EXHIBIT 99
GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(Canadian GAAP and in thousands of U.S. dollars, except share amounts)
June 28, December 31,
2002 2001
-------- ------------
ASSETS
------
Current
Cash and cash equivalents ................................................... $ 95,487 $102,959
Short-term investments ...................................................... 44,088 43,541
Accounts receivable, less allowance of $3,286 (December 31, 2001 - $3,034) .. 32,341 39,919
Income taxes receivable ..................................................... 4,342 9,224
Inventories ................................................................. 57,723 57,794
Future tax assets ........................................................... 13,951 15,664
Other current assets ........................................................ 5,490 7,168
-------- --------
Total current assets .................................................... 253,422 276,269
Property, plant and equipment, net of accumulated depreciation of $51,331
(December 31, 2001 - $50,273) ............................................... 30,337 34,154
Future tax assets .............................................................. 8,684 9,637
Other assets ................................................................... 3,179 1,539
Other investment (note 9) ...................................................... 18,924 -
Intangible assets, net of amortization of $7,250
(December 31, 2001 - $6,535) ................................................ 8,535 9,236
-------- --------
$323,081 $330,835
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current
Bank indebtedness ........................................................... $ 9,735 $ 6,171
Accounts payable ............................................................ 13,298 10,839
Accrued compensation and benefits ........................................... 8,331 7,515
Other accrued expenses ...................................................... 23,377 25,096
Current portion of long-term debt ........................................... 2,654 2,654
-------- --------
Total current liabilities ............................................... 57,395 52,275
Deferred compensation .......................................................... 2,080 2,082
-------- --------
Total liabilities ....................................................... 59,475 54,357
Commitments and contingencies (note 9)
Stockholders' equity
Common shares, no par value; Authorized shares: unlimited; Issued and
outstanding: 40,686,383 (December 31, 2001 - 40,556,130) ................. 236,914 236,194
Contributed surplus ......................................................... 1,433 1,433
Retained earnings ........................................................... 18,998 35,747
Accumulated foreign currency translation adjustment ......................... 6,261 3,104
-------- --------
Total stockholders' equity .............................................. 263,606 276,478
-------- --------
$323,081 $330,835
======== ========
The accompanying notes are an integral part of these financial statements.
32
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Canadian GAAP and in thousands of U.S. dollars, except share amounts)
Three months ended Six months ended
-------------------------- -------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
-------- -------- -------- --------
Sales ................................................. $ 39,664 $76,542 $ 76,552 $164,249
Cost of goods sold .................................... 26,955 45,625 51,570 99,199
-------- ------- -------- --------
Gross profit .......................................... 12,709 30,917 24,982 65,050
Operating expenses:
Research and development ......................... 5,044 6,754 10,874 13,406
Selling, service and administrative .............. 15,761 19,442 29,420 40,064
Amortization of purchased intangibles ............ 436 273 707 547
Restructuring and other .......................... 1,407 - 4,152 (1,400)
-------- ------- -------- --------
Income (loss) from operations ......................... (9,939) 4,448 (20,171) 12,433
Other ............................................ (203) - (203) -
Interest income .................................. 554 1,913 1,199 3,171
Interest expense ................................. (213) (439) (353) (548)
Foreign exchange transaction gains (losses) ...... (1,268) 463 (884) 247
-------- ------- -------- --------
Income (loss) before income taxes ..................... (11,069) 6,385 (20,412) 15,303
Income tax provision (benefit) ........................ (396) 2,262 (3,663) 5,662
-------- ------- -------- --------
Net income (loss) ..................................... $(10,673) $ 4,123 $(16,749) $ 9,641
======== ======= ======== ========
Net income (loss) per common share:
Basic ......................................... $ (0.26) $ 0.10 $ (0.41) $ 0.24
Diluted ....................................... $ (0.26) $ 0.10 $ (0.41) $ 0.24
Weighted average common shares outstanding (000's) .... 40,638 40,288 40,615 40,251
Weighted average common shares outstanding and
dilutive potential common shares (000's) ......... 40,638 40,946 40,615 40,952
The accompanying notes are an integral part of these financial statements.
33
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited)
(Canadian GAAP and in thousands of U.S. dollars)
Six months ended
--------------------------
June 28, June 29,
2002 2001
-------- --------
Retained earnings, beginning of period ............ $ 35,747 $ 47,260
Net income (loss) ................................. (16,749) 9,641
-------- --------
Retained earnings, end of period .................. $ 18,998 $ 56,901
======== ========
The accompanying notes are an integral part of these financial statements.
34
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Canadian GAAP and in thousands of U.S. dollars)
Three months ended Six months ended
------------------------- -------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
--------- -------- --------- ---------
Cash flows from operating activities:
Net income (loss) ......................................... $ (10,673) $ 4,123 $ (16,749) $ 9,641
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Reduction of long-lived assets ....................... 800 - 1,130 -
Loss on disposal of assets ........................... - - 62 -
Depreciation and amortization ........................ 2,149 2,015 4,012 4,499
Deferred income taxes ................................ 2,757 4,285 2,899 3,688
Changes in current assets and liabilities:
Accounts receivable .................................. (729) 8,037 8,876 17,161
Inventories .......................................... (180) 567 1,445 (4,554)
Other current assets ................................. 133 (3,527) 558 (3,380)
Accounts payable, accrued expenses, and taxes
(receivable) payable ................................. 11,676 (18,272) 5,586 (50,018)
--------- -------- --------- ---------
Cash provided by (used in) operating activities ........... 5,933 (2,772) 7,819 (22,963)
--------- -------- --------- ---------
Cash flows from investing activities:
Disposal of assets ................................... - 6,000 - 6,000
Additions to property, plant and equipment ........... (1,365) (1,394) (1,987) (5,027)
Maturity of short-term investments ................... 19,806 28,134 58,874 48,154
Purchase of short-term investments ................... (26,482) (32,727) (78,345) (60,860)
Decrease (increase) in other assets .................. 477 (466) 2,075 (2,242)
--------- -------- --------- ---------
Cash used in investing activities ......................... (7,564) (453) (19,383) (13,975)
--------- -------- --------- ---------
Cash flows from financing activities:
Proceeds (payments) of bank indebtedness ............. (151) (174) 2,817 (912)
Issue of share capital ............................... 499 276 720 764
--------- -------- --------- ---------
Cash provided by financing activities ..................... 348 102 3,537 (148)
--------- -------- --------- ---------
Effect of exchange rates on cash and cash equivalents ..... 555 271 555 397
--------- -------- --------- ---------
Decrease in cash and cash equivalents ..................... (728) (2,852) (7,472) (36,689)
Cash and cash equivalents, beginning of period ............ 96,215 80,021 102,959 113,858
--------- -------- --------- ---------
Cash and cash equivalents, end of period .................. $ 95,487 $ 77,169 $ 95,487 $ 77,169
========= ======== ========= =========
The accompanying notes are an integral part of these financial statements.
35
GSI LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of June 28, 2002
(Canadian GAAP and tabular amounts in thousands of U.S. dollars except
share amounts)
1. Basis of Presentation
These unaudited interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles for interim
financial statements and in accordance with the accounting policies and methods
of application in the Canadian Consolidated Financial Statements for the year
ended December 31, 2001. Accordingly, these interim consolidated financial
statements do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. The
consolidated financial statements reflect all adjustments and accruals,
consisting only of adjustments and accruals of a normal recurring nature, which
management considers necessary for a fair presentation of financial position and
results of operations for the periods presented. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Canadian Consolidated Financial
Statements for the year ended December 31, 2001. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-Q for the three
months ended June 28, 2002, prepared in accordance with United States generally
accepted accounting principles. The results for interim periods are not
necessarily indicative of results to be expected for the year or any future
periods.
Comparative amounts
Certain comparative amounts have been reclassified to conform to the
presentation of the financial statements for the quarter ended June 28, 2002.
2. Inventories
Inventories consist of the following:
June 28, December 31,
2002 2001
--------- ------------
Raw materials ................... $28,116 $29,779
Work-in-process ................. 11,583 8,028
Finished goods .................. 10,443 12,918
Demo inventory .................. 7,581 7,069
------- -------
Total inventories .......... $57,723 $57,794
======= =======
3. New Accounting Pronouncements
Business Combinations
On January 1, 2002, the Company implemented, on a prospective basis, CICA
Handbook Section 1581, Business Combinations. As a result, all business
combinations initiated in the future will be accounted for under the purchase
method. The adoption of Section 1581 did not have a material impact on the
Company's financial position, results of operations or cash flows.
Intangible Assets
On January 1, 2002, the Company implemented, on a prospective basis, CICA
Handbook Section 3062, Goodwill and Other Intangible Assets. As a result,
intangible assets with finite useful lives must now be amortized and goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. The adoption of Section 3062
did not have a material impact on the Company's financial position, as it does
not possess goodwill or indefinite life intangible assets. Adoption of Section
3062 also did not have a material impact on the Company's results of operations
or cash flows.
36
Intangible assets consist of the following:
June 28, 2002 December 31, 2001
--------------------------------- ---------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Patents and acquired technology ......... $10,962 $ (2,427) $10,948 $ (1,895)
Other intangible assets ................. 4,823 (4,823) 4,823 (4,640)
------- -------- ------- --------
Total cost ......................... 15,785 $ (7,250) 15,771 $ (6,535)
Accumulated amortization ................ (7,250) ======== (6,535) ========
------- -------
Net intangible assets .............. $ 8,535 $ 9,236
======= =======
Stock-Based Compensation and Other Stock-Based Payments
Effective January 1, 2002 the Company adopted CICA Handbook section 3870,
Stock-based compensation and other stock-based payments. This new Section
establishes standards for the recognition, measurement and disclosure of
stock-based compensation and other stock-based payments made in exchange for
goods and services. It applies to transactions in which an enterprise grants
shares of common stock, stock options, or other equity instruments, or incurs
liabilities based on the price of common stock or other equity instruments.
Section 3870 outlines a fair value based method of accounting for certain
stock-based transactions. As permitted by Section 3870, the Company did not
adopt the fair value based method of accounting for all employee stock-based
transactions, and was not affected by the requirements to account for the fair
value of certain other stock-based transactions. The exercise price of all stock
options is equal to the market price of the stock on the trading day of the date
of grant. During the period ended June 28, 2002, the Company's treatment of
stock based compensation did not have a significant impact on the Company's
financial position, results of operations or cash flows.
Had compensation cost for the Company's stock option plans and employee stock
purchase plan been determined using a Black-Scholes option-pricing model,
including options granted in prior years on a retroactive basis, the Company's
net income (loss) and earnings per share would have been adjusted to the pro
forma amounts below.
Three months Six months
ended ended
June 28, 2002 June 28, 2002
------------- -------------
Net income (loss):
As reported ...................... $ (10,673) $ (16,749)
Pro forma ........................ $ (11,624) $ (18,858)
Basic net income (loss) per share:
As reported ...................... $ (0.26) $ (0.41)
Pro forma ........................ $ (0.29) $ (0.46)
Diluted income (loss) per share:
As reported ...................... $ (0.26) $ (0.41)
Pro forma ........................ $ (0.29) $ (0.46)
The fair value of options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions: dividend
yield of nil; an expected life upon vesting of 1.0 years; expected volatility of
70%; and risk-free interest rate of 2.33%.
The fair value of the employees' purchase rights under the employee stock
purchase plan was estimated using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of nil; an expected life of 6 months;
expected volatility of 70%; and risk-free interest rate of 2.33%.
37
4. Bank Indebtedness
During the quarter ended June 28, 2002, the Company negotiated new lines of
credit with Fleet National Bank ("Fleet") and Canadian Imperial Bank of Commerce
("CIBC") and allowed an unused portion of an existing line of credit with Bank
One to expire, reducing the total amount of available credit from $32.4 million
at December 31, 2001 to $24.7 million at June 28, 2002. The Company's agreement
with Fleet provides for an $8 million line of credit and its agreement with CIBC
provides for a $4 million line of credit. The previous $19 million line of
credit with CIBC expired on June 28, 2002 and the new CIBC credit facility
eliminated the Company's requirement to meet certain financial covenants which
were required under the previous credit facility. Marketable securities totaling
$14 million have been pledged as collateral for the Fleet and CIBC credit
facilities under security agreements. The line of credit with Fleet expires on
June 28, 2003 and the new line of credit with CIBC is subject to review by CIBC
on May 31, 2003 and if extended, may be cancelled at any time by the Company on
appropriate advance notice at no cost, excluding breakage fees relating to the
used and outstanding amounts under fixed loan instruments. In addition to the
customary representations, warranties and reporting covenants, the borrowings
under the Fleet credit facility require the Company to maintain a quarterly
minimum tangible net worth of $200 million. A portion of the Company's existing
credit facility with Bank One expired and was not renewed. The terms of the
remaining credit facility with Bank One provide for an $11.7 million line of
credit. Borrowings under the remaining Bank One credit facility are limited to
the sum of eligible accounts receivable under 90 days. North American
inventories and accounts receivable and inventories have been pledged as
collateral for the Bank One credit facility. In addition to the customary
representations, warranties and financial reporting requirements, the borrowings
under the Bank One credit facility require the Company to seek consent of the
bank for the redemption, repurchase or acquisition of Company shares of common
stock, the declaration and payment of certain dividends, and the ability to
incur borrowed money debt in excess of $10 million. The Company is currently
re-negotiating the terms of its remaining line of credit with Bank One. In
addition to the credit facilities with Fleet, CIBC and Bank One, the Company has
outstanding letters of credit totaling $1.0 million with National Westminster
Bank, ABN Amro Bank, Bank One and Fleet.
At June 28, 2002, the Company has approximately $24.7 million denominated in
Canadian dollars, US dollars, UK Pound sterling, and Japanese yen that are
available for general purposes, under the credit facilities and letters of
credit discussed above. Of the available $24.7 million, $13.1 million was in
use, consisting of $9.7 million of borrowings in Japan and Rugby, U.K. under the
CIBC and Bank One credit facilities and $3.4 million of bank guarantees and
outstanding letters of credit under the CIBC credit facility and the various
letter of credit arrangements discussed above. The Bank One credit facility is a
demand facility with interest based on the bank's Floating Rate and/or
Eurodollar Rate. The CIBC credit facility is currently a demand facility with
interest based on the prime rate, which will be converted to a revolving credit
facility no later than August 30, 2002. At June 28, 2002, the aggregate unused
portion of credit available under the credit facilities amounts to $11.6
million.
5. Stockholders' Equity
Capital stock
The authorized capital of the Company consists of an unlimited number of common
shares without nominal or par value. During the six months ended June 28, 2002,
130,253 shares of common stock were issued pursuant to exercised share options
and the employee share purchase plan for proceeds of $0.7 million.
Net income (loss) per common share
Basic net income (loss) per common share was computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period. For diluted net income (loss) per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method. As a result of the net loss for the three months and six
months ended June 28, 2002, the effect of converting options and warrants was
anti-dilutive.
38
Common and common share equivalent disclosures are:
(in thousands)
Three Months Ended Six Months Ended
---------------------- -----------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
-------- -------- -------- --------
Weighted average common shares outstanding ........... 40,638 40,288 40,615 40,251
Dilutive potential common shares ..................... - 658 - 701
------ ------ ------ ------
Diluted common shares ................................ 40,638 40,946 40,615 40,952
====== ====== ====== ======
At June 28, 2002, the Company had options and warrants outstanding entitling
holders to up to 4,044,917 and 51,186 common shares, respectively.
6. Related Party Transactions
The Company recorded sales revenue from Sumitomo Heavy Industries, Ltd., a
significant shareholder, of $0.5 million in the six months ended June 28, 2002
and $2.8 million in the six months ended June 29, 2001 at amounts and terms
approximately equivalent to third-party transactions. Transactions with Sumitomo
are at normal trade terms. Receivables from Sumitomo of $0.4 million and $0.6
million as at June 28, 2002 and December 31, 2001, respectively, are included in
accounts receivable on the balance sheet.
In January of 2001, the Company made an investment of $2.0 million in a
technology fund, managed by OpNet Partners, L.P. During the six months ended
June 28, 2002, the Company received approximately $1.4 million of the investment
and recorded a write-down to fair market value of $0.2 million. The remaining
investment made by the Company continues to be maintained in OpNet Partners
private investment portfolio. Richard B. Black, a member of the Company's Board
of Directors, is a General Partner for OpNet Partners, L.P. This investment is
reflected in other assets on the balance sheet.
The Company has an Agreement with V2Air LLC relating to the use of the V2Air LLC
aircraft for Company purposes. The Company's President and Chief Executive
Officer, Charles D. Winston owns V2Air LLC. Pursuant to the terms of the
Agreement, the Company is required to reimburse V2Air LLC for certain expenses
associated with the use of the aircraft for Company business travel. During the
six months ended June 28, 2002, the Company reimbursed V2Air LLC approximately
$98 thousand for expenses associated with business use of the aircraft by the
Company's Chief Executive Officer under the terms of the Agreement.
On April 26, 2002 the Company entered into an agreement with Photoniko, Inc., a
private photonics company in which one of the Company's directors, Richard B.
Black is also a director and stock option holder. Under the agreement, the
Company provided a non-interest bearing unsecured loan of $75 thousand to
Photoniko, Inc. to fund designated business activities at Photoniko, Inc. in
exchange for an exclusive 90 day period to evaluate strategic alliances. In
accordance with the terms of the agreement and the promissory note which was
signed by Photoniko, Inc. on April 26, 2002, the loan is to be repaid in full to
the Company no later than August 28, 2002.
7. Financial Instruments
Cash equivalents and short-term investments
At June 28, 2002, the Company had $75.2 million invested in cash equivalents
denominated in U.S. dollars with maturity dates between July 1, 2002 and
September 12, 2002. At December 31, 2001, the Company had $79.8 million invested
in cash equivalents denominated in U.S. dollars with maturity dates between
January 7, 2002 and March 1, 2002. Cash equivalents, stated at amortized cost,
approximate fair value.
At June 28, 2002, the Company had $63.0 million invested in short-term and other
investments denominated in U.S. dollars with maturity dates between July 5, 2002
and April 25, 2003. This $63.0 million includes $14 million pledged as security
in connection with the new credit facilities discussed in note 4 and $18.9
million pledged as security and classified as long-term in connection with the
operating leases discussed in note 9. At December 31, 2001, the Company had
$43.5 million invested in short-term investments denominated in U.S. dollars
with maturity
39
dates between January 24, 2002 and May 6, 2002. The carrying value of short-term
investments approximates fair value.
Derivative financial instruments
At June 28, 2002, the Company had eleven foreign exchange forward contracts to
purchase $17.8 million U.S. dollars with an aggregate fair value loss of $0.3
million after-tax, maturing at varying dates in 2002 and 2003. At December 31,
2001, the Company had eight foreign exchange forward contracts to purchase $17.8
million U.S. dollars and one foreign exchange option contract to purchase $6.5
million U.S. dollars with an aggregate fair value gain of $0.8 million
after-tax, maturing at varying dates in 2002.
8. Restructuring and other
Restructuring charges
2002
In connection with a restructuring plan to align the Company's manufacturing
costs and operating expenses with the prevailing economic environment, the
Company recorded a pre-tax restructuring charge of $2.7 million during the first
quarter of fiscal 2002. The Company consolidated the Electronics systems
business from its facility in Kanata, Ontario into the Company's existing
systems manufacturing facility in Wilmington, MA and transferred its laser
sources business from the Company's Kanata, Ontario facility to its existing
Rugby, UK facility. In addition the Company closed its Kanata, Ontario facility
and moved its principal office from Kanata, Ontario to its existing Nepean,
Ontario facility. Restructuring provisions relate to severance and benefits of
$2.2 million for the termination of approximately 90 employees, $0.3 million for
the write-off of furniture, equipment and system software, and $0.2 million for
plant closure and other related costs. During the second quarter of fiscal 2002,
the Company recorded additional restructuring charges of $1.4 million related to
cancellation fees on contractual obligations of $0.3 million and a write-down of
land and building in Kanata, Ontario and Rugby, UK of $0.8 million, and also
leased facility costs of $0.3 million at the Farmington Hills and Oxnard
locations. At June 28, 2002, the net book value of the Kanata, Ontario facility
is reclassified as held for sale and included in other long-term assets.
Cumulative cash draw-downs of approximately $0.5 million and non-cash draw-down
of $1.1 million have been applied against the provision, resulting in a
remaining provision balance of $2.5 million as at June 28, 2002.
2001
During the fourth quarter of fiscal 2001, a charge of $3.4 million was recorded
to accrue employee severance of $0.9 million for approximately 35 employees at
our Farmington Hills, MI and Oxnard, CA locations, leased facilities costs of
$1.8 million associated with restructuring for excess capacity at five leased
locations in the United States, Canada, and Germany and write-down of leasehold
improvements and certain equipment of $0.7 million associated with the exiting
of leased facilities.
Cumulative cash draw-downs of approximately $1.5 million and a non-cash
draw-down of $0.7 million have been applied against the provision, resulting in
a remaining provision balance of $1.2 million as at June 28, 2002.
2000
During the fourth quarter of fiscal 2000, a charge of $12.5 million was taken to
accrue employee severance of $1.0 million for approximately 50 employees and
other exit costs of $3.8 million for the Company's United Kingdom operation and
worldwide distribution system related to high-power laser systems for certain
automotive applications; costs of $7.7 million associated with restructuring for
excess capacity at three leased facility locations in the United States and
Germany. The Company also recorded a write-down of land and building in the
United Kingdom of $2.0 million. Compensation expense of $0.6 million arising on
the acceleration of vesting of options upon the sale of businesses during the
year was also charged to restructuring. In addition, an inventory write-down to
net realizable value of $8.5 million was recorded in cost of goods sold related
to the high-power laser system product line.
40
Cumulative cash draw-downs of $5.8 million, reversal of $0.5 million for
restructuring costs that will not be incurred and a non-cash draw-down of $2.6
million have been applied against the provision, resulting in a remaining
provision balance of $6.2 million as at June 28, 2002.
The following table summarizes changes in the restructuring provision included
in other accrued expenses on the balance sheet.
Total Severance Facilities Other
(in millions) ----------- ------------ ------------ ------------
Provision at December 31, 2001 ......... $ 8.9 $ 0.9 $ 8.0 $ -
Cash draw-downs during Q1 2002 ......... (0.6) (0.2) (0.4) -
Charge during Q1 2002 .................. 2.7 2.2 0.3 0.2
Non-cash draw-down during Q1 2002 ...... (0.3) - (0.3) -
Charge during Q2 2002 .................. 1.4 - 1.1 0.3
Cash draw-downs during Q2 2002 ......... (1.4) (0.6) (0.8) -
Non-cash draw-down during Q2 2002 ...... (0.8) - (0.8) -
----------- ------------ ------------ ------------
Provision at June 28, 2002 ............. $ 9.9 $ 2.3 $ 7.1 $ 0.5
=========== ============ ============ ============
Other
During the first quarter of 2001, the Company adjusted an accrual related to
litigation with Electro Scientific Industries, Inc. and recorded a benefit of
$1.4 million.
9. Commitments and Contingencies
Operating Leases
The Company leases two facilities under operating lease agreements that expire
in 2003. At the end of the initial lease term, these leases require the Company
to renew the lease for a defined number of years at the fair market rental rate
or purchase the property at the then fair market value. The lessor may sell the
facilities to a third party but the leases provide for a residual value
guarantee of the first 85% of any loss the lessor may incur on its $19.1 million
investment in the building, which may become payable by the Company upon the
termination of the transaction, or the Company may exercise its option to
purchase the facilities for approximately $19 million. As of June 28, 2002,
residual value guarantees in connection with these leases totaled approximately
$16 million. Upon termination of the leases, the Company expects the fair market
value of the leased properties to reduce substantially the payment under the
residual value guarantees and, during the fourth quarter of fiscal 2000, the
Company took a charge of $6 million associated with restructuring for excess
capacity at the two leased facility locations, including the estimated residual
value guarantees. The lease agreement requires, among other things, the Company
to maintain specified quarterly financial ratios and conditions. As at March 29,
2002, the Company was in breach of the fixed charge coverage ratio, but on April
30, 2002, the Company entered into a Security Agreement with the Bank of
Montreal ("BMO") pursuant to which the Company deposited with BMO and pledged
approximately $18.9 million as security in connection with the operating leases
discussed above in exchange for a written waiver from BMO and BMO Global
Capital Solutions for any Company defaults of or obligations to satisfy the
specified financial covenants relating to the operating lease agreements until
June 30, 2003. This item is reflected on the balance sheet as other investment.
Legal proceedings and disputes
Electro Scientific Industries, Inc. v. GSI Lumonics, Inc. et al. On March 16,
2000, Electro Scientific Industries, Inc. filed an action for patent
infringement in the United States District Court for the Central District of
California against the Company and Dynamic Details Inc., an unrelated party that
is one of the Company's customers. Electro Scientific alleged that the Company
offered to sell and import into the United States the GS-600 high speed laser
drilling system and that Dynamic Details possessed and used a GS-600 System. It
further alleged that Dynamic Details' use of the GS-600 laser system infringed
Electro Scientific's U.S. patent 5,847,960 and that the Company had actively
induced the infringement of, and contributorily infringed, the patent. Electro
Scientific sought an injunction, unspecified damages, trebling of those damages,
and attorney's fees. GSI Lumonics indemnified Dynamic
41
Details with respect to these allegations. On August 14, 2001, the United States
District Court for the Central District of California granted the Company's
motion for summary judgment of non-infringement and denied Electro Scientific's
motion for summary judgment of infringement. In the ruling, the Court concluded
that the GS-600 system did not literally infringe the asserted claims of the
alleged Electro Scientific patent, nor did it infringe under the doctrine of
equivalents. On September 7, 2001, Electro Scientific appealed the District
Court's decision on the summary judgment motions and oral arguments were heard
on May 7, 2002. The Company is currently awaiting a decision from the Court of
Appeals.
Carl Baasel Lasertecknik Gmbh & Co. KG and Rofin Baasel Inc. vs. GSI Lumonics
Corporation. On May 17, 2002, Carl Baasel Lasertechnik Gmbh and Co. KG ("CBL")
and Rofin Baasel Inc. ("RBI") filed an antitrust case in the United District
Court for the District of Massachusetts against the Company's U.S. subsidiary,
GSI Lumonics Corporation ("GSLI Corp") for violations of Sections 1 and 2 of the
Sherman Act and Section 7 of the Clayton Act as a result of GSLI Corp's
acquisition of U.S. Patent No. 4,522,656 (the "656 patent") and its enforcement
of the "656 patent" against CBL and RBI in a consolidated patent infringement
action against CBL and RBI currently pending in the United States District Court
for the Eastern District of Michigan. Prior to the filing of this complaint, CBL
filed, in the United States District Court for the Eastern District of Michigan,
a motion for leave to amend its answer in the pending "656 patent" infringement
case to assert antitrust violations by GSLI Corp; which motion was denied on
April 25, 2002 by that District Court. The immediate complaint, filed shortly
after the denial, alleges that GSLI Corp held monopoly power in the laser wafer
softmarking systems market prior to and since 1990, that GSLI Corp's purchase in
1990 of the "656 patent", its filing of the "656 patent" infringement claim in
the United States District Court for the Eastern District of Michigan against AB
Lasers Inc. (nka RBI.) and CBL and its alleged refusal to license the "656
patent" to CBL or any other competitor, decreased competition, maintained GSLI
Corp's market monopoly and unreasonably restrained trade in the relevant market.
CBL and RBI seek declaratory relief as to the violations they assert and
permanent injunctive relief enjoining GSLI Corp from initiating, maintaining or
threatening infringement litigation to enforce the "656 patent," together with
treble damages and costs. On June 11, 2002 CBL and RBI filed a motion for
partial summary judgment seeking declaratory relief as to the violations they
assert. On June 17,2002 GSLI Corp filed a motion to dismiss the case on the
grounds that the case is barred by denial of the same claims raised in the
pending "656 patent" infringement case and an emergency motion to stay the
briefing on CBL's and RBI's partial summary judgment motion pending a decision
on GSLI Corp's motion to dismiss. On July 25, 2002 oral arguments were heard on
the motion to dismiss and the parties are currently awaiting a decision on the
motion to dismiss. The Company believes that this lawsuit is without merit, that
there has been no antitrust violation and that the damages sought are excessive.
In the event CBL and RBI prevail and their claims are upheld as filed, this
would have a material adverse effect on the Company's financial position and
results of operations.
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 the Company. The
plaintiff in the proceedings has alleged that certain equipment used by these
manufacturers infringes patents claimed to be held by the plaintiff. While the
Company is not a defendant in any of the proceedings, several of the Company's
customers have notified the Company that, if the party successfully pursues
infringement claims against them, they may require the Company to indemnify them
to the extent that any of their losses can be attributed to systems sold to them
by the Company.
The Company is also a party in and subject to various legal proceedings and
claims that arise in the ordinary course of business. The Company does not
believe that the outcome of these claims will have a material adverse effect
upon the Company's financial conditions or results of operations but there can
be no assurance that any such claims, or any similar claims, would not have a
material adverse effect upon the Company's financial condition or results of
operations.
10. Income Taxes
During the three months ended June 28, 2002, the income tax benefit was reduced
by approximately $3.5 million as a result of increases in valuation allowances
related to the Company's geographic distribution of its operating loss
carry-forwards. This was primarily related to the closure of the Kanata, Ontario
facility described in note 8 and its effect on the Company's ability to generate
future profit in Canada.
42
11. Segment Information
During 2001, the Company changed the way it manages its business to reflect a
growing focus on providing precision optics and laser systems to its customers.
In classifying operational entities into a particular segment, the Company
aggregated businesses with similar economic characteristics, products and
services, production processes, customers and methods of distribution. Segment
information for the 2001 year has been restated to conform to the current year's
presentation.
The Executive Committee ("EC") is the chief operating decision maker in
assessing the performance of the segments and the allocation of resources to the
segments. The EC evaluates financial performance based on measures of profit or
loss from operations before income taxes excluding the impact of amortization of
purchased intangibles, restructuring and other, interest income, interest
expense, and foreign exchange transaction gains (losses). Certain
corporate-level operating expenses, including sales, marketing, finance, legal,
information technology, communications and administrative expenses, are not
allocated to operating segments. Intersegment sales are based on fair market
values. All intersegment profit, including any unrealized profit on ending
inventories, is eliminated on consolidation.
GSI Lumonics operations include two reportable operating segments: the Laser
Systems segment (Laser Systems); and the WavePrecision segment (WavePrecision).
Laser Systems designs, develops, manufactures and markets laser-based advanced
manufacturing systems and components as enabling tools for a wide range of
high-technology applications, including computer-chip memory repair processing,
wafer and die marking, inspection systems for solder paste and component
placement on surface-mount printed circuits, via drilling of printed circuit
boards, hybrid circuit trim, circuit trim on silicon, and laser printing for
medical applications. Major markets for its products include the semiconductor
and electronics industries. WavePrecision provides precision optics for Dense
Wave Division Multiplexing networks. Major markets for its products include the
telecommunications industry.
Segments
Information on reportable segments is as follows:
Three months ended Six months ended
-------------------------- --------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
--------- -------- -------- ---------
Sales
Laser Systems ........................................ $37,624 $71,795 $ 72,072 $153,001
WavePrecision ........................................ 2,177 5,128 4,732 12,089
Intersegment sales elimination ....................... (137) (381) (252) (841)
------- ------- -------- --------
Total ................................................ $39,664 $76,542 $ 76,552 $164,249
======= ======= ======== ========
Segment income (loss) from operations
Laser Systems ........................................ $ (852) $ 8,387 $ (2,490) $ 16,612
WavePrecision ........................................ (859) (127) (1,972) 1,671
------- ------- -------- --------
Total by segment ..................................... (1,711) 8,260 (4,462) 18,283
Unallocated amounts:
Corporate expenses .............................. 6,385 3,539 10,850 6,703
Amortization of purchased intangibles ........... 436 273 707 547
Restructuring and other ......................... 1,407 - 4,152 (1,400)
------- ------- -------- --------
Income (loss) from operations ........................ $(9,939) $ 4,448 $(20,171) $ 12,433
======= ======= ======== ========
43
As at
-------------------------
June 28, December
2002 31, 2001
Assets --------- ---------
Laser Systems .................................... $ 108,553 $ 115,387
WavePrecision .................................... 10,517 11,506
Corporate ........................................ 204,011 203,942
--------- ---------
Total assets ..................................... $ 323,081 $ 330,835
========= =========
Total assets for corporate include treasury controlled, income tax, other and
intangible assets.
Geographic segment information
The Company attributes revenues to geographic areas on the basis of the customer
location. Long-lived assets and goodwill are attributed to geographic areas in
which Company assets reside.
(in millions) Three months ended
----------------------------------------------------------
June 28, 2002 June 29, 2001
--------------------------- ------------------------------
Revenues from external customers:
United States ................... $22.8 57% $33.6 44%
Canada .......................... 0.3 1% 3.4 4%
Europe .......................... 6.2 16% 16.1 21%
Japan ........................... 3.9 9% 14.4 19%
Asia-Pacific, other ............. 6.2 16% 9.0 12%
Latin and South America ......... 0.3 1% - -
----- --- ----- ---
Total ...................... $39.7 100% $76.5 100%
===== =====
Six months ended
----------------------------------------------------------
June 28, 2002 June 29, 2001
--------------------------- ------------------------------
United States ................. $46.9 61% $ 70.0 43%
Canada ........................ 1.1 2% 10.2 6%
Europe ........................ 12.5 16% 36.9 23%
Japan ......................... 6.4 8% 28.4 17%
Asia-Pacific, other ........... 9.3 12% 18.1 11%
Latin and South America ....... 0.4 1% 0.6 -
----- --- ------ ---
Total .................... $76.6 100% $164.2 100%
===== ======
As at
---------------------------------
June 28, 2002 December 31, 2001
------------- -----------------
Long-lived assets:
United States .............. $20.6 $21.6
Canada ..................... 5.9 9.4
Europe ..................... 11.5 11.5
Japan ...................... 0.7 0.7
Asia-Pacific, other ........ 0.2 0.2
----- -----
Total ................. $38.9 $43.4
===== =====
44