Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2000 ------------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 333-71449 ___________________ GSI Lumonics Inc. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> New Brunswick, Canada 38-1859358 (Jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) </TABLE> 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) ___________________ 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 [ ] As of October 24, 2000, there were 40,070,194 shares of the Common Stock of GSI Lumonics Inc., no par value, issued and outstanding. 1
GSI LUMONICS INC. Quarterly Report - Form 10-Q Table of Contents <TABLE> <S> <C> PART I - FINANCIAL INFORMATION................................................................................. 3 ITEM 1. FINANCIAL STATEMENTS................................................................................ 3 CONSOLIDATED BALANCE SHEETS......................................................................... 3 CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)................................................... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)................................................... 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited).............................................. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................... 20 PART II - OTHER INFORMATION.................................................................................... 21 ITEM 1. LEGAL PROCEEDINGS................................................................................... 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................... 21 Signatures..................................................................................................... 22 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GSI LUMONICS INC. CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share amounts) <TABLE> <CAPTION> Sept. 29, Dec. 31, 2000 1999 ---- ---- ASSETS (unaudited) ------ <S> <C> <C> Current Cash and cash equivalents........................................................ $ 66,770 $ 25,272 Short-term investments........................................................... 31,508 7,342 Accounts receivable, less allowance of $2,546 (December 31, 1999-$3,197)......... 93,024 80,448 Due from related party........................................................... 1,178 3,235 Inventories (note 3)............................................................. 97,294 72,727 Deferred tax assets.............................................................. 20,553 24,473 Other current assets............................................................. 5,805 2,338 Current portion of swap contracts................................................ 621 1,411 --------- --------- Total current assets......................................................... 316,753 217,246 Property, plant and equipment, net of accumulated depreciation of $20,903 (December 31, 1999 - $28,024).................................................... 34,264 45,278 Other assets........................................................................ 6,299 3,851 Goodwill and other intangible assets, net of accumulated amortization of $10,322 (December 31, 1999 - $8,689)..................................................... 28,265 23,347 --------- --------- $ 385,581 $ 289,722 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness................................................................ $ 10,658 $ 23,100 Accounts payable................................................................. 30,550 28,094 Accrued compensation and benefits................................................ 13,129 13,709 Other accrued expenses and income taxes.......................................... 55,043 43,067 Current portion of deferred compensation......................................... 127 124 Current portion of long-term debt................................................ 6,195 5,425 --------- --------- Total current liabilities.................................................... 115,702 113,519 Long-term debt due after one year................................................... 2,654 - Deferred income tax liability....................................................... - 2,397 Deferred compensation, less current portion......................................... 2,228 2,076 --------- --------- Total liabilities............................................................ 120,584 117,992 Commitments and contingencies (note 8) Stockholders' equity (note 4) Capital stock, no par value; Issued common shares of 40,036,707 (December 31, 1999 - 34,298,942)................................................. 301,116 222,865 Deficit.......................................................................... (26,455) (44,225) Accumulated other comprehensive income (loss).................................... (9,664) (6,910) --------- --------- Total stockholders' equity..................................................... 264,997 171,730 --------- --------- $ 385,581 $ 289,722 ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements 3
GSI LUMONICS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands of U.S. dollars, except share amounts) <TABLE> <CAPTION> Three months ended Nine months ended ------------------------------- ------------------------------- Sept. 29, Oct. 1, Sept. 29, Oct. 1, 2000 1999 2000 1999 ---- ---- ---- ---- (note 2) <S> <C> <C> <C> <C> Sales........................................................... $ 97,631 $ 78,041 $ 278,368 $ 185,883 Cost of goods sold.............................................. 58,547 47,553 165,313 124,500 --------- -------- --------- --------- Gross profit.................................................... 39,084 30,488 113,055 61,383 Operating expenses: Research and development................................... 8,993 8,104 26,276 20,024 Selling, general and administrative........................ 20,625 17,704 60,852 46,722 Amortization of technology and other intangibles........... 1,127 1,251 3,508 2,819 Acquired in-process research and development............... - - - 14,830 Restructuring and other (note 7)........................... (243) - (2,913) 19,631 --------- -------- --------- --------- Income (loss) from operations................................... 8,582 3,429 25,332 (42,643) Gain on sale of assets (note 2)............................ 1,680 - 2,388 - Interest income, net....................................... 998 2 1,582 103 Foreign exchange transaction losses........................ (229) (514) (2,003) (1,144) --------- -------- --------- --------- Income (loss) before income taxes............................... 11,031 2,917 27,299 (43,684) Income taxes provision (benefit)................................ 3,855 874 9,529 (4,671) --------- -------- --------- --------- Net income (loss)............................................... $ 7,176 $ 2,043 $ 17,770 $ (39,013) ========= ======== ========= ========= Foreign currency translation adjustments........................ (1,572) 2,499 (2,754) 1,755 Change in unrealized gain on marketable equity securities, net........................................... - 58 - 380 --------- -------- --------- --------- Comprehensive income (loss)..................................... $ 5,604 $ 4,600 $ 15,016 $ (36,878) ========= ======== ========= ========= Net income (loss) per common share: Basic...................................................... $ 0.18 $ 0.06 $ 0.47 $ (1.34) Diluted.................................................... $ 0.17 $ 0.06 $ 0.45 $ (1.34) Weighted average common shares outstanding (000's).............. 39,807 34,173 37,606 29,182 Weighted average common shares outstanding and dilutive potential common shares (000's)............................ 41,731 35,085 39,644 29,182 </TABLE> The accompanying notes are an integral part of these consolidated financial statements 4
GSI LUMONICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands of U.S. dollars) <TABLE> <CAPTION> Nine months ended ------------------------------- Sept. 29, Oct. 1, 2000 1999 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income (loss) ............................................... $ 17,770 $ (39,013) 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...................................... (2,388) - Depreciation and amortization............................... 8,177 11,019 Deferred compensation....................................... 157 30 Deferred income taxes....................................... (2,036) (5,837) Changes in current assets and liabilities: Accounts receivable......................................... (14,238) (2,785) Inventories................................................. (30,836) 11,447 Other current assets........................................ (2,893) (2,093) Accounts payable, accrued expenses, and taxes payable....... 12,149 8,754 ----------- --------- Net cash used in operating activities............................ (14,138) (3,648) ----------- --------- Cash flows from investing activities: Merger with General Scanning Inc. (note 2).................. - 1,451 Acquisition of a business, net of cash acquired............. (6,548) - Sale of assets.............................................. 26,193 - Additions to property, plant and equipment, net............. (6,160) (4,467) Maturity of short-term investments.......................... 29,097 8,208 Purchase of short-term investments.......................... (52,804) (5,316) Decrease (increase) in other assets......................... 835 (573) ----------- --------- Cash used in investing activities................................ (9,387) (697) ----------- --------- Cash flows from financing activities: Proceeds (payments) of bank indebtedness, net............... (12,442) 2,420 Payments on long-term debt.................................. (2,732) (1,646) Issue of share capital (net of issue costs)................. 78,251 149 ----------- --------- Cash provided by financing activities............................ 63,077 923 ----------- --------- Effect of exchange rates on cash and cash equivalents............ 1,946 5,867 ----------- --------- Increase in cash and cash equivalents............................ 41,498 2,445 Cash and cash equivalents, beginning of period................... 25,272 24,229 ----------- --------- Cash and cash equivalents, end of period......................... $ 66,770 $ 26,674 =========== ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest.................................................... $ 994 $ 798 Income taxes................................................ $ 3,913 $ 497 </TABLE> The accompanying notes are an integral part of these consolidated financial statements 5
GSI LUMONICS INC. Notes to Consolidated Financial Statements (unaudited) (in U.S. dollars, except share amounts) 1. Basis of presentation These unaudited interim 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 for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. 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 which management considers necessary for a fair presentation of financial position and results of operations for the periods presented. 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. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1999. The results for interim periods are not necessarily indicative of results to be expected for the year or any future periods. 2. Merger, acquisitions and dispositions On March 22, 1999, the Company completed a merger of equals with General Scanning Inc. ("General Scanning"), Watertown, Massachusetts, a leading manufacturer of laser systems and components and printers. Immediately following the merger each group of shareholders owned approximately 50% of the outstanding shares of the Company. Cash flow impact of $1.5 million from the General Scanning merger was cash acquired of $4.7 million, less merger costs of $3.2 million. 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 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. The reported results for the first 11 weeks of 1999 are those of Lumonics only. Therefore, the results of the nine months ended October 1, 1999 do not provide a meaningful basis for comparison with 2000. The following pro forma results of operations have been prepared using the purchase method of accounting as if the merger had occurred prior to the beginning of 1999. <TABLE> <CAPTION> Pro forma combined Nine months ended (in thousands) Oct. 1, 1999 ------------ <S> <C> Sales.............................................. $ 206,342 =========== Net loss........................................... $ (45,965) =========== Net loss per common share: Basic......................................... $ (1.35) Diluted....................................... $ (1.35) Weighted average common shares outstanding......... 34,162 Weighted average common shares outstanding and dilutive potential common shares................... 34,162 </TABLE> In April 2000 the Company sold the operating assets of its View Engineering metrology product line for $4.4 million cash. In April 2000 the Company sold the operating assets of its Phoenix operations on terms and conditions not material to GSI Lumonics. In June 2000 the Company sold the operating assets of its package coding product line for $8.6 million cash. The Company recorded a gain of $0.7 million on these sales during the three months ended June 30, 2000. 6
During the three months ended September 29, 2000, the Company sold two facilities in the United States for $12.5 million cash and recorded a net gain of $1.7 million. On September 21, 2000, the Company acquired all outstanding shares of General Optics, Inc. ("General Optics"), a privately-held precision optics company located in Moorpark, California. The purchase price of $13.5 million was comprised of cash of $6.5 million paid on closing and debt of $7.0 million, discounted at an imputed interest rate of 6.23%. The debt will be settled in two installments, due September 21, 2001 and 2002. The transaction has been accounted for as a purchase and, accordingly, the operations of General Optics have been included in the consolidated financial statements from the date of acquisition. The excess of fair value of net identifiable tangible assets acquired over the purchase price was recorded as goodwill, technology and other intangible assets to be amortized over estimated useful life. Results of operations would not have changed materially for 1999 or 2000 if General Optics had been acquired on January 1, 1999 and 2000, respectively. 3. Inventories Inventories consist of the following: <TABLE> <CAPTION> (in thousands) Sept. 29, December 31, 2000 1999 ---- ---- <S> <C> <C> Raw materials....................................... $ 42,788 $ 26,011 Work-in-process..................................... 20,217 17,005 Finished goods...................................... 34,289 29,711 -------- -------- Total inventories.............................. $ 97,294 $ 72,727 ======== ======== </TABLE> 4. Stockholders' equity Capital stock The authorized capital of the Company consists of an unlimited number of common shares without nominal or par value. In April 2000 the Company offered and sold 4,300,000 shares of Common Stock at a price to the public of $17 per share, for net proceeds of $70.1 million. During the nine months ended September 29, 2000, 1,437,765 shares of common stock were issued pursuant to share options exercised for proceeds of $8.2 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. Common and common equivalent share disclosures are: <TABLE> <CAPTION> (in thousands) Three months ended Nine months ended ----------------------- -------------------- Sept. 29, Oct. 1, Sept. 29, Oct. 1, 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Weighted average common shares outstanding..... 39,807 34,173 37,606 29,182 Dilutive potential common shares............... 1,924 912 2,038 - --------- ------- --------- ------- Diluted common shares.......................... 41,731 35,085 39,644 29,182 ========= ======= ========= ======= Options and warrants excluded from diluted income per common share as their effect would be anti-dilutive.... 11 1,603 7 4,964 ========= ======= ========= ======= </TABLE> 7
5. 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 $7.3 million in the nine months ended September 29, 2000 and $8.4 million in the nine months ended October 1, 1999 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. 6. Financial instruments The Company uses financial instruments to manage foreign currency exposures. The Company currently has three contracts outstanding to manage foreign currency exposure associated with certain long term debt, 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. The Company believes, based upon current terms, that the carrying value of this debt approximates its fair value. <TABLE> <CAPTION> (in thousands) Sept. 29, 2000 ---- <S> <C> Long term debt, including current portion: Sumitomo Heavy Industries, Ltd., Japanese yen term loans...... $ 1,862 Favorable value of swaps: To convert 50 million yen to U.S. $341, semi-annual interest at the six-month LIBOR less 1.56%............................. 125 To convert 75 million yen to Canadian $581, semi-annual interest at the three month bankers acceptance rate less 1.62% 309 To convert 75 million yen to U.S. $512, interest payable semi-annually at 8.20%........................................ 187 ------- Favorable value of swaps.......................................... 621 ------- Economic value.................................................... $ 1,241 ======= </TABLE> As of September 29, 2000, the Company also had foreign currency contracts to exchange foreign currencies (yen, pound sterling) with or for U.S. dollars totaling approximately $8.5 million, maturing through December 2000. These foreign currency contracts are marked-to-market. Realized and unrealized gains or losses are recorded in income. Several major financial institutions are counterparties to the Company's financial instruments. It is the practice of the Company to monitor the financial standing of those counterparties and minimize its exposure to any one institution. The Company may be exposed to credit-related losses in the event of non-performance by the counterparties to the contracts, but does not expect any counterparty to fail to meet its obligations. 7. Restructuring and other During the nine months ended September 29, 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of OLT precision alignment system product line and $2.7 million received for licensing some of the Company's technology. 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 shutdown 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 the nine months ended September 29, 2000, severance was paid to 23 employees in various locations worldwide. The following table summarizes activity during the nine months ended September 29, 2000. 8
<TABLE> <CAPTION> (in millions) Total Severance Facilities Integration ----- --------- ---------- ----------- <S> <C> <C> <C> <C> Accrual remaining December 31, 1999...... $ 10.1 $ 2.8 $ 3.9 $ 3.4 Actions during Q1 2000................... (1.8) (0.9) (0.5) (0.4) ------ --------- --------- --------- Accrual remaining March 31, 2000......... 8.3 1.9 3.4 3.0 Actions during Q2 2000................... (2.0) (0.4) (0.4) (1.2) ------ --------- --------- --------- Accrual remaining June 30, 2000.......... 6.3 1.5 3.0 1.8 Actions during Q3 2000................... (0.5) (0.2) (0.3) - ------ --------- --------- --------- Accrual remaining September 29, 2000..... $ 5.8 $ 1.3 $ 2.7 $ 1.8 ====== ========= ========= ========= </TABLE> The remaining accrual is for further reduction of redundant resources worldwide, including severance for approximately 110 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. 8. 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 $4.7 million (1998 - $1.9 million). Minimum lease payments under operating leases expiring subsequent to September 29, 2000 are: <TABLE> <S> <C> (in thousands) Remaining three months of 2000................... $ 1,182 2001............................................. 3,923 2002............................................. 3,271 2003............................................. 2,591 2004............................................. 2,535 Thereafter....................................... 7,602 -------- Total minimum lease payments..................... $ 21,104 ======== </TABLE> Legal proceedings and disputes Robotic Vision Systems, Inc. v. GSI Lumonics Engineering Corporation (formerly known as View Engineering, Inc.), USDC Case No. 95-7441. This case involves a complaint by Robotic Vision Systems, Inc. alleging infringement of a patent by GSI Lumonics Engineering Corporation a 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. Robotic Vision alleged infringement relating to lead inspection machines formerly sold by GSI Lumonics Engineering Corporation and sought damages of $60.5 million. In March 2000, the Court found that Robotic Vision's patent was invalid. Robotic Vision has appealed the Court's decision. GSI Lumonics Inc. v. BioDiscovery Inc. On December 10, 1999 GSI Lumonics filed suit in the United States District Court for the District of Massachusetts seeking a declaration that its 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(C). 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 GSI Lumonics reverse engineered his software, and also sued for copyright infringement. In the Massachusetts action, the court denied BioDiscovery's president's motion to dismiss and scheduled the trial for May 2000. In April 2000, shortly before the trial was scheduled to begin, BioDiscovery's president abandoned his copyright infringement claim and consented to the entry of a default judgment in favor of GSI Lumonics. In the California action the court, in September 2000, allowed a motion by the Company to dismiss BioDiscovery's president's complaint insofaras it alleged any reverse 9
engineering, reverse compiling or copying of ImaGene(C). The Company believes that the remaining California claims are without merit. 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 the Company and Dynamic Details Inc., an unrelated party that 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. It further alleges that Dynamic Details' use of the GS-600 laser system 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, unspecified 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. Electro Scientific Industries, Inc. v. GSI Lumonics, 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 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. 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 against the Company. 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 Company recorded a provision during the three months ended April 2, 1999 of $19 million to reflect the amount of the damages award 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. 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. Oral argument on the appeal occurred October 3, 2000. GSI Lumonics believes that Robotic Vision's and Electro Scientific's claims in the above actions are without merit and GSI Lumonics is vigorously defending these proceedings. However, if the Company were to lose on one or more of the claims and damages are awarded, there could be a material adverse effect on GSI Lumonics' operating results and/or financial condition. 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 plaintiff. 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.. GSI Lumonics does not believe that the outcome of these claims will have a material adverse effect upon GSI Lumonics, but 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. 9. 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 optical detection and transmission, in the semiconductor, electronics, automotive, and telecommunications industries. In addition, the Company supplies other markets such as aerospace and medical/biotechnology. The Company operates in one reportable segment. The Company's principal markets are in the United States, Canada, Europe, Japan and Asia-Pacific. 10
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. <TABLE> <CAPTION> (in millions) Three months ended --------------------------------------------- Revenues from external customers: Sept. 29, 2000 Oct. 1, 1999 -------------- ------------ <S> <C> <C> <C> <C> US............................ $ 49.0 50% $ 40.5 52% Canada........................ 5.0 5% 4.1 5% Europe........................ 15.2 16% 16.8 22% Japan......................... 15.7 16% 10.5 13% Asia-Pacific, other........... 10.7 11% 5.6 7% Latin and South America....... 2.0 2% 0.5 1% ------ ---- ------ ----- Total.................... $ 97.6 100% $ 78.0 100% ====== ====== </TABLE> <TABLE> <CAPTION> Nine months ended --------------------------------------------- Sept. 29, 2000 Oct. 1, 1999 -------------- -------------- <S> <C> <C> <C> <C> US............................ $ 129.2 46% $ 91.1 49% Canada........................ 13.4 5% 6.7 4% Europe........................ 58.4 21% 47.5 25% Japan......................... 43.1 15% 23.1 12% Asia-Pacific, other........... 30.0 11% 16.4 9% Latin and South America....... 4.3 2% 1.1 1% ------- ---- ------- ---- Total.................... $ 278.4 100% $ 185.9 100% ======= ======= </TABLE> <TABLE> <CAPTION> As at --------------------------------------------- Sept. 29, 2000 Dec. 31, 1999 -------------- ------------- <S> <C> <C> Long-lived assets: US.............................. $ 27.4 $ 42.4 Canada.......................... 19.5 7.7 Europe.......................... 14.5 17.5 Japan........................... 0.8 0.6 Asia-Pacific, other............. 0.3 0.4 ------- -------- Total...................... $ 62.5 $ 68.6 ======= ======== </TABLE> 10. Subsequent events On October 1, 2000, the Company completed the sale of net assets of its Life Sciences business for consideration of $40 million in cash and 4,571,429 shares of Packard BioScience Company common stock, pursuant to an asset purchase agreement between GSI Lumonics and Packard BioScience Company. The Life Sciences Business comprised working capital of approximately $6 million and fixed and other intangible assets of approximately $1 million. 11
11. Recent pronouncements In June 1998, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 133 and No. 138 Accounting for Derivative Instruments and Hedging Activities. The statements establish 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 statements require 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 and No. 138 are effective for fiscal years beginning after June 15, 2000. The Company is in the process of quantifying the impacts of adopting these statements on its financial statements and has not determined the timing of or method of adoption. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 on revenue recognition that is effective no later than the fourth quarter of our current fiscal year. We believe this Bulletin will not have a significant impact on our reported sales. In March 2000, the Financial Accounting Standard Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25. The Interpretation, which has been adopted prospectively as of July 1, 2000, requires that stock options that have been modified to reduce the exercise price be accounted for as variable. 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 an exercise price of US$4.63 or Cdn$6.95, the then-current market price of the stock, were granted with new vesting schedule and 562,966 options were cancelled. The Company is accounting for the replacement options as variable from July 1, 2000 until the options are exercised, forfeited or expire unexercised. Because the market price of the Company's stock has decreased since July 1, 2000, there was no effect on net income for the quarter ended September 30, 2000 of adopting the Interpretation. 12
ITEM 2. 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 and telecommunications industries. In addition, we sell to other markets such as the aerospace and medical/biotechnology industries. Our systems sales depend on our customers' capital expenditures, which are affected by business cycles in the markets they serve. 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. Results of Operations for Three Months Ended September 29, 2000 The following table presents unaudited quarterly results of operations as a percentage of sales. This information has been presented on the same basis as the consolidated financial statements. <TABLE> <CAPTION> Three months ended ------------------ Sept. 29, Oct. 1, 2000 1999 ---- ---- <S> <C> <C> Sales................................................. 100.0% 100.0% Cost of goods sold.................................... 60.0 60.9 ------ ------ Gross profit.......................................... 40.0 39.1 Research and development.............................. 9.2 10.4 Selling, general and administrative................... 21.1 22.7 Amortization of technology and other intangibles...... 1.2 1.6 Restructuring and other............................... (0.3) - ------ ------ Income (loss) from operations......................... 8.8 4.4 Gain on sale of assets................................ 1.7 - Interest income, net.................................. 1.0 - Foreign exchange transaction losses................... (0.2) (0.7) ------ ------ Income before income taxes............................ 11.3 3.7 Income tax provision.................................. 3.9 1.1 ------ ------- Net income ........................................... 7.4% 2.6% ====== ======= </TABLE> 13
Our sales were $97.6 million in the third quarter of 2000, up 25% compared to the third quarter of 1999. 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; Europe, consisting of Europe, the Middle East and Africa; Japan; Asia- Pacific, consisting of ASEAN countries, China and other Asia-Pacific countries; and Latin and South America. See note 9 to the financial statements for a table of sales by region. Sales increased in all regions in the quarter ended September 29, 2000 compared to the quarter ended October 1, 1999 except Europe. The regions showing the largest dollar growth were the United States, Japan, and Asia-Pacific, which increased $8.5 million, $5.2 million and $5.1 million, respectively, as a result primarily of strong sales to the semiconductor market. <TABLE> <CAPTION> (in millions) Three months ended Sept. 29, 2000 Oct. 1, 1999 -------------- ------------ <S> <C> <C> <C> <C> Quarterly revenues by market: Semiconductor.......................... $ 26.8 27% $ 9.3 12% Electronics............................ 14.4 15% 16.1 21% Automotive............................. 8.8 9% 3.4 4% Components............................. 12.9 13% 11.5 15% Other.................................. 22.0 23% 27.6 35% Parts and services..................... 12.7 13% 10.1 13% ------ ---- ----- ---- Total........................... $ 97.6 100% $78.0 100% ====== ==== ===== ==== </TABLE> Sales by Market. Our results of operations are affected by external factors that impact the markets in which we compete. Sales to the semiconductor market in the three months ended September 29, 2000 increased significantly compared to the same period in 1999. After severe recession in 1997 and 1998, the semiconductor equipment industry began to recover in 1999 and this recovery continued into 2000. Activity has increased in both the front end and back end of the fabrication process, resulting in an increase in orders for trim and test and wafer marking systems. Sales to the electronics market in the three months ended September 29, 2000 declined slightly relative to the same period in 1999, mainly in Europe. Sales to the automotive market were up significantly in the quarter reflecting the impact of a major contract in this market announced early in January 2000. Sales of components increased 12% from the same period in 1999, reflecting continued strong sales growth in this area. Sales to the other markets (including aerospace, packaging and medical/biotechnology industries) decreased during the quarter due to the divestiture of certain product lines which were included in this category. Sales to medical/biotechnology industries in subsequent quarters will be further impacted by the sale of the Life Sciences business on October 1, 2000 (see Note 10 to the consolidated financial statements). Parts and service sales during the three months ended September 29, 2000 continued to grow, due to customers' increased utilization of existing installed systems and general growth in the installed base. 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 $103 million on September 29, 2000 compared to $103 million on June 30, 2000 and $81 million on October 1, 1999. 14
Gross Profit Margin. Gross profit margin of 40.0% in the three months ended September 29, 2000 compares favorably to the gross profit margin of 39.1% in the third quarter of 1999 due to increased sales of higher margin products and consolidation of manufacturing operations. Research and Development Expenses. Research and development expenses, net of government assistance, for the three months ended September 29, 2000 were 9.2% of sales or $9.0 million compared to 10.4% of sales or $8.1 million in the three months ended October 1, 1999. Development activities focused on products in the semiconductor, electronics and automotive markets. Selling, General and Administrative Expenses. Selling, general and administrative expenses were 21.1% of sales or $20.6 million in the three months ended September 29, 2000, compared with 22.7% of sales or $17.7 million in the three months ended October 1, 1999. The decrease in expenses in percentage terms is due primarily to operating efficiencies realized from the merger and higher sales volume. Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles was 1.2% of sales or $1.1 million as a result primarily of amortizing intangible assets resulting from the merger. Restructuring and Other. During the three months ended September 29, 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line. No restructuring charges were recorded during the third quarter of 2000 and 1999. Gain on Sale of Assets. During the three months ended September 29, 2000, the Company sold two facilities in the United States and recorded a net gain of $1.7 million. Interest Income. Net interest income was $1.0 million in the three months ended September 29, 2000 , compared to $2 thousand in the three months ended October 1, 1999. The increase in this quarter is due to the investment of the proceeds from the April share offering. Foreign Exchange. Foreign exchange transaction losses were $0.2 million in the three months ended September 29, 2000, compared to $0.5 million of losses in the three months ended October 1, 1999. Income Taxes. The effective tax rate was 34.9% for the three months ended September 29, 2000 compared to 30.0% for the same period in 1999. Net Income. Net income for the three months ended September 29, 2000 was $7.2 million, or $0.18 per share based on 39.8 million weighted average common shares, and $0.17 per share based on 41.7 million diluted weighted average common shares. Results of Operations for Nine Months Ended September 29, 2000 The following table presents unaudited year-to-date results of operations as a percentage of sales. 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 consolidated financial statements. 15
<TABLE> <CAPTION> Nine months ended ----------------- Sept. 29, Oct. 1, 2000 1999/(1)/ ---- --------- <S> <C> <C> Sales................................................. 100.0% 100.0% Cost of goods sold.................................... 59.4 67.0 ------- -------- Gross profit.......................................... 40.6 33.0 Research and development.............................. 9.4 10.8 Selling, general and administrative................... 21.9 25.1 Amortization of technology and other intangibles...... 1.3 1.5 Acquired in-process research and development.......... - 8.0 Restructuring and other............................... (1.1) 10.5 ------- -------- Income (loss) from operations......................... 9.1 (22.9) Gain on sale of assets................................ 0.8 - Interest income, net.................................. 0.6 - Foreign exchange transaction losses................... (0.7) (0.6) ------- -------- Income (loss) before income taxes..................... 9.8 (23.5) Income tax provision (benefit)........................ 3.4 (2.5) ------- -------- Net income (loss)..................................... 6.4% (21.0)% ======= ======== </TABLE> /(1)/ Includes General Scanning from March 22, 1999, the date of the merger of General Scanning and Lumonics. Our sales were $278.4 million for the first nine months of 2000, up 35% compared to the first nine months of 1999 on a pro forma basis as if the merger had occurred at the beginning of 1999. <TABLE> <CAPTION> (in millions) Nine months ended ------------------------------------------- Sept. 29, 2000 Oct. 1, 1999/(1)/ -------------- ----------------- <S> <C> <C> <C> <C> Quarterly revenues by market: Semiconductor.......................... $ 54.7 20% $ 22.0 12% Electronics............................ 68.7 25% 41.8 23% Automotive............................. 21.8 8% 7.1 4% Components............................. 32.7 12% 23.1 12% Other.................................. 62.6 22% 64.4 34% Parts and services..................... 37.9 13% 27.5 15% ------- ---- ------ --- Total........................... $ 278.4 100% $185.9 100% ======= ==== ====== ==== </TABLE> /(1)/ Includes General Scanning from March 22, 1999, the date of the merger of General Scanning and Lumonics. Sales by Market. Our results of operations are affected by external factors that impact the markets in which we compete. Sales to the semiconductor market in the nine months ended September 29, 2000 more than doubled compared to the same period in 1999, in part due to the merger in the first quarter of 1999. After severe recession in 1997 and 1998, the semiconductor equipment industry began to recover in 1999 and this recovery continued into 2000. Activity has increased in both the front end and back end of the fabrication process, resulting in an increase in orders for trim and test and wafer marking systems. Sales to the electronics market in the nine months ended September 29, 2000 increased by 64% compared to the same period in 1999, again in part due to the merger in the first quarter of 1999. Growth in the electronics market, as is also the case in the semiconductor market, has been fueled by the growing demand for components for telecommunications devices, personal computers, consumer and automotive electronics. 16
Growth in sales in the automotive and components sectors is due partially to the impact of the merger with General Scanning Inc. which occurred on March 22, 1999, and to increasing demand for the company's laser processing systems and components in those markets. Sales in the automotive market also reflect the impact of a major contract announced in January 2000. Parts and service sales during the nine months ended September 29, 2000 continued to grow, due to customers' increased utilization of existing installed systems, as well as the improvement of parts and service support for the former General Scanning systems and components. Gross Profit Margin. Gross profit margin of 40.6% in the nine months ended September 29, 2000 compared to gross profit margin of 33% in the same period of 1999 is due to increased sales of higher margin products, consolidation of manufacturing operations and reduced warranty expense. Research and Development Expenses. Research and development expenses, net of government assistance, for the nine months ended September 29, 2000 were 9.4% of sales or $26.3 million compared with 10.8% of sales or $20.0 million for the nine months ended October 1, 1999 (excluding the merger related $14.8 million in-process research and development charge). The increase in dollar terms from the same period in 1999 is due primarily to the impact of the merger with General Scanning Inc. that occurred on March 22, 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses were 21.9% of sales or $60.9 million in the nine months ended September 29, 2000, compared with $46.7 million or 25.1% of sales in the nine months ended October 1, 1999. The increase in dollar terms from 1999 is due primarily to the impact of the merger with General Scanning Inc. that occurred on March 22, 1999. The decrease in percentage terms is due primarily to the increased sales volume in 2000. Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles was 1.3% of sales or $3.5 million compared to 1.5% of sales or $2.8 million in 1999 consisting primarily of the amortization of intangible assets resulting from the merger. Restructuring and Other. During the nine months ended September 29, 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line and $2.7 million received for licensing some of the Company's technology. No restructuring charges were recorded during 2000 and the second and third quarters of 1999. A charge of $19.6 million was taken during the three months ended April 2, 1999 to accrue for employee severance, leased facility and related costs associated with the closure of the plant in Oxnard, California and other facilities worldwide. These costs resulted from restructuring and integration of operations following 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. The remaining accrual is $5.8 million at September 29, 2000 (see Note 7 to the financial statements). Interest Income. Net interest income was $1.6 million in the nine months ended September 29, 2000, compared to $0.1 million in the nine months ended October 1, 1999. The increase in 2000 is due to the investment of the proceeds from the April share offering. Foreign Exchange. Foreign exchange transaction losses were $2.0 million in the nine months ended September 29, 2000, compared to $1.1 million of losses in the nine months ended October 1, 1999. Income Taxes. The effective tax rate was 34.9% for the nine months ended September 29, 2000 compared to a tax recovery rate of 10.7% for the nine months ended October 1, 1999. 17
Net Income (Loss). Net income for the nine months ended September 29, 2000 was $17.8 million, or $0.47 per share based on 37.6 million weighted average common shares, and $0.45 per share based on 39.6 million diluted weighted average common shares. In April 2000 we offered and sold 4.3 million common shares in a public offering. Liquidity and Capital Resources Cash and cash equivalents totaled $66.8 million on September 29, 2000 compared to $25.3 million at December 31, 1999. Bank debt and the current portion of long-term debt was $16.9 million on September 29, 2000 compared to $28.5 million at December 31, 1999. In April 2000 the Company offered and sold 4,300,000 shares of Common Stock at a price to the public of $17 per share, for net proceeds of $70.1 million. During the nine months ended September 29, 2000, 1,437,765 shares of common stock were issued pursuant to share options exercised for proceeds of $8.2 million. During the nine months ended September 29, 2000, we used $14.1 million in operating activities. Net income, after adjustment for non-cash items, provided cash of $21.7 million, offset by $36.1 million of increases in accounts receivable, inventory and other current assets, less increases in current liabilities. In the first nine months of 1999, operations used $3.6 million. Cash flow used in investing activities was $9.4 million during the nine months ended September 29, 2000, including $26.2 million generated from the sale of assets in the quarter offset by net purchases of $23.7 million of short-term investments, $6.5 million use in the acquisition of General Optics, and $6.2 million invested in property, plant and equipment. In the first nine months of 1999, investing activities used $0.7 million. Cash flow provided by financing activities was $63.1 million for the nine months ended September 29, 2000, primarily from the common share issuance in April 2000 and stock option exercises reduced by repayments of bank indebtedness. In the nine months of 1999, financing activities provided $0.9 million. We have credit facilities of approximately $40 million denominated in Canadian dollars, U.S. dollars, British pounds and Japanese yen. Actual bank indebtedness, of which $10.7 million was outstanding at September 29, 2000, is due on demand and bears interest based on prime. 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, available bank lines of credit, and net proceeds of the stock offering completed in April 2000, will be sufficient to satisfy anticipated cash needs to fund working capital and investments in facilities and equipment for the next two years. The Company may, from time to time, as market and business conditions warrant, invest in or acquire complementary businesses, products or technologies. The Company may require additional equity or debt financing to fund such activities, which could result in additional dilution to the Company's shareholders. 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. 18
Special Note Regarding Forward-Looking Statements Certain statements in this report on Form 10-Q 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. 19
ITEM 3. 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 such contracts outstanding, converting yen denominated interest on long term debt into U.S. dollar denominated interest and converting 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. 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 any positive fair value of our swap contracts and any gains on foreign currency contracts described below in the event of non- performance by banks acting as counterparties to the swap and foreign currency 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 swap contracts outstanding, converting yen denominated obligations into U.S. dollar obligations and converting yen denominated obligations into Canadian dollar obligations. In addition, we have foreign currency contracts to exchange foreign currencies (yen and pound sterling) with or for U.S. dollars. See Note 6 to the financial statements. 20
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS GSI Lumonics Inc. v. BioDiscovery Inc. In the California action forming part of these proceedings, the Court in September 2000 allowed a motion by GSI Lumonics Inc. to dismiss BioDisovery's president's complaint insofaras it alleged any reverse engineering, reverse compiling or copying of ImaGene(C). See also the description of this litigation in Note 8 to the Financial Statements. Electro Scientific Industries, Inc. v. GSI Lumonics Inc. In these proceedings, in April 1999, Electro Scientific Industries was awarded a $13.1 million damage judgment against GSI Lumonics Inc. This has been appealed by GSI Lumonics Inc. and oral argument on the appeal occurred on October 3, 2000. See also the description of this litigation in Note 8 to the Financial Statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) List of Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 27. Financial Data Schedule b) Reports on Form 8-K None 21
GSI Lumonics Inc. 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. <TABLE> <CAPTION> Name Title Date - ---------------------- ------------------------------------------- ----------------- <S> <C> <C> /s/ CHARLES D. WINSTON Director and Chief Executive Officer November 13, 2000 - ---------------------- Charles D. Winston (Principal Executive Officer) /s/ THOMAS R. SWAIN Vice President Finance and Chief Financial November 13, 2000 - ------------------- Thomas R. Swain Officer (Principal Financial and Accounting Officer) </TABLE> 22