<PAGE>
Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-71449
_____________
GSI Lumonics Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
New Brunswick, Canada 38-1859358
(Jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
105 Schneider Road, Kanata, Ontario, Canada K2K 1Y3
(Address of principal executive offices) (Zip Code)
(613) 592-1460
(Registrant's telephone number, including area code)
_____________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of May 2, 2000, there were 39,265,255 shares of the Common Stock of GSI
Lumonics Inc., no par value, issued and outstanding.
1
<PAGE>
GSI LUMONICS INC.
Quarterly Report - Form 10-Q
Table of Contents
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION:.......................................................................... 3
ITEM 1. FINANCIAL STATEMENTS..................................................................... 3
CONSOLIDATED BALANCE SHEETS.............................................................. 3
CONSOLIDATED STATEMENTS OF OPERATIONS.................................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................... 5
Notes to Consolidated Financial Statements............................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 16
PART II OTHER INFORMATION............................................................................... 17
ITEM 1. CHANGES IN LEGAL PROCEEDINGS............................................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 17
Signatures .............................................................................................. 18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share amounts)
<TABLE>
<CAPTION>
March 31, Dec. 31,
2000 1999
----------- -----------
ASSETS (unaudited)
------
<S> <C> <C>
Current
Cash and cash equivalents........................................................ $ 24,514 $ 25,272
Short-term investments........................................................... - 7,342
Accounts receivable, less allowance of $2,806 (December 31, 1999-$3,197)......... 81,296 80,448
Due from related party........................................................... 2,912 3,235
Inventories (note 3)............................................................. 84,866 72,727
Deferred tax assets.............................................................. 22,499 24,473
Other current assets............................................................. 4,147 2,338
Current portion of swap contracts................................................ 1,285 1,411
--------- ---------
Total current assets......................................................... 221,519 217,246
Property, plant and equipment, net of accumulated depreciation of $27,765
(December 31, 1999 - $28,024).............................................. 45,172 45,278
Other assets........................................................................ 3,335 3,851
Goodwill and other intangible assets, net of amortization of $9,914
(December 31, 1999 - $8,689)............................................... 22,122 23,347
--------- ---------
$ 292,148 $ 289,722
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current
Bank indebtedness................................................................ $ 22,662 $ 23,100
Accounts payable................................................................. 28,406 28,094
Accrued compensation and benefits................................................ 12,923 13,709
Other accrued expenses and income taxes.......................................... 38,582 43,067
Current portion of deferred compensation......................................... 127 124
Current portion of long-term debt................................................ 5,292 5,425
--------- ---------
Total current liabilities.................................................... 107,992 113,519
Deferred income tax liability....................................................... 1,979 2,397
Deferred compensation, less current portion......................................... 2,296 2,076
--------- ---------
Total liabilities............................................................ 112,267 117,992
Commitments and contingencies (note 8)
Stockholders' equity (note 4)
Capital stock, no par value; Issued common shares of 34,942,266
(December 31, 1999 - 34,298,942)................................................. 226,148 222,865
Deficit.......................................................................... (39,454) (44,225)
Accumulated other comprehensive income........................................... (6,813) (6,910)
--------- ---------
Total stockholders' equity..................................................... 179,881 171,730
--------- ---------
$ 292,148 $ 289,722
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands of U.S. dollars, except share amounts)
<TABLE>
<CAPTION>
Three months ended
--------------------------------
March 31, April 2,
2000 1999
---- ----
(note 2)
<S> <C> <C>
Sales.................................................. $ 87,900 $ 38,594
Cost of goods sold..................................... 50,931 31,075
-------- --------
Gross profit........................................... 36,969 7,519
Operating expenses:
Research and development.......................... 8,513 3,336
Selling, general and administrative............... 20,287 10,497
Amortization of technology and other intangibles.. 1,225 317
Acquired in-process research and development...... - 14,830
Restructuring and other (note 7).................. (2,670) 19,631
-------- --------
Income (loss) from operations.......................... 9,614 (41,092)
Interest income, net.............................. 82 194
Foreign exchange transaction losses............... (2,386) (787)
-------- --------
Income (loss) before income taxes...................... 7,310 (41,685)
Income taxes provision (benefit)........................ 2,539 (4,371)
-------- --------
Net income (loss)....................................... $ 4,771 $(37,314)
======== ========
Foreign currency translation adjustments................ 97 718
Change in unrealized gain on marketable equity
securities, net................................... - (145)
-------- --------
Comprehensive income (loss)............................. $ 4,868 $(36,741)
======== ========
Net income (loss) per common share:
Basic.............................................. $ 0.14 $ (1.94)
Diluted............................................ $ 0.13 $ (1.94)
Weighted average common shares outstanding (000's)...... 34,544 19,204
Weighted average common shares outstanding and dilutive
potential common shares (000's).................... 36,645 19,204
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Three months ended
--------------------------------
March 31, April 2,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 4,771 $ (37,314)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Acquired in-process research and development................ - 14,830
Depreciation and amortization............................... 3,263 5,064
Deferred compensation....................................... 223 65
Deferred income taxes....................................... 1,574 (4,009)
Changes in current assets and liabilities:
Accounts Receivable......................................... (1,958) 6,414
Inventories................................................. (12,869) 7,466
Other current assets........................................ (1,885) (354)
Accounts payable, accrued expenses, and taxes payable....... (2,460) 9,650
-------- ---------
Net cash (used in) provided by operating activities.............. (9,341) 1,812
-------- ---------
Cash flows from investing activities:
Merger with General Scanning Inc. (note 2).................. - 1,451
Additions to property, plant and equipment, net............. (1,915) (1,043)
Maturity of short-term investments.......................... 7,342 8,208
Decrease in other assets.................................... 431 249
-------- ---------
Cash provided by investing activities....................... 5,858 8,865
-------- ---------
Cash flows from financing activities:
Proceeds (payments) of bank indebtedness, net............... (55) 2,017
Payments on long-term debt.................................. - (3)
Issue of share capital (net of issue costs)................. 3,283 114
-------- ---------
Cash provided by financing activities............................ 3,228 2,128
Effect of exchange rates on cash and cash equivalents............ (503) 389
-------- ---------
Increase (decrease) in cash and cash equivalents................. (758) 13,194
Cash and cash equivalents, beginning of period................... 25,272 24,229
-------- --------
Cash and cash equivalents, end of period......................... $ 24,514 $ 37,423
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 115 $ 85
Income taxes................................................ $ 1,200 $ 432
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
GSI Lumonics Inc.
Notes to Consolidated Financial Statements (unaudited)
in U.S. dollars
1. Basis of presentation
These unaudited interim consolidated financial statements have been
prepared by the Company in United States (U.S.) dollars and in accordance with
accounting principles generally accepted in the United States for interim
financial statements and with the instructions to Form 10-Q and Regulation S-X
pertaining to interim financial statements. Accordingly, these interim 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 consolidated financial statements
include the accounts of GSI Lumonics Inc. and its wholly-owned subsidiaries (the
"Company"). Intercompany transactions and balances have been eliminated. The
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1999 and the Form S-3 registration statement filed
in April 2000. The results for interim periods are not necessarily indicative of
results to be expected for the year or any future periods.
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. Immediately following the merger each group of
shareholders owned approximately 50% of the outstanding shares of the Company.
Cash flow impact of $1.5 million from the GSI merger is cash acquired of $4.7
million, less merger costs of $3.2 million. The Company recorded a one-time
charge of $14.8 million in 1999 for purchased in-process research and
development related to thirty in-process projects.
The merger transaction has been accounted for as a purchase and
accordingly, the operations of General Scanning have been included in the
consolidated financial statements from the date of merger. The reported results
for the first 11 weeks of 1999 are those of Lumonics only. Therefore, the
results of the three months ended April 2, 1999 do not provide a meaningful
basis for comparison with 2000. The following pro forma results of operations
have been prepared using the purchase method of accounting as if the merger had
occurred prior to the beginning of 1999.
<TABLE>
<CAPTION>
Pro forma combined Three months ended
(in thousands except per share amounts) April 2, 1999
-------------
<S> <C>
Sales.............................................. $ 59,053
=========
Net loss........................................... $ (44,865)
==========
Net loss per common share:
Basic......................................... $ (1.31)
Diluted....................................... $ (1.31)
Weighted average common shares outstanding......... 34,145
Weighted average common shares outstanding and
dilutive potential common shares................... 34,145
</TABLE>
6
<PAGE>
3. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following:
(in thousands) March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials....................................... $ 33,959 $ 26,011
Work-in-process..................................... 21,033 17,005
Finished goods...................................... 29,874 29,711
-------- --------
Total inventories.............................. $ 84,866 $ 72,727
======== ========
</TABLE>
4. Stockholders' Equity
Capital stock
The authorized capital of the Company consists of an unlimited number of
common shares without nominal or par value.
Accumulated other comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130") effective January 1, 1998. SFAS
No. 130 requires that all non-owner changes in equity, such as the change in
foreign currency translation adjustments, be separately classified in the
financial statements and that the accumulated balance of other comprehensive
income be reported separately from deficit in the equity section of the balance
sheet. Any unrealized holding gains and losses on securities held
available-for-sale are excluded from earnings and reported as a component of
accumulated other comprehensive income until realized, in accordance with SFAS
115.
Net income (loss) per common share
Basic income (loss) per common share was computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. For diluted income (loss) per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method.
Common and common equivalent share disclosures are:
<TABLE>
<CAPTION>
(in thousands) Three months ended
-----------------------
March 31, April 2,
2000 1999
---- ----
<S> <C> <C>
Weighted average common shares outstanding..... 34,544 19,204
Dilutive potential common shares............... 2,101 -
------- -------
Diluted common shares.......................... 36,645 19,204
======= =======
Options and warrants excluded from
diluted income per common share
as their effect would be anti-dilutive.... 170 2,317
======= =======
</TABLE>
5. Related Party Transactions
In addition to matters discussed elsewhere, the Company had the following
transactions with related parties. The Company recorded sales revenue from
Sumitomo Heavy Industries, Ltd., a significant shareholder, of $4.5 million in
the three months ended March 31, 2000 and $3.4 million in the three months ended
April 2, 1999 at amounts and terms approximately equivalent to third party
transactions. Transactions with Sumitomo are at normal trade terms. The balance
sheet reflects receivables from Sumitomo as due from related party.
7
<PAGE>
6. Financial instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. The Company is in the process of
quantifying the impacts of adopting SFAS 133 on its financial statements and has
not determined the timing of or method of adoption of SFAS 133.
The Company does not actively trade derivative financial instruments but
uses them to manage foreign currency and interest rate positions associated with
its debt instruments. The terms of these derivative contracts match the terms of
the underlying debt instruments and are generally used to reduce financing
costs. The Company currently has three such contracts outstanding, two of which
convert yen denominated debt to U.S. dollar denominated debt and one contract
which converts a yen denominated debt into Canadian dollars.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the year-end fair value of significant financial
instruments, including debt. The Company believes, based upon current terms,
that the carrying value of its debt approximates its fair value.
<TABLE>
<CAPTION>
(in thousands) March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Long term debt, including current portion:
Sumitomo Heavy Industries, Ltd., Japanese yen term loans.............. $ 3,789 $ 3,917
Favorable value of swaps:
To convert 100 million yen to U.S. $683, semi-annual interest
at the six-month LIBOR less 1.56%..................................... 264 296
To convert 150 million yen to Canadian $1,163, semi-annual
interest at the three month bankers acceptance rate less 1.62%........ 623 669
To convert 150 million yen to U.S. $1,023, interest payable
semi-annually at 8.20%................................................ 398 446
------- -------
Favorable value of swaps.................................................. 1,285 1,411
------- -------
Economic value............................................................ $ 2,504 $ 2,506
======= =======
</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.
As of March 31, 2000 and December 31, 1999 the Company had no foreign
exchange forward contracts.
8
<PAGE>
7. Restructuring and other
During the three months ended March 31, 2000 the Company recorded a benefit
of $2.67 million for licensing some of the Company's technology.
A charge of $19.6 million was taken during the three months ended April 2,
1999 to accrue employee severance of $5.6 million, leased facility and related
costs of $4 million associated with the closure of the plant in Oxnard,
California and redundant facilities worldwide, and costs of $10 million
associated with restructuring and integration of operations as a result of the
merger. The Oxnard manufacturing operations shutdown was completed during
December 1999. Other integration activities included exit costs for some product
lines, reducing redundant resources worldwide, and abandoning redundant sales
and service facilities. During the three months ended March 31, 2000, severance
was paid to 20 employees in various locations worldwide. The following table
summarizes activity during the three months ended March 31, 2000.
<TABLE>
<CAPTION>
(in millions) Total Severance Facilities Integration
----- --------- ---------- -----------
<S> <C> <C> <C> <C>
Accrual remaining December 31, 1999...... $ 10.1 $ 2.8 $ 3.9 $ 3.4
Actions during Q1 2000................... (1.8) (0.9) (0.5) (0.4)
----------- ----------- ----------- ------------
Accrual remaining March 31, 2000......... $ 8.3 $ 1.9 $ 3.4 $ 3.0
=========== =========== =========== ============
</TABLE>
The remaining accrual is for further reduction of redundant resources
worldwide, including severance for approximately 140 employees. It is expected
that most actions will be completed by end of 2000, but certain leased facility
costs will take longer to resolve due to the nature of the lease commitments.
8. Commitments and Contingencies
Operating leases
The Company leases certain equipment and facilities under operating lease
agreements that expire through 2013. The facility leases require the Company to
pay real estate taxes and other operating costs. For the year ended December 31,
1999 lease expense was approximately $4,666 thousand (1998 - $1,923 thousand).
Minimum lease payments under operating leases expiring subsequent to March
31, 2000 are:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Remaining nine months of 2000.................... $ 3,637
2001............................................. 4,041
2002............................................. 3,327
2003............................................. 2,595
2004............................................. 2,535
Thereafter....................................... 7,602
--------
Total minimum lease payments..................... $ 23,737
========
</TABLE>
Legal proceedings and disputes
Robotic Vision Systems, Inc. v. View Engineering, Inc., USDC Case No. 95-7441.
This case involves a complaint by Robotic Vision Systems, Inc. alleging
infringement of a patent by View Engineering, Inc. a wholly owned subsidiary.
The matter was tried before a judge sitting in the United States District Court
for the Central District of California in November 1999. Robotic Vision alleged
infringement relating to lead inspection machines formerly sold by View
Engineering and sought damages of $60.5 million. In March 2000, the Court found
that Robotic Vision's patent was invalid. Robotic Vision may appeal the Court's
decision.
GSI Lumonics Inc. v. BioDiscovery, Inc. On December 10, 1999 GSI Lumonics Inc.
filed suit in the United States District Court for the District of Massachusetts
seeking a declaration that GSI Lumonics' QuantArray Microarray Analysis Software
does not infringe any copyright owned by BioDiscovery, Inc. or its president.
BioDiscovery, Inc. is a manufacturer of microarray quantification software under
the name ImaGene(R). GSI Lumonics previously distributed ImaGene(R) software
under a non-exclusive arrangement with BioDiscovery, but subsequently developed
9
<PAGE>
its own software when BioDiscovery refused to develop necessary enhancements to
stay abreast of industry trends, especially in the field of multi-channel
scanning. On December 21, 1999, BioDiscovery's president responded to the GSI
Lumonics' declaratory judgement action by filing a separate suit in the United
States District Court for the Southern District of California, alleging that GSI
Lumonics reverse engineered software and also sued for copyright infringement.
In the matter before the United States District Court for the District of
Massachusetts, the court denied BioDiscovery's president's motion to dismiss and
scheduled the trial for May 2000. During April 2000, BioDiscovery and its
president abandoned all claims that GSI Lumonics' QuantArray Microarray Analysis
Software infringes on any copyright owned or controlled by them, and
BioDiscovery's president consented to entry of judgment in GSI Lumonics' favor
in the declaratory judgement action in the United States District Court for the
District of Massachusetts. GSI Lumonics has applied to the California court to
seek the prompt dismissal of the California action.
Electro Scientific Industries, Inc. V. GSI Lumonics, Inc. On March 16, 2000,
Electro Scientific Industries, Inc. filed an action for patent infringement in
the United States District Court for the Central District of California against
the Company and Dynamic Details Inc., an unrelated party that is one of the
Company's customers. Electro Scientific alleges that the Company offers to sell
and import into the United States our GS-600 high speed laser drilling system
and that Dynamic Details possesses and uses a GS-600 System. It further alleges
that Dynamic Details' use of the GS-600 laser system infringes on Electro
Scientific's U.S. patent no.5,847,960 and that the Company has actively induced
the infringement of, and contributorily infringed on, the patent. Electro
Scientific seeks an injunction, unspecified damages, trebling of those damages,
and attorney fees. The Company intends to vigorously defend this claim and,
based on its investigation of the patent to date, it believes that it will
prevail.
Electro Scientific Industries, Inc. V. GSI Lumonics, Inc. In September 1998, the
United States District Court for the Northern District of California granted
Electro Scientific's motions for summary judgment against General Scanning in
this case on a claim of patent infringement and on the issue of whether Electro
Scientific committed inequitable conduct by intentionally failing to cite prior
art to the U.S. Patent Office in connection with one of its patents. The Court
denied General Scanning Inc.'s motion for summary judgment that the Electro
Scientific patents are invalid due to prior art. During March 1999, the Court
granted Electro Scientific's motion for partial summary judgment that upgrade
kits, sold by General Scanning for 1.3 micron laser wavelength memory repair,
infringe the Electro Scientific patents in suit. In April 1999 a federal court
jury issued a verdict that Electro Scientific's patent 5,473,624 was invalid,
and that Electro Scientific's patent 5,265,114 was valid, and awarded a $13.1
million damage judgment against the Company. In July 1999, the Court refused
Electro Scientific's requests to increase damages awarded by the jury in April,
and for attorney fees, but granted interest on the damages. The Company recorded
a provision during the three months ended April 2, 1999 of $19 million to
reflect the amount of the damages award plus accrued interest and related costs.
The Court also affirmed the jury's decision to invalidate one of the two patents
asserted by Electro Scientific in the case. The Company has appealed the
decisions on infringement, the validity of the second patent and the award of
damages. The Company was required to post an unsecured bond with the court in
order to proceed with the appeal. No date has been set for arguments.
GSI Lumonics believes that Robotic Vision's and Electro Scientific's
claims in the above actions are without merit and GSI Lumonics is vigorously
defending these proceedings. However, if the Company were to lose on one or more
of the claims and damages are awarded, there could be a material adverse effect
on GSI Lumonics' operating results and/or financial condition. The outcome is
not determinable at this time.
Other. As the Company has disclosed since 1994, a party has commenced legal
proceedings in the United States against a number of U.S. manufacturing
companies, including companies that have purchased systems from GSI Lumonics
Inc. The plaintiff in the proceedings has alleged that certain equipment used by
these manufacturers infringes patents claimed to be held by the plaintiff. While
GSI Lumonics Inc. is not a defendant in any of the proceedings, several of GSI
Lumonics Inc.'s customers have notified GSI Lumonics Inc. that, if the party
successfully pursues infringement claims against them, they may require GSI
Lumonics Inc. to indemnify them to the extent that any of their losses can be
attributed to systems sold to them by GSI Lumonics Inc.. 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>
9. Segment Information
GSI Lumonics Inc. designs, develops, manufactures and markets laser-based
advanced manufacturing systems and components. The laser systems and components
are used in highly automated environments for applications such as cutting,
drilling, welding, marking, micro machining, inspection and coding a wide range
of products and materials in the automotive, electronics, semiconductor,
packaging, medical and aerospace industries. The Company operates in one
reportable segment. The Company's principal markets are in the United States,
Canada, Europe, Japan and Asia-Pacific.
Geographic segment information
The Company attributes revenues to geographic areas on the basis of the
customer location. Long-lived assets are attributed to geographic areas in which
Company assets reside.
<TABLE>
<CAPTION>
(in millions) Three months ended
---------------------------------------------
Revenues from external customers: March 31, 2000 April 2, 1999
----------------- ------------------
<S> <C> <C> <C> <C>
USA........................... $ 42.6 49% $ 16.1 42%
Canada........................ 3.9 4% 2.5 6%
Europe........................ 23.2 27% 11.9 31%
Japan......................... 10.8 12% 5.2 13%
Asia-Pacific, other........... 7.3 8% 2.5 7%
Latin and South America....... 0.1 0% 0.4 1%
------- ------- ------- -------
Total.................... $ 87.9 100% $ 38.6 100%
======= =======
Long-lived assets:
US.............................. $ 41.5 $ 42.5
Canada.......................... 7.6 9.7
Europe.......................... 17.1 20.0
Japan........................... 0.8 0.1
Asia-Pacific, other............. 0.3 0.5
------- -------
Total...................... $ 67.3 $ 72.8
======= =======
</TABLE>
10. Subsequent Events
During April 2000, BioDiscovery and its founder, Soheil Shams abandoned
all claims that GSI Lumonics' QuantArray Microarray Analysis Software infringes
on any copyright owned or controlled by them, and Shams consented to entry of
judgement in GSI Lumonics' favor in the declaratory judgement action in the
United States District Court for the District of Massachusetts. (See Note 8)
In April 2000 the Company offered and sold 4,300,000 shares of Common
Stock at a price to the public of $17 per share, for gross proceeds of $73.1
million.
In April 2000 the Company sold the operating assets of its View
Engineering metrology product line for $4.4 million cash.
In April 2000 the Company sold the operating assets of its Phoenix
operations at terms and conditions that are to remain confidential and are not
material to GSI Lumonics.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read this discussion together with the consolidated financial
statements and other financial information included in this report. This report
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in the forward-looking
statements. Please see the "Special Note Regarding Forward-Looking Statements"
elsewhere in this report.
Overview
We design, develop, manufacture and market laser-based advanced
manufacturing systems and components for a wide range of applications, including
cutting, welding, drilling, marking, micro-machining, inspection, and optical
detection and transmission. Markets for these products include the
semiconductor, electronics, automotive, medical/biotechnology and
telecommunications industries. In addition, we sell to other markets such as the
aerospace and packaging industries. Our systems sales depend on our customers'
capital expenditures, which are affected by business cycles in the markets they
serve.
Results of Operations for Three Months Ended March 31, 2000
The following table presents unaudited quarterly results of operations as
a percentage of sales. We believe this information is helpful in isolating
ongoing trends in our business from the effects of the merger. This information
has been presented on the same basis as the consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended
-----------------------
March 31, April 2,
2000 1999/(1)/
---------- -----------
<S> <C> <C>
Sales................................................. 100.0% 100.0%
Cost of goods sold.................................... 57.9 80.5
Gross profit.......................................... 42.1 19.5
Research and development.............................. 9.7 8.6
Selling, general and administrative................... 23.1 27.3
Amortization of technology and other intangibles...... 1.4 0.8
Acquired in-process research and development.......... -- 38.4
Restructuring and other............................... (3.0) 50.9
-------- --------
Income (loss) from operations......................... 10.9 (106.5)
Interest income, net.................................. 0.1 0.5
Foreign exchange transaction (losses)................. (2.7) (2.0)
-------- --------
Income (loss) before income taxes..................... 8.3 (108.0)
Income tax provision (benefit)........................ 2.9 (11.3)
-------- -------
Net income (loss)..................................... 5.4% (96.7)%
======== =======
</TABLE>
(1) Includes General Scanning from March 22, 1999, the date of the merger of
General Scanning and Lumonics.
Our sales were $87.9 million in the first quarter of 2000, up 49% compared
to the first quarter of 1999 on a pro forma basis as if the merger had occurred
at the beginning of 1999. Generally, our sales are lower in the first quarter
than preceding fourth quarter. Revenues from operations for any quarter are not
necessarily indicative of the results to be expected for the entire fiscal year
or for any future period. Our quarterly operating results are subject to
fluctuation due to a variety of factors, some of which are outside of our
control. Accordingly, you should not rely on our results for any past quarter as
an indication of future performance.
12
<PAGE>
Sales by Region. We distribute our systems and services via our global
sales and service network and through third-party distributors and agents. Our
sales territories are divided into the following regions: the United States;
Canada; Europe, consisting of Europe, the Middle East and Africa; Japan; Asia-
Pacific, consisting of ASEAN countries, China and other Asia-Pacific countries;
and Latin and South America. See note 9 to the financial statements for a table
of sales by region.
Sales to Japan grew 14% in the three months ended March 31, 2000 compared
to the prior quarter ended December 31, 1999. Sales to Asia-Pacific region in
the three months ended March 31, 2000 grew 50% compared to the prior quarter.
Beginning in 1999, financial conditions in Japan and the Asia-Pacific region
began to improve. Sales to Japan and the Asia-Pacific region had been impacted
by the financial crisis that occurred there in the fall of 1997 and the effects
that extended into 1999.
Sales to Europe grew 30% in the three months ended March 31, 2000 compared
to the prior quarter. The growth in Japan, Asia-Pacific and Europe were offset
by decreases in North America versus prior quarter.
<TABLE>
<CAPTION>
(in millions) Three months ended
----------------------------------------------------------------
March 31, 2000 December 31, 1999 April 2, 1999/(1)/
----------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Quarterly revenues by market:
Semiconductor.......................... $ 13.3 15% $ 12.5 14% $ 3.7 10%
Electronics............................ 24.3 28% 26.1 29% 10.0 26%
Automotive............................. 3.9 4% 4.9 6% 1.6 4%
Components............................. 9.8 11% 10.3 12% 3.7 10%
Other.................................. 24.3 28% 23.1 26% 11.0 28%
Parts and services..................... 12.3 14% 11.8 13% 8.6 22%
------- ------- ------- ------- ------- -------
Total........................... $ 87.9 100% $ 88.7 100% $ 38.6 100%
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes General Scanning from March 22, 1999, the date of the merger of
General Scanning and Lumonics.
Sales by Market. Our results of operations are affected by external
factors that impact the markets in which we compete.
Sales to the semiconductor market continued to increase in the three
months ended March 31, 2000. After severe recession in 1997 and 1998, the
semiconductor equipment industry began to recover in 1999. Activity increased in
the front end of the fabrication process resulting in an increase in orders for
wafer marking.
We continued to experience strong demand in the electronics market due
primarily to demand for process systems for the printed circuit industry and
increased demand for trim and test systems. Sales to the electronics market in
the three months ended March 31, 2000 were down slightly compared to the three
months ended December 31, 1999 due to normal seasonality.
Sales to the automotive market continued to represent a small percentage
of our business, but have grown significantly over prior year.
In total, sales to the other markets increased $1.2 million from the prior
quarter. Increases on sales to the packaging and aerospace markets were offset
by reductions in the medical/biotechnology market.
Parts and service sales during the three months ended March 31, 2000
continued to grow, due to customers' increased utilization of existing installed
systems, as well as the improvement of parts and service support for the former
General Scanning systems and components.
Backlog. We define backlog as unconditional purchase orders or other
contractual agreements for products for which customers have requested delivery
within the next twelve months. Backlog was approximately $87 million on March
31, 2000 compared to $83 million on December 31, 1999 and $68 million on April
2, 1999.
13
<PAGE>
Gross Profit Margin. Gross profit margin of 42.1% in the three months ended
March 31, 2000 compared to gross profit margin of 38.8% in the fourth quarter of
1999 and 19.5% in first quarter of 1999 is due to increased sales of higher
margin products, consolidation of manufacturing operations and reduced warranty
expenses.
Research and Development Expenses. Research and development expenses, net
of government assistance, for the three months ended March 31, 2000 were 9.7% of
sales or $8.5 million compared with 9.8% of sales or $8.7 million in the three
months ended December 31, 1999 and 8.6% of sales or $3.3 million in the three
months ended April 2, 1999 (excluding the merger related $14.8 million in-
process research and development charge). Development activities focused on
products for our core targets in the semiconductor, electronics and automotive
markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 23.1% of sales or $20.3 million in the three months
ended March 31, 2000, compared with 20.2% of sales in the three months ended
December 31, 1999 and 27.3% of sales in the three months ended April 2, 1999.
The increase versus prior quarter is due to the full quarter effect of a
distributor acquired in Japan during the prior quarter, and increased third
party commissions.
Amortization of Technology and Other Intangibles. Amortization of
technology and other intangibles was 1.4% of sales or $1.2 million primarily as
a result of amortizing intangible assets resulting from the merger.
Restructuring and Other Charges. During the three months ended March 31,
2000 the Company recorded a benefit of $2.67 million received for licensing some
of the Company's technology. A charge of $19.6 million was taken during the
three months ended April 2, 1999 to accrue for employee severance, leased
facility and related costs associated with the closure of the plant in Oxnard,
California and other facilities worldwide. These costs resulted from
restructuring and integration of operations following the merger. The Oxnard
manufacturing operations shut down was completed during December 1999. Other
integration activities included exit costs for some product lines, reducing
redundant resources worldwide, and abandoning redundant sales and service
facilities. The remaining accrual is $8.3 million at March 31, 2000 (see Note 7
to the financial statements).
Interest Income. Net interest income was $0.1 million in the three months
ended March 31, 2000, compared to nil in the three months ended December 31,
1999 and $0.2 million in the three months ended April 2, 1999.
Income Taxes. The effective tax rate was 34.7% for the three months ended
March 31, 2000.
Net Income (Loss). Net income for the three months ended March 31, 2000 was
$4.8 million, or $0.14 per share based upon 34.5 million average common shares,
and $0.13 per share based on 36.6 million diluted shares. In April 2000 we
offered and sold 4.3 million common shares in a public offering.
14
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents totaled $24.5 million on March 31, 2000 compared
to $25.3 million at December 31, 1999. Bank debt and the current portion of
long-term debt was $28.1 million on March 31, 2000 compared to $28.6 million at
December 31, 1999. In April 2000 the Company offered and sold 4,300,000 shares
of Common Stock at a price to the public of $17 per share, for gross proceeds of
$73.1 million.
During the three months ended March 31, 2000, we used $9.3 million in
operating activities. Net income, after adjustment for non-cash items, provided
cash of $9.8 million, offset by $19.2 million of increases in accounts
receivable, inventory and other current assets, and reductions in current
liabilities. In the first quarter of 1999 operations provided $1.8 million.
Cash flow provided by investing activities was $5.9 million during the
three months ended March 31, 2000, including $7.3 million maturities of short-
term investments. In the first quarter of 1999, investing activities provided
$8.9 million.
Cash flow provided by financing activities was $3.2 million for the three
months ended March 31, 2000, primarily stock option exercises. In the first
quarter of 1999, financing provided $2.1 million.
We have credit facilities of approximately $40 million denominated in
Canadian dollars, U.S. dollars, British pounds and Japanese yen. Actual bank
indebtedness, of which $22.7 million was outstanding at March 31, 2000, is due
on demand and bears interest based on prime. Accounts receivable and inventories
have been pledged as collateral for the bank indebtedness under general security
agreements. The borrowings require us to maintain specified financial ratios and
conditions. We are currently in compliance with those ratios and conditions.
We believe that existing cash balances, together with cash generated from
operations, available bank lines of credit, and net proceeds of the stock
offering completed in April 2000, will be sufficient to satisfy anticipated cash
needs to fund working capital and investments in facilities and equipment for
the next two years. The Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products or
technologies. The Company may require additional equity or debt financing to
fund such activities, which could result in additional dilution to the Company's
shareholders.
Currency Exchange Matters
We have Substantial sales and expenses in currencies other than U.S.
dollars. As a result we have exposure to foreign exchange fluctuations, which
may be material.
Special Note Regarding Forward-Looking Statements
Certain statements in this report on Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance or achievements, expressed or implied by
such forward-looking statements. In making these forward-looking statements,
which are identified by words such as "will", "expects", "intends",
"anticipates" and similar expressions, the Company claims the protection of the
safe-harbor for forward-looking statements contained in the Reform Act. The
Company does not assume any obligation to update these forward-looking
statements to reflect actual results, changes in assumptions, or changes in
other factors affecting such forward-looking statements.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to market risk associated with changes in
interest rates relates primarily to our debt obligations and short-term
investments. We do not use derivative financial instruments in our investment
portfolio. We do not actively trade derivative financial instruments but may use
them to manage interest rate positions associated with our debt instruments. We
currently have three such contracts outstanding, two of which convert yen
denominated interest on long term debt into U.S. dollar denominated interest and
one contract which converts yen denominated interest on long term debt into
Canadian dollar denominated interest.
Credit Risk. There is no concentration of credit risk related to our position in
trade accounts receivable other than the amount due from Sumitomo. Credit risk,
with respect to trade receivables, is minimized because of the diversification
of our operations, as well as our large customer base and its geographical
dispersion. We are exposed to credit-related losses with respect to the positive
fair value of our swap contracts described below in the event of non-performance
by the two banks acting as counterparties to the swap contracts. We do not
expect either counterparty to fail to meet its obligations.
Foreign Currency Risk. We have a foreign currency hedging program using currency
forwards and currency options to hedge exposure to foreign currencies. The goal
of the hedging program is to manage risk associated with fluctuations in the
value of the foreign currency. We do not currently use currency forwards or
currency options for trading purposes. We currently have three such contracts
outstanding, two of which convert yen denominated obligations into U.S. dollar
obligations and one contract which converts yen denominated obligations into
Canadian dollar obligations.
See Note 6 to the financial statements.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. CHANGES IN LEGAL PROCEEDINGS
Robotic Vision Systems, Inc. v. View Engineering, Inc., USDC Case No.
95-7441. This case involves a complaint by Robotic Vision Systems,
Inc. alleging infringement of a patent by View Engineering, Inc. a
wholly owned subsidiary. The matter was tried before a judge sitting
in the United States District Court for the Central District of
California in November 1999. Robotic Vision alleged infringement
relating to lead inspection machines formerly sold by View
Engineering and sought damages of $60.5 million. In March 2000, the
Court found that Robotic Vision's patent was invalid. Robotic Vision
may appeal the Court's decision.
GSI Lumonics Inc. v. BioDiscovery, Inc. On December 10, 1999 GSI
Lumonics Inc. filed suit in the United States District Court for the
District of Massachusetts seeking a declaration that GSI Lumonics'
QuantArray Microarray Analysis Software does not infringe any
copyright owned by BioDiscovery, Inc. or its president. BioDiscovery,
Inc. is a manufacturer of microarray quantification software under
the name ImaGene(R). GSI Lumonics previously distributed ImaGene(R)
software under a non-exclusive arrangement with BioDiscovery, but
subsequently developed its own software when BioDiscovery refused to
develop necessary enhancements to stay abreast of industry trends,
especially in the field of multi-channel scanning. On December 21,
1999, BioDiscovery's president responded to the GSI Lumonics'
declaratory judgement action by filing a separate suit in the United
States District Court for the Southern District of California,
alleging that GSI Lumonics reverse engineered software and also sued
for copyright infringement. In the matter before the United States
District Court for the District of Massachusetts, the court denied
BioDiscovery's president's motion to dismiss and scheduled the trial
for May 2000. During April 2000, BioDiscovery and its president
abandoned all claims that GSI Lumonics' QuantArray Microarray
Analysis Software infringes on any copyright owned or controlled by
them, and BioDiscovery's president consented to entry of judgement in
GSI Lumonics' favor in the declaratory judgement action in the United
States District Court for the District of Massachusetts. GSI Lumonics
has applied to the California court to seek the prompt dismissal of
the California action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) List of Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27. Financial Data Schedule
b) Reports on Form 8-K
On March 9, 2000 we filed a Current Report on Form 8-K relating to a
private ruling we received from the Internal Revenue Service
concerning the taxability of the merger transaction for General
Scanning Inc. shareholders.
17
<PAGE>
GSI Lumonics Inc.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, GSI Lumonics Inc., has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GSI Lumonics Inc.
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------- ---------------------------------------------- ----------------------
<S> <C> <C>
/s/ CHARLES D. WINSTON Director and Chief Executive Officer May 3, 2000
- ----------------------
Charles D. Winston (Principal Executive Officer)
/s/ DESMOND J. BRADLEY Vice President Finance and Chief Financial May 3, 2000
- ----------------------
Desmond J. Bradley Officer (Principal Financial and Accounting
</TABLE>
Officer)
18
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,514
<SECURITIES> 0
<RECEIVABLES> 87,014
<ALLOWANCES> 2,806
<INVENTORY> 84,866
<CURRENT-ASSETS> 221,519
<PP&E> 72,937
<DEPRECIATION> 27,765
<TOTAL-ASSETS> 292,148
<CURRENT-LIABILITIES> 107,992
<BONDS> 0
0
0
<COMMON> 226,148
<OTHER-SE> (46,267)
<TOTAL-LIABILITY-AND-EQUITY> 292,148
<SALES> 87,900
<TOTAL-REVENUES> 87,900
<CGS> 50,931
<TOTAL-COSTS> 50,931
<OTHER-EXPENSES> 29,741
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 7,310
<INCOME-TAX> 2,539
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<EPS-DILUTED> 0.13
</TABLE>
