<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 1, 1999
---------------
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 333-71449
----------------
GSI Lumonics Inc.
(Exact name of registrant as specified in its charter)
New Brunswick, Canada 38-185358
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
105 Schneider Road
Kanata, Ontario, Canada K2K 1Y3
(Address of principal executive offices)
Telephone: (613) 592-1460
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of October 15, 1999, there were 34,178,566 shares of Common Stock, no par
value, outstanding.
<PAGE>
GSI Lumonics Inc.
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets......................................... 3
Consolidated Statements of Operations............................... 4
Consolidated Statements of Cash Flows.............................. 5
Notes to Consolidated Financial Statements......................... 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 13-19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................................... 19
Part II - Other Information............................................................... 20
Signatures................................................................................ 21
</TABLE>
2
<PAGE>
GSI Lumonics Inc. and Subsidiaries
Consolidated Balance Sheets
(in US$ thousands, except share data)
<TABLE>
<CAPTION>
October 1, Dec. 31,
1999 1998
---- ----
(unaudited) (see note 2)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................................... $ 26,674 $ 24,229
Short term investments........................................................ 5,316 8,098
Accounts receivable, less allowance of $3,231 (December 31, 1998 - $311)...... 67,137 31,673
Due from related party........................................................ 2,130 3,844
Inventories................................................................... 65,077 44,096
Deferred tax and other current assets......................................... 37,283 8,305
Current portion of swap contracts............................................. 1,247 1,076
--------------- -----------
Total current assets.................................................... 204,864 121,321
--------------- -----------
Property, plant and equipment, net of accumulated depreciation
of $63,619 (December 31, 1998 - $24,299)........................................ 50,566 32,209
Long term portion of swap contracts................................................ 623 1,076
Other assets....................................................................... 5,766 964
Intangible assets, net of amortization of $6,497 (December 31, 1998 - $2,953)...... 17,290 4,072
--------------- -----------
$ 279,109 $ 159,642
=============== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness............................................................. $ 14,584 $ 7,261
Accounts payable.............................................................. 25,746 5,605
Accrued expenses and income taxes............................................. 60,153 18,937
Current portion of deferred compensation...................................... 122 -
Current portion of long term debt............................................. 5,268 3,541
--------------- -----------
Total current liabilities............................................... 105,873 35,344
--------------- -----------
Long-term debt due after one year................................................. 1,916 3,541
Deferred compensation, less current portion........................................ 2,030 -
Commitments and contingencies (see note 10)
Stockholders' equity:
Capital stock, no par value;
issued shares of 34,175,663 (December 31, 1998 - 17,056,001)............... 222,548 138,871
Deficit....................................................................... (46,730) (9,451)
Cumulative translation adjustment............................................. (6,908) (8,663)
Unrealized gain on marketable equity securities, net.......................... 380 -
--------------- -----------
Total stockholders' equity.............................................. 169,290 120,757
--------------- -----------
$ 279,109 $ 159,642
=============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
GSI Lumonics Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(in US$ thousands, except share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- ------------------------------
October 1, September 30, October 1, September 30,
1999 1998 1999 1998
----------- -------------- ------------ --------------
(see note 2) (see note 2)
<S> <C> <C> <C> <C>
Sales:
Laser systems and components..................... 69,624 34,779 169,469 110,210
Printers......................................... 8,417 - 16,414 -
----------- ------------- ------------- -------------
Total sales................................. 78,041 34,779 185,883 110,210
----------- ------------- ------------- -------------
Cost of sales:
Laser systems and components..................... 42,726 24,893 114,754 78,314
Printers......................................... 4,827 - 9,746 -
----------- ------------- ------------- -------------
Total cost of sales......................... 47,553 24,893 124,500 78,314
----------- ------------- ------------- -------------
Gross profit:
Laser systems and components..................... 26,898 9,886 54,715 31,896
Printers......................................... 3,590 - 6,668 -
----------- ------------- ------------- -------------
Total gross profit.......................... 30,488 9,886 61,383 31,896
----------- ------------- ------------- -------------
Operating expenses:
Research and product development................. 8,104 2,805 20,024 10,038
Selling, general and administrative.............. 18,999 9,712 49,636 28,979
Acquired in-process research and development..... - - 13,000 -
Restructuring and other Charges.................. - - 19,631 2,086
----------- ------------- ------------ --------------
Total operating expenses..................... 27,103 12,517 102,291 41,103
----------- ------------- ------------ --------------
Income (loss) from operations.......................... 3,385 (2,631) (40,908) (9,207)
Interest income, net.................................. 2 350 103 1,007
Foreign exchange transaction gains (losses)............. (514) 1,417 (1,144) 662
----------- ------------- ------------ -------------
Income (loss) before income taxes....................... 2,873 (864) (41,949) (7,538)
Income taxes provision (benefit)........................ 874 (255) (4,671) (2,202)
---------- ------------- ------------ -------------
Net income (loss)..................................... $ 1,999 $ (609) $ (37,278) $ (5,336)
========== ============= ============ =============
Foreign currency translation adjustments................ 2,499 (1,200) 1,755 (3,028)
Change in unrealized gain on marketable equity
securities, net..................................... 58 - 380 -
--------- ------------- ------------- -------------
Comprehensive income (loss)............................. $ 4,556 $ (1,809) $ (35,143) $ (8,364)
========= ============= ============= =============
Net income (loss) per common share:
Basic $ 0.06 $ (0.04) $ (1.28) $ (0.31)
Diluted $ 0.06 $ (0.04) $ (1.28) $ (0.31)
========= ============= ============= =============
Weighted average common shares outstanding 34,173 17,059 29,182 17,091
========= ============= ============= =============
Weighted average common shares outstanding
and dilutive potential common shares............... 35,085 17,059 29,182 17,091
========= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
GSI Lumonics Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in US$ thousands)
<TABLE>
<CAPTION>
Nine months ended
--------------------------
October 1, September 30,
1999 1998
----------- ------------
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................................... (37,278) (5,336)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Acquired in-process research and development....................................... 13,000 -
Depreciation and Amortization...................................................... 11,114 3,858
Deferred compensation.............................................................. 30 -
Deferred income taxes.............................................................. (5,837) (882)
Unrealized currency exchange loss.................................................. 518 826
Changes in current assets and liabilities:
Accounts receivable................................................................ (2,785) 12,958
Inventories........................................................................ 11,447 (8,068)
Other current assets............................................................... (2,093) (1,636)
Accounts payable, accrued expenses, and taxes payable.............................. 8,754 (3,279)
----------- ------------
Net cash used in operating activities.................................................. (3,130) (1,559)
----------- ------------
Cash flows from investing activities:
Merger with General Scanning Inc....................................................... 1,451 -
Acquisition of Meteor Optics Inc....................................................... - (1,097)
Additions to property, plant, and equipment, net....................................... (4,467) (11,694)
Maturity of short term investments..................................................... 8,208 41,136
Purchase of short term investments..................................................... (5,316) (42,055)
Increase in other assets............................................................... (573) -
----------- ------------
Net cash used in investing activities.................................................. (697) (13,710)
----------- ------------
Cash flows from financing activities:
Proceeds (payments) of bank indebtedness and others, net............................... 2,420 (9,660)
Payments on long-term debt............................................................. (1,646) (1,174)
Proceeds from exercise of stock options................................................ 149 70
Repurchase of common shares............................................................ - (627)
----------- ------------
Net cash provided by (used in) financing activities.................................... 923 (11,391)
----------- ------------
Effect of exchange rate changes on cash and cash equivalents........................... 5,349 (4,244)
----------- ------------
Increase (decrease) in cash and cash equivalents....................................... 2,445 (30,904)
Cash and cash equivalents, beginning of period......................................... 24,229 56,828
----------- ------------
Cash and cash equivalents, end of period............................................... $ 26,674 $ 25,924
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.......................................................................... $ 798 $ 691
Income taxes...................................................................... $ 497 $ 3,005
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
GSI Lumonics Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
in U.S. dollars
1. Basis of presentation
---------------------
The unaudited interim financial statements presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and with the instructions to Form
10-Q and Regulation S-X pertaining to interim financial statements. Accordingly,
these interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position and
results of operations for the periods presented. The financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1998, and the Form S-4 registration statement filed in February 1999. The
results for the interim periods are not necessarily indicative of results to be
expected for the year or any future periods.
The consolidated financial statements include the accounts of GSI Lumonics
Inc. and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in con consolidation.
2. Merger
------
On March 22, 1999, the Company completed a merger of equals with General
Scanning Inc., Watertown, Massachusetts, a leading manufacturer of laser systems
and components, and printers. The merger transaction has been accounted for as a
purchase for accounting purposes and accordingly, the operations of General
Scanning have been included in the consolidated financial statements from the
date of merger. The aggregate purchase price of $84 million was allocated to
General Scanning net identifiable assets, in accordance with the purchase method
of accounting, as follows:
<TABLE>
<S> <C>
(in thousands)
Shares purchased (a)......................................... $ 83,074
Options purchased (b) & (c).................................. 917
---------
Total purchase price............................... $ 83,991
=========
Current assets, including cash of $4,719..................... 89,070
Fixed assets................................................. 21,546
Acquired technology (d)...................................... 13,000
Allocated to goodwill (e).................................... 3,704
Other long term assets (f)................................... 3,950
Current liabilities.......................................... (56,081)
Long term debt............................................... (28)
Deferred compensation, net of $757 current portion........... (1,365)
Transaction costs............................................ (2,805)
In-process research and development (g)...................... 13,000
---------
$ 83,991
=========
</TABLE>
(a) 17,079,475 common shares of GSI Lumonics Inc. valued at US$4.864 per share,
in exchange for all 12,679,640 thousand General Scanning outstanding shares
of common stock, on the basis of an exchange ratio of 1.347 shares of GSI
Lumonics Inc. for each one share of General Scanning common stock. The
total value assigned to these issued shares is $83,074 thousand. Issue and
registration costs of $463 thousand were charged against equity.
(b) 2,051,903 GSI Lumonics Inc. stock options valued at US$0.443 per share
option, total $909 thousand, in exchange for 1,523,314 General Scanning
outstanding stock options.
(c) 70,717 GSI Lumonics Inc. stock options valued at US$0.11 per share option,
total $8 thousand, in exchange for 52,500 General Scanning outstanding
stock warrants.
6
<PAGE>
(d) Acquired technology of $13 million is being amortized on a straight line
basis over the useful life of 60 months
(e) Goodwill arising from the transaction of $3.7 million is being amortized on
a straight-line basis over a ten year period.
(f) Other long term assets includes note receivable from Robotic Vision
Systems, Inc. (RVSI) of $2,250, 271,493 shares of RVSI common stock $764
thousand, and other deposits of $936 thousand.
(g) Acquired in-process research and development of $13 million charged against
income in 1999 results from an appraisal of General Scanning intangible
assets.
The allocation of purchase price may be subject to adjustment, as additional
information regarding preacquisition contingencies becomes available during the
year.
The following unaudited pro forma results of operations have been prepared
using the purchase method of accounting as if the merger had occurred at the
beginning of each fiscal period.
<TABLE>
<CAPTION>
(in thousands except per share amounts) Pro forma combined
Three months ended Nine months ended
Oct. 1, Sept. 30, Oct. 1, Sept. 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales.......................................... $ 78,041 $ 76,699 $ 206,342 $251,534
===================== =====================
Net income (loss).............................. $ 1,999 $(1,739) $(44,406) $ (7,334)
===================== =====================
Net income (loss) per common share:
Basic $ 0.06 $ (0.05) $ (1.30) $ (0.22)
Diluted $ 0.06 $ (0.05) $ (1.30) $ (0.22)
==================== =====================
Weighted average common shares outstanding 34,173 34,082 34,162 34,009
==================== =====================
Weighted average common shares outstanding
and dilutive potential common shares 35,085 34,082 34,162 34,009
==================== =====================
</TABLE>
3. Net income (loss) per share of common stock
-------------------------------------------
Basic net income (loss) per common share was computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. For diluted net income (loss) per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method.
Common and diluted per common shares amounts are calculated using the
following weighted average number of shares:
<TABLE>
<CAPTION>
(in thousands) Three months ended
-----------------------------
Oct. 1, Sept. 30,
1999 1998
-----------------------------
<S> <C> <C>
Weighted average common shares outstanding 34,173 17,059
Dilutive potential common shares 912 -0-
-----------------------------
Diluted common shares 35,085 17,059
=============================
Weighted options and warrants excluded from
diluted income per common share
as their effect would be anti-dilutive 1,603 1,281
=============================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
---------------------------
(in thousands) Nine months ended
---------------------------
Oct. 1, Sept. 30,
1999 1998
---------------------------
<S> <C> <C>
Weighted average common shares outstanding 29,182 17,091
Dilutive potential common shares -0- -0-
---------------------------
Diluted common shares 29,182 17,091
===========================
Weighted options and warrants excluded from
diluted income per common share
as their effect would be anti-dilutive 4,964 1,301
===========================
</TABLE>
4. Cash equivalents
----------------
Cash equivalents are highly liquid investments with original maturity dates
of less than three months.
5. Related party transactions
--------------------------
The company recorded sales revenue from Sumitomo Heavy Industries, Ltd., a
significant shareholder, of $8.4 million in the nine months ended October 1,
1999 and $12.5 million in the nine months ended September 30, 1998 at values and
normal terms approximately equivalent to third party transactions. The balance
sheet reflects receivables from Sumitomo as due from related party.
The Company has a long-term loan from Sumitomo, all of which is repayable
in Japanese 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.
6. Inventories
-----------
Inventories, which include materials, labor, and manufacturing overhead,
are stated at the lower of cost (first-in, first-out) or market. The components
of inventory are:
<TABLE>
<CAPTION>
(in thousands) Oct. 1, Dec. 31,
1999 1998
---- ----
<S> <C> C>
Materials $ 24,170 $ 9,123
Work-in-process 13,635 14,062
Finished goods 27,272 20,911
-------- --------
$ 65,077 $ 44,096
======== ========
</TABLE>
7. Comprehensive income
--------------------
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and displaying
comprehensive income and its components in a full set of general- purpose
financial statements.
The Company considers the RVSI (ROBV) common stock to be available-for-sale
and, accordingly, is recording changes in its fair market value as a component
of stockholders' equity and comprehensive income (loss) for the reporting
periods. During the three month's ended October 1, 1999 the Company sold 7,493
shares of RVSI stock for approximately $42 thousand.
8. New Accounting Pronouncement
----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value.
8
<PAGE>
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No.133 is
effective for fiscal years beginning after June 15, 2000. The Company has not
yet quantified the impact of adopting SFAS No. 133 on its financial statements
and has not determined the timing of or method of adoption of SFAS No. 133.
However, SFAS No. 133 could increase volatility in earnings and other
comprehensive income.
9. Restructuring and other charges
-------------------------------
A charge of $19.6 million was taken during the three months ended April 2,
1999 to accrue employee severance of $5.6 million, leased facility and related
costs of $4 million associated with the closure of the plant in Oxnard,
California and redundant facilities worldwide, and costs of $10 million
associated with restructuring and integration of operations as a result of the
merger. Accruals remaining as of October 1, 1999 from prior quarter
restructuring charges were $4 million for employee severance, $4 million for
leased facility costs and $5 million for merger integration costs.
10. Commitments and Contingencies
-----------------------------
Operating leases
The Company leases certain equipment and facilities under operating lease
agreements that expire through 2008. The facility leases require the Company to
pay real estate taxes and other operating costs. For the years ended December
31, 1996, 1997 and 1998, lease expense was approximately $1,787 thousand, $1,948
thousand and $2,717 thousand, respectively.
Minimum lease payments under operating leases expiring subsequent to
October 1, 1999 are:
<TABLE>
(in thousands)
<S> <C>
Remaining three months of 1999 $ 1,375
2000 5,081
2001 4,372
2002 3,697
2003 2,786
Thereafter 8,199
--------
Total minimum lease payments $ 25,510
========
</TABLE>
Litigation
A provision of $19 million was recorded during the three months ended April
2, 1999 to accrue damages and legal fees, through to appeal, relating to Electro
Scientific Industries, Inc. v. General Scanning Inc., USDC Case No.C-96-4628,
and is reflected as a reduction in net assets acquired at the time of merger. In
October 1998 the U.S. District Court for the Northern District of California
issued a decision on motions for summary judgment in an action filed against
General Scanning Inc. for alleged patent infringement concerning U.S. Patent
Nos. 5,265,114 and 5,473,624. The Court granted Electro Scientific's motions for
summary judgment on infringement and on the issue of whether Electro Scientific
committed inequitable conduct by intentionally failing to cite prior art to the
U.S. Patent Office in connection with one of its patents. The Court denied
General Scanning Inc.'s motion for summary judgment that the Electro Scientific
patents are invalid due to prior art. During March 1999, the Court granted
Electro Scientific's motion for partial summary judgment that upgrade kits, sold
by General Scanning for 1.3 micron laser wavelength memory repair, infringe the
Electro Scientific patents in suit. The referenced patents cover the use of 1.32
micron wavelength lasers in the repair of memory chips and semiconductors with
imbedded memory. In April 1999 a federal court jury issued a verdict that
Electro Scientific's patent 5,473,624 was invalid, and that Electro Scientific's
patent 5,265,114 was valid, and awarded a $13.1 million damage judgment. A
federal district court judge ruled on several post-trial matters in July 1999.
The Court refused Electro Scientific's requests to increase damages awarded by
the jury in April, and for attorney fees, but granted
9
<PAGE>
interest on the damages. The Court also affirmed the jury's decision to
invalidate one of the two patents asserted by Electro Scientific in the case.
The Company has appealed the decisions on infringement, the validity of the
second patent, which was not overturned, and the award of damages. No date has
been set for arguments.
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. The referenced patents cover the use of 1.32 micron wavelength
lasers in the trimming of certain semiconductor devices. General Scanning denied
Electro Scientific's allegations and asserted that the referenced patents were
invalid. During July 1999, a settlement agreement was reached. The terms and
conditions of the agreement are confidential. GSI Lumonics has made no payments
to Electro Scientific as part of the settlement. GSI Lumonics is not
manufacturing or offering for sale laser trimming systems incorporating the use
of 1.3 micron wavelength lasers. The litigation and its settlement have no
impact on the Company's business.
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 November 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, arising
from General Scanning Inc.'s acquisition of View in August 1996, General
Scanning Inc. agreed not to compete in the field of semiconductor
interconnection inspection. During the first six months of 1998, sales by
General Scanning Inc. of all products used in semiconductor lead interconnection
inspection which involved products relating to the alleged infringement totaled
approximately 2% of General Scanning Inc.'s total sales.
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.
General Scanning Inc., on behalf of View, appealed the injunction. Oral argument
on the appeal was held during May 1999 and the court affirmed the decision. In
settlement of separate litigation with RVSI, in June 1998, arising from the
General Scanning Inc. acquisition of View in August 1996, General Scanning Inc.
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.
GSI Lumonics believes that RVSI's claims in the above actions are without
merit and GSI Lumonics Inc. is vigorously defending these proceedings. However,
if RVSI prevails on one or more of its claims, there could be a material adverse
effect on GSI Lumonics Inc.'s business, operating results and/or financial
condition.
Other. A party has commenced legal proceedings in the United States
against a number of U.S. manufacturing companies, including companies that have
purchased systems from GSI Lumonics Inc. The plaintiff in the proceedings has
alleged that certain equipment used by these manufacturers infringes patents
claimed to be held by the claimant. While GSI Lumonics Inc. is not a defendant
in any of the proceedings, several of GSI Lumonics Inc.'s customers have
notified GSI Lumonics Inc. that, if the party successfully pursues infringement
claims against them, they may require GSI Lumonics Inc. to indemnify them to the
extent that any of their losses can be attributed to systems sold to them by GSI
Lumonics Inc.. While GSI Lumonics does not believe that the outcome of these
claims will have a material adverse effect upon GSI Lumonics, there can be no
assurance that any such claims, or any similar claims, would not have a material
adverse effect upon GSI Lumonics' financial condition or results of operations.
10
<PAGE>
11. Segment Information
-------------------
In 1999, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The new disclosure requirements
established revised standards for public companies relating to the reporting of
financial and descriptive information in financial statements about their
operating segments.
Business segment information
The Company has two reportable segments as set forth in the table below.
In classifying operational entities into a particular segment, the Company
aggregated businesses with similar economic characteristics, products and
services, production processes, customers and methods of distribution. The
accounting policies for segments are the same as the Company's accounting
policies as described in Note 1. There are no transfers between segments.
Management evaluates segment performance based on segment income (loss) from
operations before interest income and expense, foreign exchange transaction
gains (losses), certain non-recurring items such as legal expenses, and income
taxes.
<TABLE>
<CAPTION>
(in thousands) Three months ended Nine months ended
------------------------------ ---------------------------
Oct. 1, Sept. 30, Oct. 1, Sept. 30,
1999 1998 1999 1998
---- ---- ---- ----
------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers:
Laser systems and components $ 69,624 $ 34,779 $ 169,469 $ 110,210
Printers 8,417 - 16,414 -
------------------------------ ---------------------------
Total $ 78,041 $ 34,779 $ 185,883 $ 110,210
============================== ===========================
Income (loss) from operations:
Laser systems and components (1,2) $ 5,139 $ (1,768) $ (33,547) $ (6,180)
Printers 1,854 - 2,597 -
Corporate expenses (3,608) (863) (9,958) (3,027)
------------------------------ ---------------------------
Total $ 3,385 $ (2,631) $ (40,908) $ (9,207)
============================== ===========================
Total assets:
Laser systems and components $179,179 $119,362 $ 179,179 $ 119,362
Printers 11,815 - 11,815 -
Corporate assets (3) 88,115 45,632 88,115 45,632
------------------------------ ---------------------------
Total $279,109 $164,994 $ 279,109 $ 164,994
============================== ===========================
Capital expenditures:
Laser systems and components $ 1,195 $ 3,519 $ 3,000 $ 11,694
Printers 83 - 1,467 -
------------------------------ ---------------------------
Total $ 1,278 $ 3,519 $ 4,467 $ 11,694
============================== ===========================
Depreciation and amortization:
Laser systems and components $ 2,646 $ 1,414 $ 10,735 $ 3,858
Printers 196 - 379 -
------------------------------ ---------------------------
Total $ 2,842 $ 1,414 $ 11,114 $ 3,858
============================== ===========================
</TABLE>
(1) Includes $13,000 charge for acquired in-process research and development in
first quarter 1999.
(2) Includes $19,631 charges for restructuring and other charges in first
quarter 1999.
(3) Consists primarily of cash, cash equivalents, investments, deferred tax and
intangible assets.
11
<PAGE>
Geographic segment information
The Company attributes revenues to geographic areas on the basis of the
customer location invoiced. Long-lived assets are attributed to geographic areas
in which Company assets reside.
<TABLE>
<CAPTION>
(in millions) Three months ended
Oct. 1, Sept. 30,
Revenues from external customers: 1999 1998
---- ----
<S> <C> <C> <C> <C>
USA......................................... $ 40.5 52% $ 15.1 43%
Canada...................................... 4.1 5% 2.1 6%
Latin & South America....................... 0.5 1% 0.1 0%
Europe...................................... 16.8 22% 11.5 33%
Japan....................................... 10.5 13% 3.4 10%
Asia........................................ 5.6 7% 2.6 8%
======== ========
Total................................... 78.0 100% 34.8 100%
======== ========
Long lived assets:
USA......................................... $ 24.8 $ 3.9
Canada...................................... 7.4 9.5
Europe...................................... 17.9 18.3
Japan....................................... 0.1 -
Asia........................................ 0.4 0.3
======== ========
Total................................... 50.6 32.0
======== ========
</TABLE>
12. Subsequent Event
----------------
On October 4, 1999 the Company acquired 100% of LPKK, a subsidiary of
Sumitomo Heavy Industries Ltd. of Tokyo Japan for $1.4 million.
12
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations in U.S. dollars
Overview
On March 22, 1999, GSI Lumonics Inc. completed a merger of equals with General
Scanning Inc. The merger transaction has been accounted for as a purchase for
accounting purposes and accordingly, the operations of General Scanning have
been included in the consolidated financial statements only from the date of
merger.
GSI Lumonics Inc. is a leading manufacturer of laser systems and components, and
printers. The Company sells its laser systems primarily to manufacturers of
products containing advanced electronic components and circuitry. In addition,
the Company produces a line of laser subsystems and components that are used in
the Company's own systems, as well as sold to other manufacturers of laser
systems. The Company's laser system sales have been, and are expected to
continue to be, dependent upon its customers' capital expenditures which are, in
turn, affected by business cycles in the markets served by those customers. The
Company's strategy is to expand applications for its products into different and
varied markets in order to limit dependency on any one market, but it may not
always be successful in doing so.
The Company also sells printers. These products have historically been sold
primarily to manufacturers of medical equipment for patient care monitoring.
This segment of the Company's business has not experienced significant
cyclicality in the past. However, sales of certain printers used in the greeting
card industry tend to increase in the third quarter in anticipation of holiday
greeting card sales.
Because substantial portions of the Company's sales, costs of sales and other
expenses are denominated in Canadian dollars, U.K. pounds sterling, Japanese yen
and several other currencies, the Company's results of operations are subject to
the effects of exchange rate fluctuations of those currencies relative to the US
dollar. Changes in currency exchange rates may also affect the relative prices
at which the Company and its competition sell their products in the same
markets.
Results of Operations
Three months ended October 1, 1999 and September 30, 1998
Sales. Total sales were $78.0 million for the three months ended October 1,
1999, compared to $34.8 million in the three months ended September 30, 1998.
Laser systems and component sales for the three months ended October 1, 1999
increased 100% to $70 million from $35 million in the comparable period of 1998
due primarily to the merger with General Scanning Inc. Printer sales for the
three months ended October 1, 1999 are due to the merger with General Scanning
Inc. and were zero in the comparable period of 1998.
<TABLE>
<CAPTION>
(in millions) Three months ended
Oct. 1, Sept. 30,
Revenues by market: 1999 1998
---- ----
<S> <C> <C> <C> <C>
Semiconductor............................... $ 9.3 12% $ 3.7 11%
Electronics................................. 16.1 21% 7.8 23%
Automotive.................................. 3.4 4% 1.1 3%
Aerospace................................... 5.7 7% 0.8 2%
Packaging................................... 4.0 5% 3.2 9%
Emerging.................................... 3.3 4% 7.5 22%
Medical/Biotechnology....................... 14.6 19% 1.4 4%
Components.................................. 11.5 15% 1.9 5%
Parts & service............................. 10.1 13% 7.4 21%
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
------ ------
Total............................ 78.0 100% 34.8 100%
====== ======
</TABLE>
Gross profit. Total gross profit was $30 million, or 39% of sales, for the three
months ended October 1, 1999, compared to $10 million, or 28% of sales, for the
three-month period ended September 30, 1998. Laser systems and components gross
profit increased to 38% of sales in the three months ended October 1, 1999 from
28% of sales for the comparable three-month period of 1998. The increase was due
primarily to merger with General Scanning Inc., which runs a higher gross
margin, and product mix. Printers gross profit was 43% of sales in the three
months ended October 1, 1999.
Research and product development. Research and product development expenses were
$8 million, or 10% of total sales, for the three months ended October 1, 1999
compared to $3 million, or 8% of total sales, for the three months ended
September 30, 1998. The increase was due primarily to merger with General
Scanning Inc.
Selling, general and administrative. Selling, general and administrative
expenses increased to $19 million in the three months ended October 1, 1999 from
$10 million in the comparable period of 1998. This increase was due primarily to
merger with General Scanning Inc. These expenses decreased to 24% of total sales
for the three-month period ended October 1, 1999 from 28% in the comparable
period in 1998.
Restructuring charges. Accruals remaining as of October 1, 1999 from prior
quarter restructuring charges were $4 million for employee severance, $4 million
for leased facility costs and $5 million for merger integration costs.
Interest. Interest income was $0.4 million for the three month period ended
October 1, 1999 compared to $0.5 million for the comparable period of 1998.
Interest expense was $0.4 million for the three month period ended October 1,
1999 compared to $0.2 million for the comparable period of 1998. There was a net
decrease in cash and investments, resulting in less interest income, and an
increase in bank debt partially offset by a decrease in long term debt.
Foreign exchange. Foreign exchange transactions resulted in a loss of $0.5
million in the three months ended October 1, 1999 compared to a gain of $1.4
million in the comparable period of 1998. Gains and losses are incurred when the
Company's net receivables denominated in various currencies, including Canadian
dollar, Japanese yen, pounds Sterling, Deutsche marks, Euro and other European
currencies, are not fully hedged versus the US dollar.
Income tax. The income tax provision for the Company was $0.9 million for the
three months ended October 1, 1999 compared to a benefit of $0.3 million for the
three months ended September 30, 1998.
Net income (loss). Net income for the three months ended October 1, 1999 was
$2.0 million, or $0.06 per share, based upon 34.2 million common shares or
35.1million diluted shares, compared to net loss of $0.6 million, or $0.04 per
share, based upon 17.1 million common shares in the comparable three month
period of 1998.
14
<PAGE>
Nine months ended October 1, 1999 and September 30, 1998
Sales. Total sales were $186 million for the nine months ended October 1, 1999,
compared to $110 million in total sales in the nine months ended September 30,
1998. Laser systems and component sales for the nine months ended October 1,
1999 increased 54% to $169 million from $110 million in the comparable period of
1998 due primarily to the merger with General Scanning Inc. Printer sales for
the nine months ended October 1, 1999 are due to the merger with General
Scanning Inc. and were zero in the comparable period of 1998.
<TABLE>
<CAPTION>
(in millions) Nine months ended
Oct. 1, Sept. 30,
Revenues by market: 1999 1998
---- ----
<S> <C> <C> <C> <C>
Semiconductor............................... $ 22.0 12% $ 12.0 11%
Electronics................................. 41.8 23% 23.2 21%
Automotive.................................. 7.1 4% 9.1 8%
Aerospace................................... 13.7 7% 11.0 10%
Packaging................................... 9.6 5% 9.4 9%
Emerging.................................... 8.7 5% 12.6 11%
Medical/Biotechnology....................... 32.4 17% 3.6 3%
Components.................................. 23.1 12% 5.4 5%
Parts & service............................. 27.5 15% 23.9 22%
====== ======
Total................................... 185.9 100% 110.2 100%
====== ======
</TABLE>
Gross profit. Total gross profit was $61 million, or 33% of sales, for the nine
months ended October 1, 1999, compared to $32 million, or 29% of sales, for the
nine months ended September 30, 1998. Laser systems and components gross profit
increased to 32% of sales in the nine months ended October 1, 1999 from 29% of
sales for the comparable nine month period of 1998. The increase was due
primarily to merger with General Scanning Inc., which runs a higher gross
margin, and product mix. Printers gross profit was 41% of sales in the nine
months ended October 1, 1999.
Research and product development. Research and product development expenses were
$20 million, or 11% of total sales, for the nine months ended October 1, 1999
(excluding a one-time expense relating to acquired in-process research and
development associated with the merger with General Scanning) compared to $10
million, or 9% of total sales, for the nine months ended September 30, 1998.
Selling, general and administrative. Selling, general and administrative
expenses increased to $50 million in the nine months ended October 1, 1999 from
$29 million in the comparable period of 1998. This increase was due primarily to
the merger with General Scanning Inc. These expenses increased to 27% of total
sales for the nine month period ended October 1, 1999 from 26% in the comparable
period in 1998.
Restructuring, litigation settlement and other charges. A charge of $19.6
million was taken during the three months ended April 2, 1999 to accrue employee
severance of $5.6 million, leased facility and related costs of $4 million
associated with the closure of the plant in Oxnard, California and redundant
facilities worldwide, and costs of $10 million associated with restructuring and
integration of operations as a result of the merger. Accruals remaining as of
October 1, 1999 from prior quarter restructuring charges were $4 million for
employee severance, $4 million for leased facility costs and $5 million for
merger integration costs.
A provision of $19 million was recorded during the three months ended April 2,
1999 to accrue damages and legal fees, through to appeal, relating to Electro
Scientific Industries, Inc. v. General Scanning Inc., USDC Case No. C-96-4628,
and is reflected as a reduction in net assets acquired at the time of the
merger. A federal district court judge ruled on several post-trial matters in
July 1999. The Court refused ESI's requests to increase damages awarded by the
jury in April, and for attorney fees, but granted interest on the
15
<PAGE>
damages. The Court also affirmed the jury's decision to invalidate one of the
two patents asserted by ESI in the case. The company appealed the decisions on
infringement, the validity of the second patent, which was not overturned, and
the award of damages. No date has been set for arguments. The accrual remaining
as of October 1, 1999 was $18 million.
Merger expenses. Charges of $3 million during the three months ended April 2,
1999, including brokers fees and legal and accounting costs, are reflected in
the cost of acquisition. Costs spent by the Company of $463 thousand, net of tax
effects, related to issuance of common shares, have been included in equity.
Interest. Interest income was $1.0 million for the nine months ended October 1,
1999 compared to $1.8 million for the comparable period of 1998. Interest
expense was $0.9 million for the nine months ended October 1, 1999 compared to
$0.8 million for the comparable period of 1998. There was a net decrease in
cash, resulting in less interest income, and an increase in bank debt partially
offset by a decrease in long term debt.
Foreign exchange. Foreign exchange transactions resulted in a loss of $1.1
million in the nine months ended October 1, 1999 compared to a gain of $0.7
million in the comparable period of 1998. Gains and losses are incurred when the
Company's net receivables denominated in various currencies, including Canadian
dollar, Japanese yen, pounds Sterling, Deutsche marks, Euro and other European
currencies, are not fully hedged versus the US dollar.
Income tax. The income tax benefit for the Company was $4.7 million for the nine
months ended October 1, 1999 compared to a benefit of $2.2 million for the nine
months ended September 30, 1998. The low rate of recovery of 11% is a result of
a number of factors, including permanent differences between income for
accounting and income for tax purposes such as the acquired in-process research
and development expense which is not deductible for tax purposes.
Net income (loss). Net loss for the nine months ended October 1, 1999 was $37
million, or $1.28 per share based upon 29.2 million average common shares,
compared to net loss of $5.3 million, or $0.31 per share based upon 17.1 million
common shares in the comparable nine months of 1998.
Backlog. Backlog at October 1, 1999 was approximately $81 million compared to
$29 million at December 31, 1998. On a pro forma basis, as if the merger had
occurred at the beginning of the fiscal period, backlog was $59 million at
December 31, 1998.
Liquidity and Capital Resources
Cash and cash equivalents totaled $27 million on October 1, 1999 compared to $24
million on December 31, 1998. Bank indebtedness and the current portion of
long-term debt increased to $20 million on October 1, 1999 from $11 million on
December 31, 1998. The merger with General Scanning accounts for $6 million of
this increase.
During the first nine months of 1999, cash flows of $3.1 million were used in
operating activities, cash flows of $0.7 million were used in investing
activities, and financing activities provided cash flows of $0.9 million.
A net loss of $37 million in the first nine months of 1999, offset by non-cash
charges for acquired in-process research and development, depreciation,
amortization, unrealized currency exchange loss, deferred taxes and deferred
compensation totaling $19 million, and by net decrease in working capital of $15
million, resulted in $3.1 million used in operating activities.
Cash flow from investing activities was due primarily to $8.2 million maturity
of short-term investments, offset by $5.3 million in purchases, capital
expenditures of $4.5 million and increases in other assets of $0.6
16
<PAGE>
million. At the date of merger, General Scanning added $4.7 million in cash and
cash equivalents, offset by merger costs of $3.3 million.
The Company has credit facilities of approximately $39 million, which are
denominated in Canadian dollars, US dollars, Pound sterling and Japanese yen.
Borrowings under the credit facilities, of which $15 million were outstanding at
October 1, 1999, are due on demand and bear interest based on prime.
The borrowings require, among other things, the Company to maintain specified
financial ratios and conditions. As of October 1, 1999, the Company was in
breach of certain covenants and the lending institutions have provided waivers.
The Company believes that existing cash and investments, together with cash
generated by future operations and the existing credit facilities, will be
sufficient to satisfy anticipated cash needs to fund working capital and
investments in manufacturing facilities and equipment for its existing
businesses over the next twelve months. GSI Lumonics is reviewing and
restructuring its existing lines of credit to meet the needs of the merged
company. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies. The Company may require additional equity or debt financings to
fund such activities, which could result in additional dilution to the Company's
shareholders.*
Legal Proceedings
A provision of $19 million was recorded during the three months ended April 2,
1999 to accrue damages and legal fees, through to appeal, relating to Electro
Scientific Industries, Inc. v. General Scanning Inc. USDC Case No. C-96-4628 and
is reflected as a reduction in net assets acquired at the time of merger. The
company appealed the decisions on infringement, the validity of the second
patent, which was not overturned, and the award of damages. No date has been set
for arguments *
See Note 10 to the consolidated financial statements.
Year 2000
The use of computer programs written using two digits rather than four to define
the applicable year gives rise to what is commonly referred to as the Year 2000
problem. The major areas being addressed by the Company in regards to Year 2000
compliance are internal operating systems, the installed base of products at
customer sites and third party compliance issues.
The efficient operation of the Company's business is dependant, in part, on its
computer software and hardware. These systems are used in several key areas of
the Company's business, including sales, purchasing, engineering, inventory
control, manufacturing, service and financial reporting. The Company has
completed evaluation of systems to rectify Year 2000 compliance problems. Based
on present information, the Company believes its systems for operations are Year
2000 compliant.
The company also continues to assess the impact of the Year 2000 issue on the
operations of its products installed at customers. The installed base customers
that have older products that are not Year 2000 compliant have been contacted
and offered upgrade options. Many customers have responded favorably to the
service offer. The Company will continue to assist customers on Y2K related
issues as a top priority.
Finally, the Company is in the process of assessing its major suppliers' and
customers' compliance with Year 2000 issues. This will be an ongoing effort
throughout the year. The Company believes that suppliers and customers present
the area of greatest risk to the Company in part because of the Company's
limited ability to influence actions of such third parties, and in part because
of the Company's inability to estimate the level of impact of noncompliance of
third parties throughout the extended supply chain. The most
17
<PAGE>
reasonably likely worst case scenario would involve non-performance by a
supplier, which could delay production and delivery of product to customers.
Independent of issues related to Year 2000, the Company began a program to
select, acquire and install a new hardware and software platform to replace the
current operations systems which did not have the capacity to accommodate the
Company's growth plans. Recent upgrades to such systems to make them Year 2000
compliant have been made by the Company's hardware and software providers under
standard maintenance contracts at no additional cost to the Company. Because the
Company has been upgrading its operations systems to newer applications which
are Year 2000 compliant, it is anticipated that the future costs of the Year
2000 compliance for operations will not materially impact the financial results
of the Company. Separate expenditures exclusively for Year 2000 compliance have
been immaterial to date. However, the effect of third party impact cannot be
quantified at this time because the Company cannot accurately estimate the
magnitude, duration, or ultimate impact of noncompliance by suppliers, customers
and other third parties that have no direct relationship to the Company. The
Company believes that its competitors face a similar risk. Going forward the
Company will continue to make every effort to identify and minimize that risk.
Contingency plans include identifying second source suppliers for critical
components, and review of accounts receivable statements with customers and
preparing to assist customers in the event their payable systems fail.
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.*
Outlook for 1999
On March 22, 1999, GSI Lumonics Inc. completed a merger of equals with General
Scanning Inc. Integration teams continue to refine and implement plans to guide
the first 12 months' integration initiatives. 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.
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 product rationalization and production transfer. As a result of
the changes, GSI Lumonics' facility in Wilmington, Massachusetts has begun
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 end of 1999. The costs associated with
these restructuring activities were accrued in the first quarter of 1999.
GSI Lumonics has implemented 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 and related costs were accrued in the first
quarter of 1999.
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
18
<PAGE>
activities, foreign currency exchange rate fluctuations, timing and shipment of
significant orders, the risk of delays by the Company's OEM customers in
introducing their new products and market acceptance of those products
incorporating subsystems supplied by the Company, similar risks to the Company
in delays in new product introductions and market acceptance of its new
products, the level of cost-reduction efforts, the general economic environment
and other risks detailed in the Company's Form 10-K that has been filed in
connection with its 1998 fiscal year. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding GSI Lumonics' exposure to certain market risks, see
item 7A, Quantitative and Qualitative Disclosures About Market Risk in GSI
Lumonics' Annual Report on Form 10-K for the year 1998.
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.
<TABLE>
<CAPTION>
(in thousands) Oct. 1, 1999
------------
<S> <C>
Long-term debt, including current portion:
Sumitomo Heavy Industries, Ltd., Japanese yen term loans............ $ 5,618
Favorable value of swaps:
- to convert 150 million yen to U.S. $1,024, semi-annual
interest at the six-month LIBOR less 1.56%........................ 381
- to convert 225 million yen to Canadian $1,744, semi-annual
interest at the three month bankers acceptance rate less 1.62%.... 917
- to convert 225 million yen to U.S. $1,535, interest payable
semi-annually at 8.20%............................................ 572
-----------
Favorable value of swaps................................................ 1,870
-----------
Economic value.......................................................... $ 3,748
===========
</TABLE>
19
<PAGE>
GSI Lumonics Inc.
Part II. Other Information
Item 1. Changes in legal proceedings and arbitration
--------------------------------------------
A provision of $19 million was recorded during the three months ended
April 2, 1999 to accrue damages and legal fees, through to appeal,
relating to Electro Scientific Industries, Inc. v. General Scanning
Inc., USDC Case No. C-96-4628, and is reflected as a reduction in net
assets acquired at the time of the merger between the Company and
General Scanning. In October 1998 the U.S. District Court for the
Northern District of California issued a decision on motions for
summary judgment in an action filed against General Scanning Inc. for
alleged patent infringement concerning U.S. Patent Nos. 5,265,114 and
5,473,624. The Court granted Electro Scientific's motions for summary
judgment on infringement and on the issue of whether Electro
Scientific committed inequitable conduct by intentionally failing to
cite prior art to the U.S. Patent Office in connection with one of its
patents. The Court denied General Scanning Inc.'s motion for summary
judgment that the Electro Scientific patents are invalid due to prior
art. During March 1999, the Court granted Electro Scientific's motion
for partial summary judgment that upgrade kits, sold by General
Scanning for 1.3 micron laser wavelength memory repair, infringe the
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 invalid, and
that ESI's patent 5,265,114 was valid, and awarded a $13.1 million
damage judgment against General Scanning. A federal district court
judge ruled on several post-trial matters in July 1999. The Court
refused ESI's requests to increase damages awarded by the jury in
April, and for attorney fees, but granted interest on the damages. The
Court also affirmed the jury's decision to invalidate one of the two
patents asserted by ESI in the case. The Company appealed the
decisions on infringement, the validity of the second patent, which
was not overturned, and the award of damages. No date has been set for
arguments.
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. The
referenced patents cover the use of 1.32 micron wavelength lasers in
the trimming of certain semiconductor devices. General Scanning denied
Electro Scientific's allegations and asserted that the referenced
patents were invalid. During July 1999, a settlement agreement was
reached. The terms and conditions of the agreement are confidential.
GSI Lumonics has made no payments to Electro Scientific as part of the
settlement. GSI Lumonics is not manufacturing or offering for sale
laser trimming systems incorporating the use of 1.3 micron wavelength
lasers. The litigation and its settlement have no impact on the
Company's business.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
-------------
27. Financial Data Schedule.
b) Reports on Form 8-K
------------------------
None
20
<PAGE>
GSI Lumonics Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GSI Lumonics Inc.
/s/ Charles D. Winston Date: November 2, 1999
- ----------------------
Charles D. Winston
Chief Executive Officer
/s/ Desmond J. Bradley Date: November 2, 1999
- ----------------------
Desmond J. Bradley
Vice President Finance and
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-03-1999
<PERIOD-END> OCT-01-1999
<CASH> 26,674
<SECURITIES> 5,316
<RECEIVABLES> 72,498
<ALLOWANCES> 3,231
<INVENTORY> 65,077
<CURRENT-ASSETS> 204,864
<PP&E> 114,185
<DEPRECIATION> 63,619
<TOTAL-ASSETS> 279,109
<CURRENT-LIABILITIES> 105,873
<BONDS> 0
0
0
<COMMON> 222,548
<OTHER-SE> (53,258)
<TOTAL-LIABILITY-AND-EQUITY> 279,109
<SALES> 78,041
<TOTAL-REVENUES> 78,041
<CGS> 47,553
<TOTAL-COSTS> 47,553
<OTHER-EXPENSES> 27,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> 2,873
<INCOME-TAX> 874
<INCOME-CONTINUING> 1,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,999
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
