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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TRANSITION REPORT
COMMISSION FILE NO. 333-71449
GSI LUMONICS INC.
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 38-1859358
(Jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
105 SCHNEIDER ROAD, KANATA, ONTARIO, CANADA K2K 1Y3
(Address of principal executive offices) (Zip Code)
(613) 592-1460
(Registrant's telephone number, including area code)
________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Title of Each Class
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES NO X
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
On April 5, 1999, 34,161,917 shares of the Common Stock of GSI
Lumonics Inc. were issued and outstanding. Non-affiliates of the
registrant held 27,534,725 shares having an aggregate market value of
U.S. $122,185,342 based on the closing price of the shares on Nasdaq on
April 5, 1999 of U.S. $4.4375.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 11, 1999 are incorporated by reference in
Part III of the Report. Other documents incorporated by reference are
listed in the Exhibit Index.
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GSI LUMONICS INC.
Annual Report - Form 10-K
Table of Contents
<TABLE>
<S> <C>
PART I.............................................................. 3
ITEM 1. BUSINESS OF GSI LUMONICS INC. .............................. 3
Overview................................................... 3
Corporate History and Structure............................ 4
Business of Lumonics....................................... 5
Corporate Strategy......................................... 6
Customers.................................................. 8
Sales, Marketing and Customer Support...................... 9
Order Backlog.............................................. 11
Products and Services...................................... 11
Product List............................................... 16
Competition................................................ 19
Manufacturing.............................................. 20
Research and Development................................... 21
Patents and Intellectual Property.......................... 23
Human Resources............................................ 23
ITEM 2. PROPERTIES.................................................. 24
ITEM 3. LEGAL PROCEEDINGS........................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 27
PART II............................................................. 29
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS........................................ 29
Market Information........................................ 29
Currency Prices........................................... 29
Dividends................................................. 29
ITEM 6. SELECTED FINANCIAL DATA..................................... 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 30
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 21
PART III............................................................ 21
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 21
ITEM 11. EXECUTIVE COMPENSATION..................................... 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 21
PART IV............................................................. 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................... 22
List of Financial Statements........................................ 22
List of Financial Statement Schedules............................... 22
Reports on Form 8-K................................................. 24
</TABLE>
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PART 1
ITEM 1. BUSINESS OF GSI LUMONICS INC.
On March 17, 1999, the shareholders of General Scanning Inc. ("GSI") and
Lumonics Inc. ("Lumonics") approved an agreement to form GSI Lumonics Inc. ("GSI
Lumonics") as a merger of equals. GSI stockholders each receive 1.347 GSI
Lumonics common shares for each share of GSI common stock they own and Lumonics
shareholders will continue to hold their common shares of Lumonics which,
following the merger, has been renamed GSI Lumonics Inc. Immediately following
the merger, the GSI stockholders and the Lumonics shareholders will each, as a
group, own approximately 50% of the common shares of GSI Lumonics. In addition,
Lumonics will assume all options and warrants to purchase GSI common stock
outstanding at the time of the merger, which will be exercisable for GSI
Lumonics common shares. There are eight directors of GSI Lumonics, chosen
equally from the boards of GSI and Lumonics. In addition, GSI Lumonics will be
managed by some members of the current management team of each company.
The merger was completed on March 22, 1999. Prior to the closing of the
merger, integration teams were developing plans to guide the first 12 months
integration initiatives of GSI Lumonics. Cross functional, inter-company teams
covering manufacturing operations, distribution, research and development,
technology, customer support and administration were asked to cover many topics
including customer retention, cost saving synergy, revenue enhancement
opportunities and organization structure.
In the first two weeks following the close of the merger, GSI Lumonics
moved quickly to implement integration plans. Announcements have been made
covering the closing of one of two manufacturing facilities in California,
removing sales office redundancy in key markets outside North America,
rationalizing product overlap and relocating the manufacture of a product line.
The costs associated with these restructuring activities will be incurred in the
first quarter of 1999.
GSI Lumonics has also moved quickly to implement an organization structure
to see it through at least the first 12 months. All redundant employment
positions were identified in the first week following the merger.
There will be other integration initiatives that will be identified in the
release of first quarter 1999 results. These include the re-organization of
the Company's worldwide sales force, integration of worldwide customer support
and consolidation of some of the Company's administrative functions.
OVERVIEW
GENERAL SCANNING INC.
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GSI was incorporated in Massachusetts in 1968. GSI develops and
manufactures a broad line of laser systems for a wide range of applications in
the automotive, electronics, semiconductor, medical and aircraft industries. In
addition, GSI produces a line of laser subsystems and components, which are used
in GSI's own systems as well as sold in the merchant market. GSI also designs
and manufactures a line of printers for medical instrument companies, and
recently introduced a new foil imprinting technology for use in photo labs and
retail photo finishing outlets. In 1998, over 81% of GSI's revenues were
derived from the sale of laser systems and components. GSI sells and supports
its products worldwide. In 1998, 60% of its sales were in the United States,
20% in Asia and 20% in Europe.
GSI manufactures laser systems for a variety of industrial applications
including: thin film resistor processing systems used in the production of
automotive sensors for airbags, anti-lock brakes, emissions control and airflow
measurement; thick film resistor processing systems used in the manufacture of
surface mount ("SMT") electronic components; memory repair processing systems
used in the fabrication of high density computer memory chips; inspection
systems for solder paste and component placement on SMT printed circuits; laser
marking systems used for permanent identification of products such as integrated
circuit packages and automotive components; component handling and sorting
systems used in the integration of one or more laser process or inspection
systems; precision alignment systems used primarily in the fabrication of
aircraft composite structures; inspection and metrology systems employing non-
contact 3-D image processing used in the manufacture of disk drives and other
precise
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3
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tolerance devices; micro-array scanners for biological analysis; and laser
systems and subsystems used in film imaging. In addition, GSI manufactures laser
subsystems and components used by GSI and its customers in many applications
including materials processing, test and measurement, alignment, inspection,
graphics, vision systems, rapid prototyping and certain medical procedures
including dermatology and ophthalmology.
GSI's core technological expertise, which is employed in each of these
applications, is high speed micropositioning and precise power control of
lasers, as well as 2-D and 3-D image processing. Designing and manufacturing
GSI's products requires specialized expertise in: electronics that can operate
reliably and accurately under a wide range of environmental conditions;
electromechanical devices that can sustain high torsional acceleration; optics
and lenses that operate with a variety of laser power and wavelength; closed-
loop electronic servo systems that precisely and quickly measure and control
relative positions of mechanical components; and software that controls laser
systems and interfaces with adjunct equipment. In addition, GSI maintains
control of the critical production processes which, GSI believes, allows it to
control costs, realize higher quality production and bring new products to
market more quickly. Two of GSI's core development and manufacturing sites,
located in Wilmington, MA and Bedford, MA, are ISO 9001 certified operations.
GSI expands the scope and use of its core products by working closely with
leading customers to identify both value-added functionality and new
applications. GSI designs and manufactures systems and components with the aim
of providing its customers with low overall cost of ownership. GSI's close
relationship with its customers enables it to expand the number of applications
for its core technology and reduce the risks associated with new product
development. GSI believes the diversity of applications for its products
reduces the risk of dependence on the economic conditions in any one industrial
sector it serves.
LUMONICS INC.
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CORPORATE HISTORY AND STRUCTURE
Lumonics was incorporated by letters patent as Lumonics Research Limited
under the laws of Ontario on November 26, 1970 for the purpose of producing
lasers for scientific and research applications. By articles of amendment dated
June 11, 1980, the company changed its name to Lumonics Inc. The company first
became a public company in 1980 and Lumonics common shares were listed on The
Toronto Stock Exchange until 1989. From 1980 to 1988, annual revenues of
Lumonics increased twelve fold from Can $7.4 million to Can. $87.5 million.
In 1989, all of the outstanding Lumonics common shares were acquired by SHI
Canada Inc. ("SHI"), a wholly-owned subsidiary of Sumitomo Heavy Industries,
Ltd. ("Sumitomo") and Lumonics ceased to be a public company. Sumitomo
acquired Lumonics to expand its relationship with Lumonics, which began in 1988
when Sumitomo became a value-added reseller of Lumonics' products in Japan.
Sumitomo, a Tokyo Stock Exchange listed company, is one of Japan's leading
manufacturers and builders of ships, heavy machinery and equipment, chemical
plants, steel structures and bridges. Sales to Sumitomo, Lumonics' largest
distributor, represented 10.8% of Lumonics' total sales in fiscal 1998.
On September 28, 1995, Lumonics again became a public company and its
shares were listed on The Toronto Stock Exchange. As part of the public
offering, SHI participated in a secondary offering. On June 9, 1997, Lumonics
completed a public offering of 2.0 million shares from treasury, with SHI
participating in a secondary offering of 1.0 million shares. SHI completed a
sale to the public of an additional 1.0 million shares on September 29, 1997.
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4
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Lumonics has historically prepared and filed its consolidated financial
statements in Canadian dollars and in accordance with Canadian GAAP. The
consolidated financial statements of Lumonics included in this document have
been prepared in accordance with US GAAP and have been recast in US dollars in
accordance with US GAAP.
The following discussion is based on the US GAAP financial statements.
BUSINESS OF LUMONICS
Lumonics is a world leader in the development, design, manufacture and
marketing of laser-based advanced manufacturing systems, products and services.
Lumonics' systems are used in highly automated manufacturing environments for
cutting, drilling and welding and for coding and marking a wide range of
products. In addition to lasers, Lumonics' systems often include precision or
fibre optics, proprietary control software, robotics, machine vision, motion
control and parts handling.
Lumonics' laser systems are sold to a variety of targeted industrial
markets. Some markets, such as the semiconductor, electronics, aerospace,
medical device manufacturing and nuclear energy industries have used laser
systems as enabling technologies where precision, reliability, speed, process
quality and flexibility are essential. Other industries, such as automotive and
packaging, have used laser systems less frequently and for a more limited range
of applications, although utilization of lasers in these markets is increasing.
Still other industries, such as consumer products manufacturing, are
characterized by comparatively low utilization of laser systems.
The following table sets forth sales to Lumonics' primary markets and each
market's primary applications for the twelve months ended December 31, 1998:
<TABLE>
<CAPTION>
MARKET % OF SALES PRIMARY APPLICATIONS
------ ---------- --------------------
<S> <C> <C>
Semiconductor 10% Marking of wafers and integrated circuits
Electronics 21 Micro welding, wire stripping, component identification
Automotive 10 3-D cutting, body welding, component identification
Aerospace 9 Engine drilling, wire identification, welding components
Packaging 9 Marking of packages (food, pharmaceuticals) and bottles (beer, wine)
Emerging 18 Spot welding, metal marking, remote welding
Parts and Service 23
---
100%
</TABLE>
Lumonics markets its systems worldwide in more than 40 countries through
its global distribution network, which includes 13 sales offices in North
America, Europe and Asia-Pacific and 45 independent distributors and agents in
30 countries. Lumonics has seven manufacturing facilities located in Canada,
the United States and the United Kingdom.
Many of Lumonics' customers are among the largest global participants in
their respective industries. Approximately 60% of the company's sales in 1998
were generated from existing customers.
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CORPORATE STRATEGY
GSI Lumonics' strategy will be very similar to the strategies of the merged
partners, as there was significant overlap in the pre-merger strategies of GSI
and Lumonics. GSI Lumonics will continue to focus on key industrial markets and
expand applications within these markets by leveraging core technologies to
develop customer driven products. The Company will maintain and enhance its
global perspective to better serve its multinational and regional customers and
to take advantage of opportunities in developing economies. Diversification,
which was important to the merge partners, will be a continuing strategy of GSI
Lumonics and acquisitions that add complementary products and technologies will
be pursued. The strategies of GSI and Lumonics before the merger were as
follows:
GENERAL SCANNING INC.
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GSI's strategy is to continue to apply its expertise in rapid and high
accuracy micropositioning and precise power control of laser beams and 2-D and
3-D image processing to the development and manufacture of end-user and OEM
systems, subsystems and components for a broad range of market applications.
This strategy builds upon GSI's strengths in technology, manufacturing and
distribution. The key elements of GSI's business strategy are as follows:
Leverage Core Technology. GSI is committed to developing new products and
enhancing existing products to address new applications and evolving
manufacturing requirements primarily by leveraging GSI's core technologies for
high accuracy micropositioning and precise power control of lasers and in image
processing.
Customer Driven Product Development. GSI seeks to partner and work closely
with leading manufacturing companies in selected but diverse areas. This
approach allows GSI to incorporate customer feedback during the design process,
which expedites product development, thereby saving development time and
expense. GSI believes that developing a product to meet a need identified by a
market leader and potential customer decreases the risk typically associated
with new product introductions.
Broad Applications in Diverse Markets. GSI currently offers products
serving broad applications in diverse markets, including laser systems for
semiconductor manufacturing, production of automotive sensors, manufacturing of
electronic components and circuits, precision alignment of manufactured parts,
permanent product marking, film imaging and biological analysis. GSI makes
subsystems and components for OEM manufacturers of equipment for detection of
in-process defects and contamination, performance of medical diagnostic and
corrective procedures, confocal microscopy, film imaging, rapid prototyping, and
medical patient vital sign recording. By addressing diverse markets, GSI seeks
to increase its product sales and reduce its reliance on any single industry or
customer. In addition, GSI's marketing strategy is to continue to develop
products based on its core technical and manufacturing competencies for markets
in which it believes it can attain a leading position in market share.
Maintain Control of Critical Production Processes. GSI's manufacturing
strategy is to identify and perform internally those manufacturing functions
which enable GSI to maintain control over critical portions of the production
process and which add value to its products. GSI believes it achieves a number
of competitive advantages from such integration, including the ability to
achieve lower cost and higher quality, to bring new products and product
enhancements quickly and reliably to market, and to produce sophisticated
component parts not readily available from other sources.
Focus on Customers' Overall Cost of Ownership. GSI designs and
manufactures systems, subsystems and components aimed at providing its customers
with low overall cost of ownership relative to competing solutions. GSI's laser
systems are intended to assist customers in achieving higher yields, greater
productivity, more efficient use of operator time and more economical use of
manufacturing space.
Address Worldwide Markets. GSI markets, sells and supports its products
worldwide. GSI believes the strength of its international sales and customer
support organization is important to its continued success. To facilitate its
worldwide marketing strategy, GSI has dedicated sales and support organizations
in Japan, Hong Kong, Korea, Taiwan, Singapore, Malaysia, the Philippines,
Germany, England, France and Italy, in addition to eight major locations in the
United States.
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LUMONICS INC.
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Lumonics' objective is to maintain and enhance its market position and to
use its competitive advantages to establish leadership positions for additional
applications and in other targeted industries. The strategies to achieve this
goal are:
One Lumonics. Lumonics is managed as an integrated business combining its
worldwide skills and capabilities to increase market share and to maximize its
profitability. Employees operate in an environment in which they are provided
with information about Lumonics' systems, services and operational activities
and are encouraged to work together to use all of the Lumonics' resources in
delivering value-added total solutions to meet customer needs in targeted
markets.
Total Solutions. Lumonics focuses on identifying for its customers the
solutions which the Lumonics' systems represent, rather than on the systems
themselves. To grow market share, Lumonics delivers turn-key, total solutions
which add value to manufacturing processes, are customer-defined and Lumonics-
developed.
Industry Focused Operations. Lumonics concentrates its marketing
activities on the advanced manufacturing segments of the semiconductor,
electronics, aerospace, automotive and packaging industries. These industries
were targeted because of their projected growth rates and utilization of
advanced manufacturing processes and because of Lumonics' established market
presence.
Rapid Response Organization. Lumonics recognizes that being a customer
driven organization is key to its continued growth. With approximately 60% of
the Lumonics' sales in 1998 generated from existing customers, the timeliness
and effectiveness of all customer interaction is a high priority. In 1994,
Lumonics successfully implemented 24 hour, 365 day a year, field service support
in North America. This field service support has subsequently been extended to
both Europe and the Asia-Pacific region.
Global Perspective. Lumonics provides its total solutions in the principal
geographic locations in which its customers operate. Lumonics recognizes the
global nature of its customer base as well as the important regional areas in
which certain of the targeted industries operate. This strategy exploits
Lumonics' international manufacturing capability and global distribution and
service network to serve its multinational and regional customers.
People Development. Lumonics believes that its human resources are
integral to its profitable growth. Lumonics makes a significant investment in
human resources through personnel development and training programs at all
levels of the organization.
Profitable Growth. Lumonics achieves its growth by developing new products
internally and by acquiring complementary product lines and technology which
enhance Lumonics' position in the targeted industries. Lumonics' global
distribution and service network and the size and nature of its existing
customer base position Lumonics to profitably add new technologies, products and
systems to its existing product offerings.
Since the implementation of the strategies outlined above, Lumonics has
generated an 87% increase in sales, from $77.0 million in 1992 to $144.2 million
in 1998, and a 58% increase in gross profit, from $25.7 million in 1992 to $40.7
million in 1998. Net loss in 1998 was $7.9 million and order backlog as at
December 31, 1998 was $29 million.
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ACQUISITIONS AND STRATEGIC RELATIONSHIPS
In addition to growing its level of internally generated sales, expanding
through acquisitions and strategic relationships is an integral component of
Lumonics' strategy. Lumonics seeks to acquire complementary products and
technologies which can be integrated easily into Lumonics' global distribution
and service network. Lumonics has a history of expanding its product lines by
acquiring laser-based technologies and systems from others and entering into
strategic relationships which increase penetration of targeted markets.
Acquisitions
In June 1998, Lumonics made a technology acquisition for approximately $1.2
million, acquiring Meteor Optics Inc., of Glendale, Arizona which specializes in
manufacturing fibre optics - a key component in the beam delivery of higher-
powered YAG lasers. Meteor Optics has been a valued supplier to Lumonics for
several years and has now been renamed Lumonics Phoenix Operations.
On October 28, 1998, in a proposed merger of equals, the Boards of
Directors of GSI and Lumonics announced the signing of a definitive agreement to
combine the two companies, subject to shareholder and regulatory approvals. The
merged company, GSI Lumonics Inc., is the world's leading producer of laser-
based advanced manufacturing systems.
GSI manufactures a broad line of laser systems for a wide range of
applications in the seminconductor, electronics, aircraft and medical
industries. In addition, GSI produces a line of laser subsystems and components,
which are used in the company's own systems as well as sold to other
manufacturers of laser systems.
Lumonics and GSI have very little competitive overlap, but operate in
similar markets with complementary technologies. The merger was successfully
completed on March 22, 1999.
Strategic Relationships
In forming and evaluating strategic relationships, Lumonics seeks:
. to achieve greater market penetration into its target markets;
. to develop new markets for Lumonics' systems;
. to provide Lumonics with additional products to manufacture, sell and
distribute into its target markets.
CUSTOMERS
GENERAL SCANNING INC.
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GSI has over 1,000 customers. During 1998, revenues from two divisions of
one customer represented $19.6 million or 10.8% of GSI's consolidated revenues.
GSI's printer and laser systems/components segments serve these divisions. No
other single customer accounted for more than 5% of GSI's total sales. GSI's
ten most significant customers in terms of sales in 1998, listed alphabetically,
were: Analog Devices, Bosch, Dale, Denso, Eastman Kodak, IBM, Maxium, Motorola,
Philips and Physio-Control.
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LUMONICS INC.
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Lumonics has over 1,000 customers, many of whom are among the largest
global participants in their respective industries. Lumonics' customers include:
<TABLE>
<CAPTION>
SEMICONDUCTOR
& ELECTRONICS AEROSPACE AUTOMOTIVE PACKAGING OTHER
<S> <C> <C> <C> <C>
Lucent Beech Aircraft Audi Allied Lyons British Nuclear Fuels
Canon Boeing Bosch Allied Distillers Cardiac Pacemakers
Hewlett Packard British Aerospace BMW Carlsberg Corning
IBM General Electric Chrysler Coca-Cola Gillette
Intel Lockheed Ford General Foods Johnson & Johnson
Motorola McDonnell Douglas General Motors Glaxo Solar Turbine
Nortel Pratt & Whitney Harley Davidson Kellogg's Westinghouse
Philips Rolls Royce Kelsey Hayes Labatts Whirlpool
Texas Instruments SNECMA Nippon Denso Procter & Gamble
Toshiba Pico Industrial Tools United Distillers
Yamaha Toyota Seagrams
Volvo
Honda
Magna
</TABLE>
SALES, MARKETING AND CUSTOMER SUPPORT
GENERAL SCANNING INC.
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GSI believes that its marketing, sales and customer support organizations
are important to its long-term growth and give GSI the ability to respond
rapidly to the needs of its customers. GSI has marketing managers for each
major product line who have worldwide responsibility for determining product
strategy based on knowledge of the industry, customer requirements and product
performance. These marketing managers have direct contact with customers and
support the field sales and service personnel. GSI believes that its business
has been, and is expected to continue to be, dependent upon the capital
expenditure approval cycles of its customers which are, in turn, affected by
cycles in the markets served by these customers.
GSI sells and supports its products worldwide primarily through its own
direct sales and customer service organization. This domestic and international
sales network is augmented by selected independent sales representatives for
end-user laser systems, due to the geographical dispersion of customers for such
products. Field offices have been located in close proximity to key customers
to help achieve short response time. In the United States, GSI provides
marketing support at its locations in Watertown, Wilmington, Arlington and
Bedford, Massachusetts, Simi Valley and Santa Clara, California and in Ann
Arbor, Michigan. In Europe, GSI distributes its products through its direct
sales offices located in Germany, the United Kingdom, Italy and France. GSI
distributes its products in Japan through its offices in Tokyo and Osaka.
Throughout the remainder of Asia, GSI distributes through its offices in Hong
Kong, Korea, Singapore, Malaysia, the Philippines and Taiwan.
GSI provides customer support in the form of applications engineering,
repair services and spare parts inventory through its offices in Massachusetts,
Michigan, California, France, Germany, Italy, the United Kingdom, Hong Kong,
Japan, Korea, Singapore, Malaysia, the Philippines and Taiwan. Engineering and
field support personnel provide telephone support or are dispatched to customer
locations. Additionally, GSI's offices generally have certain models of GSI's
laser systems which are used for demonstration purposes and for applications
engineering. From time to time, at the request of a customer, GSI will install
a laser system at the customer's manufacturing site to establish manufacturing
process and demonstrate product performance as part of the selling process prior
to receipt of an order. The typical purchase of a laser system includes
installation and on-site customer support and applications engineering during a
warranty period.
LUMONICS INC.
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Lumonics' systems are marketed in more than 40 countries. Lumonics has 49
direct sales personnel operating in 13 sales offices located in eight countries.
In addition, Lumonics has 45 independent distributors and agents in 30
countries. For the twelve months ended December 31, 1998, 6% of Lumonics' sales
were in Canada, 43% of sales were in the United States, 28% were in Europe, 11%
were in Japan and 12% were in Asia-Pacific.
Lumonics directs its worldwide sales and marketing activities from Oxnard,
California. In Europe, Lumonics maintains offices in the United Kingdom,
Germany, France, and Italy. Sales offices are maintained in Singapore and
Malaysia to cover the Asia-Pacific market outside of Japan. In Japan, Lumonics'
principal distributor is Sumitomo, which accounted for 10.8% of Lumonics' total
sales in 1998.
Independent distributors and agents market Lumonics' systems in areas such
as Eastern Europe, South Korea, People's Republic of China, Australia and Latin
America.
All direct sales staff and distributors are trained on Lumonics' systems,
services and operational activities, and are given information on industry
trends and applications. Sales and marketing teams identify new opportunities
based on customers' medium to long term manufacturing requirements. Internal
and external resources are used to develop and implement industry and country-
specific marketing strategies which are shared across Lumonics' sales and
marketing network.
Once a sales opportunity has been identified, Lumonics tries to provide the
optimal solution to satisfy a customer's application requirements. Lumonics
provides customers with process diagnostic and verification techniques, as well
as specialized training in the operation and maintenance of its systems.
CUSTOMER SERVICE AND REPLACEMENT PARTS
One of Lumonics' principal strategies is to focus on customer service.
Recognizing the importance of its existing and growing installed base Lumonics
follows its customers into new geographic regions by providing local service and
support. Lumonics has 158 customer service personnel of which 91 are field
service technicians located in 10 countries. Lumonics' field service and in-
house technical support personnel receive ongoing training with respect to
Lumonics' laser-based systems, maintenance procedures, laser-operating
techniques and processing technology. Most of Lumonics' distributors also
provide customer service and support.
Many of Lumonics' laser systems are operated 24 hours a day in high speed,
quality intensive manufacturing operations. Accordingly, in 1994 Lumonics
successfully launched 24-hour, 365-day-a-year service support to its North
American customers. This support includes field service personnel who reside in
close proximity to Lumonics' installed base. Lumonics has subsequently extended
this support to Europe and the Asia-Pacific region.
Lumonics' approach to the sale of replacement parts is closely linked to
Lumonics' strategic focus on rapid customer response. Lumonics provides same or
next day delivery of parts worldwide to minimize disruption to a customers
manufacturing operations. Lumonics generally expects to provide after sale
parts and service for seven to ten years. Lumonics' growing base of installed
systems is expected to continue to generate a stable source of parts and service
sales.
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ORDER BACKLOG
GENERAL SCANNING INC.
- ---------------------
GSI defines backlog as written purchase orders or other contractual
agreements for products for which the customer has requested delivery within the
next twelve months. Backlog was approximately $30 million on December 31, 1998
compared to $44 million on December 31, 1997.
LUMONICS INC.
- -------------
Backlog is defined by Lumonics as an unconditional purchase order for a
product to be delivered within the next twelve months, although typical delivery
dates average eight to 12 weeks from the date an order is placed. Lumonics'
backlog was approximately $29 million on December 31, 1998 compared to $45
million on December 31, 1997.
PRODUCTS AND SERVICES
GENERAL SCANNING INC.
- ---------------------
Laser Systems and Components
Thin Film Laser Processing Systems. GSI's laser systems are used in the
production of thin film circuits to precisely tune the performance of linear and
mixed signal devices used in a variety of applications including automotive
electronics, consumer products, personal computers, communications products,
appliances, and medical instruments. Tuning is accomplished by adjusting
various component parameters with selective laser cuts, while the circuit is
under test, thereby achieving the desired electrical performance. For example,
in automotive applications, these precision sensor circuits are used to measure
analog variables such as acceleration, voltage, temperature and pressure, and
convert them into electronic signals suitable for computer processing and
subsequent control of vehicle performance and safety. Automotive applications
include engine control, airbag deployment, anti-lock brake control and active
suspension systems. The M310 laser system subjects the sensor to a calibrating
pressure and then the laser adjusts the sensor parameters to exacting
specifications. GSI's M310 systems combine material handling, test stimulus,
temperature control and laser trim subsystems into a single turnkey package for
tuning linear and mixed signal devices.
Recently, such linear mixed signal circuits are being adopted for smart
appliances (such as camcorders and mobile GPS devices), extended life batteries,
video games, medical instruments and HVAC systems. Such mixed signal devices
were among the fastest growing segments in the electronic components industry
during 1997. GSI's thin film processing systems range in price from
approximately $300,000 to $1,000,000. Representative customers include Analog
Devices, Robert Bosch, Denso, Fuji Denki, Burr Brown, Maxim, Motorola and Texas
Instruments.
Thick Film Laser Processing Systems. GSI's laser systems are used in the
production of thick film resistive components (known as chip resistors) for SMT
electronic circuits. Chip resistors are microelectronic components that replace
larger axial lead resistors formerly used in electronic circuits. Chip
resistors are used in most consumer and industrial electronic products including
CD players, VCRs, TVs, camcorders and cellular telephones. A camcorder, for
example, may contain over five hundred chip resistors. The increasing use of
these devices is being driven by the demand for enhanced functionality, reduced
size, and lower cost of consumer electronics. SMT components meet these needs
by providing reduced package size and production set-up time, and improved
reliability and delivery times. GSI's W724C laser system is an integral part of
the process for manufacturing chip resistors. By means of selected cuts, laser
systems are used to change the effective length and cross section of the
electrical conductor of each resistor element. The resistance is monitored, and
the laser action continues until the precise resistance value is obtained. GSI
believes that the size of resistors will continue to shrink and, as a result,
manufacturers will require more precise laser systems. In November 1998, GSI
introduced the W770 Chip Component Trim System featuring faster and higher
quality cuts, as well as an intelligent parts handler for increased reliability
and simplicity, delivering production tolerant, "lights out" operation on the
smallest packages sizes and automatically managing multi-lot jobs and non-
conforming parts.
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<PAGE>
GSI's W670 laser systems are used for processing more general purpose
hybrid thick film electronic circuits. These circuits are designed to withstand
harsh environmental uses, such as automotive ignition controls, fuel sensors and
high voltage regulation.
GSI's thick film resistor processing systems range in price from
approximately $200,000 to $350,000. Representative customers include Kyocera,
Matsushita, Philips, Samsung and Vishay.
Surface Mount Measurement Systems. GSI's surface mount measurement
products address another sector of the electronics industry, the manufacture of
printed circuit board assemblies. Customers for SMT measurement products
require systems which can be used for prototyping, near-process monitoring and
in-line process control. These systems can be installed near or in the circuit
board assembly line to address these needs. In the manufacture of surface-mount
electronics, solder, in paste form, is stenciled onto the circuit board with a
screen printer, and then components are placed in their respective positions on
the board by automated equipment. Critical variables in the manufacturing
process, which GSI's systems address, include the amount of solder deposited on
the board and the accurate placement of the electronic components.
The Model 8100 system was introduced in 1995 and represents the third
generation of equipment design. The Model 8100 uses GSI's patented three-
dimensional scanning laser data acquisition technology, and can inspect either
solder paste depositions or component placement accuracy. The current base
price for the Model 8100 system is approximately $200,000 to $300,000. The
strongest market segments for SMT measurement products have been in the
computer, telecommunications and automotive industries as well as in contract
manufacturers which serve those and other industries. The Model 8200 system was
introduced in March 1998 and offers a faster, lower-priced solution for
inspection of smaller sized circuit boards. The current price for the Model
8200 is approximately $150,000 to $250,000. The strongest market segments for
SMT measurement products have been in the telecommunications, automotive, and
computer industries as well as contract manufacturers which serve those and
other industries. Customers include Celestica, Delco, Ericsson, Jabil Circuits,
and Motorola.
Memory Repair Systems. Dynamic random access memory chips are critical
components in the active memory portion of computers and a broad range of other
digital electronic products. To obtain efficient yields in the production
process, each memory component is designed with redundant circuitry. Using
GSI's M325 and M325 Plus laser systems, a semiconductor manufacturer can
effectively disconnect defective or redundant circuits in a memory chip with
accurately positioned and power modulated laser pulses. This improves the yield
of usable components per treated wafer, effectively lowering the cost per unit
produced.
The demand for memory, measured in megabits, has in recent years been
growing at greater than 50% per year. Approximately half to three quarters of
memory components produced are used in personal computers, with additional
demand coming from networked systems (file servers), flat panel displays,
multimedia systems and consumer electronics. Memory demand by the computer
industry is driven by both memory intensive software (Windows 95, graphics,
etc.) and higher speed microprocessors. As the memory capacity increases, the
feature size and spacing between the elements of the microcircuits decrease.
The industry is presently changing from 16 megabit to 64 megabit memory in
response to the demand for additional memory, space limitations to accommodate
it and manufacturing economics. GSI offers products which are currently being
used for processing memory up to and including 64 megabits. First-pass
manufacturing yields are typically low at the start of production of a new
generation of higher capacity devices. Laser processing is used to raise
production yields to acceptable economic levels, frequently to greater than 95%.
Memory components are currently produced in batches on silicon wafers
typically measuring 6" or 8" in diameter. The industry is currently planning
for production using 12" (300 millimeter) diameter wafers. GSI believes that
its technology and systems architecture will allow it to develop and introduce
products to process the new 12" wafers. However, industry implementation of
conversion to 12" wafers has been delayed due to current conditions of excess
capacity within the semiconductor industry. GSI's M325 memory processing
systems range in price from approximately $500,000 to $900,000. Representative
customers include Cypress Semiconductor, Dominion Semiconductor, IBM, Mitsubishi
and Toshiba.
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<PAGE>
Permanent Marking Systems. GSI's moving spot laser marking systems are
used to apply permanent alphanumeric, graphic and bar-code identification
directly onto electronic components, industrial products and packaging
materials. Laser marking systems remove precise amounts of material from, or
modify the surface of, an object being marked by exact control of the laser beam
as it moves along a prescribed path. Such systems are gaining acceptance over a
broad range of markets, replacing older technologies such as inkjet, mechanical
imprinting, chemical etching and ink stamping. This change is being driven by
the need for permanent marking and for marking systems which can be interfaced
with computers, and by environmental acceptance. Industry has recently begun to
require product traceability for years after the date of manufacture. At
present, inkjet and ink stamping do not provide this permanence, while laser
marking does. Also, the laser marking process does not involve the use of
environmentally hazardous solvents.
As an example of this application, GSI's HM1500 laser system is used to
mark integrated circuit ("IC") packages. The plastic or ceramic package
surrounding an IC must be marked without penetration of its thin wall to avoid
damaging the expensive circuits it protects. This process requires a high
degree of precision. Laser marking for this application is gaining widespread
usage. GSI's laser systems are also used in other applications including the
marking of automotive parts, electrical components, tools, medical implants, as
well as in the decorative marking of consumer items. During 1996, GSI replaced
its current product offerings with the 1000 Series products which offered
significant advantages in terms of higher power, larger marking fields, faster
marking speeds and higher precision. In 1997, GSI introduced a diode-pumped
laser marker, with a full 8,760 hour warranty on the laser, which requires no
external cooling or three-phase power. The FM3500-4 laser marking system, also
introduced in mid-1997, multiplexes a high power laser beam into four completely
independent marking heads that can be remotely located up to 100 feet away from
the laser by fiber optic cable. GSI's laser marking systems range in price from
approximately $50,000 to $250,000. Representative customers include Harris,
Hewlett-Packard, Motorola, SGS Thompson, Texas Instruments and Toshiba.
Components Handling Systems. GSI designs, manufactures and, then,
integrates electronic components handling systems for laser marking, lead
inspection, parts sorting and parts packaging. This capability was added in
late 1997 through the acquisition of Reel-Tech, Inc. Products include in-tray
laser marking, tube-to-tube laser marking, tape and reel systems, media transfer
systems and integrated multi-process systems. These systems can handle a wide
variety of component package configurations. This capability enables GSI to
more effectively serve its customers by meeting the emerging trend to more
closely integrate multiple processes and, therefore, increase manufacturing
productivity. GSI's component handler systems sell in the price range of
approximately $125,000 to $400,000. Representative customers include Micron,
Motorola and Samsung.
Precision Alignment Systems. GSI's precision alignment systems interface
with computer assisted design and manufacturing ("CAD/CAM") software to assist
in the precision alignment of parts during manufacturing assembly processes.
The principal use to date has been in the precision alignment of composite
materials for the aircraft industry. Composite materials are important elements
in the fabrication of critical structures for aircraft, such as jet engine
cowlings, cargo and nose wheel doors, and control surfaces of the wings and
vertical stabilizer, as well as for major components in jet engines,
helicopters, communication satellites and rockets. GSI's systems project a
precise image generated from existing CAD/CAM data to guide the assembly
operations personnel in the proper placement and order of layers of composite
materials. GSI's OLT4000 precision alignment systems allow aircraft
manufacturers to eliminate mechanical alignment templates, minimize costs from
engineering changes, and reduce operator learning time and assembly labor
requirements. GSI is exploring the applications of these systems in other
markets. GSI's precision alignment systems sell in the range from approximately
$50,000 to $250,000. Representative customers include Bell Helicopter, Boeing,
CFAN, Daimler-Benz Aerospace, Hughes Aircraft and Northrop Grumman.
Metrology Systems. GSI's metrology products are automated, non-contact
dimensional coordinate measurement systems which provide major electronics,
telecommunications, and computer manufacturers with the ability to perform
micron accurate measurements of component parts and assemblies produced
throughout their manufacturing processes. These systems use combinations of CCD
video camera, image processing, and various laser sensor technologies to acquire
part measurement data. The metrology products are primarily sold to
manufacturers of disk drives, semiconductor packages, printed circuit boards,
and their associated micro-electronic components. During 1997, GSI replaced one
of its core product offerings with a new Voyager platform featuring advances in
illumination and autofocus technology, complemented by easy-to-use graphical
user interface to
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<PAGE>
facilitate measurement and programming. Current prices range from $55,000 to
$150,000. Representative customers include Applied Magnetic, Cummins Engine,
IBM, Intel, K. R. Precision and Seagate Technology.
Film Imaging Systems. The application of lasers for imaging directly onto
film has progressed steadily over the past decade to the point where it has
become the technology of choice in two major markets: medical diagnostics and
graphics. Both applications demand precise micropositioning for pixel placement
and adjustable contrast range. Medical diagnostics often involve images of the
human anatomy derived from computer assisted tomography ("CAT"), magnetic
resonance imaging ("MRI") or nuclear medicine systems. Such images are
usually presented on photographic film for viewing by a radiologist. GSI's
laser imaging subsystems are used to produce images of adjustable gray-level
contrast and high resolution for enhanced medical diagnostic purposes. GSI's
laser imaging equipment, using data sets from CAT, MRI or nuclear medicine
equipment, creates a film image by moving a laser beam across the width of the
film, and modulating it to produce the correct gray scale level for each picture
element, or pixel. When the width of the film has been scanned, the next line is
scanned in sequence. The process is continued until the entire image is exposed.
In late 1997, GSI introduced a film duplicating system which duplicates 8 x
10 and 14 x 17 films from existing X-ray, CAT and MRI electronic films.
Initially, the system will directly interface with wet and dry laser imaging
systems including Imation's DryView 8700 Laser Imaging System. In November
1998, GSI expanded this digitizing equipment to include applications in
teleradiology and PACS (picture archiving and communication systems).
GSI also sells a modified version of its film imaging subsystem to write
directly onto a film plate for graphic printing.
GSI's laser imaging systems and subsystems sell in the range from approximately
$1,500 to $20,000. Representative customers include A.B. Dick, Agfa and Imation.
Imation's imaging business, including its OEM relationship with GSI, is being
acquired by Eastman Kodak.
Large Format Systems. In 1997, GSI commenced development of an innovative
laser patterning system for use in the manufacture of flat panel displays
("FPD"). The development, alpha and beta phases of this project are funded by
two multinational companies with an interest in the FPD industry. In 1998, GSI
delivered and installed two prototypes. FPDs are compact, lightweight, low power
alternatives to the traditional picture tube used in televisions and computer
monitors. A typical FPD is composed of a thin layer of liquid crystal sandwiched
between two sheets of glass, with a variety of layers of material patterned onto
the glass surfaces. The rapidly growing FPD market has been driven by the growth
in "laptop" portable computers and is projected to grow from $10.8 billion in
1995 to $23.7 billion in 2002 (Stanford Resources). To reduce manufacturing
costs per FPD, the industry is moving to large (up to 1 meter by 1 meter) glass
substrates, capable of simultaneously fabricating six to nine FPDs per
substrate, and to new techniques for one or more of the manufacturing steps. The
product under development combines GSI's expertise in the precision pointing,
shaping and control of laser beams to precision patterns, this time over a large
field of view when compared to GSI's current applications. Production versions
of the product are expected to be priced between $2.5 to $3.5 million each.
Biological Scanners. In late 1997, GSI introduced a laser-based
fluorescence imaging system for use in the measurement of gene expression.
Identification and quantification of the expression level of different genes
under varying conditions provide researchers with a rough functional analysis of
genomic sequence information, which could lead to potential drug targets.
Similarly, gene expression analysis can be used for diagnostic purposes. Some
scientists believe that pharmacogenomics (the discipline of identifying genes
responsible for different reactions to drugs) could be the quickest route to
improving the therapeutic specificity of drugs. Several biotechnology companies
are active in the development of molecular array technology and fluorescently
labeled ligands. The ScanArray 3000 Biochip Analysis System measures the
fluorescent intensity at each DNA grid spot facilitating, at high speed, the
analysis of the expression level of a particular gene. The system is offered for
sale to end users in research and, on an OEM basis, for resale by those
companies active in biochemistry and microchip technology. The average unit
selling price is less than $100,000.
Components. GSI develops, produces and sells optical scanners and scanner
subsystems which include optics, software and control systems. These are used by
GSI and its customers in a variety of applications including
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<PAGE>
materials processing, test and measurement, alignment, inspection, displays,
graphics, vision, rapid prototyping, and medical applications including
dermatology and ophthalmology. GSI intends to continue to work with its
customers to develop new components and subsystems based upon its optical
scanning technology. GSI sells its scanners in a range from approximately $100
to $4,000 and its subsystems in a range from approximately $2,000 to $30,000.
Representative customers include Eastman Kodak, Nikon, Perceptron and Texas
Instruments.
Printing Products
GSI develops, produces and sells a variety of thermal printers which are
designed for use with defibrillators, patient care monitors, cardiac pacemaker
programmers, and other medical applications. The printers are used to provide a
permanent record of a patient's condition during critical medical care.
GSI's printers generate signal traces, grids and real time annotation on
heat sensitive paper. Paper widths ranging from 48 to 216 millimeters are moved
at speeds that can be remotely selected in the range from 1 millimeter per hour
to 125 millimeters per second, and have a resolution of 8 x 32 dots per
millimeter. The text and graphics are generated by selectively and
instantaneously modulating the temperature of small (approximately 0.105 x 0.175
millimeters) elements of a print head across the width of the chart. The heated
elements create dots on thermal sensitive paper. By repeated action under the
control of an on-board microprocessor, the desired graphic output can be
produced.
GSI works closely with its OEM customers to develop and produce thermal
printers which are incorporated into its customers' products. Typical
customized features of thermal printers offered by GSI include: package and size
dimensions dictated by the customer's end products; speed and accuracy of chart
transport; print resolution; number of fonts; and number of data channels.
Medical uses for GSI's thermal printers require high reliability, since they are
often used in emergency medical equipment which must be rugged and lightweight.
GSI believes that its ability to work rapidly and efficiently with its customers
provides an important benefit to such customers. Approximately, 66,000 thermal
printers were shipped during 1997. GSI's thermal printers sell in a range from
approximately $200 to $3,000. Representative customers include Datascope,
Marquette, Medtronic, Physio-Control, Solectron, Spacelabs Medical and Zoll
Medical.
In 1997, GSI introduced a new foil imprinting technology, initially for use
in photo labs and in retail photo finishing locations for personalization of
greeting cards. The new process can replace time-consuming litho techniques, as
well as film, metal dies, type and plates typically required by current foil
stamping processes. Qualex, Inc., a subsidiary of Eastman Kodak, is GSI's
initial customer for this new application. This technology may be applied to
other materials in graphics art.
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<PAGE>
PRODUCT LIST
The following is an abbreviated list of GSI's products and their typical
market applications:
<TABLE>
<CAPTION>
PRODUCTS MARKET APPLICATIONS
-------- -------------------
<S> <C>
Laser Systems
M310ST......................... Automotive sensor production
M310/W678...................... Processing of thin film electronic circuits
W770........................... Manufacture of thick film resistive components (chip resistors)
W670........................... Processing of hybrid thick film electronic circuits
Model 8100 and 8200............ Solder paste measurement, component placement inspection
M325........................... Memory and PLD fabrication
HM1000 Series.................. Integrated circuit marking
DM1100......................... Permanent marking of manufactured parts
FM3500-4....................... Marking across multiple production lines
VersaStation................... Material handling and marking of large industrial parts
LM-4000........................ Integrated tube-to-tube marking
LM-6000........................ Integrated in-tray marking
LM-3000MT...................... Dual probe tape and reel for fine pitch SMDs
OLT4000........................ Assembly of composite structures
Voyager 1000................... Benchtop metrology
Ultra 8........................ Automated, non-contact 3-D measurement
TAE............................ Production of film images for both medical and graphics applications
LD2000......................... Digitizer for film duplication, teleradiology, PACs
ScanArray...................... Fluorescent imaging for DNA analysis
Components
HPM/SPM/HPLK................... Laser processing of materials, including permanent marking, cutting,
drilling and rapid prototyping
VSH............................ Semiconductor inspection
Performance of medical procedures in ophthalmology and dermatology
Performance of biomedical measurement and analysis
Optical Scanners............... Processing of materials
Test, measurement and alignment
Ophthalmology and dermatology applications
Confocal microscopes
Projection of images on film
Inspection
Printers
AR42........................... Defibrillator vital sign recording
OMNI-100....................... Patient critical care monitoring
OMNI-200....................... Cardiac pacemaker programming
AR200FB........................ Stress testing; electroencephalograph
Slimline....................... Foil imprinting at point-of-sale
Decorator 2000................. Foil imprinting at central labs
</TABLE>
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LUMONICS INC.
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Laser Systems
More than 14,000 of Lumonics' laser systems have been sold since 1970,
including those sold by entities which have since been acquired by Lumonics.
Lumonics currently offers a range of laser-based systems of which there are
eleven principal product lines.
Lumonics' systems can be used in a variety of applications, including
robotic welding of automobile bodies, precision hole drilling in jet engine
turbo fans for the aerospace industry and land-based turbines, and marking
silicon wafers in the manufacture of semiconductor microchips. Lumonics' range
of products, breadth of technology, ability to offer customized solutions and 28
years of application and laser processing expertise allow Lumonics to satisfy
customers' needs for enhanced productivity.
In addition to lasers, Lumonics' systems often include precision or fibre
optics, proprietary control software, robotics, machine vision, motion control
and parts handling.
The following is a description of Lumonics' principal product lines:
JK700 Series
Lumonics' JK700 Series laser systems incorporate advanced solid state laser
technology to produce efficient, reliable, dependable and accurate production
systems. The JK700 systems operate at uniform energy density, offer improved
process efficiency and require less energy to be used. These systems use
Lumonics' patented power supply, allowing a wide range of applications,
including drilling cooling holes in jet engine turbo fans, seam welding cardiac
pacemakers and welding automotive parts such as ignition components, fuel
injector assemblies and smog detection sensors. These systems also permit high
speed, repetitive processing which maximizes production rates. The JK700 Series
can be readily linked with robotics systems to provide manufacturers with a
flexible production tool. The current price range for a JK700 system is
$100,000 to $250,000.
LuxStar(TM)
The introduction by Lumonics of the LuxStar laser welding system in 1993
brought its high power, state-of-the-art laser expertise to lower power, high
volume applications. The LuxStar produces welds that would be difficult or
impossible for conventional welding systems to produce. The product's low heat
input prevents damage or distortion to surrounding components. In addition,
Lumonics' proprietary control software ensures reliable laser output and
consistent weld quality. The LuxStar is compact, with its laser beam
deliverable through flexible fibre optics, and is used in the electronics
industry for welding micro components in the manufacture of televisions,
computers, hard disk drives and related applications. As with Lumonics' other
laser systems, there is no tool wear since the laser does not come in contact
with the workpiece. Current prices for a LuxStar system range from $60,000 to
$150,000.
MultiWave(TM)
Lumonics' MultiWave laser product line was introduced in 1993. Since then the
product line has been expanded by the acquisition of Hobart Laser Products in
1996 adding the MultiWave 3000 and MultiWave 1500, and by the development of
Lumonics' latest high power laser, the MultiWave Auto, launched in late 1997.
MultiWave systems produce continuous and modulated power with high throughput
speeds and power flexibility to achieve cutting and high speed, deep penetration
welding in reflective materials. MultiWave is often integrated with customers'
robotic systems. MultiWave is used in various applications, including
processing of zinc coated materials and aluminum in the automotive industry,
deep penetration welding for energy and petrochemical applications, and
processing reflective or difficult materials in the manufacture of both
airframes and turbines in the aerospace industry. The current price range for a
MultiWave system is $125,000 to $400,000.
Laserdyne(R)
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<PAGE>
Laserdyne systems provide fully integrated motion and laser control on multi-
axis, articulated machines. These systems incorporate proprietary control
software and permit high speed, precision processing of large parts where the
workpiece cannot be in motion during processing. Laserdyne systems are used in
the manufacture and repair of jet aircraft engines, and trimming of aerospace
and automobile stampings and other large formed parts. Laserdyne systems can be
integrated with automated guided vehicles and conveyor systems. The current
price range for a Laserdyne system is $625,000 to $950,000.
ScreenCut(TM)
ScreenCut laser stencil cutting systems are designed to reduce the time to
produce solder stencils in the printed circuit board industry by combining fast
conversion of design files with a state-of-the-art linear motor based laser
cutting system. The ScreenCut laser system is used for cutting stencils as an
alternate to or, in some cases, a complement to the traditional, photochemical
machining process. ScreenCut systems sell for approximately $350,000.
INDEX(R) IMPACT(R)
INDEX and IMPACT laser systems are used for cutting and drilling thin
materials with very high resolution and precision such as drilling via holes of
sizes less than 20 microns in flexible printed circuit boards. Current prices
for INDEX and IMPACT systems range from $60,000 for a single laser to $600,000
for a turn-key system.
GS Series
GS Series products were launched during 1997. Targeted at the electronics
market, these systems are capable of drilling blind vias (precise holes) at very
high speeds in every type of material commonly used for printed wire board
fabrication. GS Series systems currently range in price from $300,000 to
$475,000.
LaserMark(R)
The LaserMark system, which was pioneered by Lumonics in 1976, was the world's
first industrial laser-based marking system. LaserMark, which Lumonics continues
to upgrade and enhance, provides flexible, reliable, programmable, clean and
safe marks for the electronics and packaging industries. As a result, LaserMark
is still a market leader with over 3,000 systems installed to date. LaserMark
provides high speed, non-contact coding without ink, thereby allowing clean,
permanent and attractive date and batch coding on a wide range of materials
including paper, foil, glass, plastics, coated metals and ceramics. LaserMark
systems currently range in price from $40,000 to $100,000.
WaferMark(R)
Lumonics' WaferMark laser systems are used for marking silicon wafers used in
the semiconductor manufacturing industry. Lumonics' position as a principal
supplier of wafer marking laser systems enables it to work closely with
customers and to keep current with their future development needs and
activities. The current generation of WaferMark systems incorporates advanced
robotics to provide debris free marking of high density silicon wafers along an
automated production line. WaferMark systems currently range in price from
$160,000 to $500,000.
LightWriter(R)
LightWriter systems are used for tracing and regulatory compliance purposes on
various materials including metals, plastics and ceramics. Applications include
serializing micro processors in the semiconductor industry, coding automotive
airbag assemblies and engraving surgical instruments. The current price range
for a LightWriter system is $55,000 to $85,000.
Xymark(R)
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<PAGE>
Xymark high speed dot matrix laser coding systems complement the
LaserMark(R) product line. Xymark systems can be programmed and adjusted to
vary the length, character style and height of a mark. These systems use
Lumonics' proprietary software and are employed in a wide variety of
applications such as marking food packages, bottles and beverage containers.
Prices for Lumonics' Xymark systems currently range between $20,000 and $50,000.
Other Systems and Products
Other systems and products offered by Lumonics include diode-pumped solid
state lasers, various custom designed systems, precision optical components and
fiber optics.
COMPETITION
GENERAL SCANNING INC.
- ---------------------
The markets for GSI's products are highly competitive. GSI is subject to
substantial competition from both established competitors and potential new
market entrants. Significant competitive factors include: product
functionality, performance, size, flexibility, cost, market presence, customer
satisfaction, customer support capabilities and breadth of product line. GSI
believes that it competes favorably on the basis of each of these factors.
Competition in the development, manufacture and sale of laser systems is
concentrated in certain segments and fragmented in others. To GSI's knowledge,
the automotive sensor manufacturing market in which GSI's thin film processing
systems are used has no other competitors. The markets for the thick film
hybrid circuit processing systems in which GSI competes have several other
manufacturers. GSI is aware of three competitors in vision systems for solder
paste and component placement inspection. GSI competes primarily with Electro
Scientific Industries, which has the major market share, in laser systems for
memory fabrication. GSI is aware of laser marking systems produced by many
other manufacturers which compete with GSI's laser marking equipment. There are
several competitors in the field of component handling systems. To GSI's
knowledge, in the precision alignment market for the aircraft industry, GSI has
one competitor. There are several competitors in the field of general purpose,
non-contact metrology in which GSI competes.
GSI knows of at least five other manufacturers of subsystems for the film
imaging systems and subsystems market.
In the optical scanner subsystem and components markets, GSI knows of two
other manufacturers. Additionally, there exist two alternate technologies,
rotating polygons and XY-moving tables, to the galvonometric scanning technology
used by GSI, which compete for certain segments of the markets served by GSI's
products.
Printers for the medical equipment market has fragmented competition,
mostly from vertically integrated equipment manufacturers.
GSI expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that GSI's competitors
will not develop enhancements to, or future generations of, competitive products
that will offer superior price or performance features, or that new processes or
technologies will not emerge that render GSI's products less competitive or
obsolete. As a result of the substantial investment required by a customer to
integrate capital equipment into a production line, or to integrate components
and subsystems into a product design, GSI believes that once a customer has
selected certain capital equipment, or certain components or subsystems from a
particular vendor, the customer generally relies upon that vendor to provide
equipment for the specific production line or product application and may seek
to rely upon that vendor to meet other capital equipment, or component or
subsystem requirements. Accordingly, GSI may be at a competitive disadvantage
with respect to a particular customer if that customer uses a competitor's
manufacturing equipment or components. Increased competitive pressure could lead
to lower prices for GSI's products, thereby adversely affecting GSI's business
and results of operations. There can be no assurance that GSI will be able to
compete successfully in the future.
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<PAGE>
LUMONICS INC.
- -------------
The market for laser-based advanced manufacturing systems is fragmented,
and includes a large number of competitors, many of which are small or privately
owned or which compete with Lumonics on a limited geographic, industry-specific
or application-specific basis. Lumonics also competes in certain target markets
with competitors which are part of large industrial groups. Lumonics believes
it has the largest market share for many applications in the markets in which
its systems are sold. Companies such as ESI, Trumpf-Haas, Mazak, NEC and Rofin-
Sinar compete in certain of the markets in which Lumonics operates. However, in
Lumonics' opinion, none of these companies competes in all of the industries,
applications and geographic markets currently served by Lumonics.
Lumonics also competes with manufacturers of conventional non-laser
products in applications such as welding, drilling, cutting and marking.
Lumonics believes that as industries continue to modernize, seek to reduce
production costs and require more precise and flexible manufacturing, the
features of laser-based systems will become more desirable than systems
incorporating conventional manufacturing techniques and processes.
MANUFACTURING
GENERAL SCANNING INC.
- ---------------------
GSI's manufacturing strategy is to identify and perform internally those
manufacturing functions which enable GSI to maintain control over critical
portions of the production process and which add value to its products. GSI
believes it achieves a number of competitive advantages from such integration,
including the ability to achieve lower costs and higher quality, the ability to
bring new products and product enhancements quickly and reliably to market, and
the ability to produce sophisticated component parts not available from other
sources.
GSI's manufacturing is conducted at four facilities located near Boston,
Massachusetts and in Simi Valley, California. Each of GSI's manufacturing
facilities has co-located manufacturing, manufacturing engineering, marketing
and product design personnel. GSI believes, based on its experience, that this
organizational proximity greatly accelerates development and entry into
production of new products and aids economical manufacturing. GSI's thermal
printers and many of its laser systems are manufactured under ISO 9001
certification.
GSI has fully integrated manufacturing operations in key strategic
elements, such as state-of-the-art metals and plastics fabrication, surface
mount (SMT) printed circuit board assembly and testing, and extensive in-process
and final product testing capabilities. GSI believes it gains competitive
advantages in its capability to produce high quality, short-run parts and
assemblies in a just-in-time environment which reduces delivery times to
customers.
Certain of the components and materials included in GSI's laser systems and
optical products are currently obtained from single source suppliers. GSI
currently obtains a component for one of its laser systems products from a
single source. GSI currently maintains a six month inventory of this component
and plans to increase this over the next year. GSI has explored the possibility
of producing this component internally, and in the event of a disruption in the
outside supply of this component, GSI believes that it could commence production
internally within twelve months
GSI is subject to a variety of governmental regulations related to the
discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used
on GSI's premises. GSI believes it is in material compliance with these
regulations and it has obtained all necessary environmental permits to conduct
its business. Such compliance has not had a material effect upon GSI capital
expenditures, earnings and competitive position. GSI has no current or planned
capital expenditures for environmental control facilities. Nevertheless, future
regulations could require GSI to purchase expensive equipment or to incur other
substantial expenses to comply with environmental regulations. Any failure by
GSI to control the use of, or adequately restrict the discharge or disposal of,
hazardous substances could subject GSI to future liabilities, result in fines
being imposed on GSI, or result in the suspension of production or cessation of
GSI's manufacturing operations in one or more locations.
_________________
20
<PAGE>
LUMONICS INC.
- -------------
Lumonics' systems are manufactured in seven locations: two in the Ottawa
area, one in each of Minnesota and California and Phoenix and two in the United
Kingdom.
Lumonics' in-house manufacturing includes only those manufacturing
operations which are critical to achieve quality standards or protect
intellectual property. Such operations include process development, sub-
assembly, testing, proprietary software design and hardware/software
integration. Lumonics minimizes the number of suppliers and component types
but, wherever practicable, it has at least two sources of supply for key items.
Lumonics is not dependent on any supplier and has not experienced difficulty in
obtaining necessary materials and components.
Lumonics is committed to meeting internationally recognized manufacturing
standards. Lumonics facilities with ISO 9001 certification include: its two
facilities in England, its Kanata, Ontario facility, and its California
facility. Lumonics intends to apply for certification of all of its
manufacturing sites.
Lumonics is subject to various federal, provincial, state and local
provisions concerning the discharge of materials into the environment or
otherwise relating to the protection of the environment. Lumonics believes it
is currently in compliance with these provisions and that continued compliance
with current provisions will not have a material impact on its capital
expenditures in the current year or in future years. Lumonics also believes
that continued compliance with current provisions will not impact on the
earnings and competitive position of Lumonics and its subsidiaries. It should
be noted that future regulations could be enacted which could require Lumonics
to purchase costly capital equipment or otherwise incur substantial expenses in
order to comply with those new regulations.
RESEARCH AND DEVELOPMENT
GENERAL SCANNING INC.
- ---------------------
GSI devotes significant resources to development programs directed at
creating new products and product enhancements, as well as developing new
applications for existing products. All of the markets served by GSI are
characterized by rapid technological change and product innovation. GSI
believes that continued timely development of new products and product
enhancements to serve both existing and new markets is necessary to remain
competitive.
_______
21
<PAGE>
GSI maintains significant expertise in the following core technologies:
Mechanics: design of mechanisms with high rigidity and low moving mass; use
of materials at high stress levels; techniques for precise assembly and
vibration isolation of bearings, lasers and lenses.
Optics: design of laser quality lenses with variable depth of field or
large numerical aperture; design of mirrors of high dynamic rigidity; selection
of wavelength-specific mirror and lens coatings; specification and adjustment of
lasers; and interaction of lasers with materials.
Magnetics: design and use of rare-earth magnets; heat treatment of
specialty magnetic alloys; design and heat dissipation of compact electrical
drive coils.
Electronics: design of wide bandwidth power amplifiers and high signal-to-
noise ratio and low thermal drift signal detection circuits; design and
manufacture of analog servo controllers with low electromagnetic interference
(EMI) circuitry.
Software: development of high-speed computing algorithms for real-time
control of servo mechanisms; handling of data transmitted according to customer-
specific protocols; design of operator-friendly computer/systems interfaces.
Systems Design: integration of mechanisms, optics, lasers, laser electro-
optics, power supplies, electronics, communications interfaces and software.
GSI's personnel work closely with customers, frequently at the customers'
facilities, to develop complete process solutions that often involve new or
extended application of GSI's existing products. This close cooperation leads
to new products being developed for a ready customer.
For the years ended December 31, 1998, 1997 and 1996, GSI's research and
development expenditures were approximately $26.9 million, $22.3 million
(excluding a one-time expense relating to acquired in-process research and
development associated with the acquisition of Reel-Tech), and $18.4 million,
respectively. These amounts were approximately 18%, 12% and 12% of GSI's sales
in the respective periods. As of December 31, 1998, GSI had 133 people engaged
in research and product development activities. Because GSI believes the
development of new products is vital to its continued success, GSI expects
significant expenditures to continue on research and development activities.
LUMONICS INC.
- -------------
Lumonics' research and development activities are directed at meeting
customers' manufacturing needs and application processes. Core technologies
include gas and solid state lasers, precision optics, electronic power supplies,
fibre optics, control systems and systems integration. Lumonics strives for
customer-driven development activities and promotes the use of alliances with
key customers and joint development programs in a wide range of its target
markets.
Lumonics has 128 employees engaged in product research and development.
Lumonics' research and development activities are carried out in five locations
around the world and are centrally coordinated and managed. Interaction and
communication among research and development personnel throughout Lumonics
promote a sharing of their cumulative expertise. Lumonics maintains strong
links with leading industrial, government and university research laboratories
around the world, including Sumitomo's corporate technology group. Such
linkages include funding of doctoral and post-doctoral research, joint
development programs with research institutes and personnel exchange programs
with universities and other research organizations.
For the twelve months ended December 31, 1998, Lumonics' research and
development expenditures represented 9.0% of Lumonics sales, compared to 6.8% of
Lumonics sales for the same period in 1997. During the years ended December 31,
1998, 1997 and 1996, Lumonics spent $13.0 million; $12.0 million; and $11.9
million, respectively, on research and development activities. During these
years, the amount of expenditures on customer-sponsored research activities was
not material in comparison to total research and development activities for each
_______
22
<PAGE>
year. R&D investments during the past two years have resulted in the
introduction of 5 new products which are targeted across all major markets.
PATENTS AND INTELLECTUAL PROPERTY
GENERAL SCANNING INC.
- ---------------------
GSI believes the success of its business depends more on the technical
competence and creativity of its employees than on patents, trademarks and
copyrights. Nevertheless, GSI has a policy of seeking patents, when
appropriate, on inventions concerning new products and improvements as part of
its ongoing research, development and manufacturing activities.
Although GSI has been granted, has filed applications for and has been
licensed under a number of patents in the United States and foreign countries,
there can be no assurance as to the degree of protection offered by these
patents or as to the likelihood that patents will be issued for pending
applications.
Competitors in the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with GSI's
ability to make and sell some of its products. Although GSI believes its
products do not infringe the patents or other proprietary rights of third
parties, there can be no assurance that other third parties will not assert
infringement claims against GSI or that such claims will not be successful.
GSI also relies upon trade secret protection for its confidential and
proprietary information. GSI routinely enters into confidentiality agreements
with its employees and consultants. There can be no assurance, however, that
these agreements will provide meaningful protection of GSI's trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information.
LUMONICS INC.
- -------------
Lumonics has intellectual property which includes patents, proprietary
software, technical know-how and expertise, designs, process techniques and
inventions. While policies and procedures are in place to protect critical
intellectual properties, Lumonics believes that its success depends to a larger
extent on the innovative skills, know-how, technical competence and abilities of
Lumonics' personnel.
Lumonics protects its intellectual property in a number of ways including,
in certain circumstances, through patents. Lumonics has sought patent
protection primarily in the United States. Some patents have also been
registered in other jurisdictions including Great Britain, Japan and Germany.
Lumonics currently holds 24 separate patents for inventions relating to lasers,
processes and power supplies. In addition, Lumonics requires its employees and
certain of its customers, suppliers, distributors, agents and consultants to
enter into confidentiality agreements to further safeguard Lumonics'
intellectual property.
HUMAN RESOURCES
GENERAL SCANNING INC.
- ---------------------
As of December 31, 1998 and taking into account the workforce reduction
discussed below, GSI had 770 full-time employees worldwide, including 341 in
manufacturing, 199 in marketing, sales and field service, 133 in research and
development, and 97 in general administration. Approximately 99 of these
employees, mostly foreign nationals, reside and work outside of the United
States, primarily in marketing, sales and support. In addition, GSI periodically
engages contract employees principally in new product development and
manufacturing operations. None of GSI's employees is represented by a labor
union, and GSI has never experienced a work stoppage or strike. GSI considers
its employee relations to be good.
_______
23
<PAGE>
In early November, 1998, GSI reduced its staff by 70 employees, or about 8%
of its total work force, from its manufacturing process systems group located in
Massachusetts and California as well as in its worldwide systems sales and
service force, particularly in the Far East. This action was designed to allow
the company to operate profitably at lower levels of sales over the next several
quarters, while maintaining critical skills and capacity to respond to an
anticipated upturn late in 1999.
LUMONICS INC.
- -------------
As at December 31, 1998, Lumonics had 848 employees in the following
departments:
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEES PERCENTAGE
<S> <C> <C>
Production and Operations............................ 315 37%
Customer Service..................................... 158 19%
Sales, Marketing and Distribution.................... 141 17%
Research and Development............................. 128 15%
Administration....................................... 106 12%
--- ---
Total........................................... 848 100%
</TABLE>
Lumonics believes in the principle of performance-linked compensation. Most
employees of Lumonics participate in a profit sharing program which provides for
payments determined on the achievement of annual operating targets and
calculated as a percentage of base salaries. Lumonics considers its employee
relations to be satisfactory.
ITEM 2. PROPERTIES
GENERAL SCANNING INC.
- ---------------------
GSI's headquarters is located in Watertown, Massachusetts, which is a
suburb of Boston. The principal owned and leased properties of GSI and its
subsidiaries are listed in the table below.
<TABLE>
<CAPTION>
APPROXIMATE OWNED/
LOCATION PURPOSE SQUARE FEET LEASED
<S> <C> <C> <C>
Watertown, MA, USA Marketing, sales, manufacturing, engineering, 84,000 owned
Offices; corporate headquarters
Wilmington, MA, USA Marketing, sales, manufacturing, engineering, Offices 78,000 leased/(1)/
Arlington, MA, USA Marketing, sales, manufacturing, engineering, Offices 32,000 leased/(2)/
Bedford, MA, USA Marketing, sales, manufacturing, engineering, Offices 50,000 leased/(3)/
Simi Valley, CA, USA Marketing, sales, manufacturing, engineering, Offices 41,000 owned
Ann Arbor, MI, USA Marketing, sales, engineering, Offices 15,000 leased/(4)/
Billerica, MA, USA Marketing, sales, manufacturing, engineering, Offices 80,000 leased/(5)/
</TABLE>
Additional sales and service offices are located in Japan, Germany, France,
Italy, the United Kingdom, Hong Kong, Korea, Taiwan, Singapore, Malaysia, the
Philippines and other locations in the United States. These additional
marketing and sales offices are in leased facilities occupying approximately
25,000 square feet in the aggregate.
GSI believes that additional manufacturing facilities will be required
within the next two years and that suitable additional or substitute space will
be available as needed.
/1/ Lease expires in 2007, with two 5-year renewal options.
/2/ Lease expires in 2000, with one 2-year renewal option.
/3/ Lease expires in 2003, with one 3-year renewal option.
/4/ Lease expires in 2001, with two 3-year renewal options.
_______
24
<PAGE>
/5/ Lease expires in 2008, with two 5-year renewal options.
LUMONICS INC.
- -------------
The following table lists the location and additional details of Lumonics'
principal manufacturing facilities and properties:
<TABLE>
<CAPTION>
APPROX.
FLOOR AREA
LOCATION (SQ. FT.) OWNERSHIP USE
<S> <C> <C> <C>
CANADA
Kanata, Ontario 74,000 Owned Corporate head office, manufacturing
operations and research & development
Nepean, Ontario 40,900 (two Owned Manufacturing operations for custom optics
sites)
UNITED STATES
Livonia, MI 30,000 Leased; lease expires March 31, North American customer support center, product
2000 demonstration facility and parts depot
Eden Prairie, MIN 69,000 Leased; lease expires June, Manufacturing operations and research &
1999; no option to renew development
Oxnard, CA 44,000 Leased; lease expires June 30, Manufacturing operations and research &
2004; option to purchase development
Phoenix, AR 6,000 Leased; lease expires Manufacturing operations for customer fibre optics
July 2000
UNITED KINGDOM
Rugby, England 110,000 Owned Manufacturing operations and research &
development
Hull, England 35,000 Leased; lease expires June, Manufacturing operations and research &
2002; no option to renew development
CONTINENTAL EUROPE
Munich, Germany 29,600 Leased; lease expires January European customer support center, product
2013; option to renew demonstration facility and parts, depot
ASIA-PACIFIC
Singapore 5,800 Leased; lease expires February, Asia-Pacific customer support center, product
2002 option to renew demonstration facility and parts depot
</TABLE>
Additional sales and services offices are located in France, Italy, and
Malaysia. These offices are in leased facilities occupying a total of
approximately 5,000 square feet.
_______
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
GENERAL SCANNING INC.
- ---------------------
Robotic Vision Systems, Inc. v. View Engineering, Inc. USDC Case No. 95-
7441. This case involves a patent infringement complaint by Robotic Vision
Systems, Inc. (''RVSI'') alleging infringement of U.S. Patent No. 5,463,227. A
trial date is scheduled for June 1, 1999. The referenced patent covers a method
of inspecting the electronic interconnect leads of certain semiconductor
components. In settlement of separate litigation with RVSI in June 1998 (see
below), arising from GSI's acquisition of View in August 1996, GSI agreed not to
compete in the field of semiconductor interconnection inspection. During the
first six months of 1998, sales by GSI of all products used in semiconductor
lead interconnection inspection which involved products relating to the alleged
infringement totaled approximately 2% of GSI's total sales.
Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case No.
C-96-4628. In October, 1998 the U.S. District Court for the Northern District
of California issued a decision on motions for summary judgment in an action
filed against GSI for alleged patent infringement concerning U.S. Patent Nos.
5,265,114 and 5,473,624. The Court granted Electro Scientific's motions for
summary judgment on infringement and on the issue of whether Electro Scientific
committed inequitable conduct by intentionally failing to cite prior art to the
U.S. Patent Office in connection with one of its patents. The Court denied
GSI'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 ESI
patents in suit. The referenced patents cover the use of 1.32 micron wavelength
lasers in the repair of memory chips and semiconductors with imbedded memory.
In April, 1999 a federal court jury issued a verdict that ESI's patent 5,473,624
was found to be invalid, and that ESI's patent 5,265,114 was valid, and awarded
a $13.1 million damage judgment. The company intends to appeal the decisions on
validity and damages. During the first nine months of 1998, sales by GSI of
products associated with memory repair using 1.32 micron wavelength accounted
for approximately 2% of total sales. Since the District Court's decision in
October 1998, GSI has discontinued sales of 1.32 wavelength laser systems for
use in memory repair applications.
Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case No.
98-4027. On or about October 20, 1998, Electro Scientific commenced an action
in the U.S. District Court for the Northern District of California alleging
infringement of three Electro Scientific patents (U.S. Patent Nos. 5,569,398,
5,685,995 and 5,808,272) and seeking an injunction, damages and attorneys' fees.
Discovery has not yet commenced, and a trial date has not been set. The
referenced patents cover the use of 1.32 micron wavelength lasers in the
trimming of certain semiconductor devices. To date, GSI has shipped only one
system employing such technology for an application covered by the patents and
this unit is being converted to another wavelength at the request of the
customer.
Robotic Vision Systems Inc. v. View Engineering, Inc. USDC Case No. 96-
2288. In June 1998, the U.S. District Court for the Central District of
California found infringement by View Engineering, Inc. (''View'') on a
particular method of measuring substrate coplanarity of unpopulated ball grid
array packages. RVSI had previously dropped all claims for damages; hence, no
damages were awarded. The Court determined that View had not willfully
infringed and therefore refused RVSI's claim for attorneys' fees. The Court
enjoined View from infringing or inducing infringement of the patent in
question, No. 5,465,152. GSI, on behalf of View, has appealed the injunction.
No date has been set for oral argument on the appeal. In settlement of separate
litigation with RVSI, in June 1998 (see below), arising from the GSI acquisition
of View in August 1996, GSI agreed not to compete in the field of semiconductor
interconnection inspection. Systems for use in inspection of ball grid
electronic interconnection and for measuring substrate coplanarity accounted for
approximately 1% of total sales during the first six months of 1998.
Robotic Vision Systems, Inc. v. General Scanning Inc. USDC Case No. 96-
3884. Litigation with RVSI, arising from GSI's acquisition of View in August
1996, was settled in June 1998. RVSI claimed that GSI used improperly obtained
information in connection with the acquisition. GSI denied all such claims.
Under the terms of the settlement, in consideration of $3.75 million in stock
and notes from RVSI, GSI has agreed not to compete and has granted an exclusive
technology license to RVSI in the field of semiconductor interconnection
inspection. RVSI agreed not to compete in the field of solder paste inspection.
_______
26
<PAGE>
GSI believes that RVSI's and Electro Scientific's claims in each of the
above unresolved actions are without merit and GSI is vigorously defending these
proceedings. However, if RVSI or Electro Scientific prevails on one or more of
its claims, there could be a material adverse effect on GSI's business,
operating results and/or financial condition.
General Scanning Inc. v. Voxel. In May 1998, a three-member panel of the
American Arbitration Association decided in favor of GSI and awarded GSI $1.9
million plus applicable post-judgment interest. The award included $1.0 million
that GSI had recorded as earned and due from Voxel as of December 31, 1997 for
engineering services performed and out-of-pocket expenses related to the
construction of beta units. Following the arbitration decision Voxel filed a
voluntary petition under Chapter 11, which was subsequently converted to a
proceeding under Chapter 7 of the Federal Bankruptcy Code. Accordingly, during
1998, GSI wrote off the amount due from Voxel.
Other. A party has commenced legal proceedings in the United States
against a number of US semiconductor manufacturing companies, including
companies that have purchased systems from GSI. The plaintiff in the
proceedings has alleged that certain equipment used by these manufacturers
infringes patents claimed to be held by the claimant. While GSI is not a
defendant in any of the proceedings, several of GSI's customers have notified
GSI that, if the party successfully pursues infringement claims against them,
they may require GSI to indemnify them to the extent that any of their losses
can be attributed to systems sold to them by GSI.
LUMONICS INC.
- -------------
A party has commenced legal proceedings in the United States against a
number of U.S. manufacturing companies, including companies which have purchased
systems from Lumonics. The plaintiff in the proceedings has alleged that
certain equipment used by these manufacturers infringes patents claimed to be
held by the claimant. While Lumonics is not a defendant in any of the
proceedings, seven of Lumonics' customers have notified Lumonics that, if the
party successfully pursues infringement claims against them, they may require
Lumonics to indemnify them to the extent that any of their losses can be
attributed to systems sold to them by Lumonics. While Lumonics does not believe
that the outcome of these claims will have a material adverse effect upon
Lumonics, there can be no assurance that any such claims, or any similar claims,
would not have a material adverse effect upon Lumonics' financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the current
executive officers of the Company and the principal occupations held by each
person named for at least the past five years. Executive officers serve at the
pleasure of the Board of Directors and, except as indicated below, assume
current positions on consummation of the merger.
NAME AGE POSITION WITH GSI LUMONICS
Charles D. Winston 57 Chief Executive Officer
Warren Scott Nix 52 President and Chief Operating Officer
Desmond J. Bradley 42 Vice President, Finance and Chief Financial Officer
Michael R. Kampfe 48 Vice President, Laser Systems Group
Patrick D. Austin 47 Vice President, Sales
John W. George 55 Vice President, Customer Support
Gregory S. Baletsa 45 Vice President, Instruments Group
Victor Sabella 53 Vice President, Components Group
_______
27
<PAGE>
Charles D. Winston served as President and Chief Executive Officer of GSI
beginning in September 1988 and has been Chief Executive Officer of GSI Lumonics
since March, 1999. He has served as a Director of GSI since 1989. Prior to
joining GSI, from 1986 to 1988, Mr. Winston served as a management consultant.
In 1986, Mr. Winston was an officer of Savin Corporation. From 1981 to 1985, he
served as a Senior Vice President of Federal Express Corporation.
Warren Scott Nix was President and Chief Executive Officer of Lumonics
since January 1997 and has been President and Chief Operating Officer of GSI
Lumonics since March, 1999. Prior to that time, Mr. Nix was President and Chief
Operating Officer of Lumonics. Prior to January 1996, Mr. Nix was Vice
President, Operations of Lumonics and prior to July 1994, was Executive Vice
President, North American Operations. Prior to June 1993, Mr. Nix was Vice
President and General Manager of the Nuclear Division of Allied Signal Inc.
Desmond J. Bradley has held his current position since October 1994. From
September 1993 until October 1994, Mr. Bradley was Vice President, Finance and
Administration of Lumonics. Prior to September 1993, he was Vice President,
Laser Products Division.
Michael R. Kampfe joined GSI in 1984. From 1990 through 1996, he served as
Vice President and General Manager of GSI's Laser Graphics Division. In late
1996, the Laser Graphics Division was merged into the Optical Scanning Products
Division under Mr. Kampfe.
Patrick Austin has held his current position since January 1996. Prior to
that time he was Vice President, Market Development of Lumonics and prior to
October 1992 was Vice President, Laser Marking Division.
John W. George has held his position since January 1997. Prior to that
time he was Director, North American Service.
Gregory S. Baletsa joined GSI in 1985. Beginning in 1989, he has served as
Vice President and General Manager of GSI's Recorder Products Division.
Victor Sabella served as Vice President and General Manager of GSI's
Optical Scanning Products Division from October 1992 through 1996. In late
1996, Mr. Sabella became General Manager of the then newly-formed Industrial
Laser Products Division, a combination of the Laser Systems Division's laser
marking product line and a new initiative for this technology into expanded
industrial applications. Following the reorganization of the Laser Systems
Group in July 1998, Mr. Sabella has served as Group Vice President, Laser
Systems. Prior to joining GSI, from 1991 to 1992, Mr. Sabella served as Senior
Vice President of Crosscomm Corp., a communication inter-networking firm. From
1986 to 1991, he served as the General Manager of the Microelectronics Division
at Analog Devices, Inc.
_______
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Lumonics' common stock, no par value ("Common Stock"), has been traded on
The Toronto Stock Exchange (the "TSE") under the symbol LUM since September 29,
1995. From May, 1989 to September 28, 1995 the Company's Common Stock was not
publicly traded. Following the merger to form GSI Lumonics, the common stock
was listed and began trading under the symbol GSLI on Nasdaq on March 24, 1999,
in addition to the TSE under the symbol LSI.
The following table sets forth, for the periods indicated, the high and low
prices per share of the Common Stock as reported by the TSE in Canadian dollars.
<TABLE>
<CAPTION>
1998 (CDN$) 1997 (CDN$)
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $27.00 $21.50 $30.05 $24.30
Second Quarter 23.00 11.80 29.00 24.60
Third Quarter 13.75 7.55 32.25 27.00
Fourth Quarter 8.75 6.75 29.25 21.50
</TABLE>
CURRENCY PRICES
The following table sets forth in Canadian dollars the exchange rates of
the Canadian dollar to the United States dollar, determined based upon publicly
available information from the Federal Reserve Bank of New York for the calendar
years 1997 and 1998. For example, on December 31, 1997, one US dollar bought
1.4288 Canadian dollars.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
High Cdn$1.5770 Cdn$1.4398
Low 1.4075 1.3357
End of Period 1.5375 1.4288
Average (1) 1.4898 1.3845
</TABLE>
(1) The average of the exchange rate on the last business day of each month
during the applicable period.
HOLDERS
On February 5, 1999, there were approximately 288 holders of record Common
Stock.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to reinvest its earnings for use in the business and does not
expect to pay cash dividends in the foreseeable future. Subject to the
provisions of the Canada-US Income Tax Convention (the "Convention"), Canadian
withholding tax at a rate of 25% will be payable on dividends paid or credited,
or deemed to be paid or credited, by GSI Lumonics to a US holder on GSI Lumonics
common shares. Under the Convention, the withholding tax rate is generally
reduced to 15%, or if the US holder is a corporation that owns 10% or more of
GSI Lumonics voting stock, to 5%.
_______
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data Lumonics Inc. (and does not include
GSI) on an historical basis.
(IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales.................................................... 144,192 177,328 153,367 125,268 97,828
Gross profit............................................. 40,673 65,922 60,999 48,031 34,925
Selling, general and administrative expenses............. 38,420 37,991 33,380 28,769 22,897
Research and development costs........................... 12,985 11,993 11,872 7,068 5,452
Restructuring costs(1)................................... 2,022 -- -- -- 1,144
Interest income (expense)(net)........................... 1,578 1,048 634 (854) (1,108)
Income (loss) before income taxes........................ (11,176) 16,986 16,381 11,340 4,325
Provision for income taxes............................... (3,260) 5,074 4,635 3,304 997
Net income (loss) for the year........................... (7,916) 11,912 11,746 8,036 3,327
Net income (loss) per common share:
--Basic........................................... (0.46) 0.75 0.83 0.70 0.31
--Weighted average shares (000's)................. 17,079 15,989 14,077 11,521 10,874
--Diluted......................................... (0.46) 0.72 0.78 0.65 0.30
--Adjusted weighted average shares (000's)........ 17,079 16,454 15,079 12,457 11,267
</TABLE>
<TABLE>
<CAPTION>
AS AT DECEMBER 31
-------------------------------------------------------------
1998 1997 1996 1995 1994
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.......................................... 85,977 110,895 71,981 58,087 30,186
Total assets............................................. 159,642 189,180 135,602 122,802 68,236
Long-term debt........................................... 3,541 6,159 10,365 15,494 17,673
Stockholders' equity..................................... 120,757 133,623 88,345 71,343 33,318
</TABLE>
(1) Restructuring costs includes $2,022 in 1998 for severance, and $1,144 in
1994 for the closure of a plant.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains forward-looking statements which
are identified with an asterisk (*). Factors that could
significantly impact the expected results referenced in
the forward-looking statements are listed in the last
paragraph of the section, "Outlook for 1999."
OVERVIEW
Lumonics is a world leader in development, design, manufacture and
marketing of laser-based advanced manufacturing systems for the semiconductor,
electronics, aerospace, automotive, aerospace and packaging markets. Lumonics
also sells to other emerging markets such as consumer products, medical device
manufacturing and nuclear energy.
For the year ended December 31, 1998, sales declined by 19% following sales
growth of 16% and 22% in each of the previous two years. Product prices have
remained relatively stable during the periods covered by this discussion, and
price fluctuations did not have a material effect on reported gross profit. A
significant portion of sales are made in foreign currencies. Fluctuations in
currency exchange rates, particularly in the U.S. dollar, the Japanese yen and
European currencies can impact Lumonics' sales and expenses. During 1996,
Lumonics continued to make significant investments in its distribution channels
and accelerated product development programs to strengthen its position in
selected markets and acquired the assets of Hobart Laser Products Inc. in June
1996. In
______
30
<PAGE>
May 1997, Lumonics raised a net $35.7 million through a public offering of two
million Lumonics Common Shares.
Lumonics sales have been and are expected to continue to be heavily
dependent upon its customers capital expenditures which are in turn affected by
cycles in the markets served by those customers. Lumonics' strategy is to
expand applications for its products into different and varied markets to limit
its dependency on any one market, but it may not always be successful in doing
so.
FISCAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
RESULTS OF OPERATIONS
The information set out below relates to Lumonics Inc., before the merger
with GSI and is not indicative of the future results of the merged GSI Lumonics
entity. The following table sets forth items in the Consolidated Statement of
Operations as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Sales................................................................ 100.0% 100.0% 100.0%
Cost of goods sold................................................... 71.8 62.8 60.2
Gross profit margin.................................................. 28.2 37.2 39.8
Selling, general and administrative.................................. 26.7 21.4 21.8
Research and development............................................. 9.0 6.8 7.7
Restructuring........................................................ 1.4 0.0 0.0
Income (loss) before the following................................... (8.9) 9.0 10.3
Net interest income.................................................. 1.1 0.6 0.4
Income (loss) before taxes........................................... (7.8) 9.6 10.7
Provision for (recovery of) income taxes............................. (2.3) 2.9 3.0
Net income (loss).................................................... (5.5) 6.7 7.7
</TABLE>
SALES BY MARKET. The following table sets forth sales (in millions of
dollars) to Lumonics' primary markets as well as parts and service revenue for
1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
% OF OVER PRIOR % OF OVER PRIOR
SALES TOTAL YEAR SALES TOTAL YEAR SALES TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Semiconductor.................. $ 14.0 9.7% (63.3)% $ 38.1 21.5% 5.0% $ 36.3 23.7%
Electronics.................... 30.8 21.4 11.2 27.7 15.6 51.4 18.3 11.9
Automotive..................... 13.6 9.4 (27.3) 18.7 10.6 37.5 13.6 8.8
Aerospace...................... 13.1 9.1 (26.0) 17.7 10.0 12.0 15.8 10.3
Packaging...................... 13.5 9.4 (1.5) 13.7 7.7 20.2 11.4 7.4
Emerging....................... 26.7 18.5 0.4 26.6 15.0 (4.7) 27.9 18.2
Parts and Service.............. 32.5 22.5 (6.6) 34.8 19.6 15.6 30.1 19.7
------ ----- ------ ------ ----- ---- ------ -----
Total........................ $144.2 100.0% (18.7)% $177.3 100.0% 15.6% $153.4 100.0%
</TABLE>
Due to continued cyclical weakness, sales to the semiconductor industry
were down 63.3% in 1998 relative to the previous year. The drop in
semiconductor, combined with declines of 27.3% and 26.0% in automotive and
aerospace respectively, resulted in an overall decline of 18.7% in total sales
for the year. Sales to the electronics industry increased by 11.2%, while
packaging market sales and emerging markets were essentially flat during the
year. During 1997, sales increased 15.6% to $177.3 million, compared with $153.4
million in 1996. The increase in 1997 over 1996 was primarily attributable to
continued strong demand in North America, a recovering market in Europe,
successful new product introductions in the electronics market and further
penetration in the automotive market.
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31
<PAGE>
As expected, the decline experienced in the semiconductor market during
1997, continued into 1998. The continued lack of fabrication plant construction
worldwide, resulted in a 63.3% decline in sales relative to the previous year.
During 1997, sales growth dropped to 5.0%, after an increase of 41.8% in 1996.
The semiconductor market is cyclical and the recent downturn in the industry
slowed demand for Lumonics' products. For 1996, contributing to the rate of
growth was strong demand for Lumonics' silicon wafer marking systems for new
semiconductor fabrication plants, market acceptance of Lumonics' TrayMark(R)
product (part of the Lightwriter(R) product line) introduced in 1996 and a
strong replacement market.
Sales continued to grow for the electronics market during 1998, increasing
by 11.2% over 1997. The increase is primarily the result of increased demand
for systems from the printed circuit board industry, and market acceptance of
the new IMPACT(R) GS-600 systems. The increase during 1998 follows an increase
of 51.4% in 1997 which resulted from market acceptance of Lumonics' new and
enhanced system offerings and new applications. In late 1996 and early 1997,
Lumonics started shipping new versions of its ScreenCut(TM) 400 and IMPACT(R)
GS-300 systems to manufacturers of printed circuit boards. New applications
such as welding components used in the production of computer disk drives also
contributed to sales growth.
During 1998 sales to the automotive sector declined by 27.3% due to lower
capital spending by North American automotive companies. This decline
contrasted sharply with performance in this market during 1997, which
experienced growth of 37.5% and represented 10.6% of total sales. The increase
during 1997 followed growth of 63.9% in 1996 when Lumonics' products were
gaining acceptance by both automakers and parts suppliers for applications such
as welding, cutting and marking. In late 1997, after more than 18 months of
development, Lumonics introduced a major new product, MultiWave-Auto(TM),
designed principally for applications in the automotive market.
Sales to the aerospace market also declined during 1998, primarily due to a
decreased demand for systems from the aerospace sector in North America. Sales
eroded by 26.0% relative to the previous year, after increasing 12.0% to $17.7
million in 1997. During 1997, Lumonics delivered a $3.5 million order (two
systems), the largest advanced laser-based systems ever built by Lumonics.
Packaging market sales were essentially flat during 1998, after growth of
20.2% in 1997. In early 1996, Lumonics reorganized its distribution channels
for the packaging market, establishing a sales team complemented by agents with
industry knowledge and experience. After implementing this distribution system,
Lumonics was able to increase sales to customers in this market from $11.4M, or
7.4% of sales in 1996 to $13.7M, or 7.7% of sales in 1997.
Sales of systems to emerging markets were also flat during 1998, with
increases in demand for medical devices, consumer products and components being
offset by a continuing decline in sales in the nuclear energy industry. During
1997 sales to this sector decreased 4.7%, largely because of lower sales to
customers in the nuclear energy industry and manufacturers of consumer products.
Largely as a result of the slowdown in semiconductor, 1998 parts and
service revenues declined by 6.6% relative to the previous year. Parts and
service revenue had increased 15.6% in 1997, due to a growing installed base,
improved service offerings from Lumonics and more customers using multiple
production shifts.
SALES BY REGION. Distribution of Lumonics' systems and services is via
Lumonics' global network of sales and service offices and through third-party
distributors and agents. In 1998, 75% of sales were made through Lumonics'
direct sales and service channel, compared with 77% in 1997. Lumonics' sales
territories are divided into the following regions: Canada, the United States,
Latin and South America, Europe (consisting of Europe, the Middle East and
Africa), Japan and Asia-Pacific (consisting of ASEAN countries, China and other
Asia-Pacific countries). The table below sets forth sales (in millions of US$)
to each geographic region for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
% OF OVER PRIOR % OF OVER PRIOR % OF
SALES TOTAL YEAR SALES TOTAL YEAR SALES TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
________
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada..................................... $ 8.3 5.8% (14.4)% $ 9.7 5.5% 31.1% $ 7.4 4.8%
United States.............................. 61.3 42.5 (33.2) 91.8 51.8 23.7 74.2 48.4
Latin and South America.................... 0.6 0.4 (62.5) 1.6 0.9 300.0 0.4 0.3
Europe..................................... 40.4 28.0 21.0 33.4 18.8 13.2 29.5 19.2
Japan...................................... 16.0 11.1 (19.2) 19.8 11.2 4.2 19.0 12.4
Asia-Pacific............................... 17.6 12.2 (16.2) 21.0 11.8 (8.3) 22.9 14.9
------ ----- ------ ------ ----- ----- ------ -----
Total................................. $144.2 100.0% ( 18.7)% $177.3 100.0% 15.6% $153.4 100.0%
</TABLE>
Sales to customers in Canada decreased 14.4% in 1998 due to lower demand
from the automotive and aerospace markets. In 1997, Canadian sales increased
31.1% on demand from the automotive and electronics markets.
Sales in the United States declined by 33.2% in 1998 due to a weak
semiconductor market and lower capital spending in automotive and aerospace.
During 1997 sales in the United States increased by 23.7%, with gains in the
semiconductor, electronics, automotive and aerospace markets.
Sales in Latin and South America decreased 62.5% in 1998 on low volume.
The decline reflects lower sales to semiconductor and electronics. During 1997
sales increased by 300.0%, again on low volume. The increase in 1997 was
attributable to demand in the packaging and electronics markets.
Sales in Europe increased 21.0% in 1998 after a 13.2% increase in 1997.
Sales growth in this region can be attributed to demand from the electronics
sector, combined with Lumonics' reorganized and enlarged European sales force
and some improvement in general market conditions.
Sales to Japan declined by 19.2% in 1998 to $16.0 million, compared with
$19.8 million in 1997 and $19.0 million in 1996. Economic conditions in Japan
affected Lumonics' ability to improve sales performance in that country in both
1998 and 1997. The Japanese market is served primarily by Lumonics' largest
distributor and significant shareholder, Sumitomo Heavy Industries, Ltd., which
accounted for $15.5 million of 1998 sales and $18.9 million of 1997 sales and
$17.4 million of 1996 sales. In 1997, Lumonics commenced discussions with
Sumitomo to explore initiatives to improve sales and distribution of Lumonics'
products in Japan.
Sales to the Asia-Pacific region declined 16.2% in 1998, after a decline of
8.3% in 1997. This region continues to feel the impact of a weak semiconductor
market. Most of Lumonics' large customers in this region are multinationals
manufacturing products for global markets. The economic crisis in the region
did not have a material impact on 1997 sales. Growth of 27.9% during 1996 in
the Asia-Pacific market can be attributed to Lumonics' increased presence in the
region with the opening and staffing of Lumonics' new customer support center in
Singapore in April 1996, and strong demand from the semiconductor and
electronics markets.
BACKLOG. Order backlog was $29 million at December 31, 1998 compared to
$45 million at December 31, 1997due to factors described above.
GROSS PROFIT MARGIN. Gross profit margin declined to 28.2% in 1998,
compared with 37.2% in 1997 and 39.8% in 1996. Results during 1998 were
impacted by lower overall sales volume, declines in sales of higher margin
products, varying levels of capacity use at Lumonics' manufacturing plants, cost
overruns on large and custom systems, and costs associated with consolidating UK
(Rugby) facilities. Inefficiencies in the manufacture of large custom systems
during the 1997 year and higher costs associated with the introduction of
advanced products to serve new applications in Lumonics' targeted markets
contributed to lower 1997 gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to 26.7% of sales in 1998 from 21.4% of sales
in 1997 and 21.8% in 1996. Actual expenses increased to $38.4 million in 1998
from $38.0 million in 1997, primarily due to increased costs associated with the
launch and promotion of new products, and expansion of the Company's information
technology infrastructure. Actual 1997 expenses increased to $38.0 million from
$33.4 million in 1996, primarily as a result higher costs associated with the
launch of new laser-based advanced manufacturing systems, a larger direct sales
force and higher sales volumes.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
1998, net of government assistance, were 9.0% of sales or $13.0 million,
compared with 6.8% of sales or $12.0 million in 1997 and 7.7% of
________
33
<PAGE>
sales or $11.9 million in 1996. Government assistance in 1998 was $0.8 million,
compared with $2.1 million in 1997 and $0.2 million in 1996. During 1998
Research and Development investments included products targeted at the aerospace
and electronics markets. During the 1997 year, Lumonics launched five new or
enhanced products: MultiWave-Auto(TM) for high-power applications in the
automotive market, LightWriter(R) 2000 for high-speed marking of semiconductor
components, IMPACT(R) GS-300 and ScreenCut(TM) 4000 for applications in the
printed circuit board industry, and WaferMark(R) Sigma XC for marking 300-
millimeter silicon wafers. Lumonics believes the development of new products is
vital to its continued success.
RESTRUCTURING CHARGE. In an effort to align operating expenses with
anticipated sales volumes of $30 million to $36 million per quarter, Lumonics
incurred a pre-tax restructuring charge during 1998 of $2.0 million for
severance costs related to a 15% downsizing of Lumonics' global workforce (to
reduce the number of employees from 1,066 at March 31, 1998). As well,
inventory provisions totaling $1.4 million were charged to cost of goods sold.
INTEREST. Net interest income was $1.6 million or 1.1% of sales in 1998,
compared with $1.0 million or 0.6% in 1997 and $0.6 million or 0.4% in 1996.
The increase in 1998 is a result of interest for a full year on the investment
of proceeds from a public issue of two million shares in May 1997, which raised
$35.7 million.
INCOME TAXES. The effective rate of recovery for taxes for 1998 was
29.2%, compared with an effective tax rate of 29.9% for the year ended December
31, 1997 and 28.3% in 1996. The 29.2% recovery rate in 1998 primarily relates
to the Company's ability to carry back current losses against prior year profits
to recover taxes paid in prior years. Lumonics' effective tax rate for 1997 and
1996 was less than the Canadian statutory tax rate because tax rates in many of
the countries where Lumonics operates are lower than the Canadian statutory
rate. Lumonics has provided a valuation allowance against operating loss tax
carryforwards and investment tax credits due to the uncertainty of their
realizability as a result of limitations on their utilization in accordance with
certain tax laws and regulations, market conditions, and historical operations
in those jurisdictions.
NET INCOME. The net loss was $7.9 million in 1998 compared with net
income of $11.9 million in 1997 and $11.7 million in 1996. The net loss was
primarily due to decreased sales volumes, gross margin erosion and restructuring
activities.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $24.2 million on
December 31, 1998 compared to $56.8 million on December 31, 1997.
In 1998 Lumonics used $6.9 million to fund operations, including a net loss
of $7.9 million and investments of $3.6 million in non-cash working capital
balances. Accounts receivable provided $13.2 million in cash during the year,
which was offset by an $8.3 million increase in inventory and $6.1 million in
income taxes. During 1997, a net $5.3 million was used in operating activities,
including $21 million in non-cash working capital, primarily a result of an
increase in accounts receivable from shipments late in the fourth quarter. Net
income and non-cash items contributed $15.7 million. In 1996, a net $15.2
million was provided by operating activities, when net income of $11.7 million
was supplemented by non-cash charges including $3.1 million for depreciation.
During 1998, a total of $11.3 million in cash was used in investing
activities. These activities included $43.5 million of purchases and $47.1
million of maturities of short-term investments, $13.9 million in capital
expenditures and $1.2 million to acquire Meteor Optics Inc. Capital
expenditures in 1998 included $6.3 million to complete the expansion of
manufacturing facilities in Rugby, England that began in 1997 and approximately
$1.5 million to purchase and equip a second optics facility in Nepean, Canada.
Cash flows used in investing activities totaled $9.3 million in 1997, including
$80.2 million of purchases and $79.4 million of maturities of short term
investments, and $8.7 million in capital expenditures. Capital expenditures
included $4.2 million of costs incurred in the expansion and modernization of
Lumonics' manufacturing facility in Rugby, England and $4.5 million invested in
machinery and equipment at other Lumonics' locations. Cash flows provided by
investing activities totaled $9.8 million in 1996, including $20.8 million of
purchases and $38.1 million of maturities of short term investments, $5.1
million in fixed asset additions, $4.4 million to acquire the assets of Hobart
Laser Products Inc. and $1.5 million received as
________
34
<PAGE>
payment in full of a mortgage receivable that was not due until December 31,
2001. Capital additions during 1996 included $4.6 million on machinery and
equipment, $0.3 million on building improvements and $0.2 million on vehicles.
Cash flow used in financing activities was $10.6 million for the year ended
December 31, 1998 compared to cash provided by financing activities of $42.8
million for 1997 and $2.1 million for 1996. Changes during the 1998 year were
primarily due to $7.9 million reduction in bank indebtedness, $2.3 million used
to repay long term debt and $0.6 million used to repurchase and cancel 94,900
common shares. Changes during the 1997 year were primarily due to $7.7 million
increase in bank indebtedness, $2.5 million used to repay long term debt, $35.7
million raised through a public offering of 2 million shares of common stock and
$1.9 million raised from the exercise of stock options. Changes during the 1996
year were primarily due to $2.6 million used to repay long term debt and $4.8
million raised from the exercise of stock options.
Under borrowings by Lumonics from Sumitomo Heavy Industries, Ltd. in 1990
and 1991, term loans are repayable by Lumonics in 10 equal semi-annual
installments, which commenced in April 1996. Lumonics made two payments in 1998
totaling $2.3 million and two payments in 1997 totaling $2.5 million. As at
December 31, 1998, the current portion of the long-term debt was $3.5 million.
At December 31, 1998, Lumonics had credit facilities available of up to
approximately $20 million which are denominated in Canadian dollars, US dollars
and Pound Sterling (1997 - $21 million). Bank indebtedness is due on demand and
bears interest based on prime which resulted in an effective average rate of 7%
for fiscal 1998 (1997 - 8%). As at December 31, 1998, the Company had unused
and available demand lines of credit amounting to approximately $9 million (1997
- - $3 million). Accounts receivable and inventories have been pledged as
collateral for the bank indebtedness under general security agreements. The
borrowings require, among other things, the Company to maintain specified
financial ratios and conditions. As at December 31, 1998, the Company was in
breach of certain covenants and the lending institutions have provided waivers
up to December 31, 1998. Borrowings under Lumonics bank indebtedness amounted
to $7.3 million as at December 31, 1998 and $15.2 million as at December 31,
1997. GSI Lumonics is reviewing and restructuring its existing lines of credit
to meet the needs of the merged company. GSI Lumonics believes that existing
cash balances, together with cash generated from the future merged operations
and available bank lines of credit, will be sufficient to satisfy anticipated
cash needs to fund working capital and investments in facilities and equipment
for the merged business for the next two years. *
________
35
<PAGE>
CURRENCY EXCHANGE MATTERS
Lumonics has substantial operations in the United States and the United
Kingdom, the sales and related expenses of which create a partial hedge against
foreign currency exposure. In addition, Lumonics has a policy that permits up
to 50% of the foreign currency exposure in the annual operating plan to be
hedged. As at December 31, 1998, Lumonics had no hedge contracts in place. As
at December 31, 1997, Lumonics had hedge contracts in place to exchange $9.0
million for Canadian dollars at an average rate of Cdn$1.4161 ($0.7061).
YEAR 2000
Lumonics has an evolving plan intended to achieve Year 2000 compliance for
its products and operations. In November 1998, Lumonics notified its customers
that all of its laser system products in current manufacture had achieved Year
2000 compliance. For products which were not in current manufacture, Lumonics
provides advice and information to customers regarding those products and, where
possible, provides upgrades or modifications to the existing products so as to
render those products Year 2000 compliant. Lumonics has upgraded major
information technology systems to serve its business needs, which suppliers have
confirmed to be Year 2000 compliant. Lumonics performed individual tests on
internal desktop and laptop computers. Lumonics has performed tests on, or has
received certification of compliance from suppliers on embedded systems such as
telephone systems, security systems and heating, ventilation and air
conditioning systems. Computers and systems found to be non-compliant will be
upgraded during 1999.
The Year 2000 specific costs incurred in the past, and expected to be
incurred in the future, do not have a material effect on Lumonics' financial
position or results of operations.
Lumonics is confident of its readiness in the area of internal operations.
However, some customers, suppliers and distributors have not certified Year 2000
compliance to Lumonics. The Company's reasonable worst case scenario with
respect to Year 2000 is manufacturing problems of customers or suppliers having
a material impact on Lumonics if customers delay orders or suppliers delay
delivery of parts.
Through 1999, Lumonics intends to develop contingency relationships with
alternate suppliers where existing suppliers cannot certify Year 2000 compliance
to offset, to the extent possible, potential disruption in the supply of parts.
Readers are cautioned that the Year 2000 section contains forward-looking
information. Please see the "Outlook for 1999" for a list of some of the
factors that could cause actual results to differ materially from expected
results.*
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on the
financial statements. However, it could increase volatility in earnings and
other comprehensive income.
OUTLOOK FOR 1999
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36
<PAGE>
Excluding the impacts of the merger with GSI, Lumonics expects its sales to
remain between $30 million and $37 million per quarter pending a recovery in
capital equipment spending. Because of lower backlog to start the year
(December 31, 1998 - $29 million; December 31, 1997 - $45 million), first
quarter 1999 sales are expected to come in at the lower end of this range. In
response, Lumonics plans to reduce its global workforce by 12%. To cover the
associated costs, Lumonics will record a restructuring charge of between $0.9
million and $1.1 million in the first quarter of 1999. Because of the timing of
restructuring initiatives, Lumonics expects to report a loss in the first
quarter of 1999.
The merger was completed on March 22, 1999. Prior to the closing of the
merger, integration teams were developing plans to guide the first 12 months
integration initiatives of GSI Lumonics. Cross functional, inter-company teams
covering manufacturing operations, distribution, research and development,
technology, customer support and administration were asked to cover many topics
including customer retention, cost saving synergy, revenue enhancement
opportunities and organization structure.
In the first two weeks following the close of the merger, GSI Lumonics
moved quickly to implement integration plans. On April 5, 1999 the Company
announced measures to consolidate operations and realize cost savings. The
measures include closing the Oxnard, California manufacturing facility; removing
sales office redundancy in key markets outside North America and improving
production capabilities for the semiconductor industry through a product
rationalization and a production transfer. As a result of the changes, GSI
Lumonics' facility in Wilmington, Massachusetts will begin manufacturing
semiconductor wafer marking equipment that was previously produced in Oxnard.
Oxnard's other marking product line will be rationalized and consolidated with a
similar product line developed and manufactured at the Wilmington facility. To
ensure an orderly transition, the changes are being phased in and will be
completed by the summer of 1999. The costs associated with these restructuring
activities will be incurred in the first quarter of 1999.
GSI Lumonics has also moved quickly to implement an organization structure
to see it through at least the first 12 months. All redundant employment
positions were identified in the first week following the merger.
There will be other integration initiatives that will be identified in the
release of first quarter 1999 results. These include the re-organization of
the Company's worldwide sales force, integration of worldwide customer support
and consolidation of some of the Company's administrative functions.
The information included in the above "Outlook for 1999" section, as well
as in certain statements made throughout the Management's Discussion and
Analysis of Financial Condition and Results of Operations that are identified by
an asterisk (*) is forward-looking and involves risks and uncertainties that
could result in actual results differing materially from expected results. It
is not reasonably possible to itemize all of the many factors and specific
events that could affect the outlook of a laser manufacturing business operating
in the global economy. Some factors that could significantly impact expected
revenues, costs, and net income (loss) include: capital expenditures by
customers which are in turn affected by cycles in the markets served by those
customers, the Asian economic environment, the impacts of the Company's merger
related activities, foreign currency exchange rate fluctuations, timing and
shipment of significant orders, the level of cost-reduction efforts and the
general economic environment. With respect to the forward-looking statements
set forth in the "Legal Proceedings" section, some of the factors that could
affect the ultimate disposition of these contingencies are the development of
facts in individual cases, settlement opportunities and the actions of
plaintiffs, judges and juries. Some factors that could significantly impact the
Company's expected Year 2000 readiness and the estimated cost thereof include
the results of the technical assessment, remediation and testing of date-
sensitive systems and equipment and the ability of critical business suppliers
and customers to achieve Year 2000 readiness.
________
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLMENTARY DATA
LUMONICS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Auditors' Report............................................................................ FIN - 2
Consolidated Balance Sheets as at December 31, 1998 and 1997................................ FIN - 3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996............................................................ FIN - 4
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.. FIN - 5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.. FIN - 6
Notes to Consolidated Financial Statements.................................................. FIN - 7
</TABLE>
________
FIN-1
<PAGE>
AUDITORS' REPORT
To the Stockholders of
Lumonics Inc.
We have audited the consolidated balance sheets of Lumonics Inc. as at
December 31, 1998 and 1997 and the consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. Our audits also included the financial
statement schedule listed at Item 14 of this Form 10-K Annual Report. These
financial statements and the schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998 in accordance with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
On February 12, 1999 (except for note 21 which is as of March 17, 1999), we
reported without reservation to the stockholders on the Company's consolidated
financial statements prepared in accordance with accounting principles generally
accepted in Canada.
Ottawa, Canada, Ernst & Young LLP
February 12, 1999 (except for note 21 Chartered Accountants
which is as of March 17, 1999).
________
FIN-2
<PAGE>
LUMONICS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1998 1997
<S> <C> <C>
ASSETS
------
Current
Cash and cash equivalents...................................................... $ 24,229 $ 56,828
Short-term investments (note 13)............................................... 8,098 12,325
Accounts receivable (notes 2 and 6)............................................ 31,673 45,096
Due from related party (note 12)............................................... 3,844 5,328
Inventories (notes 3 and 6).................................................... 44,096 35,369
Other assets (note 5).......................................................... 8,305 4,783
Current portion of swap contracts (note 13)................................... 1,076 564
-------- --------
Total current assets...................................................... 121,321 160,293
Fixed assets, net (note 4)..................................................... 32,209 23,960
Long-term portion of swap contracts (note 13).................................. 1,076 1,128
Other assets (note 5).......................................................... 5,036 3,799
-------- --------
$159,642 $189,180
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current
Bank indebtedness (note 6)..................................................... $ 7,261 $ 15,213
Accounts payable............................................................... 5,605 8,145
Accrued compensation and benefits.............................................. 3,456 3,657
Other accruals (note 17)....................................................... 15,481 16,178
Income taxes -- 3,125
Current portion of long-term debt (note 7)..................................... 3,541 3,080
-------- --------
Total current liabilities................................................. 35,344 49,398
Long-term debt (note 7)........................................................ 3,541 6,159
-------- --------
Total liabilities......................................................... 38,885 55,557
-------- --------
Commitments and contingencies (notes 13 and 14)
Stockholders' equity (note 8)
Capital stock, no par value (1998 - 17,101,000 shares;
1997 - 17,056,000 shares)................................................ 138,871 139,178
Deficit........................................................................ (9,451) (1,448)
Accumulated other comprehensive income......................................... (8,663) (4,107)
-------- --------
Total stockholders' equity................................................ 120,757 133,623
-------- --------
$159,642 $189,180
======== ========
</TABLE>
See accompanying notes
________
FIN-3
<PAGE>
LUMONICS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CAPITAL STOCK COMPREHENSIVE COMPREHENSIVE
----------------------
# SHARES AMOUNT DEFICIT INCOME INCOME TOTAL
--------- ----------- ---------- --------------- -------------- --------------
(000'S)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995..................... 13,821 $ 96,854 $(25,106) $(2,306) $ 6,743 $ 69,442
========
Net income..................................... 11,746 11,746 11,746
Issuance of capital stock
--stock options........................... 893 4,765 4,765
Foreign currency translation adjustment........ 2,392 2,392 2,392
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996..................... 14,714 101,619 (13,360) 86 $ 14,138 88,345
========
Net income..................................... 11,912 11,912 11,912
Issuance of capital stock
--public offering (net of issuing costs).. 2,000 35,658 35,658
--stock options........................... 387 1,901 1,901
Foreign currency translation adjustment........ (4,193) (4,193) (4,193)
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997..................... 17,101 139,178 (1,448) (4,107) $ 7,719 133,623
========
Net loss....................................... (7,916) (7,916) (7,916)
Issuance of capital stock
-- stock options.......................... 50 233 233
Repurchase of capital stock under
normal course issuer bid.................... (95) (540) (87) (627)
Foreign currency translation adjustment........ (4,556) (4,556) (4,556)
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998..................... 17,056 $138,871 $ (9,451) $(8,663) $(12,472) $120,757
======== ======== ======== ======= ======== ========
</TABLE>
See accompanying notes
________
FIN-4
<PAGE>
LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales (note 12)................................................. $144,192 $177,328 $153,367
Cost of goods sold.............................................. 103,519 111,406 92,368
-------- -------- --------
Gross profit.................................................... 40,673 65,922 60,999
Selling, general and administrative expenses.................... 38,420 37,991 33,380
Research and development costs (note 9)......................... 12,985 11,993 11,872
Restructuring (note 19)......................................... 2,022 -- --
-------- -------- --------
Income (loss) before the following.............................. (12,754) 15,938 15,747
Interest expense (note 7)....................................... 642 1,104 1,213
Interest income................................................. (2,220) (2,152) (1,847)
-------- -------- --------
Income (loss) before income taxes............................... (11,176) 16,986 16,381
Provision for (recovery of) income taxes (note 10).............. (3,260) 5,074 4,635
-------- -------- --------
Net income (loss) for the year.................................. $ (7,916) $ 11,912 $ 11,746
======== ======== ========
Net income (loss) per common share (note 8)
-- Basic................................................... $ (0.46) $ 0.75 $ 0.83
-- Weighted average shares (000's)......................... 17,079 15,989 14,077
-- Diluted................................................. $ (0.46) $ 0.72 $ 0.78
-- Adjusted weighted average shares (000's)................ 17,079 16,454 15,079
</TABLE>
See accompanying notes
________
FIN-5
<PAGE>
LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the year................................. $ (7,916) $ 11,912 $ 11,746
Items not affecting cash
Depreciation................................................ 4,739 3,607 3,070
Amortization of intangible assets........................... 861 400 380
Deferred income tax recovery................................ (1,306) (434) (732)
Exchange loss (gain)........................................ 330 241 13
Net change in non-cash operating assets and liabilities........ (3,616) (21,011) 686
(note 11)...................................................... -------- -------- --------
Cash provided by (used in) operating activities................ (6,908) (5,285) 15,163
-------- -------- --------
INVESTING ACTIVITIES
Additions to fixed assets...................................... (13,941) (8,706) (5,145)
Maturity of short-term investments............................. 47,091 79,351 38,136
Purchase of short-term investments............................. (43,522) (80,185) (20,835)
Proceeds on disposal of fixed assets........................... 373 294 548
Additions to patents and technology............................ (102) (53) (84)
Decrease in other long-term assets............................. -- 10 1,523
Acquisition of assets of Hobart Laser Products Inc............. -- -- (4,356)
(note 16)
Acquisition of Meteor Optics Inc. (note16)..................... (1,158) -- --
-------- -------- --------
Cash provided by (used in) investing activities................ (11,259) (9,289) 9,787
-------- -------- --------
FINANCING ACTIVITIES
Issue of share capital (net of issue costs).................... 233 37,560 4,765
Repurchase of share capital.................................... (627) -- --
Repayment of long-term debt.................................... (2,325) (2,527) (2,561)
Increase (decrease) in bank indebtedness....................... (7,865) 7,741 (151)
-------- -------- --------
Cash provided by (used in) financing activities................ (10,584) 42,774 2,053
-------- -------- --------
Effect of foreign currency translation on cash and cash
equivalents.................................................... (3,848) (710) (1,383)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... (32,599) 27,490 25,620
Cash and cash equivalents, beginning of year................... 56,828 29,338 3,718
-------- -------- --------
Cash and cash equivalents, end of year......................... $ 24,229 $ 56,828 $ 29,338
======== ======== ========
</TABLE>
See accompanying notes
___________
FIN-6
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND MERGER WITH GENERAL SCANNING
Lumonics Inc. designs, develops, manufactures and markets laser-based
advanced manufacturing systems. The systems are used in highly automated
environments for applications such as cutting, drilling, welding, marking and
coding a wide range of products and materials. The Company's principal markets
are in Canada, United States, Europe and Asia-Pacific. On October 27, 1998 the
Company signed an Agreement and Plan of Merger with General Scanning Inc., a
U.S. company engaged in similar business as the Company. See note 21.
BASIS OF PRESENTATION AND CHANGE IN REPORTING CURRENCY
These consolidated financial statements have been prepared by the Company
in United States (U.S.) dollars and in accordance with accounting principles
generally accepted in the U.S. (''GAAP''), applied on a consistent basis. Prior
to 1998, the Company prepared and filed its consolidated financial statements in
Canadian dollars. During 1998, the Company adopted the U.S. dollar as its
reporting currency for presentation. Accordingly, these consolidated financial
statements have been restated in accordance with SFAS No. 52, Foreign Currency
Translation.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances have
been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents are investments held to maturity and have original
maturities of three months or less. Cash equivalents consist principally of
Canadian commercial paper, short-term corporate debt, and banker's acceptances.
Cash equivalents are stated at cost, which approximates their fair value.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of Government of Canada Treasury
Bills and banker's acceptances, with original maturities greater than three
months. The Company has classified these investments as available-for-sale
securities in accordance with SFAS 115, and carries them at fair value. Any
unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and reported as a component of accumulated other
comprehensive income until realized.
INVENTORIES
Finished goods are valued at the lower of average cost and net realizable
value. Work-in-process and raw materials are valued at the lower of average cost
and replacement cost.
FIXED ASSETS
___________
FIN-7
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
Fixed assets are stated at cost. Buildings, machinery and equipment are
predominantly depreciated using the declining balance method at the following
rates:
<TABLE>
<S> <C>
Buildings................................................. 4-5%
Machinery and equipment....................................20-33%
</TABLE>
GOODWILL
Goodwill consists of the excess of cost over acquired net identifiable
assets for business purchase combinations.
The amortization period for goodwill is determined on a separate basis for
each acquisition. Goodwill is amortized on a straight-line basis over periods
ranging from a minimum of two to a maximum of ten years from the date of
acquisition. The Company assessed the recoverability of its goodwill by
determining whether the amortization of goodwill over the remaining lives can be
recovered from future discounted operating results. At this time, the Company
expects full recoverability.
PATENTS AND TECHNOLOGY
Patents and purchased technology are stated at cost and are amortized on a
straight-line basis over the expected life of the asset, up to 17 years. The
Company periodically assesses the recoverability of its patents and technology
assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of.
REVENUE RECOGNITION
The Company recognizes substantially all of its revenue at date of shipment
or when services are provided. Where applicable, a percentage of completion
basis is used for certain long term contracts. The Company accrues potential
product liability and warranty claims, based on the Company's claim experience,
when revenue is recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and are
reduced by related non-refundable government assistance.
FOREIGN CURRENCY TRANSLATION
The financial statements of the parent company and its non-U.S.
subsidiaries have been translated into U.S. dollars in accordance with the
Financial Accounting Standards Board (FASB) Statement No. 52, Foreign Currency
Translation. All balance sheet amounts have been translated from foreign
currencies into U.S. dollars at the exchange rates in effect at year end. Income
statement amounts have been translated using the weighted average exchange rate
for the applicable year. Gains and losses resulting from changes in exchange
rates from year to year have been reported as a separate component of
accumulated other comprehensive income.
___________
FIN-8
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange forward contracts and local currency borrowings are used
to reduce the impact of certain foreign currency balance sheet fluctuations and
foreign currency denominated sales.
Gains and losses from forward contracts that are not hedges of firm
commitments are accrued at each balance sheet date and included in the
Consolidated Statements of Operations as foreign exchange transactions gains
(losses).
In certain circumstances, the Company uses currency and interest rate swap
contracts to manage foreign currency exposures and interest rate risk. Payments
and receipts under such swap contracts are recognized as adjustments to interest
expense on a basis that matches them with the fluctuations in the interest
receipts and payments under floating rate financial assets and liabilities.
INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and the income tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
2. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of
$311,000 and $191,000 as of December 31, 1998 and 1997, respectively. Accounts
receivable include unbilled receivables on long-term contracts of $5,531,000 and
$3,367,000 as of December 31, 1998 and 1997, respectively.
3. INVENTORIES
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials............................... $ 9,123 $ 9,082
Work-in-process............................. 14,062 12,138
Finished goods.............................. 20,911 14,149
------- -------
$44,096 $35,369
======= =======
</TABLE>
4. FIXED ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
---- ------------- ---- -------------
<S> <C> <C> <C> <C>
Land.................................... $ 2,146 $ -- $ 2,117 $ --
Buildings............................... 24,144 4,963 15,939 3,986
Machinery and equipment................. 30,218 19,336 26,634 16,744
-------- ------- -------- -------
56,508 $24,299 44,690 $20,730
Accumulated depreciation................ (24,299) (20,730)
-------- --------
Net book value.......................... $ 32,209 $ 23,960
======== ========
</TABLE>
__________
FIN-9
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
5. OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Short term other assets
Income tax recoverable................................................ $3,201 $ --
Prepaid expenses...................................................... 1,890 1,677
Deferred income taxes................................................. 3,214 3,106
------ ------
8,305 4,783
====== ======
Long term other assets
Deferred income taxes................................................. 912 --
Patents and technology, net of accumulated amortization
of $1,783 (1997 - $1,125)......................................... 2,813 3,443
Goodwill, net of accumulated amortization of $1,170 (1997 - $1,084)... 1,259 304
Other................................................................. 52 52
------ ------
$5,036 $3,799
====== ======
</TABLE>
6. BANK INDEBTEDNESS
The Company has credit facilities of approximately $20 million which are
denominated in Canadian dollars, US dollars and Pound Sterling (1997 - $21
million). Bank indebtedness is due on demand and bears interest based on prime
which resulted in an effective average rate of 7% for fiscal 1998 (1997 - 8%).
As at December 31, 1998, the Company had unused and available demand lines of
credit amounting to approximately $9 million (1997 - $3 million).
Accounts receivable and inventories have been pledged as collateral for the bank
indebtedness under general security agreements. The borrowings require, among
other things, the Company to maintain specified financial ratios and conditions.
As at December 31, 1998, the Company was in breach of certain covenants and the
lending institutions have provided waivers.
7. LONG-TERM DEBT
The Company has a long term loan from Sumitomo Heavy Industries, Ltd., a
significant shareholder, all of which is repayable in Japanese yen. The foreign
exchange rates as at December 31, 1998 were 1 $Cdn to 73.8 yen (1997 - 1 $Cdn to
90.5 yen) and 1 $US to 113.0 yen (1997 - 1 $U.S. to 129.9 yen).
The Company has entered into currency and interest rate swap contracts
which oblige it to pay Canadian dollars and receive Japanese yen, and pay U.S.
dollars and receive Japanese yen, on the dates principal and interest payments
are due. The terms of these contracts are described in Note 13.
_________
FIN-10
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
Long term debt is comprised of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Sumitomo Heavy Industries, Ltd., Japanese yen term loans,
interest payable semi- annually at 6.30% with semi-annual
principal payments, maturing October 31, 2000.......................... $ 7,082 $ 9,239
Less current portion..................................................... (3,541) (3,080)
------- -------
$ 3,541 $ 6,159
======= =======
</TABLE>
Interest expense on long-term debt during the year amounted to $371,000
(1997 - $464,000; 1996 - $640,000).
Principal repayments of long-term debt are as follows:
<TABLE>
<S> <C>
1999....................................................................... $ 3,541
2000....................................................................... 3,541
-------
$ 7,082
=======
</TABLE>
8. STOCKHOLDERS' EQUITY
CAPITAL STOCK
The authorized capital of the Company consists of an unlimited number of
common shares without nominal or par value. In fiscal 1994, the shareholders
approved a reduction in the stated legal capital and deficit totaling
$29,575,000. The stated legal capital stock of the company at December 31, 1998
is $109,296,000
(1997 - $109,603,000; 1996 - $72,044,000; 1995 - $67,279,000).
ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130") effective January 1, 1998. SFAS
No. 130 requires that all non-owner changes in equity such as the change in the
such as foreign currency translation adjustments, be separately classified in
the financial statements and that the accumulated balance of other comprehensive
income be reported separately from deficit in the equity section of the balance
sheet.
Accumulated other comprehensive income comprises only unrealized foreign
currency translation gains and losses. For the year end December 31, 1998, the
Company has an unrealized foreign currency translation loss of $4,556,000, (1997
- - loss of $4,193,000; 1996 - gain of $2,392,000) primarily as a result of
fluctuations of the U.S. dollar against the Canadian dollar and pound sterling.
NET INCOME (LOSS) PER COMMON SHARE
The dilutive effect of stock options is excluded under the requirements of
SFAS 128 for calculating basic net income (loss) per share, but is included in
the calculation of diluted net income per share.
__________
FIN-11
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
The reconciliation of the numerator and denominator for the calculation of basic
net income per share and diluted net income per shares is as follows: (000's,
except for per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic net income (loss) per share
Net income (loss)..................................................... $(7,916) $11,912 $11,746
------- ------- -------
Weighted average number of shares outstanding......................... 17,079 15,989 14,077
Basic net income (loss) per share..................................... $ (0.46) $ 0.75 $ 0.83
------- ------- -------
Diluted net income (loss) per share
Net income (loss)..................................................... $(7,916) $11,912 $11,746
------- ------- -------
Weighted average number of shares outstanding......................... 17,079 15,989 14,077
Dilutive effect of stock options...................................... -- 465 1,002
------- ------- -------
Adjusted weighted average number of shares outstanding................ 17,079 16,454 15,079
------- ------- -------
Diluted net income (loss) per share................................... $ (0.46) $ 0.72 $ 0.78
======= ======= =======
</TABLE>
STOCK OPTIONS
The Company has stock option plans providing for the issue of options to
purchase the Company's common stock. Outstanding options vest over periods of
one to four years beginning on the date of grant. The options expire over a
period of two to seven years beginning at the date of grant. Of the 3.7 million
(1997 - 3.7 million) options authorized under these plans, 103,425 (1997 -
843,198) options were available for grant as at December 31, 1998.
Under SFAS No. 123, the Company has elected to continue applying APB
Opinion 25 in accounting for its stock option plans, and to provide the pro
forma disclosure of earnings per share as if the fair value based method of
accounting had been applied.
The exercise price of all stock options is equal to the market price of the
stock on the trading day preceding the date of grant. Accordingly, no
compensation cost has been recognized in the financial statements for the
Company's stock option plans. If the fair values of the options granted in
fiscal 1998, 1997 and 1996 had been recognized as compensation expense on a
straight-line basis over the vesting period of the grant (consistent with the
method prescribed by SFAS No. 123), the Company's net income (loss) and earnings
per share would have been reduced to the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss)
As reported........................................................... $(7,916) $11,912 $11,746
Pro forma............................................................. $(8,976) $11,145 $11,486
Basic net income (loss) per share
As reported........................................................... $ (0.46) $ 0.75 $ 0.83
Pro forma............................................................. $ (0.53) $ 0.70 $ 0.82
Diluted net income (loss) per share
As reported........................................................... $ (0.46) $ 0.72 $ 0.78
Pro forma............................................................. $ (0.53) $ 0.68 $ 0.76
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
January 1, 1995, the above pro forma disclosure is not indicative of pro forma
amounts that will be reported in future years. It is expected that all non-
vested awards will be included in the pro forma disclosure in fiscal 2000.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
4.6%, 5.8% and 5.9%; expected life of the options of 1.2 years, 1.8 years, and
1.8 years; expected volatility of 40%, 30% and 30% and a dividend yield of zero
for all years.
__________
FIN-12
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
Activity in the stock option plans for fiscal 1998, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
# OPTIONS PRICE # OPTIONS PRICE # OPTIONS PRICE
----------- --------- ----------- --------- ----------- ---------
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........................... 1,321 $13.15 951 $ 5.71 1,836 $ 5.16
Granted........................................... 879 5.16 833 18.40 50 19.16
Exercised......................................... (50) 4.72 (387) 4.91 (893) 5.33
Canceled.......................................... (146) 15.63 (76) 0.34 (42) 5.13
----- ------ ----- ------ ----- ------
Outstanding, end of year................................. 2,004 $ 9.11 1,321 $13.15 951 $ 5.71
===== ====== ===== ====== ===== ======
Options exercisable at year end.......................... 705 123 69
----- ----- -----
Weighted average per share fair value of options
granted during the year calculated using the
Black-Scholes option pricing model.................. $ 1.00 $ 3.76 $ 3.79
====== ====== ======
</TABLE>
The following table summarizes significant ranges of outstanding and
exercisable options as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
EXERCISABLE
-------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES # OPTIONS LIFE PRICE # OPTIONS PRICE
----------- ----------- ------------ ------------ -------------
(000'S) (000'S)
<S> <C> <C> <C> <C> <C>
$2.61 to $5.10. 1,208 3.8 years $ 4.48 373 $ 3.83
$8.43 to $11.11 54 2.6 years $ 9.57 33 $ 9.47
$15.03 to $18.69 742 2.2 years $16.59 299 $16.08
----- ---
2,004 705
===== ===
</TABLE>
REPURCHASE OF COMMON SHARES
The On April 29, 1998, the Board of Directors authorized a program to
repurchase up to 5% of its issued and outstanding common shares. During the
year, the Company repurchased 94,900 common shares for approximately $627,000.
Pursuant to provisions of the Agreement and Plan of Merger with General Scanning
Inc., the Company suspended its repurchase program.
9. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are net of non-refundable government
assistance of $772,000
(1997 - $2,123,000; 1996 - $167,000).
10. INCOME TAXES
Details of the income tax provision (recovery) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Canadian................................................. $ 1,687 $2,513 $ 830
</TABLE>
__________
FIN-13
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
Foreign......................................................... (3,641) 2,995 4,537
------- ------ -------
(1,954) 5,508 5,367
------- ------ -------
Deferred
Canadian........................................................ (247) 384 1,029
Foreign......................................................... (1,059) (818) (1,761)
------- ------ -------
(1,306) (434) (732)
------- ------ -------
Income tax provision (recovery)................................... $(3,260) $5,074 $ 4,635
======= ====== =======
</TABLE>
The income tax provision (recovery) reported differs from the amounts
computed by applying the Canadian rate to income (loss) before income taxes. The
reasons for this difference and the related tax effects are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected Canadian tax rate........................................ 44.6% 44.0% 44.0%
Expected income tax provision (recovery).......................... $(4,984) $7,474 $ 7,208
Canadian rate adjustment for manufacturing and processing
activities..................................................... (363) (624) (354)
Foreign tax rate differences...................................... 266 (244) (98)
Change in valuation allowance..................................... 1,216 (230) (195)
Permanent difference for UK tax deduction......................... -- -- (1,325)
Settlement of Canadian and foreign tax matters.................... -- (423) --
Other items....................................................... 605 (879) (601)
------- ------ -------
Reported income tax provision..................................... $(3,260) $5,074 $ 4,635
======= ====== =======
</TABLE>
Deferred income taxes result principally from temporary differences in the
recognition of certain revenue and expense items for financial and tax reporting
purposes. Significant components of the Company's deferred tax assets and
liabilities as at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Operating tax loss carryforwards................................... $ 6,539 $ 2,803
Investment tax credits............................................. 582 1,042
Research and development expenses.................................. 646 1,454
Accounting provisions not deductible............................... 1,400 1,504
Deferred revenue................................................... 1,231 790
Other.............................................................. 535 756
------- -------
Total deferred tax assets............................................... 10,933 8,349
Valuation allowance for deferred tax assets............................. (5,731) (4,515)
------- -------
Net deferred tax assets................................................. 5,202 3,834
------- -------
Deferred tax liabilities
Book and tax differences on assets................................. 1,076 728
------- -------
Net deferred income tax asset........................................... $ 4,126 $ 3,106
======= =======
</TABLE>
The Company has provided a valuation allowance related primarily to
operating losses and unclaimed expenses of companies with an inconsistent
history of taxable income and loss, due to the uncertainty of their realization.
The net change in the total valuation allowance for the years ended
December 31, 1998 and December 31, 1997 was an increase of $1,216,000 and a
decrease of $230,000, respectively.
As at December 31, 1998, the Company had loss carryforwards of
approximately $16 million available to reduce future years' income for tax
purposes of which $650,000 expires by the end of 2001, a further $330,000
expires by the end of 2003, with the remainder carried forward indefinitely.
_______
FIN-14
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
Income(loss) before taxes attributable to foreign operations was
($15,200,000); $7,370,000; and $9,693,000 in each of fiscal 1998, 1997 and 1996,
respectively. The Company has not recorded a provision for withholding tax on
unremitted earnings of foreign subsidiaries as the Company currently has no
plans to repatriate those earnings. The amount of retained earnings(deficit) of
foreign subsidiaries as at December 31, 1998 was ($5,700,000), (1997 -
$13,020,000).
Income taxes paid were $2,316,000; $2,531,000 and $4,527,000 for fiscal
years 1998, 1997 and 1996, respectively.
11. STATEMENT OF CASH FLOWS
The net change in non-cash working capital balances related to operations
consists of:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Accounts receivable.................................. $13,220 $(21,405) $ (745)
Due from related party............................... 1,188 (2,086) 1,345
Inventories.......................................... (8,343) (3,654) (217)
Accounts payable..................................... (2,097) 3,790 (931)
Deferred revenue..................................... 2,341 (608) 2,654
Accrued warranty provision........................... (446) 777 765
Other accrued liabilities............................ (3,229) (74) (3,051)
Accrued compensation and benefits.................... 28 (77) 1,290
Income taxes......................................... (6,073) 2,013 450
Prepaid expenses..................................... (205) 313 (874)
------- -------- -------
$(3,616) (21,011) $ 686
======= ======== =======
</TABLE>
Supplemental cash flow information:
Interest paid during the year totaled $899,000, $1,112,000, and $1,231,000
for the years 1998, 1997 and 1996, respectively.
____________
FIN-15
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
12. RELATED PARTY TRANSACTIONS
In addition to matters discussed elsewhere, the Company had the following
transactions with related parties:
During the year ended December 31, 1998, the Company recorded sales revenue
of $15,540,000
(1997 - $18,891,000; 1996 - $17,380,000) from Sumitomo Heavy Industries, Ltd., a
significant shareholder, at values and terms approximately equivalent to third
party transactions. Transactions with Sumitomo are at normal trade terms.
13. FINANCIAL INSTRUMENTS
The Company does not actively trade derivative financial instruments but
uses them to manage foreign currency and interest rate positions associated with
its debt instruments. The terms of these derivative contracts match the terms of
the underlying debt instruments and are generally used to reduce financing
costs. The Company currently has three such contracts outstanding, two of which
convert yen denominated debt to U.S. dollar denominated debt and one contract
which converts a yen denominated debt into Canadian dollars.
The fair value of the Company's recognized financial instruments
approximates carrying amounts where applicable, except as shown in the table
below. The fair value of long-term debt was determined by discounting cash flows
of the obligation at the rates generally available to the Company on similar
credit facilities. The fair values of the swap contracts have been estimated by
management using available market information and do not necessarily represent
amounts that the Company could potentially realize in a current market exchange
transaction between willing parties.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term debt:
Sumitomo Heavy Industries, Ltd., Japanese yen term loans......... $7,082 $7,430 $9,239 $9,797
Favorable value of swaps:
--to convert 200 million yen (1997 - 300 million yen) to U.S.
$1,365 (1997 - U.S. $2,047), semi-annual interest at the
six-month LIBOR less 1.56%..................................... 406 523 262 748
--to convert 300 million yen (1997 - 450 million yen) to Cdn
$2,326 (1997 - Cdn $3,488) semi-annual interest at the three
month bankers acceptance rate less 1.62%....................... 1,136 1,312 1,035 1,416
--to convert 300 million yen (1997 - 450 million yen) to U.S.
$2,046 (1997 - U.S. $3,070) interest payable semi-annually
at 8.20%....................................................... 610 698 395 575
------ ------ ------ ------
Favorable value of swaps................................................ 2,152 2,533 1,692 2,739
------ ------ ------ ------
Economic value.......................................................... $4,930 $4,897 $7,547 $7,058
====== ====== ====== ======
</TABLE>
The Company is exposed to credit-related losses with respect to the
positive fair value of the swap contracts in the event of non-performance by the
Canadian Imperial Bank of Commerce and the Industrial Bank of Japan as
counterparties. The Company does not expect any counterparties to fail to meet
their obligations.
____________
FIN-16
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
The entitlements under the swap contracts are as follows:
<TABLE>
<S> <C>
1999....................................................................... $1,076
2000....................................................................... 1,076
------
$2,152
======
</TABLE>
As of December 31, 1998, the Company had no foreign exchange forward
contracts (1997 - contracts to sell approximately U.S. $9 million in exchange
for Canadian dollars at an average rate of $1.416).
As at December 31, 1998, the Company had $8,098,000 (1997 - $12,325,000)
invested in short-term investments denominated in Canadian dollars with maturity
dates between January 7, 1999 and January 21, 1999.
RISK AND UNCERTAINTIES
The Company operates internationally in one business segment. The Company
principally manufactures and distributes lasers. The Company is not dependent on
any single customer, group of customers, or supplier.
The Company may experience fluctuations in operating results due to a
variety of factors including the rate of growth of markets for lasers, market
acceptance of the Company's products and those of its competitors, expenses
relating to the introduction of new products or new versions of existing
products, changes in pricing policies by the Company and its competitors, timing
of receipts of orders from major customers, the timing of shipments and
conditions in foreign markets and reliance on a limited number of suppliers.
There is no concentration of credit risk related to the Company's position
in trade accounts receivable other than the amount due from Sumitomo Heavy
Industries, Ltd., a related party. Credit risk, with respect to trade
receivables, is minimized because of the diversification of the Company's
operations, as well as its large customer base and its geographical dispersion.
14. COMMITMENTS AND CONTINGENCIES
Future minimum payments under long-term operating leases for manufacturing
premises, automobiles and equipment are as follows:
<TABLE>
<S> <C>
1999.............................................................................. $ 2,853
2000.............................................................................. 2,903
2001.............................................................................. 2,631
2002.............................................................................. 2,107
2003.............................................................................. 1,646
2004 and beyond................................................................... 4,708
-------
$16,848
=======
</TABLE>
Rent expense during fiscal 1998, 1997 and 1996 was $1,923,000, $1,645,000
and $1,754,000 respectively.
As has been reported by the Company since 1994, a party has commenced legal
proceedings in the United States against a number of U.S. manufacturing
companies, including companies which have purchased systems from Lumonics. The
plaintiff in the proceedings has alleged that certain equipment used by these
manufacturers infringes patents claimed to be held by it. While the Company is
not a defendant in any of the proceedings, seven of Lumonics' customers have
notified the Company and others that, if the party successfully pursues its
infringement claims against them, they may require Lumonics to indemnify them to
the extent that any of their losses can be attributed to systems sold to them by
the Company. While the Company does not believe that the outcome of these
claims will have a material adverse effect upon the Company, there can be no
assurance that any such claims, or any
____________
FIN-17
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
similar claims, would not have a material adverse effect upon the Company's
financial condition or results of operations.
YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
15. DEFINED BENEFIT PENSION PLAN
The Company's subsidiary in the United Kingdom maintains a pension plan,
known as the Lumonics Ltd. UK Pension Scheme. The plan has two components: the
Final Salary Plan, which is a defined benefit plan, and the Retirement Savings
Plan, which is a defined contribution plan. Effective April 1997, membership to
the Final Salary Plan was closed. The most recent actuarial valuation of the
plan was performed as at November 30, 1997. The extrapolation as at December 1,
1998 indicates the actuarial present value of the accrued pension benefits and
the net assets available to provide for these benefits, at market value, were as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Pension fund assets...................................................... 12,000 10,000
Accrued pension benefits................................................. 9,500 8,100
</TABLE>
The assumptions used to develop the actuarial present value of the accrued
pension benefits were as follows for 1998, 1997, and 1996:
<TABLE>
<S> <C>
Discount rate........................................................................... 9%
Compensation increase rate.............................................................. 7%
Investment return assumption............................................................ 9%
Average remaining service life of employees............................................. 18 years
</TABLE>
The estimates are based on actuarially computed best estimates of pension
asset long-term rates of return and long-term rate of obligation escalation.
Variances between these estimates and actual experience are amortized over the
employees' average remaining service life.
Pension expense during fiscal 1998, 1997 and 1996 was $670,000, $500,000,
and $360,000 respectively.
____________
FIN-18
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
16. ACQUISITIONS
In June 1998, the Company acquired, for cash consideration of $1,158,000,
all outstanding shares of Meteor Optics Inc., a fiber-optics manufacturer based
in the United States. This transaction has been accounted for as a purchase.
Net tangible assets had no significant value, and the purchase price has been
allocated to goodwill and will be amortized over 10 years.
In June 1996, the Company acquired, for cash consideration of $4,356,000,
working capital of $2,526,000 and technology of $1,830,000 from Hobart Laser
Products Inc., a laser manufacturer and distributor based in the United States.
This transaction has been accounted for as a purchase.
17. OTHER ACCRUALS
Other accruals consist of:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred revenue........................................................ $ 7,379 5,449
Accrued warranty provision.............................................. 2,961 3,619
Other................................................................... 5,141 7,110
------- -------
$15,481 $16,178
======= =======
</TABLE>
18. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information for the December 31, 1998 year end.
The Company and its subsidiaries operate internationally in Canada, the
United States, Europe, Japan and Asia-Pacific in one dominant industry segment,
the manufacture and distribution of lasers.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------
FIXED INTANGIBLE FIXED INTANGIBLE
SALES ASSETS ASSETS SALES ASSETS ASSETS
-------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Canada............................... $ 8,264 $ 9,349 $ 218 $ 9,750 $ 9,010 $2,297
United States........................ 61,269 3,381 2,167 91,835 4,043 1,299
Latin and South America.............. 657 24 -- 1,577 -- --
Europe............................... 40,427 19,161 1,687 33,385 10,606 151
Japan................................ 15,987 -- -- 19,806 -- --
Asia-Pacific......................... 17,588 294 -- 20,975 301 --
-------- ------- ------ -------- ------- ------
$144,192 $32,209 $4,072 $177,328 $23,960 $3,747
======== ======= ====== ======== ======= ======
</TABLE>
Sales are attributed to geographic regions based on location of customers.
____________
FIN-19
<PAGE>
LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
19. RESTRUCTURING COSTS
The Company incurred $2.0 million in restructuring costs in the form of
severance costs during the year ended December 31, 1998. In addition, an
inventory write-down of $1.4 million is included in the cost of goods sold.
20. COMPARATIVE FIGURES
Certain comparative figures have been reclassified from statements
previously presented to conform to the presentation of the 1998 financial
statements.
21. SUBSEQUENT EVENTS
In January 1999, the Company announced plans to reduce its global workforce
by 12%. To cover the associated costs, the Company will record a restructuring
charge of between $850,000 and $1.0 million in fiscal 1999, excluding any
restructuring resulting from the merger discussed below.
On March 17, 1999, the shareholders of General Scanning Inc. ("GSI") and
Lumonics Inc. ("Lumonics) approved an agreement to form GSI Lumonics Inc. ("GSI
Lumonics") as a merger of equals. GSI stockholders will each receive 1.347 GSI
Lumonics common shares for each share of GSI common stock they own and Lumonics
shareholders will continue to hold their common shares of Lumonics which,
following the merger, will be renamed GSI Lumonics Inc. Immediately following
the merger, the GSI stockholders and the Lumonics shareholders will each, as a
group, own approximately 50% of the common shares of GSI Lumonics. In addition,
Lumonics will assume all options and warrants to purchase GSI common stock
outstanding at the time of the merger, which will be exercisable for GSI
Lumonics common shares. The transaction will be accounted for by the purchase
accounting method. Unaudited Pro Forma financial information for the
acquisition as if the business had been acquired at the beginning of each
respective fiscal period is presented as follows:
<TABLE>
<CAPTION>
(unaudited)
PRO FORMA PRO FORMA
COMBINED COMBINED
1998 1997
------------------ -----------------
<S> <C> <C>
Revenue.................................................................. $325,589 $358,858
Net income (loss)........................................................ $(10,510) $ 16,116
Net income (loss) per common share - basic.............................. $ (0.31) $ 0.49
Net income (loss) per common share - diluted............................ $ (0.31) $ 0.48
</TABLE>
The unaudited Pro Forma information does not include the operating savings or
synergies anticipated as a result of the combined operations.
____________
FIN-20
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISRANT
Directors
The information with respect to directors is contained in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 11,
1999 (the "1999 Proxy Statement") and is incorporated herein by reference.
Executive Officers
The information with respect to executive officers is set forth under the
caption "Executive Officers" in Part I of this report.
Reports of Beneficial Ownership
The information required by this item is contained in the 1999 Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 1999 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 1999 Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the Company's 1999 Proxy
Statement under the caption "Certain Transactions: and is incorporated herein by
reference.
____________
FIN-21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
LIST OF FINANCIAL STATEMENTS
The financial statements required by this item are listed in Item 8,
"Financial Statements and Supplementary Data" herein.
LIST OF FINANCIAL STATEMENT SCHEDULES
See Schedule II-Valuation and Qualifying Accounts. All other schedules are
omitted because they are not applicable, not required or the required
information is shown in the consolidated financial statements or notes thereto.
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1 Amended and Restated Agreement and Plan of Merger, dated as of October
27, 1998, by and among the Registrant, Grizzly Acquisition Corp., New
Grizzly Acquisition Corp. and General Scanning Inc. Pursuant to Item
601(b)(2) of Regulation S-K, the Schedules referred to in the Merger
Agreement are omitted. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted Schedule to the Commission upon
request. (5)
3.1 Certificate and Articles of Continuance of the Registrant dated March
22, 1999. (6)
3.2 By-Law No.1 of the Registrant. (5)
10.1 Line of Credit Agreement between the Registrant and CIBC dated April
8, 1998 and accepted April 15, 1998. (5)
10.2 Loan Agreement between Sumitomo Heavy Industries, Ltd. and the
Registrant dated August 10, 1990. (5)
10.3 Amended and Restated Revolving Credit Agreement between GSI and The
First National Bank of Boston dated as of December 28, 1995. (3)
10.4 Amendment to Amended and Restated Revolving Credit Agreement between
GSI and the First National Bank of Boston dated July 25, 1997. (4)
10.5 Second Amendment to Amended and Restated Revolving Credit Agreement
between GSI and the First National Bank of Boston dated November 28,
1997. (4)
10.6 Lease Agreement between JRF II Associates Ltd. Partnership and
Lumonics Corporation dated September 24, 1991. (5)
10.7 Industrial Space Lease between Lumonics Corporation and The Travelers
Insurance Company dated March 17, 1992. (5)
10.8 Lease Agreement between Lumonics Corporation and Sisilli dated June
1994. (5)
10.9 Lease dated August 10, 1989, as amended to date, between GSI and
Arlington Center Garage and Service Corp. (1)
____________
FIN-22
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
10.10 Lease dated February 24, 1989, as amended to date, between Ames Realty
Trust Associates and Teradyne Laser Systems Inc. and GSI (1)
10.11 GSI Lease dated July 31, 1996, as amended to date, between View
Engineering, Inc. and Donald J. Devine as Trustee under the Donald J.
Devine Trust Agreement. (2)
10.12 Lease dated March 24, 1995, as amended to date, between View
Engineering, Inc. and Marjorie Lynn Landon. (2)
10.13 Lease dated July 15, 1997, as amended to date, between GSI and The
Wilmington Realty Trust. (4)
10.14 1998 Management Incentive Plan of the Registrant. (5)
10.15 1998 Executive Management Incentive Plan of the Registrant. (5)
10.16 Severance Agreement between the Registrant and Robert J. Atkinson
dated April 13, 1998. (5)
10.17 Severance Agreement between the Registrant and W. Scott Nix dated
April 13, 1998. (5)
10.18 Severance Agreement between the Registrant and Michael W. Lupiano
dated April 13, 1998. (5)
10.19 Severance Agreement between the Registrant and Patrick D. Austin dated
April 13, 1998. (5)
10.20 Severance Agreement between the Registrant and John W. George dated
April 13, 1998. (5)
10.21 Severance Agreement between the Registrant and Desmond J. Bradley
dated April 13, 1998. (5)
10.22 Split Dollar Compensation Agreement dated September 13, 1997 between
GSI and Charles D. Winston. (4)
10.23 Key Employee Retention Agreement between GSI and Charles Winston dated
May 1, 1998 and amended October, 1998. (5)
10.24 Key Employee Retention Agreement between GSI and Linda Palmer dated
May 1, 1997 and amended October 27, 1998. (5)
10.25 Key Employee Retention Agreement between GSI and Kurt Pelsue dated May
1, 1997 and amended October 27, 1998. (5)
10.26 Key Employee Retention Agreement between GSI and Michael R. Kampfe
dated May 1, 1997 and amended October 27, 1998. (5)
10.27 Key Employee Retention Agreement between GSI and Victor Sabella dated
May 1, 1997 and amended October 27, 1998. (5)
10.28 Key Employee Retention Agreement between GSI and Joseph Verderber
dated May 1, 1997 and amended October 27, 1998. (5)
10.29 Key Employee Retention Agreement between GSI and Gregory Baletsa dated
May 1, 1998 and amended October 27, 1998.(5)
10.30 Key Employee Retention Agreement between GSI and Victor H. Woolley,
dated May 1, 1997. (5)
10.31 Settlement Agreement dated June 12, 1998 between GSI and Robotic
Vision Systems, Inc. (5)
21.1 Subsidiaries of the Registrant. (5)
21.2 Subsidiaries of GSI (4)
24.1 Powers of Attorney. (5)
99.1 Amended and Restated Stock Option Agreement dated October 27, 1998 by
and among GSI, Lumonics and Grizzly Acquisition Corp. (5)
99.2 Stock Option Agreement dated October 27, 1998 by and among GSI and
Lumonics (5)
____________
FIN-23
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
99.3 Form of Proxy for GSI common stock. (5)
99.6 1981 Stock Option Plan of GSI (1)
99.7 1992 Stock Option Plan of GSI (1)
99.8 1995 Directors' Warrant Plan of GSI (1)
99.9 1994 Executive Management Stock Option Plan of the Registrant. (5)
99.10 1994 Key Employees and Directors Stock Option Plan of the Registrant.
(5)
99.11 1995 Employees and Directors Stock Option Plan of the Registrant. (5)
- ----------
(1) Incorporated by reference to GSI's registration statement on Form S-1,
filed August 11, 1995 (33-95718)
(2) Incorporated by reference to GSI's Current Report on Form 10-K for the
year ended December 31, 1996.
(3) Incorporated by reference to GSI's Current Report on Form 10-Q for the
quarter ended June 30, 1996.
(4) Incorporated by reference to GSI's Current Report on Form 10-for the
year ended December 31, 1997.
(5) Incorporated by reference to Lumonics' registration statement on Form
S-4/A Amendment No. 2, filed February 11, 1999 (333-71449)
REPORTS ON FORM 8-K
A report on Form 8-K has been filed during the first quarter of 1999.
____________
FIN-24
<PAGE>
LUMONICS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Description BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED BALANCE
OF PERIOD EXPENSES TO OTHER AT END OF
ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts................. $293 $ 59 $-- $131 $221
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Allowance for doubtful accounts................. $221 $ 15 $-- $ 45 $191
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Allowance for doubtful accounts................. $191 $109 $-- $(11) $311
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
____________
FIN-25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,229
<SECURITIES> 8,098
<RECEIVABLES> 31,984
<ALLOWANCES> 311
<INVENTORY> 44,096
<CURRENT-ASSETS> 121,321
<PP&E> 56,508
<DEPRECIATION> 24,999
<TOTAL-ASSETS> 159,642
<CURRENT-LIABILITIES> 35,344
<BONDS> 0
0
0
<COMMON> 138,871
<OTHER-SE> (18,114)
<TOTAL-LIABILITY-AND-EQUITY> 159,642
<SALES> 144,192
<TOTAL-REVENUES> 144,192
<CGS> 103,519
<TOTAL-COSTS> 103,519
<OTHER-EXPENSES> 53,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,578)
<INCOME-PRETAX> (11,176)
<INCOME-TAX> (3,260)
<INCOME-CONTINUING> (7,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,916)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
