement of,
and contributorily infringed on the patent. Electro Scientific seeks 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 failing to cite 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 in the United States District Court for the Central District of
California in November 1999, and we are currently awaiting the court's decision.
Robotic Vision alleges infringement relating to lead inspection machines
formerly sold by View and seeks damages of $60.5 million. We believe that the
claims in this action are without merit and are vigorously defending the
proceedings.
If we lose on one or more of these 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 in
the United States District Court for the District of Massachusetts seeking a
declaration that our QuantArray Microarray Analysis Software does not infringe
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 applied to the California court to seek 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 and has scheduled the trial for May
2000. We believe that the claim in this action is without merit.
Potential Claim. In 1994, a party commenced legal proceedings in the United
States against a number of U.S. manufacturing companies, including companies
that have purchased systems from us. The plaintiff has alleged that
13
certain equipment used by these manufacturers infringes patents claimed to be
held by the plaintiff. We are not a defendant in any of the proceedings.
However, several of our customers have notified us that, if the party
successfully pursues infringement claims against them, they may require us to
indemnify them to the extent that any of their losses can be attributed to
systems we sold to them. We do not believe that the outcome of these claims will
have a material adverse effect on us, but there is a risk that these claims, or
similar claims, may have a material adverse effect on our financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Executive Officers of 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 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
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.
14
Felix 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 in December 1999, 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.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
GSI Lumonics common stock, no par value, trades on The Nasdaq Stock Market(R)
under the symbol GSLI and on The Toronto Stock Exchange (the "TSE") under the
symbol LSI. Prior to the merger, Lumonics' common stock was traded on The
Toronto Stock Exchange under the symbol LUM beginning September 29, 1995. From
May 1989 to September 28, 1995 the Company's Common Stock was not publicly
traded.
The following table sets forth, for the periods indicated, the high and low
prices per share of the common stock as reported by Nasdaq in U.S. dollars and
the TSE 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 6.75
Currency 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.
Holders
On February 29, 2000, there were approximately 149 holders of record of Common
Stock. Since many of the shares of Common Stock are registered in "nominee" or
"street" name, the Company estimates that the total number of beneficial owners
is considerably higher.
16
Dividends
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"), Canadian
withholding tax at a rate of 25% will be payable on dividends paid or credited,
or deemed to be paid or credited, by GSI Lumonics to a US holder on GSI Lumonics
common shares. Under the Convention, the withholding tax rate is generally
reduced to 15%, or if the US holder is a corporation that owns 10% or more of
GSI Lumonics voting stock, to 5%.
17
ITEM 6. SELECTED FINANCIAL DATA
This section presents our selected historical consolidated financial data. You
should read carefully the consolidated financial statements included in this
report, including the notes to the consolidated financial statements. 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.
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:
Research and development ............................................. 28,700 12,985 11,993 11,872 7,068
Selling, general and administrative .................................. 64,653 38,191 37,591 32,999 28,385
Amortization of technology 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 69,442
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You 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 Note Regarding Forward-Looking Statements"
elsewhere in this report.
Overview
We design, develop, manufacture and market laser-based advanced manufacturing
systems and components for a wide range of applications, including cutting,
welding, drilling, marking, micro-machining, inspection, and optical detection
and transmission. Markets for these products include the semiconductor,
electronics, automotive, medical/biotechnology and telecommunications
industries. In addition, we sell to other markets such as the aerospace and
packaging industries. Our systems sales depend on our customers' capital
expenditures which are affected by business cycles in the markets they serve.
Results of Operations for Fiscal Years Ended December 31, 1999, 1998 and 1997
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
The following table sets forth sales in millions of dollars to our primary
markets for 1999, 1998 and 1997.
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%
====== === ===== ====== === ==== ====== ===
Sales by Market. Our results of operations are affected by external factors that
impact the markets in which we compete. Sales to Japan and the Asia-Pacific
region were impacted by the financial crisis that occurred there in the fall of
1997 and the effects which extended into 1999. Japan suffered a recession during
the same period, brought about partly by the financial crisis. The semiconductor
equipment business was in a recession from mid-1998 through the first quarter of
1999.
In 1999, sales increased by 90% due primarily to the merger and improved
market conditions in the second half of the year in some 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% overall due to a sharp decline
in the semiconductor market as well as declines of 26% in the automotive market
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 and
into 1999. 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 demand
for our 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 the
medical and biotechnology markets increased in 1999 due primarily to the merger
and the increased market acceptance of ScanArray systems.
20
Sales 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 the improvement
of parts and service support for the former General Scanning systems. Largely as
a result of the slowdown in the semiconductor market in 1998, parts and service
revenues declined by 7% relative to the previous year.
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. The table below shows sales in millions of dollars to
each geographic region for 1999, 1998 and 1997.
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 increases in 1999 in all regions were due primarily to the merger.
Economic conditions in Japan have depressed our sales in that country during
the past few years. Before the merger, 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.
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 million at December 31, 1998.
Gross Profit Margin. Gross profit margin was 34.9% in 1999, 28.2% in 1998 and
37.2% in 1997. Gross profit margin in 1999 was affected 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.
Research and Development Expenses. Research and development expenses, net of
government assistance, for 1999 were 10.5% of sales or $28.7 million (excluding
the $14.8 million merger related in-process research and development charge),
compared with 9.0% of sales or $13.0 million in 1998 and 6.8% of sales or $12.0
million in 1997. The increase in 1999 was due primarily to the merger. During
1999, research and development activities focused on products targeted at the
electronics, semiconductor, biotechnology, aerospace and automotive markets.
During 1998, research and development activities focused on products targeted at
the aerospace and electronics markets.
21
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 23.5% of sales in 1999 due primarily to
operating efficiencies realized from the merger and increased sales. In 1998, in
dollar terms, selling, general and administrative expenses were essentially the
same as 1997.
Amortization of Technology and Other Intangibles. Amortization of technology
and other intangibles increased to 1.5% of sales or $4.1 million in 1999 as a
result of amortizing intangible assets acquired in the merger.
Restructuring and Other Charges. During 1999, we took a charge of $19.6
million to accrue for employee severance, leased facility and related costs
associated with the closure of our plant in Oxnard, California and other
facilities worldwide. These costs resulted from restructuring and integration of
operations following the merger. 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 took a restructuring charge
of $2.0 million for severance costs associated with a downsizing of our global
workforce.
Acquired In-Process Research and Development Costs. During 1999, we wrote
off $14.8 million of in-process research and development costs acquired in the
merger.
Interest Income. Net interest income was $0.1 million in 1999 compared with
$1.6 million or 1.1% of sales in 1998 and $1.0 million or 0.6% in 1997. The
decrease in net interest income in 1999 was due to higher average debt balances
and lower average cash and investments balances compared to 1998. The increase
in 1998 was a result of interest accrued for a full year on the investment of
proceeds received from the public issuance of two million shares in May 1997,
which raised $35.7 million.
Income Taxes. The effective rate of recovery for taxes for 1999 was 6.8% of
income before taxes, compared with an effective rate of recovery of 29.2% for
1998. In 1997, we had an effective tax rate of 29.9%. Our recovery rate in 1999
reflects the non-deductibility for tax purposes of acquired in-process research
and development costs arising from the merger and the non-recognition of the tax
benefit from losses in certain countries where future use of the losses is
uncertain. Our 29.2% recovery rate in 1998 derives primarily from our ability to
carry back current losses against prior year profits to recover taxes paid in
prior years. In addition, our annual effective tax rate 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.
Net Income (Loss). The net loss during 1999 was $34.8 million compared with a
net loss of $7.9 million in 1998 and a net income of $11.9 million in 1997. The
net loss during 1999 was due primarily to one-time restructuring and acquired
in-process research and development charges related to the merger offset in part
by improved operating margins. The net loss in 1998 was due primarily to
decreased sales volumes, gross margin erosion and downsizing activities.
22
Quarterly 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. In the
second half of the year, activity increased in the back end of the 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 million in the fourth quarter of 1999 compared to $78.0
million 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, sales to the components 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% in the fourth quarter of 1999, 39.1% in the
third quarter, 33.8% in the second quarter and 19.5% in the first quarter. The
gross profit margin in the fourth quarter reflected increased warranty expense
accrued related to emerging market products. This factor outweighed the benefits
from improved product mix and higher 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 reflected the first full quarter of combined General Scanning and
Lumonics results and the favorable mix of relatively high margin systems from
General Scanning's product line. Gross profit margin in the first quarter
reflected reduced sales volumes, pricing pressures, inventory provisions and an
unfavorable product mix, related primarily to our operations prior to the merger
in March 1999.
Liquidity and Capital Resources
Cash and cash equivalents totaled $25.3 million at December 31, 1999 compared
to $24.2 million at December 31, 1998 and $56.8 million at December 31, 1997.
During 1999, we used $4.4 million in operating activities. The net loss, after
adjustment for non-cash items, resulted in the use of cash of $6.7 million in
1999. Accounts receivable used a further $14.4 million, which was
24
more than offset by inventories, other current assets and current liabilities
providing $16.7 million. In 1998 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 million in investing activities, including $7.3 million
of purchases and $8.2 million of maturities of short-term investments. During
the year, we generated $3.9 million from the sale of business assets and
invested $6.2 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 of the Sumitomo distribution
business added $0.1 million in cash, 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 flow provided by financing activities was $5.4 million for the year ended
December 31, 1999 compared to cash used in financing activities of $10.6 million
in 1998 and $42.8 million provided by financing activities in 1997. The increase
in cash in 1999 relates primarily to a $7.5 million increase 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 through a public offering of 2 million common shares
and $1.9 million raised from the exercise of stock options.
Term loans from Sumitomo made in 1990 and 1991 are repayable 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 balance of $1.5 million, also due in 2000, under a
mortgage on property in California.
We have credit facilities of approximately $40 million denominated 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%). As at
December 31, 1999, we had unused and available demand lines of credit amounting
to approximately $19 million (1998--$9 million).
Accounts receivable and inventories have been pledged as collateral for the
bank indebtedness under general security agreements. The borrowings require us
to maintain specified financial ratios and conditions. We are currently in
compliance with those ratios and conditions.
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.
25
Update On Year 2000 Compliance
We have not experienced material problems related to the Year 2000. We are not
aware of customers having related problems with system products manufactured by
us. We are also not aware of any significant problems in receiving payments on
customer receivables due to Year 2000 problems. In addition, we are not aware of
any significant vendor performance issues due to Year 2000 problems identified.
We have 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, customers and vendors.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to market risk associated with changes in
interest rates relates primarily to our debt obligations and short-term
investments. 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 have three such contracts outstanding, two of which convert yen
denominated interest on long term debt into U.S. dollar denominated interest and
one 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 position in
trade accounts receivable other than the amount due from Sumitomo. Credit risk,
with respect to trade receivables, is minimized because of the diversification
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. We have a foreign currency hedging program using currency
forwards and currency options to hedge exposure to foreign currencies. The goal
of the hedging program is to manage risk associated with fluctuations in the
value of the foreign currency. We do not currently use currency forwards or
currency options for trading purposes. We currently have three such contracts
outstanding, two of which convert yen denominated obligations into U.S. dollar
obligations and one contract which converts yen denominated obligations into
Canadian dollar obligations.
26
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............................ 32
Notes to Consolidated Financial Statements....................... 33
27
AUDITORS' REPORT
To the Stockholders of
GSI Lumonics Inc.
We have audited the consolidated balance sheets of GSI Lumonics Inc. as of
December 31, 1999 and 1998 and the consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. Our audits also included the financial statement
schedule listed at Item 14 of this Form 10-K Annual Report. These financial
statements and the schedule are the responsibility of the Company'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, 1999
and 1998 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1999 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.
On February 11, 2000, we reported without reservation to the stockholders on
the Company's consolidated financial statements prepared in accordance with
accounting principles generally accepted in Canada.
Ernst & Young LLP
Chartered Accountants
Ottawa, Canada,
February 11, 2000
(except with respect
to note 19, which is
as at March 17, 2000)
28
GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS
(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
========= =========
The accompanying notes are an integral part of these financial statements
29
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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
======= ========= ========= ======== ======== =========
The accompanying notes are an integral part of these financial statements
30
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT 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
The accompanying notes are an integral part of these financial statements
31
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
======== ======== ========
The accompanying notes are an integral part of these financial statements
32
GSI LUMONICS INC.
Notes to Consolidated Financial Statements
as of December 31, 1999
(Tabular Amounts in Thousands of U.s. Dollars Except Share Amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
GSI Lumonics Inc. designs, develops, manufactures and markets laser-based
advanced manufacturing systems and components which are used in applications
such as cutting, welding, drilling, marking, micro-machining, inspection, gene
analysis and optical transmission. Major markets for these products include the
semiconductor, electronics, automotive, medical/biotechnology and
telecommunications industries. In addition, the Company sells to other markets
such as the aerospace and packaging industries. The Company's principal markets
are in the United States, Canada, Europe, Japan and Asia-Pacific.
Basis of presentation and change in reporting currency
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
The consolidated financial statements include the accounts of GSI Lumonics
Inc. and its wholly-owned subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated.
On March 22, 1999, the Company 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 included in the consolidated financial statements from
the date of merger (see Note 2).
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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Cash equivalents are investments held to maturity and have original maturities
of three months or less. Cash equivalents consist principally of commercial
paper, short-term corporate debt, and banker's acceptances. Cash equivalents are
stated at cost, which approximates their fair value. The Company does not
believe it is exposed to any significant credit risk on its cash equivalents.
33
Short-term Investments
Short-term investments consist principally of banker's acceptances, with
original maturities greater than three months. The Company has classified these
investments as available-for-sale securities and carries them at fair value.
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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The declining-balance and
straight-line methods determine depreciation and amortization over the estimated
useful lives of the owned assets. 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 Other Intangibles
Goodwill consists of the excess of cost over acquired net identifiable assets
for business purchase combinations. Other intangibles include assembled
workforce, trademarks and trade names.
The amortization period for goodwill and other intangibles is determined on a
separate basis for each acquisition. Goodwill and other intangibles are
amortized on a straight-line basis over periods ranging from a minimum of two to
a maximum of ten 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 to 17 years.
Impairment of long-lived assets
The Company regularly assesses the realizability of its long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of. Based on its review, the Company
expects full recovery.
Revenue Recognition
The Company recognizes revenues generally 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, when revenue 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.
34
Stock Based Compensation
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.
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. Assets and liabilities of foreign operations are translated from
foreign currencies into U.S. dollars at the exchange rates in effect at the
period-end. Revenues and expenses are translated at the average exchange rate
in effect for the period. The resulting translation adjustments are reported as
a separate component of other comprehensive income in stockholders' equity.
Derivative Financial Instruments
Foreign exchange forward contracts and local currency borrowings are used to
reduce the impact of certain foreign currency balance sheet fluctuations and
foreign currency denominated sales.
Gains and losses from forward contracts that are not hedges of firm
commitments are accrued at each balance sheet date and included in the
Consolidated Statements of Operations as foreign exchange transactions gains
(losses).
In certain circumstances, the Company uses currency and interest rate swap
contracts to manage foreign currency exposures and interest rate risk. Payments
and receipts under such swap contracts are recognized as adjustments to interest
expense on a basis that matches them with the fluctuations in the interest
receipts and payments under floating rate financial assets and liabilities.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and the income tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Recent Pronouncements
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin #101 on revenue recognition which is effective for our
current fiscal year. We believe this bulletin will not have a significant impact
on our reported sales.
Comparative Figures
Certain comparative figures have been reclassified from statements previously
presented to conform to the presentation of the 1999 financial statements.
2. MERGER AND ACQUISITIONS AND DISPOSITIONS
On March 22, 1999, the Company completed a merger of equals with General
Scanning Inc., Watertown, Massachusetts, a leading manufacturer of laser systems
and components, and printers. Under the terms of the merger, GSI stockholders
received 1.347 shares of common stock in 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
35
approximately 50% of the outstanding shares of the Company. The merger
transaction has been accounted for as a purchase and accordingly, the operations
of General Scanning have been included in the consolidated financial statements
from the date of merger. Cash flow impact of $1,451 thousand from the GSI merger
is cash acquired of $4,719 thousand, less merger costs of $3,268 thousand. The
aggregate purchase price of $84 million was allocated to General 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 being amortized on a straight line basis
over its useful life of 60 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.
36
As 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 34,030
On 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 over 10 years.
In December, 1999 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 the operating assets of
the OLT product line. GSI Lumonics recorded a gain of $699 thousand on this sale
during December 1999.
3. ACCOUNTS RECEIVABLE
Accounts receivable include unbilled receivables on long-term contracts of $0
(1998 - $5,531 thousand).
37
4. INVENTORIES
Inventories consist of the following:
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, plant and equipment 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 assets consist of the following:
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
====== ======
38
7. BANK INDEBTEDNESS
The Company has credit facilities of approximately $40 million which are
denominated in Canadian dollars, US dollars, Pound sterling 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 4.98% for
fiscal 1999 (1998--7%). As at December 31, 1999, the Company had unused and
available demand lines of credit amounting to approximately $19 million (1998 -
$9 million).
Accounts receivable and inventories have been 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. As at December 31, 1999, the Company was in compliance with those
ratios and conditions.
8. LONG-TERM DEBT
Current Portion of Long-term debt
Long-term debt includes a mortgage payable at 10-3/8% 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...................................... 102.1 113.0
The Company has entered into currency and interest rate swap contracts which
oblige it to pay Canadian dollars and receive Japanese yen, and pay U.S. dollars
and receive Japanese yen, on the dates principal and interest payments are due.
The terms of these contracts are described in Note 15.
Long term debt is comprised of:
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 debt during the year ended December 31, 1999
was $1,155 thousand (1998 - $899 thousand; 1997 - $1,112 thousand).
9. DEFERRED COMPENSATION
Certain officers and employees may defer 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 averaged
8.01% during the year ended December 31, 1999. The portion of deferred
compensation estimated to be due within one year is included in current
liabilities.
39
10. 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 Income
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 as the change 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 component of
accumulated other comprehensive income 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 income at end of year includes only unrealized foreign
currency translation gains and losses.
Net Income (Loss) Per Common Share
Basic income (loss) per common share was computed by dividing net income
(loss) by the weighted 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.
Common and common equivalent share disclosures are:
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
On April 12, 1999, the Board of Directors adopted a Shareholders Rights Plan
(the "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").
The Rights are not exercisable and cannot be transferred separately from the
common shares until the "Separation Time", which is defined as the eighth
business day (subject to extension by the Board) after the earlier of (a) the
"Stock Acquisition 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 any
40
person or group of affiliated or associated persons becomes an "Acquiring
Person" (a "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 Event 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.
In conjunction with the merger with General Scanning Inc. the Company adopted
outstanding options held by employees under nonqualified and incentive stock
options, and issued 2,051,903 stock options 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) $ 0.68
The 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 $3.76
Stock option activity for the years ended 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
====== ======
42
The following summarizes outstanding and exercisable options outstanding 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
======== =====
Repurchase of common shares
On April 29, 1998, the Board 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 with 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.
Warrants
In conjunction with the merger with General Scanning Inc. 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, none were granted, exercised or cancelled. At December 31,
1999, 70,718 warrants, of which 57,248 are exercisable, remain outstanding at
prices ranging from $1.75 to $15.41 per share.
11. 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 plan is
governed by the provisions of Section 401(k) of the Internal Revenue Code under
which contributions may be made by its United States employees. The Company
matches the contributions of participating employees on the basis of the
percentages specified in each plan. Company matching contributions to the plans
during 1999 were $2.3 million (1998 - $1.1 million; 1997 - $0.9 million).
12. DEFINED BENEFIT PENSION PLAN
The Company's subsidiary in the United Kingdom maintains a pension plan, known
as the GSI Lumonics Ltd. UK Pension Scheme. 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. The most recent actuarial valuation of the
plan was performed as at 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 as
follows:
43
1999 1998
--------------- ---------------
Pension fund assets ........................................ 13,700 12,000
Accrued pension benefits ................................... 13,700 9,500
The assumptions used to develop the actuarial present value of the accrued
pension benefits 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
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' average remaining service life.
Pension expense under this plan during fiscal 1999 was $520 thousand (1998 -
$670 thousand; 1997 -$500 thousand).
13. 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
======= ======= =======
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
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'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
======== ========
The Company has provided a valuation allowance against losses in 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 and tax credits related to its
wholly-owned subsidiary, View Engineering, Inc., due to the uncertainty of their
realizability as a result of limitations on their utilization in accordance with
certain US tax laws and regulations.
As at December 31, 1999, the Company had loss carryforwards of approximately
$34 million available to reduce future years' income for tax purposes. Of this
amount, approximately $8.5 million expires by the end of 2005 and a further $7.5
million expires by the end of 2019, with the remainder carried forward
indefinitely.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3,133 thousand at December 31, 1999. 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.
Income taxes paid during 1999 were $810 thousand (1998 - $2,316 thousand; 1997
- - $2,531 thousand).
14. RELATED PARTY TRANSACTIONS
In addition to matters discussed elsewhere, the Company had the following
transactions with related parties. The Company recorded sales revenue from
Sumitomo Heavy Industries, Ltd., a significant shareholder, of $11.7 million in
the twelve months ended December 31, 1999 (1998 - $15.5 million; 1997 $18.9
million) at amounts and terms approximately equivalent to third party
transactions. Transactions with Sumitomo are at normal trade terms. The balance
sheet reflects receivables from Sumitomo as due from related party.
45
15. FINANCIAL INSTRUMENTS
Short-term Investments
At December 31, 1999, the Company had $7,342 thousand invested in short-term
investments denominated in both U.S. and Canadian 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 losses to
offset 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 match the terms of the
underlying debt instruments and are generally used to reduce financing costs.
The Company currently has three such contracts outstanding, two of which convert
yen denominated debt to U.S. dollar denominated debt and one contract which
converts a yen denominated debt into Canadian dollars.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of the year-end fair 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 contracts in the event of non-performance by the Canadian
Imperial Bank of Commerce and the Industrial Bank of Japan as counterparties.
The Company does not expect any counterparties to fail to meet their
obligations.
46
As of December 31, 1999 and 1998, the Company had no foreign exchange forward
contracts.
16. RESTRUCTURING AND OTHER CHARGES
A charge of $19.6 million was taken during the three months ended April 2,
1999 to accrue employee severance of $5.6 million, leased facility and related
costs of $4 million associated with the closure of the plant in Oxnard,
California and redundant facilities worldwide, and costs of $10 million
associated with restructuring and integration of operations as a result of the
merger. The Oxnard manufacturing operations shut down was completed during
December 1999. Other integration activities included exit costs 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 costs for employee severance for some
activities have been less than estimated in the accrual due to redeployment of
personnel and voluntary terminations. In addition, some facility exit costs and
other integration costs have been less than originally estimated. These
reductions are reflected in a $2.1 million reversal of restructuring charges
during the three 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 nature of the lease commitments.
17. 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,
1999 lease expense was approximately $4,666 thousand (1998 - $1,923 thousand;
1997 - $1,645 thousand).
Minimum lease payments under operating leases expiring subsequent to December
31, 1999 are:
2000 ................................... $ 4,849
2001 ................................... 4,041
2002 ................................... 3,327
2003 ................................... 2,595
2004 ................................... 2,535
Thereafter.............................. 7,602
-------
Total minimum lease payments............ $24,949
=======
47
Recourse receivables
In Japan, where it is customary to do so, the Company discounts certain
customer notes receivable at a bank with recourse. The Company's maximum
exposure was $2,961 thousand at December 31, 1999. The book value of the
recourse receivables approximates fair value. During 1999, the Company received
cash proceeds relating to the discounted receivables of $6,661 thousand.
Legal proceedings and disputes
A provision of $19 million was recorded during the three months ended April 2,
1999 to accrue damages and legal fees, through to appeal, relating to 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
and GSI 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
48
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.
49
Geographic 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 EVENTS
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 the Company and Dynamic Details Inc., an unrelated party
who is one of the Company's customers. Electro Scientific alleges that the
Company offers to sell and import into the United States our GS-600 high speed
laser drilling system and that Dynamic Details possesses and uses a GS-600
System. They further allege that Dynamic Details infringes on Electro
Scientific's U.S. patent no. 5,847,960 and that the Company has actively induced
the infringement of, and contributorily infringed on, the patent. Electro
Scientific seeks an injunction, an unspecified amount of damages, trebling of
those damages, and attorney fees. The Company intends to vigorously defend this
claim and, based on its investigation of the patent to date, it believes that it
will prevail. The outcome is not determinable at this time.
50
GSI 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 19,204
The quarterly amounts differ from results of operations published in interim
financial reports on form 10-Q due to changes in the purchase accounting for the
merger with General Scanning Inc. The valuation of intangible assets, land and
deferred taxes was completed at different amounts than estimated resulting in
negative goodwill which was allocated to the long term assets. 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)
====== ======= ========
51
ITEM 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
The information with respect to directors is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 8, 2000 (the
"2000 Proxy Statement") and is incorporated herein by reference.
Executive Officers
The information with respect to executive officers is set forth under the
caption "Executive Officers" in Part I of this report.
Reports of Beneficial Ownership
The information required by this item is contained in the 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the Company's 2000 Proxy Statement
and is incorporated herein by reference.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LIST OF FINANCIAL STATEMENTS
The financial statements required by this item are listed in Item 8,
"Financial Statements and Supplementary Data" herein.
LIST OF FINANCIAL STATEMENT SCHEDULES
See 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 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
supplementally a copy of any omitted Schedule to the Commission upon
request. (4)
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)
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)
53
EXHIBIT
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.
54
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/ 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 Director and Chief March 21, 2000
- -------------------------- Executive Officer
Charles D. Winston (Principal Executive Officer)
/s/ Desmond J. Bradley Vice President Finance and 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
55
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