-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QFf3azb99kAhytfkEPEczzKHRbHL/XT4ZBxinda8xHq20xkd7qu6KiHqNn+hrsmz 93eGyqm+6iNAxQXzzLLsDg== 0000927016-00-000953.txt : 20000323 0000927016-00-000953.hdr.sgml : 20000323 ACCESSION NUMBER: 0000927016-00-000953 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GSI LUMONICS INC CENTRAL INDEX KEY: 0001076930 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 381859358 STATE OF INCORPORATION: A3 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25705 FILM NUMBER: 575079 BUSINESS ADDRESS: STREET 1: 105 SCHNEIDER RD KANATA STREET 2: ONTARIO CANADA CITY: K2K 1Y3 MAIL ADDRESS: STREET 1: 105 SCHNEIDER RD KANATA STREET 2: ONTARIO CANADA CITY: K2K 1Y3 FORMER COMPANY: FORMER CONFORMED NAME: GSI LUMONICS DATE OF NAME CHANGE: 19990331 FORMER COMPANY: FORMER CONFORMED NAME: LUMONICS INC DATE OF NAME CHANGE: 19990115 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 333-71449 GSI Lumonics Inc. (Exact name of registrant as specified in its charter) NEW BRUNSWICK, CANADA 38-1859358 (Jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 105 SCHNEIDER ROAD, KANATA, ONTARIO, CANADA K2K 1Y3 (Address of principal executive offices) (Zip Code) (613) 592-1460 (Registrant's telephone number, including area code) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE Title of Each Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On February 29, 2000, 34,546,875 shares of the Common Stock of GSI Lumonics Inc. were issued and outstanding. Non-affiliates of the registrant held 27,532,855 shares having an aggregate market value of U.S. $691,762,982 based on the closing price of the shares on Nasdaq on February 29, 2000 of U.S. $25.125. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2000 are incorporated by reference in Part III of the Report. Other documents incorporated by reference are listed in the Exhibit Index. GSI LUMONICS INC. Annual Report - Form 10-K TABLE OF CONTENTS PART I....................................................................... 3 ITEM 1. BUSINESS OF GSI LUMONICS INC........................................ 3 Overview.......................................................... 3 Corporate History................................................. 3 Industry Overview................................................. 4 Corporate Strategy................................................ 5 Products and Services............................................. 6 Customers......................................................... 9 Marketing, Sales and Customer Support............................. 9 Competition........................ .............................. 10 Manufacturing...................... .............................. 10 Research and Development........... .............................. 11 Patents and Intellectual Property.. .............................. 11 Human Resources.................... .............................. 11 ITEM 2. PROPERTIES.......................................................... 12 ITEM 3. LEGAL PROCEEDINGS................................................... 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 14 Executive Officers Of The Registrant.............................. 14 PART II...................................................................... 16 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................................ 16 Market Information................................................ 16 Currency Prices................................................... 16 Holders........................................................... 16 Dividends......................................................... 17 ITEM 6. SELECTED FINANCIAL DATA............................................. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 19 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 27 AUDITORS' REPORT.................................................. 28 CONSOLIDATED BALANCE SHEETS....................................... 29 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY................... 30 CONSOLIDATED STATEMENTS OF OPERATIONS............................. 31 CONSOLIDATED STATEMENTS OF CASH FLOWS............................. 32 Notes to Consolidated Financial Statements........................ 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................ 52 PART III..................................................................... 52 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISRANT................... 52 ITEM 11. EXECUTIVE COMPENSATION.............................................. 52 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT....... 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 52 PART IV...................................................................... 53 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..... 53
2 As used in this report, the terms "we," "us," "our," "GSI Lumonics" and the "Company" mean GSI Lumonics Inc. and its subsidiaries, unless the context indicates another meaning. The following trademarks and trade names of GSI Lumonics are used in this report: WaferMark(R), LightWriter(R), ScreenCut(R), ICMARKII(TM), LuxStar(R), Laserdyne(R), Xymark(R), LaserMark(R) QuantArray(R) and ScanArray(R). Special Note Regarding Forward-Looking Statements Certain statements in this Annual Report on Form 10-K 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. PART I ITEM 1. BUSINESS OF GSI LUMONICS INC. Overview We design, develop, manufacture and market laser-based advanced manufacturing systems and components for a wide range of applications, including cutting, drilling, welding, marking, micro-machining, inspection, and optical detection and transmission. Major 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. Corporate History Lumonics Inc. was incorporated in 1970 for the purpose of producing lasers for scientific and research applications. We first became a public company in 1980, and our common shares were listed on The Toronto Stock Exchange until 1989. In 1989, all of our common shares were acquired by a wholly owned subsidiary of Sumitomo Heavy Industries, Ltd., and we ceased to be a public company. On September 28, 1995, we again became a public company, and our shares were listed on The Toronto Stock Exchange. At December 31, 1999, Sumitomo owned 17.7% of our outstanding shares. General Scanning Inc. was incorporated in 1968 in Massachusetts. In its early years, General Scanning developed, manufactured and sold components and subsystems for high-speed micropositioning of laser beams. Starting in the mid-to-late 1980s, General Scanning began manufacturing complete laser-based, advanced manufacturing systems for the semiconductor and electronics markets as well as a number of other applications such as aerospace, assembly and medical recording and imaging. On March 22, 1999, Lumonics and General Scanning completed a merger of equals and continued as a New Brunswick corporation under the name GSI Lumonics Inc. Our shares commenced trading on the Nasdaq National Market and continued to trade on The Toronto Stock Exchange. Immediately following the merger, the General 3 Scanning shareholders and the Lumonics shareholders each, as a group, owned approximately 50% of the combined company's common shares. Industry Overview Laser-based systems are used in many different applications such as material processing, medical therapy, instrumentation, research, telecommunications, optical storage, entertainment, image recording, inspection, measurement and control, bar-code scanning and other end uses. Industrial lasers are generally used in the machine-tool, automotive, semiconductor and electronics industries. We expect capital equipment expenditures by the semiconductor and electronics industry, fueled by demand for computers, cellular phones and communications devices, to stimulate demand for laser-based systems. Dataquest, an independent market research company, estimates that capital spending by the semiconductor industry will grow from $33.9 billion in 1999 to $74.9 billion in 2002, representing a compound annual growth rate of 30.2%. Industrial users of lasers generally demand high-speed, highly durable laser sources which have reliable output power. These lasers must be easily and flexibly integrated into the customers' production process. Lasers are used for four main material processing applications: cutting, drilling, welding and marking. Laser Cutting. Laser cutting is fast, flexible and high-precision, as it can be used to cut complex contours on flat, tubular and three-dimensional materials. The laser source can be easily programmed by a computerized numerical controller and is able to process many different kinds of materials such as steel, aluminum, brass, copper, wood, glass, ceramics and plastics at various thicknesses. Additionally, laser cutting technology is a non-contact, no-wear process which is easy to integrate into an automated production line. Principal markets for laser cutting are the semiconductor, electronics, automotive and aerospace industries. Laser Drilling. Lasers drill holes at production rates that are difficult to achieve using conventional processes. In industrial applications, lasers drill virtually all types of metals, nonmetals, organic graphite-reinforced composites, and metal matrix composites. Hole shape and size can be controlled by the laser system software to produce round, oval or rectangular holes. In electronics applications, blind micro via drilling is best accomplished with lasers. These holes measure from 25 to 250 microns and are drilled into printed circuit boards at a speed of up to 1,800 holes per second. End user applications for these boards include cellular phones, pagers, base stations, automotive components and other devices. Laser welding. Laser welding is non-contact, easy to automate, provides high process speed and results in narrow-seamed, high quality welds which require little, if any, post-processing machining. Because there is low heat input into the material being processed and therefore minimal part damage or distortion, parts can be accurately machined before welding. Additionally, because laser welding is non-contact based, the process is not subject to tool wear. As with lasers used for cutting applications, lasers can be used to weld a wide variety of materials of different thickness. Principal markets served are electronics, medical, automotive and aerospace. Laser marking. With the increasing need for source traceability, component identification, and product tracking as a means to reduce product liability and prevent falsification, industrial manufacturers are increasingly demanding variable code marking systems capable of applying serialized alphanumeric, graphic or bar code identifications directly onto their manufactured components. Laser marking offers several advantages which are desirable in industrial applications. Lasers can mark a wide variety of metal and non-metal (for example, wood, glass and plastics) surfaces at high speeds without contact by changing the surface structure of the material or by engraving. Laser marking systems are reliable, flexible, fast, produce permanent marks and, because they are computer controlled, may be easily integrated into the customer's production process. Given that laser marking is contact-free, it does not subject the item being marked to any mechanical stress. Principal applications for laser marking have been in the semiconductor and electronics industries, as well as automotive industry. In the semiconductor and electronics industries, lasers are used to mark electrical components such as contactors and relays, and assembled components such as integrated circuits, printed circuit boards and keyboards. With the increase in marking speed in recent years, laser marking of integrated circuits has decreased in 4 cost, improving the price and performance characteristics of this technology and therefore increasingly displacing alternative methods such as ink-based marking installations. Corporate Strategy We intend to accelerate growth and increase market share. The key elements of our strategy include: . Invest in laser-based technologies, products and capabilities which position us as one of the leading competitors in markets that offer strong profitable growth opportunities, specifically semiconductor, electronics and automotive; . Concentrate on high value-added systems that have a global market; . Enhance our capabilities to supply parts on precision optical components used in dense wavelength division multiplexing for the fiber optic telecommunications networks; . Further strengthen our competencies in technology, manufacturing and distribution; and . Acquire complementary products and. Consistent with our strategy, we plan to divest product lines that are no longer strategic. These actions will allow us to redirect capital to opportunities in our strategic markets including semiconductor, electronics, automotive and telecommunications. We are considering alternatives for our nonstrategic product lines, including a product line that serves the medical market. In 2000, we plan to take specific actions to strengthen our position in our strategic markets: . Semiconductors. We are developing and plan to introduce, in the second half of 2000, a new technology platform for memory repair, an application for our manufacturing systems. We estimate the market for memory repair systems is between $80 million and $100 million of which we currently have less than a 15% share. . Electronics. We plan to enhance our market position in printed circuit board manufacturing processes, including solder paste inspection, via drilling and thick film trimming by investing significantly in research and development. We believe that demand for products such as telecommunications equipment, cell phones and pagers will drive demand for our newly developed products. . Automotive. We believe that new manufacturing techniques in the automotive industry are well suited to the use of our high power laser technology. Applications such as welding dissimilar materials, welding aluminum, cutting hydroformed parts and welding tailored blanks are gaining acceptance with automotive manufacturers. We are currently developing the next generation of high power laser systems for introduction in late 2000 to serve this market. . Telecommunications. With the recent acceleration in the construction of fiber optic networks, demand for our precision optic products has increased significantly. In 1999, we began to enhance our capability to supply precision optical components used in dense wavelength division multiplexing for fiber optic telecommunication networks. 5 PRODUCTS AND SERVICES Semiconductor Market Our laser systems are used in numerous production process steps within the semiconductor industry, which is characterized by ever increasing demands on throughput, reduced device size and increased device complexity, performance, traceability and quality. Semiconductor devices are used in a variety of products including automotive electronics, consumer products, personal computers, communications products, appliances and medical instruments. Laser Trim and Test Systems. These systems enable production of electronic circuits by precisely tuning the performance of linear and mixed signal devices. Tuning is accomplished by adjusting various component parameters with selective laser cuts, while the circuit is under test, thereby achieving the desired electrical performance. These systems combine material handling, test stimulus, temperature control and laser trim subsystems to form turnkey production process packages. Permanent Marking Systems. We provide products to support the product marking requirements of the semiconductor industry. WaferMark laser systems are used for marking of silicon wafers at the front end of the semiconductor process, aiding process control and device traceability. These systems incorporate advanced robotics and proprietary process control technology to provide debris free marking of high-density silicon wafers along automated production lines. We also supply systems for die marking of wafers. Our automated wafer marking system supports individual bare die traceability marks. The system incorporates a tightly coupled vision system for automated wafer identification and mark alignment on each die. Complete system operation is managed with software for intuitive process monitoring and automated wafer map downloading through a single graphical user interface. Additional semiconductor device marking capabilities, such as in-tray marking of integrated circuits, are supported by our HM, LM, and LightWriter series of laser marker products. Memory Repair Systems. Dynamic random access memory chips are critical components in the active memory portion of computers and a broad range of other digital electronic products. First-pass manufacturing yields are typically low at the start of production of a new generation of higher capacity devices. Laser processing is used to raise production yields to acceptable economic levels. Our memory repair laser systems allow semiconductor manufacturers to effectively disconnect defective or redundant circuits in a memory chip with accurately positioned and power modulated laser pulses. This improves the yield of usable components per treated wafer, effectively lowering the cost per unit produced. Electronics Market Producers of electronic components and assemblies, particularly surface mount technology assemblies, have a number of our laser systems available to support their process requirements. Features of these systems include precision laser spot size, laser power control, high-speed parts handling, and applications adaptability. Printed Circuit Board Processing Systems. Our laser systems are used in various process steps in the production of printed circuit boards and flex circuits. Our GS series of products, which is capable of drilling micro vias at very high speeds in every type of material commonly used for printed circuit board fabrication, supports the miniaturization trend within the industry. Our ScreenCut systems are used for cutting stencils as an alternative or, in some cases, a complement to the traditional photochemical machining process. Surface Mount Measurement Systems. Our surface mount measurement products are used in the manufacture of printed circuit board assemblies. In the manufacture process, surface-mount solder, in paste form, is stenciled onto the circuit board with a screen printer, and components are then placed in their respective positions on the board by automated equipment. Our systems use our patented three-dimensional scanning laser data acquisition technology, to inspect either solder paste depositions or component placement accuracy. 6 Thick Film Laser Processing Systems. Our laser systems are used in the production of thick film resistive components for surface mount technology electronic circuits, known as chip resistors, as well as more general-purpose hybrid thick film electronic circuits. Permanent Marking Systems. We offer a broad line of laser marking systems for printed circuit boards and other electronic components. These systems place permanent high-contrast marks in any combination of text, barcodes, or 2D cell codes on even the highest density circuit boards using an industry standard interface. We manufacture many other component marking systems which have found wide acceptance in the electronics market. Among the features offered by these systems are speed, accuracy, power control, wide field marking and application specific control software. Welding Systems. Our laser welding systems produce welds that would be difficult or impossible for conventional welding systems to produce. The system's low heat input avoids damage or distortion to surrounding components. In addition, our proprietary control software promotes reliable laser output and consistent weld quality. Our laser welding systems, with laser beams deliverable through flexible fiber optics, are used in the electronics industry for welding micro components in the manufacture of televisions, computers, hard disk drives and related applications. Metrology Systems. Our metrology products are automated, non-contact, dimensional coordinate measurement systems which provide micron-accurate measurements of component parts and assemblies for electronics, telecommunications and computer manufacturers. Automotive, Aerospace and Other Industrial Markets We manufacture laser systems for the automotive, aerospace and other industrial markets for advanced manufacturing applications including cutting, drilling, welding, scribing and machining. Our laser systems can be controlled and directed with precision and used in a wide spectrum of applications. Lasers offer lower production costs, fast solutions and flexibility on the production line. In addition to lasers, systems may include precision optics, fiber optics, control software, robotics, machine vision, motion control and parts handling. Welding, Cutting and Drilling Systems. Our AM Series of high power solid-state laser systems produce continuous and modulated power with throughput speeds and power flexibility to achieve cutting and high speed, deep penetration welding in reflective materials. These systems are often integrated with customers' robotic systems in various applications, including: . processing of dissimilar materials such as zinc coated materials and aluminum in the automotive industry, including welding aluminum, cutting hydroformed parts and welding tailored blanks; . processing reflective and difficult materials in the manufacture of airframes and turbines in the aerospace industry; and . deep penetration welding for energy and petrochemical applications. Our JK Series laser systems incorporate advanced solid-state laser technology to produce efficient, reliable, dependable and accurate production systems. These systems operate at uniform energy density, offer improved process efficiency and require less energy. These systems use our patented power supply, allowing a wide range of applications, including drilling cooling holes in jet engine turbo fans and welding automotive parts such as ignition components, fuel injector assemblies and smog detection sensors. They also permit high speed, repetitive processing which maximizes production rates. Our JK Series can be readily linked with robotics systems to provide manufacturers with a flexible production tool. Our Laserdyne systems provide fully integrated motion and laser control on multi-axis, articulated machines. These systems incorporate proprietary control software and permit high speed, precision processing of large parts where the workpiece cannot be in motion during processing. Our Laserdyne systems are used in the manufacture and 7 repair of jet aircraft engines, and the trimming of aerospace and automobile stampings and other large formed parts. They can also be integrated with automated guided vehicles and conveyor systems. Permanent Marking Systems. Our LaserMark and HM systems provide marking capabilities for automotive, aerospace and other industrial markets. Optical and Other Components Telecommunications. We design and manufacture precision optical components used in dense wavelength division multiplexing technology for increasing the bandwidth of fiber optic networks. These networks have been used mostly for `long-haul' inter-city applications and, more recently, over short-range `metro' applications using optical add drop multiplexing. Our products select, shift or interleave very precise wavelengths of light, thereby increasing the bandwidth and efficiency of dense wavelength division multiplexing systems. These products require highly precise polishing and measurement technology to produce these components to exacting specifications that are critical to their performance. Specialty Optical Components. Our specialty optical components are used primarily for high performance lasers used in lithography, industrial processing and medical applications. Scanning Components and Subsystems. We produce optical scanners, scanner subsystems, and diode-pumped solid state lasers. These are used in a variety of applications including materials processing, test and measurement, alignment, inspection, displays, graphics, vision, rapid prototyping, and medical applications such as dermatology and ophthalmology. Other Markets and Products Biotechnology. Our laser-based fluorescence imaging systems address a great variety of microarray applications including gene expression, genotyping, mapping, high-throughput screening and drug discovery. The ScanArray biochip analysis system measures the fluorescent intensity at each DNA grid spot facilitating, at high speed, the analysis of the expression level of a particular gene. Printing Products. We produce a variety of printing products. Thermal printers are used in end products such as defibrillators, patient care monitors, and cardiac pacemaker programmers. We also produce specialty printing products. Film Imaging Systems. We produce laser imaging and digitizing equipment for use with data sets from computer assisted tomography, magnetic resonance imaging or nuclear medicine equipment. Package Coding. Our Xymark systems provide marking for packaging, medical devices, pharmaceuticals and other consumer products. Depending on the application, a variety of laser marking techniques, including steered beam, dot matrix, and flash, are used to apply laser marks on a wide variety of metals, plastics, paper and ceramics at high speed, without contact or ink. These systems are reliable, flexible, and adaptable and allow the user to incorporate off-the-shelf graphics and font software. 8 Customers We have over 1,000 customers, many of whom are among the largest global participants in their industries. Many of our customers participate in several market segments. These customers include:
Semiconductor Electronics Automotive Other - -------------------------------- ----------------------- ----------------------- ----------------------- Anadigics A.T.&S. Audi 3M Analog Devices Bosch Chrysler AB Dick Cypress Semiconductor Celestica Ford Bell Helicopter Dominion Semiconductor Ericsson General Motors Boeing Flip Chip Semiconductor Hadco Harley Davidson Cardiac Pacemakers IBM Hewlett Packard Honda Ciba Intel IBM Magna Corning Maxim Jabil Circuits Magnetti-Marelli General Electric Micron Kyocera Pico Industrial Tools Gillette Mitsubishi Lucent Tower Automotive Glaxo Motorola Matsushita Toyota Kodak National Semiconductor Motorola TRW Automotive Lockheed Powerchip Semiconductor Nippon Denso Medtronic Samsung Nortel Northrop Grumman Texas Instruments Philips Pratt & Whitney Toshiba SDL Rolls Royce Seagate Vickers SGS Thomson Siemens Toshiba Vishay
Marketing, Sales and Customer Support We believe that our marketing, sales and customer support organizations are important to our long-term growth and give us the ability to respond rapidly to the needs of our customers. Our product line managers have worldwide responsibility for determining product strategy based on their knowledge of the industry, customer requirements and product performance. These managers have direct contact with customers and, working with the sales and customer service organizations, develop and implement strategic and tactical plans aimed at serving the needs of existing customers as well as identifying new opportunities based on the market's medium-to-long term requirements. We direct our worldwide advanced manufacturing systems sales activities from the United States. Sales management for components is based in Massachusetts. Field offices are located close to key customers to maximize sales and support effectiveness. In Europe, we maintain offices in the United Kingdom, Germany, France and Italy, and in the Asia-Pacific region, in Hong Kong, Japan, Korea, Malaysia, the Philippines, Singapore and Taiwan. Our direct sales organization is augmented by selected independent distributors and agents who sell our products in areas such as Eastern Europe, People's Republic of China, Australia and Latin America. We provide 24-hour, 365-day-a-year service support to our advanced manufacturing systems customers. Our service support organization is based in Livonia, Michigan; Munich; and Hong Kong for the North American, European, and Asia-Pacific regions, respectively. This support includes field service personnel who reside close to concentrations of customer sites. These field service and in-house technical support personnel receive ongoing training with respect to our laser-based systems, maintenance procedures, laser-operating techniques and processing technology. Many of our distributors also provide customer service and support. In order to minimize disruption to 9 customers' manufacturing operations, we provide same or next day delivery of replacement parts worldwide from three regional replacement parts logistics centers. Competition We face substantial competition in several markets from both established competitors and potential new market entrants. Significant competitive factors include product functionality, performance, size, flexibility, cost, market presence, customer satisfaction, customer support capabilities and breadth of product line. We believe that we compete favorably on the basis of each of these factors. Competition for our products is concentrated in certain markets and fragmented in others. In laser-based processing systems for the semiconductor and electronics markets, we compete primarily with a few large companies such as Electro Scientific Industries and NEC. In laser-based marking systems there are several significant competitors such as Excel Technology and Rofin-Sinar as well as a large number of smaller companies that compete with us on a limited geographic, industry-specific or application-specific basis. In automotive and industrial markets, we compete with Trumpf-Haas, Prima, Robomatix, and Unitek. In other markets, we compete with CTI, a unit of Excel Technology, in scanning components and with several companies in optical components. We also compete with manufacturers of non-laser products in applications such as welding, drilling, cutting and marking. We believe that, as industries continue to modernize, seek to reduce production costs and require more precise and flexible manufacturing, the features of laser-based systems will become more desirable than systems incorporating conventional manufacturing techniques and processes. We expect our competitors to continue to improve the design and performance of their products. There is a risk that our competitors will develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new processes or technologies will emerge that render our products less competitive or obsolete. Increased competitive pressure could lead to lower prices for our products, adversely affecting business. Manufacturing We perform internally those manufacturing functions that enable us to maintain control over critical portions of the production process and outsource other portions of the production process. This approach has led to changes in our manufacturing organization as we move attention from the management of internal production processes to the management of supplier quality and production. The retained internal activity is focused on module integration and testing with particular emphasis on our customers' applications. We believe we achieve a number of competitive advantages from this integration, including the ability to achieve lower costs and higher quality, bring new products and product enhancements more quickly and reliably to market, and produce sophisticated component parts not available from other sources. We manufacture at eleven facilities: four near Boston, Massachusetts, one each in Arizona, California, and Minnesota, two near Ottawa, Canada, and two in the United Kingdom. Each of our manufacturing facilities has co-located manufacturing, manufacturing engineering, marketing and product design personnel. We believe that this organizational proximity greatly accelerates development and entry into production of new products and aids economical manufacturing. Many of our products are manufactured under ISO 9001 certification. We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used on our premises. We believe we are in material compliance with these regulations and have obtained all necessary environmental permits to conduct our business. 10 Research and Development We devote significant resources to development programs directed at creating new products, product enhancements and new applications for existing products, as well as funding research into formative market opportunities. The markets we serve are generally characterized by rapid technological change and product innovation. We believe that continued timely development of new products and product enhancements to serve both existing and new markets is necessary to remain competitive. We carry out our research and development activities in multiple locations around the world. We also maintain links with leading industrial, government and university research laboratories worldwide. We work closely with customers and institutions to develop new or extended applications of our technology. We maintain significant expertise in the following core technologies: Lasers: both gas and solid-state, designed to produce efficient, reliable and accurate laser sources in a broad range of configurations for material processing applications. Precision Optics: design and manufacturing process capability for production of laser quality lenses, mirrors of high dynamic rigidity, high performance mirrors and lens coatings. Mechanics: design of large laser-based advanced manufacturing systems and small precision servo mechanisms and optical scanners, typically associated with a broad spectrum of laser systems. Electronics: design of wide bandwidth power amplifiers and high signal-to-noise ratio and low thermal drift signal detection circuits; design and manufacture of analog servo controllers with low electromagnetic interference circuitry. Software: development of real-time control of servomechanisms, process system control and machine interfaces. Inspection: design of non-contact measurement probes, systems and related software. Systems Design and Integration: leveraging our core technologies to produce highly efficient and effective application-specific manufacturing solutions typically based on lasers and their interaction with materials including integration with robotics systems. Patents and Intellectual Property Our intellectual property includes copyrights, patents, proprietary software, technical know-how and expertise, designs, process techniques and inventions. We own 85 United States and 52 foreign patents; in addition, applications are pending for 43 United States and 89 foreign patents. We have also been licensed under a number of patents in the United States and foreign countries. There can be no assurance as to the degree of protection offered by these patents or as to the likelihood that patents will be issued for pending applications. We also rely on trade secret protection for our confidential and proprietary information. We routinely enter into confidentiality agreements with our employees and consultants. There is a risk that these agreements will not provide meaningful protection of our proprietary information in the event of misappropriation or disclosure. 11 Human Resources At December 31, 1999, we had 1,581 employees in the following areas:
Number of employees Percentage --------- ---------- Production and operations ....................... 565 36% Customer service ................................ 204 13% Sales, marketing and distribution ............... 314 20% Research and development ........................ 299 19% Administration .................................. 199 12% ----- ----- Total ........................................ 1,581 100% ===== =====
Other Information concerning product lines, working capital, research and development expenses, and seasonality may be found in section seven, Management Discussion and Analysis. Information about geographic segments may be found in note 18 to the financial statements. ITEM 2. PROPERTIES The principal owned and leased properties of GSI Lumonics and its subsidiaries are listed in the table below.
APPROXIMATE OWNED/ LOCATION PRINCIPAL USE SQUARE FEET LEASED - -------- ------------- ----------- ------ Kanata, Ontario, Canada Principal corporate executive offices; 75,000 Owned Manufacturing, R&D, Marketing, Sales Nepean, Ontario, Canada Manufacturing, R&D, Marketing, Sales 41,000 Owned (two sites) Maple Grove, MN, USA Manufacturing, R&D, Marketing, Sales 104,000 Leased; expires in 2004 Watertown, MA, USA Manufacturing, R&D, Marketing, Sales 84,000 Owned Billerica, MA, USA Manufacturing, R&D, Marketing, Sales 80,000 Leased; expires in 2008 with two 5-year renewal options Wilmington, MA, USA Manufacturing, R&D, Marketing, Sales 78,000 Leased; expires in 2007 with two 5-year renewal options Bedford, MA, USA Manufacturing, R&D, Marketing, Sales 51,000 Leased; expires in 2003 with one (currently unoccupied) 3-year renewal option Oxnard, CA, USA Manufacturing, R&D, Marketing, Sales 44,000 Leased; expires in 2004 with (operations discontinued; 9,000 square option to purchase feet used for sales and administration) Simi Valley, CA, USA Manufacturing, R&D, Marketing, Sales 40,000 Owned Livonia, MI, USA Customer Support and Logistics Center 30,000 Leased; expires in March 2000 Ann Arbor, MI, USA R&D, Marketing, Sales 16,000 Leased; expires in 2001 with two 3-year renewal options Rugby, England Manufacturing, R&D, Marketing, Sales 113,000 Owned Hull, England Manufacturing, R&D, Marketing, Sales 35,000 Leased; expires in 2002 Munich, Germany Customer Support and Logistics Center 29,000 Leased; expires in 2013 with option to renew
Additional sales, service and logistics sites are located in France, Hong Kong, Italy, Japan, Korea, Malaysia, the Philippines, Singapore, and Taiwan. These additional marketing and sales offices are in leased facilities occupying approximately 42,000 square feet in the aggregate. The Company will soon occupy a 56,000 square foot facility in Farmington Hills, Michigan which will be subject to a five year lease commitment, and, as a result, will close the facilities in Ann Arbor, Michigan and Livonia, Michigan. 12 ITEM 3. LEGAL PROCEEDINGS 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 us and Dynamic Details Inc., an unrelated party who is one of our customers. Electro Scientific alleges that we offer to sell, 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 our GS-600 laser system infringes on Electro Scientific's U.S. patent number 5,847,960 and that we have 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. Electro Scientific Industries, Inc. v. General Scanning 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 our motion for summary judgment that the 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 patents in suit. In April 1999, a federal court jury issued a verdict that Electro Scientific's patent no. 5,473,624 was invalid, and that Electro Scientific's patent no. 5,265,114 was valid, and awarded a $13.1 million damage judgment against us. 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. We have recorded a provision during the three months ended April 2, 1999 of approximately $19 million to reflect the amount of the damages awarded 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. We have appealed the decisions on infringement, the validity of the second patent, which was not overturned, and the award of damages. We were required to post an unsecured bond with the court in order to proceed with the appeal. No date has been set for arguments. Robotic Vision Systems, Inc. v. View Engineering, Inc. This action involves a complaint by Robotic Vision Systems, Inc. alleging infringement of a patent by View Engineering, Inc., our 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, and we are currently awaiting the court's decision. Robotic Vision alleges infringement relating to lead inspection machines formerly sold by View and seeks damages of $60.5 million. We believe that the claims in this action are without merit and are vigorously defending the proceedings. If we lose on one or more of these claims there could be a material adverse effect on our operating results and/or financial condition. GSI Lumonics Inc. v. BioDiscovery, Inc. On December 10, 1999 we filed suit in the United States District Court for the District of Massachusetts seeking a declaration that our 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). We had previously distributed ImaGene(R) software under a non-exclusive arrangement with BioDiscovery, but subsequently developed our 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 our action for declaratory judgment by filing a separate suit in the United States District Court for the Southern District of California, alleging that we reverse engineered his software, and additionally sued us for copyright infringement. We have applied to the California court to seek the prompt dismissal of the California action in favor of our prior pending action. 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 has scheduled the trial for May 2000. We believe that the claim in this action is without merit. Potential Claim. In 1994, a party commenced legal proceedings in the United States against a number of U.S. manufacturing companies, including companies that have purchased systems from us. The plaintiff has alleged that 13 certain equipment used by these manufacturers infringes patents claimed to be held by the plaintiff. We are not a defendant in any of the proceedings. However, several of our customers have notified us that, if the party successfully pursues infringement claims against them, they may require us to indemnify them to the extent that any of their losses can be attributed to systems we sold to them. We do not believe that the outcome of these claims will have a material adverse effect on us, but there is a risk that these claims, or similar claims, may have a material adverse effect on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable Executive Officers of the Registrant The following table sets forth the names, ages and positions of the current executive officers of the Company as at March 15, 2000, and the principal occupations held by each person named for at least the past five years. Executive officers serve at the pleasure of the Board of Directors.
NAME AGE POSITION WITH GSI LUMONICS ---- --- -------------------------- Charles D. Winston 58 President and Chief Executive Officer Desmond J. Bradley 43 Vice President, Finance and Chief Financial Officer Patrick D. Austin 48 Vice President, Sales, Advanced Manufacturing Systems John W. George 57 Vice President, Customer Support, Advanced Manufacturing Systems Michael R. Kampfe 50 Vice President, Operations, Advanced Manufacturing Systems Felix Stukalin 39 Vice President, Components Linda Palmer 48 Vice President, Human Resources Kurt A. Pelsue 46 Vice President, Technology Victor H. Woolley 58 Vice President, Business Development
Charles D. Winston has served as Chief Executive Officer of GSI Lumonics since March 1999 and as President since November, 1999. He previously served as President and Chief Executive Officer of General Scanning commencing in September 1988. Mr. Winston served as a Director of General Scanning from 1989 until the merger. Desmond J. Bradley has held his current position since October 1994. From September 1993 until October 1994, Mr. Bradley was Vice President, Finance and Administration of Lumonics. Prior to September 1993, he was Vice President, Laser Products Division. Patrick D. Austin has held his current position since March 1999, and has served as Vice President, Sales since January 1996. Prior to that time he was Vice President, Market Development of Lumonics and prior to October 1992 was Vice President, Laser Marking Division. John W. George has held his position since March 1999, and has served as Vice President, Customer Support since January 1997. Prior to that time he was Director, North American Service. Michael R. Kampfe assumed his current role in March 1999. From 1996 to 1999, he was Vice President and General Manager of General Scanning's optical scanning products division, and from 1990 through 1996 he served as Vice President and General Manager of General Scanning's laser graphics division. Mr. Kampfe joined General Scanning in 1984. 14 Felix Stukalin was appointed Vice President, Components in February 2000. He joined General Scanning in 1994 as Director of Engineering, Components and assumed the position of General Manager in July 1999. Linda Palmer assumed her current role in December 1999, having served as the Vice President of Integration from March 1999 through December 1999. She had been General Scanning's Vice President of Human Resources since joining General Scanning in 1996. Prior to that time, Ms. Palmer served as Director of Human Resources of Analog Devices. Kurt A. Pelsue assumed his current position in March 1999, having served since 1997 as Vice President, Corporate Engineering for General Scanning. Prior to that time, Mr. Pelsue held numerous senior level engineering assignments within General Scanning. He joined the firm in 1976. Victor H. Woolley assumed his current role in March 1999, having served as Chief Financial Officer, Treasurer and Clerk of General Scanning since August 1995. From 1986 to 1995, Mr. Woolley was Vice President and Chief Financial Officer of Sepracor Inc., a drug development company. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information GSI Lumonics common stock, no par value, trades on The Nasdaq Stock Market(R) under the symbol GSLI and on The Toronto Stock Exchange (the "TSE") under the symbol LSI. Prior to the merger, Lumonics' common stock was traded on The Toronto Stock Exchange under the symbol LUM beginning September 29, 1995. From May 1989 to September 28, 1995 the Company's Common Stock was not publicly traded. The following table sets forth, for the periods indicated, the high and low prices per share of the common stock as reported by Nasdaq in U.S. dollars and the TSE in Canadian dollars.
NASDAQ TORONTO STOCK EXCHANGE PRICE RANGE PRICE RANGE US$ CDN$ HIGH LOW HIGH LOW ---- --- ---- --- Fiscal year 1999: First Quarter ............ $ 6.813 $ 4.500 $ 10.50 $ 6.75 Second Quarter ........... 4.750 3.250 7.00 5.00 Third Quarter ............ 6.875 4.063 10.25 5.95 Fourth Quarter ........... 11.250 4.188 16.20 7.60 Fiscal year 1998: First Quarter ............ -- -- $ 27.00 $ 21.50 Second Quarter ........... -- -- 23.00 11.80 Third Quarter ............ -- -- 13.75 7.55 Fourth Quarter ........... -- -- 8.75 6.75
Currency Prices The following table sets forth in Canadian dollars the exchange rates of the Canadian dollar to the United States dollar, determined based upon publicly available information from the Federal Reserve Bank of New York for the calendar years 1999 and 1998. For example, on December 31, 1998, one US dollar bought 1.5375 Canadian dollars.
1999 1998 -------------- --------------- High ....................................... Cdn$1.5302 Cdn$1.5770 Low......................................... 1.4440 1.4075 End of Period............................... 1.4440 1.5375 Average (1)................................. 1.4827 1.4898
(1) The average of the exchange rate on the last business day of each month during the applicable period. Holders On February 29, 2000, there were approximately 149 holders of record of Common Stock. Since many of the shares of Common Stock are registered in "nominee" or "street" name, the Company estimates that the total number of beneficial owners is considerably higher. 16 Dividends The Company has never paid cash dividends on its Common Stock. The Company currently intends to reinvest its earnings for use in the business and does not expect to pay cash dividends in the foreseeable future. Subject to the provisions of the Canada-US Income Tax Convention (the "Convention"), Canadian withholding tax at a rate of 25% will be payable on dividends paid or credited, or deemed to be paid or credited, by GSI Lumonics to a US holder on GSI Lumonics common shares. Under the Convention, the withholding tax rate is generally reduced to 15%, or if the US holder is a corporation that owns 10% or more of GSI Lumonics voting stock, to 5%. 17 ITEM 6. SELECTED FINANCIAL DATA This section presents our selected historical consolidated financial data. You should read carefully the consolidated financial statements included in this report, including the notes to the consolidated financial statements. The selected consolidated data in this section is not intended to replace the consolidated financial statements. We derived the consolidated statement of operations data for the years ended December 31, 1999, December 31, 1998 and December 31, 1997 and the consolidated balance sheet data as of December 31, 1999 and December 31, 1998 from the audited consolidated financial statements in this report. Those consolidated financial statements were audited by Ernst & Young LLP, our independent auditors. We derived the consolidated statement of operations data for the years ended December 31, 1996 and December 31, 1995 and consolidated balance sheet data as of December 31, 1996 and December 31, 1995 from audited consolidated financial statements that are not included in this report. On March 22, 1999, Lumonics and General Scanning completed a merger of equals. We recorded this transaction as a purchase for accounting purposes. Accordingly, the consolidated financial statements exclude the results of General Scanning before the merger date and therefore do not provide meaningful year-to-year comparative information. Note 2 to the consolidated financial statements includes, for illustrative purposes, unaudited pro forma information as if the merger had occurred January 1, 1998. Results for 1999 reflect $34.5 million of restructuring and acquired in-process research and development expenses related to the merger.
Years ended December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- --------- (in thousands except per share amounts) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales ................................................................. $ 274,550 $ 144,192 $177,328 $153,367 $ 125,268 Gross profit .......................................................... 95,777 40,673 65,922 60,999 48,031 Operating expenses: Research and development ............................................. 28,700 12,985 11,993 11,872 7,068 Selling, general and administrative .................................. 64,653 38,191 37,591 32,999 28,385 Amortization of technology and other intangibles ..................... 4,070 861 400 381 384 Acquired in-process research and development ......................... 14,830 -- -- -- -- Restructuring and other charges ...................................... 19,631 2,022 -- -- -- Foreign exchange, interest and gain on sales of assets ............... (1,223) 2,210 1,048 634 (854) --------- --------- -------- -------- --------- Income (loss) before income taxes ..................................... (37,330) (11,176) 16,986 16,381 11,340 Income tax provision (benefit) ........................................ (2,556) (3,260) 5,074 4,635 3,304 --------- --------- -------- -------- --------- Net income (loss) for the year ........................................ $ (34,774) $ (7,916) $ 11,912 $ 11,746 $ 8,036 ========= ========= ======== ======== ========= Net income (loss) per common share: Basic ................................................................ $ (1.14) $ (0.46) $ 0.75 $ 0.83 $ 0.70 Diluted .............................................................. $ (1.14) $ (0.46) $ 0.72 $ 0.78 $ 0.65 ========= ========= ======== ======== ========= Weighted average common shares outstanding ............................ 30,442 17,079 15,989 14,077 11,521 Weighted average common shares outstanding and dilutive potential Common shares ........................................................ 30,442 17,079 16,454 15,079 12,457 December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- --------- (in thousands) BALANCE SHEET DATA: Working capital ....................................................... $ 103,727 $ 85,977 $110,895 $ 71,981 $ 58,087 Total assets .......................................................... 289,722 159,642 189,180 135,602 122,802 Long-term liabilities, including current portion ...................... 10,022 7,082 9,239 13,820 19,367 Total shareholders' equity ............................................ 171,730 120,757 133,623 88,345 69,442
18 ITEM 7. 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 Fiscal Years Ended December 31, 1999, 1998 and 1997 The following table sets forth items in the consolidated statement of operations as a percentage of sales for the periods indicated:
Year ended December 31, ------------------------------------- 1999 1998 1997 ------------ ----------- ---------- Sales............................................... 100.0% 100.0% 100.0% Cost of goods sold.................................. 65.1 71.8 62.8 Gross profit........................................ 34.9 28.2 37.2 Research and development............................ 10.5 9.0 6.8 Selling, general and administrative................. 23.5 26.5 21.2 Amortization of technology and other intangibles.... 1.5 0.6 0.2 Acquired in-process research and development........ 5.4 -- -- Restructuring and other changes..................... 7.2 1.4 -- ------ ----- ----- Income (loss) from operations....................... (13.2) (9.3) 9.0 Interest income, net................................ -- 1.1 0.6 Gain on sale of assets.............................. 0.6 -- -- Foreign exchange translation gains (losses)......... (1.0) 0.4 -- ------ ----- ----- Income (loss) before income taxes................... (13.6) (7.8) 9.6 Income tax provision (benefit)...................... (0.9) (2.3) 2.9 ------ ----- ----- Net income (loss)................................... (12.7)% (5.5)% 6.7% ====== ===== =====
19 The following table sets forth sales in millions of dollars to our primary markets for 1999, 1998 and 1997.
1999 1998 1997 -------------------------------- --------------------------------- ------------------ INCREASE INCREASE (DECREASE) (DECREASE) % OF OVER % OF OVER % OF SALES TOTAL PRIOR YEAR SALES TOTAL PRIOR YEAR SALES TOTAL ----- ----- ---------- ----- ----- ---------- ----- ----- Semiconductor............. $ 34.5 13% 146% $ 14.0 10% (63)% $ 38.1 21% Electronics............... 67.9 25 120 30.8 21 11 27.7 16 Automotive................ 12.0 5 (12) 13.6 9 (27) 18.7 11 Aerospace................. 15.0 5 15 13.1 9 (26) 17.7 10 Packaging................. 11.9 4 (12) 13.5 9 (1) 13.7 8 Components................ 33.4 12 351 7.4 5 28 5.8 3 Medical/Biotechnology..... 50.3 18 1,098 4.2 3 20 3.5 2 Emerging.................. 10.3 4 (32) 15.1 11 (13) 17.3 10 Parts and service......... 39.3 14 21 32.5 23 (7) 34.8 19 ------ --- ----- ------ --- ---- ------ --- Total..................... $274.6 100% 90% $144.2 100% (19)% $177.3 100% ====== === ===== ====== === ==== ====== ===
Sales by Market. Our results of operations are affected by external factors that impact the markets in which we compete. Sales to Japan and the Asia-Pacific region were impacted by the financial crisis that occurred there in the fall of 1997 and the effects which extended into 1999. Japan suffered a recession during the same period, brought about partly by the financial crisis. The semiconductor equipment business was in a recession from mid-1998 through the first quarter of 1999. In 1999, sales increased by 90% due primarily to the merger and improved market conditions in the second half of the year in some of our markets. Product prices in some of our markets faced increased competitive pressures during 1999, particularly in the first half of the year, and had a negative effect on reported gross profit. Sales in 1998 declined 19% overall due to a sharp decline in the semiconductor market as well as declines of 26% in the automotive market and 27% in the aerospace market. The increase in sales during 1999 to the semiconductor industry was due primarily to the merger between Lumonics and General Scanning. The decline experienced in the semiconductor market during 1997 continued through 1998 and into 1999. Excess capacity in semiconductor fabrication plants worldwide resulted in a 63% decline in 1998 semiconductor sales relative to 1997. The semiconductor market is cyclical, and the downturn in the industry slowed demand for our products through this period. The semiconductor equipment market, however, has been on a slow recovery as reflected in quarterly improvements in sales during 1999. Sales to the electronics market grew in each quarter in 1999. This increase was due primarily to the success of the new GS-600 systems for drilling micro vias, or precise holes, and increased demand for trim and test systems. During 1998, sales to the electronics market increased by 11% over 1997, as a result primarily of increased demand for systems from the printed circuit board industry, particularly the GS-600. During 1999, sales to the automotive market declined 12% following a decline of 27% in 1998, each due to lower capital spending by automotive companies. The increased sales to the aerospace market in 1999 were due primarily to the merger. Sales to the aerospace market declined by 26% during 1998, due primarily to a decreased demand for systems from the aerospace sector in North America. In addition, sales in 1997 were unusually high because we delivered a $3.5 million order representing the largest advanced laser-based systems we have ever built. Packaging market sales declined in 1999 by 12% compared to 1998. Sales in this market sector were not affected significantly by the merger. Packaging market sales were essentially flat during 1998 compared to 1997. Component sales increased in 1999 due primarily to the merger. Sales to the medical and biotechnology markets increased in 1999 due primarily to the merger and the increased market acceptance of ScanArray systems. 20 Sales of systems to our emerging product markets declined in 1999 due to a decline in consumer products sales and a further decline in sales to the nuclear energy industry. During 1998, in aggregate dollars, sales to the emerging products component and medical and biotechnology markets were essentially flat. Parts and service full year sales increased 21% for 1999, with about half of the increase due to the merger. The remaining increase reflects customers' increased utilization of existing installed systems, as well as the improvement of parts and service support for the former General Scanning systems. Largely as a result of the slowdown in the semiconductor market in 1998, parts and service revenues declined by 7% relative to the previous year. 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; Latin and South America; Europe, consisting of Europe, the Middle East and Africa; Japan; and Asia-Pacific, consisting of ASEAN countries, China and other Asia-Pacific countries. The table below shows sales in millions of dollars to each geographic region for 1999, 1998 and 1997.
1999 1998 1997 -------------------------------- --------------------------------- ------------------ INCREASE INCREASE (DECREASE) (DECREASE) % OF OVER % OF OVER % OF SALES TOTAL PRIOR YEAR SALES TOTAL PRIOR YEAR SALES TOTAL ----- ----- ---------- ----- ----- ---------- ----- ----- United States............... $143.0 52% 133% $ 61.3 42% (33)% $ 91.8 52% Canada...................... 10.8 4 30 8.3 6 (14) 9.7 6 Latin and South America..... 1.6 -- 167 0.6 -- (63) 1.6 1 Europe...................... 65.3 24 62 40.4 28 21 33.4 19 Japan....................... 32.6 12 104 16.0 11 (19) 19.8 11 Asia-Pacific................ 21.3 8 21 17.6 13 (16) 21.0 11 ------ --- --- ------ --- ---- ------ --- Total..................... $274.6 100% 90% $144.2 100% (19)% $177.3 100% ====== === === ====== === ==== ====== ===
Sales increases in 1999 in all regions were due primarily to the merger. Economic conditions in Japan have depressed our sales in that country during the past few years. Before the merger, the Japanese market was served primarily by our largest distributor and significant shareholder, Sumitomo Heavy Industries, Ltd., which accounted for $11.7 million of 1999 sales, $15.5 million of 1998 sales and $18.9 million of 1997 sales. In October 1999, we purchased part of this distribution business from Sumitomo to broaden our direct sales and service in Japan. 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 $83 million on December 31, 1999 compared to $29 million on 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. Gross Profit Margin. Gross profit margin was 34.9% in 1999, 28.2% in 1998 and 37.2% in 1997. Gross profit margin in 1999 was affected by increased sales of higher margin products, varying levels of capacity utilization at our manufacturing plants and warranty settlements on large custom systems and printers. Gross profit margin in 1998 was lower due to declines in sales of higher margin products, lower capacity utilization, cost overruns on large and custom systems and costs associated with consolidating facilities. Research and Development Expenses. Research and development expenses, net of government assistance, for 1999 were 10.5% of sales or $28.7 million (excluding the $14.8 million merger related in-process research and development charge), compared with 9.0% of sales or $13.0 million in 1998 and 6.8% of sales or $12.0 million in 1997. The increase in 1999 was due primarily to the merger. During 1999, research and development activities focused on products targeted at the electronics, semiconductor, biotechnology, aerospace and automotive markets. During 1998, research and development activities focused on products targeted at the aerospace and electronics markets. 21 Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to 23.5% of sales in 1999 due primarily to operating efficiencies realized from the merger and increased sales. In 1998, in dollar terms, selling, general and administrative expenses were essentially the same as 1997. Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles increased to 1.5% of sales or $4.1 million in 1999 as a result of amortizing intangible assets acquired in the merger. Restructuring and Other Charges. During 1999, we took a charge of $19.6 million to accrue for employee severance, leased facility and related costs associated with the closure of our plant in Oxnard, California and other facilities worldwide. These costs resulted from restructuring and integration of operations following the merger. The Oxnard manufacturing operation shutdown was completed during December 1999. Other integration activities included incurring exit costs for some product lines, reducing redundant resources worldwide, and abandoning redundant sales and service facilities. The remaining accrual is $10.1 million at December 31, 1999. During 1998, we took a restructuring charge of $2.0 million for severance costs associated with a downsizing of our global workforce. Acquired In-Process Research and Development Costs. During 1999, we wrote off $14.8 million of in-process research and development costs acquired in the merger. Interest Income. Net interest income was $0.1 million in 1999 compared with $1.6 million or 1.1% of sales in 1998 and $1.0 million or 0.6% in 1997. The decrease in net interest income in 1999 was due to higher average debt balances and lower average cash and investments balances compared to 1998. The increase in 1998 was a result of interest accrued for a full year on the investment of proceeds received from the public issuance of two million shares in May 1997, which raised $35.7 million. Income Taxes. The effective rate of recovery for taxes for 1999 was 6.8% of income before taxes, compared with an effective rate of recovery of 29.2% for 1998. In 1997, we had an effective tax rate of 29.9%. Our recovery rate in 1999 reflects the non-deductibility for tax purposes of acquired in-process research and development costs arising from the merger and the non-recognition of the tax benefit from losses in certain countries where future use of the losses is uncertain. Our 29.2% recovery rate in 1998 derives primarily from our ability to carry back current losses against prior year profits to recover taxes paid in prior years. In addition, our annual effective tax rate is generally less than the Canadian statutory tax rate as tax rates in many of the countries where we operate are lower than the Canadian statutory rate. Net Income (Loss). The net loss during 1999 was $34.8 million compared with a net loss of $7.9 million in 1998 and a net income of $11.9 million in 1997. The net loss during 1999 was due primarily to one-time restructuring and acquired in-process research and development charges related to the merger offset in part by improved operating margins. The net loss in 1998 was due primarily to decreased sales volumes, gross margin erosion and downsizing activities. 22 Quarterly Results of Operations The following tables present unaudited quarterly data for the quarters ended December 31, 1999, October 1, 1999, July 2, 1999 and April 2, 1999. 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 audited consolidated financial statements appearing elsewhere in this report. 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. Generally, our sales are higher in the second and fourth quarters of the year. This table reflects all adjustments, consisting only of all normal recurring accruals, necessary in the view of management to fairly present results of operations.
Three months ended ---------------------------------------------------- December 31, October 1, July 2, April 2, 1999 1999 1999 1999 ------- ------- -------- -------- (In thousands except per share amounts) QUARTERLY STATEMENT OF OPERATIONS DATA: Sales .................................................. $88,667 $78,041 $ 69,248 $ 38,594 Gross profit ........................................... 34,394 30,488 23,376 7,519 Operating expenses: Research and development .............................. 8,676 8,104 8,584 3,336 Selling, general and administrative ................... 17,931 17,704 18,521 10,497 Amortization of technology and other intangibles ...... 1,251 1,251 1,251 317 Acquired in-process research and development .......... -- -- -- 14,830 Restructuring and other charges ....................... -- -- -- 19,631 Foreign exchange, interest and gain on sale of assets . 182 512 (64) 593 ------- ------- -------- -------- Income (loss) before income taxes ...................... 6,354 2,917 (4,916) (41,685) Income taxes provision (benefit) ....................... 2,115 874 (1,174) (4,371) ------- ------- -------- -------- Net income (loss) ...................................... $ 4,239 $ 2,043 $ (3,742) $(37,314) ======= ======= ======== ======== Net income (loss) per common share: Basic ................................................. $ 0.12 $ 0.06 $ (0.11) $ (1.94) Diluted ............................................... $ 0.12 $ 0.06 $ (0.11) $ (1.94) ======= ======= ======== ======== Weighted average common shares outstanding ............. 34,222 34,173 34,167 19,204 Weighted average common shares outstanding and dilutive potential common shares ....................... 35,755 35,085 34,167 19,204
(1) Includes General Scanning from March 22, 1999, the date of the merger of General Scanning and Lumonics. 23
Three months ended ------------------------------------------------ December 31, October 1, July 2, April 2, 1999 1999 1999 1999 ----- ----- ----- ----- (millions) QUARTERLY REVENUES BY MARKET: Semiconductor .............. $12.5 $ 9.3 $ 9.0 $ 3.7 Electronics ................ 26.1 16.1 15.7 10.0 Automotive ................. 4.9 3.4 2.1 1.6 Aerospace .................. 1.4 5.7 6.0 1.9 Packaging .................. 2.3 4.0 2.4 3.2 Components ................. 10.3 11.5 7.9 3.7 Medical/Biotechnology ...... 17.9 14.6 14.6 3.2 Emerging ................... 1.5 3.3 2.8 2.7 Parts and services ......... 11.8 10.1 8.8 8.6 ----- ----- ----- ----- Total .................. $88.7 $78.0 $69.3 $38.6 ===== ===== ===== =====
- ------------------ (1) Includes General Scanning from March 22, 1999, the date of the merger of General Scanning and Lumonics. Beginning in 1999, financial conditions in Japan and the Asia-Pacific region began to improve. During the first half of 1999, the semiconductor equipment industry emerged from a recession. Activity increased in the front end of the fabrication process resulting in an increase in orders for wafer marking. In the second half of the year, activity increased in the back end of the fabrication process resulting in increased sales of laser markers. Electronic equipment demand was stirred by consumer demand for cellular phones. Late in the fall, activity increased in the auto industry as shown by a $12 million order we received from Tower Automotive to be delivered during 2000. Our sales were $88.7 million in the fourth quarter of 1999 compared to $78.0 million in the third quarter of 1999, an increase of 14%. The increase in sales quarter to quarter was due primarily to increased levels of orders and revenues from the semiconductor and electronics market. For the three months ended December 31, 1999, sales to these two markets totaled $38.6 million, compared to $25.4 million for the three months ended October 1, 1999. Sales in the third quarter of 1999 were $78.0 million compared to $69.3 in the second quarter of 1999, an increase of 13%. The increase in sales quarter to quarter was due primarily to increased orders from the components market. For the three months ended October 1, 1999, sales to the components markets totaled $11.5 million compared to $7.9 million for the three months ended July 2, 1999. Sales in the second quarter of 1999 were $69.3 million compared to $38.6 million in the first quarter of 1999, an increase of 80%. The increase in sales quarter to quarter was due primarily to the merger. Gross profit margins were 38.8% in the fourth quarter of 1999, 39.1% in the third quarter, 33.8% in the second quarter and 19.5% in the first quarter. The gross profit margin in the fourth quarter reflected increased warranty expense accrued related to emerging market products. This factor outweighed the benefits from improved product mix and higher capacity utilization. Third quarter gross profit margin increased, benefiting from a more favorable product mix, volume leverage and consolidation of manufacturing operations. Second quarter gross profit margin reflected the first full quarter of combined General Scanning and Lumonics results and the favorable mix of relatively high margin systems from General Scanning's product line. Gross profit margin in the first quarter reflected reduced sales volumes, pricing pressures, inventory provisions and an unfavorable product mix, related primarily to our operations prior to the merger in March 1999. Liquidity and Capital Resources Cash and cash equivalents totaled $25.3 million at December 31, 1999 compared to $24.2 million at December 31, 1998 and $56.8 million at December 31, 1997. During 1999, we used $4.4 million in operating activities. The net loss, after adjustment for non-cash items, resulted in the use of cash of $6.7 million in 1999. Accounts receivable used a further $14.4 million, which was 24 more than offset by inventories, other current assets and current liabilities providing $16.7 million. In 1998 we used $6.9 million to fund operations. In 1998, the net loss of $7.9 million, after adjustment for non-cash items, resulted in the use of cash of $3.3 million in 1998. Accounts receivable provided $14.4 million in cash during the year, offset by an $8.3 million increase in inventory and a reduction of $6.4 million in accounts payable and other current liabilities. During 1997, a net $5.3 million was used in operating activities, including $21.0 million in non-cash working capital, consisting mainly of an increase in accounts receivable from shipments late in the fourth quarter. In 1999, we used $0.9 million in investing activities, including $7.3 million of purchases and $8.2 million of maturities of short-term investments. During the year, we generated $3.9 million from the sale of business assets and invested $6.2 million in property, plant and equipment. 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 acquisition of the Sumitomo distribution business added $0.1 million in cash, offset by $0.4 million cash to acquire the company. In 1998, we used a total of $11.3 million in cash in investing activities. These activities included $43.5 million of purchases of short-term investments, $47.1 million of maturities of short-term investments, $13.6 million in capital expenditures and $1.2 million to acquire Meteor Optics Inc. Capital expenditures in 1998 included $6.3 million to complete the expansion of manufacturing facilities in Rugby, England that began in 1997 and approximately $1.5 million to purchase and equip a second optics facility in Nepean, Canada. Cash flows used in investing activities totaled $9.3 million in 1997, including $80.2 million of purchases of short-term investments, $79.4 million of maturities of short term investments, and $8.7 million in capital expenditures. Capital expenditures included $4.2 million of costs incurred in the expansion and modernization of the facility in Rugby, England and $4.5 million invested in machinery and equipment at other locations. Cash flow provided by financing activities was $5.4 million for the year ended December 31, 1999 compared to cash used in financing activities of $10.6 million in 1998 and $42.8 million provided by financing activities in 1997. The increase in cash in 1999 relates primarily to a $7.5 million increase in bank indebtedness less $2.6 million of payments of long-term debt. Changes during 1998 were due primarily to $7.9 million reduction in bank indebtedness, $2.3 million used to repay long-term debt and $0.6 million used to repurchase and cancel 94,900 common shares. Changes during 1997 were due primarily to $7.7 million increase in bank indebtedness, $2.5 million used to repay long-term debt, $35.7 million raised through a public offering of 2 million common shares and $1.9 million raised from the exercise of stock options. Term loans from Sumitomo made in 1990 and 1991 are repayable in 10 equal semi-annual installments, which commenced in April 1996. We made two payments in 1999 totaling $2.6 million and two payments in 1998 totaling $2.3 million. At December 31, 1999, Sumitomo debt, which is due in 2000, was $3.9 million. In addition, we have a loan balance of $1.5 million, also due in 2000, under a mortgage on property in California. We have credit facilities of approximately $40 million denominated in Canadian dollars, U.S. dollars, British pounds and Japanese yen (1998--$20 million). Actual bank indebtedness is due on demand and bears interest based on prime which resulted in an effective average rate of 4.98% in 1999 (1998--7%). As at December 31, 1999, we had unused and available demand lines of credit amounting to approximately $19 million (1998--$9 million). 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 and available bank lines of credit, will be sufficient to satisfy anticipated cash needs to fund working capital and investments in facilities and equipment for the next two years. 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. 25 Update On Year 2000 Compliance We have not experienced material problems related to the Year 2000. We are not aware of customers having related problems with system products manufactured by us. We are also not aware of any significant problems in receiving payments on customer receivables due to Year 2000 problems. In addition, we are not aware of any significant vendor performance issues due to Year 2000 problems identified. We have not experienced significant internal operations problems related to Year 2000. We intend to maintain efforts to identify possible problems related to Year 2000 with internal systems, customers and vendors. ITEM 7A 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. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GSI LUMONICS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITORS' REPORT................................................. 28 CONSOLIDATED BALANCE SHEETS...................................... 29 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.................. 30 CONSOLIDATED STATEMENTS OF OPERATIONS............................ 31 CONSOLIDATED STATEMENTS OF CASH FLOWS............................ 32 Notes to Consolidated Financial Statements....................... 33
27 AUDITORS' REPORT To the Stockholders of GSI Lumonics Inc. We have audited the consolidated balance sheets of GSI Lumonics Inc. as of December 31, 1999 and 1998 and the consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. Our audits also included the financial statement schedule listed at Item 14 of this Form 10-K Annual Report. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States and Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 in accordance with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. On February 11, 2000, we reported without reservation to the stockholders on the Company's consolidated financial statements prepared in accordance with accounting principles generally accepted in Canada. Ernst & Young LLP Chartered Accountants Ottawa, Canada, February 11, 2000 (except with respect to note 19, which is as at March 17, 2000) 28 GSI LUMONICS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31, ------------------------- 1999 1998 --------- --------- ASSETS ------ Current Cash and cash equivalents .................................................... $ 25,272 $ 24,229 Short-term investments (note 15) ............................................. 7,342 8,098 Accounts receivable, less allowance of $3,197 (1998-$311)(notes 3 and 7) ..... 80,448 31,673 Due from related party (note 14) ............................................. 3,235 3,844 Inventories (notes 4 and 7) .................................................. 72,727 44,096 Deferred tax assets (note 13) ................................................ 24,473 3,214 Other current assets (note 6) ................................................ 2,338 5,091 Current portion of swap contracts (note 15) ................................. 1,411 1,076 --------- --------- Total current assets ...................................................... 217,246 121,321 Property, plant and equipment, net of accumulated depreciation of $28,024 (1998 45,278 32,209 - $24,299) (note 5) .......................................................... Long-term portion of swap contracts (note 15) ................................. -- 1,076 Other assets (note 6) ......................................................... 3,851 964 Goodwill and other intangible assets, net of amortization of $8,689 (1998 - 2,953) ....................................................................... 23,347 4,072 --------- --------- $ 289,722 $ 159,642 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness (note 7) ................................................... $ 23,100 $ 7,261 Accounts payable ............................................................. 28,094 5,605 Accrued compensation and benefits ............................................ 13,709 3,456 Other accrued expenses and income taxes ...................................... 43,067 15,481 Current portion of deferred compensation (note 9) ............................ 124 -- Current portion of long-term debt (note 8) ................................... 5,425 3,541 --------- --------- Total current liabilities .................................................. 113,519 35,344 -- 3,541 Long-term debt due after one year (note 8) .................................... Deferred income tax liability (note 13) ....................................... 2,397 -- Deferred compensation, less current portion (note 9) .......................... 2,076 -- --------- --------- Total liabilities .......................................................... 117,992 38,885 Commitments and contingencies (note 17) Stockholders' equity (note 10) Capital stock, no par value; Issued common shares of 34,298,942 ............ 222,865 138,871 (1998 - 17,056,001) Deficit ...................................................................... (44,225) (9,451) Accumulated other comprehensive income ....................................... (6,910) (8,663) --------- --------- Total stockholders' equity ............................................... 171,730 120,757 --------- --------- $ 289,722 $ 159,642 ========= =========
The accompanying notes are an integral part of these financial statements 29 GSI LUMONICS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
Accumulated Capital Stock Other ------------------------ Comprehensive Comprehensive # Shares Amount Deficit Income Income Total ------- --------- --------- -------- -------- --------- (000's) BALANCE, DECEMBER 31, 1996 ............... 14,714 $ 101,619 $ (13,360) $ 86 $ 14,138 $ 88,345 ========= Net income ............................... 11,912 11,912 11,912 Issuance of capital stock --public offering (net of issue costs) . 2,000 35,658 35,658 --stock options ........................ 387 1,901 1,901 Foreign currency translation adjustments . (4,193) (4,193) (4,193) ------- --------- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1997 ............... 17,101 139,178 (1,448) (4,107) $ 7,719 133,623 ======== Net loss ................................. (7,916) (7,916) (7,916) Issuance of capital stock --stock options ......................... 50 233 233 Repurchase of capital stock under normal course issuer bid .............. (95) (540) (87) (627) Foreign currency translation adjustments . (4,556) (4,556) (4,556) ------- --------- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1998 ............... 17,056 138,871 (9,451) (8,663) $(12,472) 120,757 ======== Net loss ................................. (34,774) (34,774) (34,774) Issuance of capital stock ................ 17,079 83,528 83,528 --merger with General Scanning Inc. ..... --stock options ......................... 164 466 466 Foreign currency translation adjustments . 1,753 1,753 1,753 ------- --------- --------- -------- -------- --------- BALANCE, DECEMBER 31, 1999 ............... 34,299 $ 222,865 $ (44,225) $ (6,910) $(33,021) $ 171,730 ======= ========= ========= ======== ======== =========
The accompanying notes are an integral part of these financial statements 30 GSI LUMONICS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
Year ended December 31, ---------------------------------------- 1999 1998 1997 --------- --------- -------- (note 2) Sales ...................................................... $ 274,550 $ 144,192 $177,328 Cost of goods sold ......................................... 178,773 103,519 111,406 --------- --------- -------- Gross profit ............................................... 95,777 40,673 65,922 Operating expenses: Research and development ................................. 28,700 12,985 11,993 Selling, general and administrative ...................... 64,653 38,191 37,591 Amortization of technology and other intangibles ......... 4,070 861 400 Acquired in-process research and development (note 2) .... 14,830 -- -- Restructuring and other charges (note 16) ................ 19,631 2,022 -- --------- --------- -------- Income (loss) from operations .............................. (36,107) (13,386) 15,938 Gain on sale of assets (notes 2 and 10) .................. 1,599 -- -- Interest income, net ..................................... 89 1,578 1,048 Foreign exchange transaction gains (losses) .............. (2,911) 632 -- --------- --------- -------- Income (loss) before income taxes .......................... (37,330) (11,176) 16,986 Income taxes provision (benefit) ........................... (2,556) (3,260) 5,074 --------- --------- -------- Net income (loss) .......................................... $ (34,774) $ (7,916) $ 11,912 ========= ========= ======== Net income (loss) per common share: Basic .................................................... $ (1.14) $ (0.46) $ 0.75 Diluted .................................................. $ (1.14) $ (0.46) $ 0.72 Weighted average common shares outstanding (000's) ......... 30,442 17,079 15,989 Weighted average common shares outstanding and dilutive potential common shares (000's) ........................... 30,442 17,079 16,454
The accompanying notes are an integral part of these financial statements 31 GSI LUMONICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF U.S. DOLLARS)
Year ended December 31, -------------------------------------- 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income (loss) for the year ........................................... $(34,774) $ (7,916) $ 11,912 Adjustments to reconcile net income (loss) to net cash (used in) operating activities: Acquired in-process research and development ........................... 14,830 -- -- Gain on sale of assets ................................................. (1,599) -- -- Depreciation and amortization .......................................... 15,177 5,600 4,007 Deferred compensation .................................................. 78 -- -- Deferred income taxes .................................................. (1,704) (1,306) (434) Unrealized currency exchange loss ...................................... 1,326 330 241 Changes in current assets and liabilities: Accounts Receivable .................................................... (14,448) 14,408 (23,491) Inventories ............................................................ 6,084 (8,343) (3,654) Other current assets ................................................... 4,540 (3,321) 313 Accounts payable, accrued expenses, and taxes payable .................. 6,073 (6,360) 5,821 -------- -------- -------- Net cash (used in) operating activities .................................. (4,417) (6,908) (5,285) -------- -------- -------- Cash flows from investing activities: Merger with General Scanning Inc. (note 2) ............................. 1,451 -- -- Acquisition of Lumonics Pacific KK (note 2) ............................ (336) -- -- Acquisition of Meteor Optics Inc. (note 2) ............................. -- (1,158) -- Sale of assets ......................................................... 3,940 -- -- Additions to property, plant and equipment, net ........................ (6,219) (13,568) (8,412) Maturity of short-term investments ..................................... 8,208 47,091 79,351 Purchase of short-term investments ..................................... (7,342) (43,522) (80,185) (Increase) in other assets ............................................. (609) (102) (43) -------- -------- -------- Cash (used in) investing activities .................................... (907) (11,259) (9,289) -------- -------- -------- Cash flows from financing activities: Proceeds (payments) of bank indebtedness, net .......................... 7,502 (7,865) 7,741 Payments on long-term debt ............................................. (2,617) (2,325) (2,527) Issue of share capital (net of issue costs) ............................ 466 233 37,560 Repurchase of common shares ............................................ -- (627) -- -------- -------- -------- Cash provided by (used in) financing activities .......................... 5,351 (10,584) 42,774 Effect of exchange rates on cash and cash equivalents .................... 1,016 (3,848) (710) -------- -------- -------- Increase (decrease) in cash and cash equivalents ......................... 1,043 (32,599) 27,490 Cash and cash equivalents, beginning of year ............................. 24,229 56,828 29,338 -------- -------- -------- Cash and cash equivalents, end of year ................................... $ 25,272 $ 24,229 $ 56,828 ======== ======== ========
The accompanying notes are an integral part of these financial statements 32 GSI LUMONICS INC. Notes to Consolidated Financial Statements as of December 31, 1999 (Tabular Amounts in Thousands of U.s. Dollars Except Share Amounts) 1. SIGNIFICANT ACCOUNTING POLICIES Nature of operations GSI Lumonics Inc. designs, develops, manufactures and markets laser-based advanced manufacturing systems and components which are used in applications such as cutting, welding, drilling, marking, micro-machining, inspection, gene analysis and optical transmission. Major markets for these products include the semiconductor, electronics, automotive, medical/biotechnology and telecommunications industries. In addition, the Company sells to other markets such as the aerospace and packaging industries. The Company's principal markets are in the United States, Canada, Europe, Japan and Asia-Pacific. Basis of presentation and change in reporting currency These consolidated financial statements have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the United States, applied on a consistent basis. Prior to 1998, the Company prepared and filed its consolidated financial statements in Canadian dollars. Basis of consolidation 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. 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 Inc. have been included in the consolidated financial statements from the date of merger (see Note 2). Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents Cash equivalents are investments held to maturity and have original maturities of three months or less. Cash equivalents consist principally of commercial paper, short-term corporate debt, and banker's acceptances. Cash equivalents are stated at cost, which approximates their fair value. The Company does not believe it is exposed to any significant credit risk on its cash equivalents. 33 Short-term Investments Short-term investments consist principally of banker's acceptances, with original maturities greater than three months. The Company has classified these investments as available-for-sale securities and carries them at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a component of accumulated other comprehensive income until realized. Inventories Inventories, which include materials and conversion costs, are stated at the lower of cost (primarily first-in, first-out) or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. The declining-balance and straight-line methods determine depreciation and amortization over the estimated useful lives of the owned assets. Estimated useful lives for buildings and improvements range from 5 to 39 years and for machinery and equipment from 3 to 15 years. Leasehold improvements are amortized over the lesser of their useful lives or the lease term, including option periods expected to be utilized. Goodwill and Other Intangibles Goodwill consists of the excess of cost over acquired net identifiable assets for business purchase combinations. Other intangibles include assembled workforce, trademarks and trade names. The amortization period for goodwill and other intangibles is determined on a separate basis for each acquisition. Goodwill and other intangibles are amortized on a straight-line basis over periods ranging from a minimum of two to a maximum of ten years from the date of acquisition. Patents and purchased technology are stated at cost and are amortized on a straight-line basis over the expected life of the asset, up to 17 years. Impairment of long-lived assets The Company regularly assesses the realizability of its long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. Based on its review, the Company expects full recovery. Revenue Recognition The Company recognizes revenues generally at the time of shipment or when services are provided. For certain long-term contracts, revenues and profits are recognized using the percentage-of-completion method. The Company accrues estimated potential product liability and warranty costs, based on the Company's experience, when revenue is recognized. Research and Product Development Expense Research and development costs are charged to expense as incurred and are reduced by certain related non-refundable government assistance. 34 Stock Based Compensation The Company has elected to continue to apply APB 25 in accounting for its stock option plans, and immaterial amounts of compensation have been recognized. Foreign Currency Translation The financial statements of the parent corporation and its subsidiaries outside the U.S. have been translated into U.S. dollars in accordance with the Financial Accounting Standards Board Statement No. 52, Foreign Currency Translation. Assets and liabilities of foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the period-end. Revenues and expenses are translated at the average exchange rate in effect for the period. The resulting translation adjustments are reported as a separate component of other comprehensive income in stockholders' equity. Derivative Financial Instruments Foreign exchange forward contracts and local currency borrowings are used to reduce the impact of certain foreign currency balance sheet fluctuations and foreign currency denominated sales. Gains and losses from forward contracts that are not hedges of firm commitments are accrued at each balance sheet date and included in the Consolidated Statements of Operations as foreign exchange transactions gains (losses). In certain circumstances, the Company uses currency and interest rate swap contracts to manage foreign currency exposures and interest rate risk. Payments and receipts under such swap contracts are recognized as adjustments to interest expense on a basis that matches them with the fluctuations in the interest receipts and payments under floating rate financial assets and liabilities. Income Taxes The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between financial reporting and the income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Recent Pronouncements In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin #101 on revenue recognition which is effective for our current fiscal year. We believe this bulletin will not have a significant impact on our reported sales. Comparative Figures Certain comparative figures have been reclassified from statements previously presented to conform to the presentation of the 1999 financial statements. 2. MERGER AND ACQUISITIONS AND DISPOSITIONS 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. Under the terms of the merger, GSI stockholders received 1.347 shares of common stock in the Company in exchange for each common share of GSI stock they held. Lumonics shareholders continued to hold shares of Lumonics Inc., which, following the merger, was renamed GSI Lumonics Inc. Immediately following the merger each group of shareholders owned 35 approximately 50% of the outstanding shares of the Company. 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. Cash flow impact of $1,451 thousand from the GSI merger is cash acquired of $4,719 thousand, less merger costs of $3,268 thousand. The aggregate purchase price of $84 million was allocated to General Scanning net identifiable assets, based on estimated fair values, as follows: Shares purchased (a) ...................... $ 83,074 Options purchased (b) & (c) ............... 917 -------- Total purchase price ...................... $ 83,991 ======== Current assets, including cash of $4,719 .. 69,883 Fixed assets .............................. 16,110 Acquired technology (d) ................... 20,017 Other identified intangible assets (e) .... 4,804 Other long term assets (f) ................ 3,949 Deferred taxes, net ....................... 14,676 Current liabilities ....................... (55,440) Long term debt ............................ (28) Deferred compensation, net of $117 current portion ................................... (2,005) Transaction costs ......................... (2,805) In-process research and development (g) ... 14,830 -------- $ 83,991 ========
(a) 17,079,475 common shares of GSI Lumonics Inc. valued at US$4.864 per share, in exchange for all 12,679,640 General Scanning outstanding shares of common stock, on the basis of an exchange ratio of 1.347 shares of GSI Lumonics Inc. for each 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 capital stock; (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; (d) Acquired technology of $20 million results from an appraisal of General Scanning intangible assets and is being amortized on a straight line basis over its useful life of 60 months; (e) Assembled workforce of $3.4 million and trademark and trade name of $1.4 million result from an appraisal of General Scanning intangible assets and are being amortized on a straight-line basis over a ten year period; (f) Other long term assets includes a note receivable from Robotic Vision Systems, Inc. (RVSI) of $2,250 thousand, 271,493 shares of RVSI common stock valued at $764 thousand, and other deposits of $935 thousand; (g) Acquired in-process research and development of $14.8 million charged against income in 1999 results from an appraisal of General Scanning intangible assets. The purchase price allocation and intangible valuation was based on management's estimates of the after-tax net cash flows, and differs from preliminary estimates in interim statements. Specifically, the valuation gave consideration to the following: a) a fair market premise, excluding any Company-specific considerations which could result in estimates of investment value for the subject assets; b) comprehensive due diligence concerning all potential intangible assets including trademarks, trade names, patents, copyrights, non-compete agreements, assembled workforce, customer relationships, and sales channel; c) the value of acquired existing technology, which was specifically addressed, with a view toward ensuring the relative allocations to existing technology and in-process research and development were consistent with the relative contributions of each to the final product; and d) the allocation to in-process research and development, based on a calculation that considered only the efforts completed as of the merger date, and only the cash flow associated with the completed efforts for one generation of the products currently being developed. 36 As shown above, 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 charge is related to the portion of the value of these projects, excluding the contribution of existing technology, that were not yet technically feasible, had no alternative future use and for which successful development was uncertain. Management's conclusion that the in-process development effort had no alternative future use was reached in consultation with engineering personnel from both GSI and Lumonics. To conform with United States generally accepted accounting principles and to reflect the purchase accounting method used to transact the merger, results for the first 11 weeks of 1999 and all of 1998 are those of Lumonics only. Therefore, the results of 1998 and 1997 do not provide a meaningful basis for comparison with 1999, although they are provided in the financial statements attached. The following 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.
Pro forma combined (unaudited) Year ended December 31, ---------------------------- 1999 1998 --------- --------- Sales ................................................. $ 295,009 $ 325,109 ========= ========= Net loss .............................................. $ (41,726) $ (11,233) ========= ========= Net loss per common share: Basic ............................................ $ (1.22) $ (0.33) Diluted .......................................... $ (1.22) $ (0.33) Weighted average common shares outstanding ............ 34,177 34,030 Weighted average common shares outstanding and dilutive potential common shares .............................. 34,177 34,030
On October 4, 1999 the Company acquired all outstanding shares of Lumonics Pacific KK, a subsidiary of Sumitomo Heavy Industries Ltd. of Tokyo Japan. The purchase price of $1,305 thousand was comprised of a cash consideration of $439 thousand (cash flow impact of $336 thousand is net of $103 thousand in cash acquired) that was paid upon closing, and debt of $866 thousand, plus agreed interest. The debt will be settled in two equal installments, the first due April 4, 2000, and the second on October 4, 2000 and is included in other accrued expenses and income taxes as at December 31, 1999. This transaction has been accounted for as a purchase. In June 1998, the Company acquired, for cash consideration of $1,158 thousand, all outstanding shares of Meteor Optics Inc., a fiber-optics manufacturer based in the United States. This transaction has been accounted for as a purchase. Net tangible assets had no significant value, and the purchase price has been allocated to goodwill and is being amortized over 10 years. In December, 1999 the Company completed the sale of the OLT precision alignment system product line to Virtek Vision International Inc. (Virtek) of Waterloo, Ontario. Under the terms of the sale, GSI Lumonics received cash of $2,366 thousand as well as a 10% royalty on Virtek's sales of these systems to the aerospace industry for three years in exchange for the operating assets of the OLT product line. GSI Lumonics recorded a gain of $699 thousand on this sale during December 1999. 3. ACCOUNTS RECEIVABLE Accounts receivable include unbilled receivables on long-term contracts of $0 (1998 - $5,531 thousand). 37 4. INVENTORIES Inventories consist of the following:
December 31, ---------------------- 1999 1998 -------- -------- Raw materials........................... $26,011 $ 9,123 Work-in-process......................... 17,005 14,062 Finished goods.......................... 29,711 20,911 ------- ------- Total inventories....................... $72,727 $44,096 ======= =======
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
December 31, ----------------------- 1999 1998 -------- -------- Cost: Land, buildings and improvements........ $ 36,435 $ 26,290 Machinery and equipment................. 36,867 30,218 -------- -------- Total cost.............................. 73,302 56,508 Accumulated depreciation................ (28,024) (24,299) -------- -------- Net property, plant and equipment....... $ 45,278 $ 32,209 ======== ========
6. OTHER ASSETS Other assets consist of the following:
December 31, -------------------------- 1999 1998 ---------- --------- Short term other assets: ------------------------ Income tax recoverable.................. $ - $3,201 Prepaid expenses........................ 2,338 1,890 Total................................... $2,338 $5,091 ====== ====== Long term other assets: ----------------------- Note receivable......................... $2,250 $ - Deferred income taxes................... - 912 Deposits and other...................... 1,601 52 ------ ------ Total................................... $3,851 $ 964 ====== ======
38 7. BANK INDEBTEDNESS The Company has credit facilities of approximately $40 million which are denominated in Canadian dollars, US dollars, Pound sterling and Japanese yen (1998 - $20 million). Actual bank indebtedness is due on demand and bears interest based on prime which resulted in an effective average rate 4.98% for fiscal 1999 (1998--7%). As at December 31, 1999, the Company had unused and available demand lines of credit amounting to approximately $19 million (1998 - $9 million). Accounts receivable and inventories have been pledged as collateral for the bank indebtedness under general security agreements. The borrowings require, among other things, the Company to maintain specified financial ratios and conditions. As at December 31, 1999, the Company was in compliance with those ratios and conditions. 8. LONG-TERM DEBT Current Portion of Long-term debt Long-term debt includes a mortgage payable at 10-3/8% interest, assumed as part of the merger with General Scanning Inc., collateralized by the related land and building, maturing in March 2000, at which time the remaining principal of $1,508 thousand will be payable. The Company has a long-term loan from Sumitomo Heavy Industries, Ltd., a significant shareholder, all of which is repayable in Japanese yen. The relevant foreign exchange rates were:
December 31, ------------------------------ 1999 1998 ------------- ------------- $1 Canadian = Japanese yen................................ 70.3 73.8 $1 US = Japanese yen...................................... 102.1 113.0
The Company has entered into currency and interest rate swap contracts which oblige it to pay Canadian dollars and receive Japanese yen, and pay U.S. dollars and receive Japanese yen, on the dates principal and interest payments are due. The terms of these contracts are described in Note 15. Long term debt is comprised of:
1999 1998 ------- ------- Sumitomo Heavy Industries, Ltd., Japanese yen term loans, interest payable semi-annually at 5.43% with semi-annual principal payments, maturing October 31, 2000..................... $ 3,917 $ 7,082 Silicon Valley Bank, mortgage principal due March 1, 2000........... 1,508 - Less current portion................................................ (5,425) (3,541) ------- ------- Total............................................................. $ - $ 3,541 ======= =======
Total cash interest paid on all debt during the year ended December 31, 1999 was $1,155 thousand (1998 - $899 thousand; 1997 - $1,112 thousand). 9. DEFERRED COMPENSATION Certain officers and employees may defer payment of a portion of their compensation until termination of employment or later. Interest on the outstanding balance is credited quarterly at the prime rate, which averaged 8.01% during the year ended December 31, 1999. The portion of deferred compensation estimated to be due within one year is included in current liabilities. 39 10. 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. During 1999, the Company sold securities held for sale and the realized gain of $900 thousand has been included in the results of operations. Accumulated other comprehensive income at end of year includes only unrealized foreign currency translation gains and losses. 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 year. For diluted income 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:
Year ended December 31, ------------------------------------------ 1999 1998 1997 --------- --------- --------- Weighted average common shares outstanding 30,442 17,079 15,989 Dilutive potential common shares.......... - - 465 ----------- ----------- ----------- Diluted common shares..................... 30,442 17,079 16,454 =========== =========== =========== Options and warrants excluded from diluted income per common share as their effect would be anti-dilutive.... 3,978 2,004 290 =========== =========== ===========
Shareholder Rights Plan On April 12, 1999, the Board of Directors adopted a Shareholders Rights Plan (the "Plan"). Under this Plan one Right has been issued in respect of each common share outstanding as of that date and one Right has been and will be issued in respect of each common share issued thereafter. Under the Plan, each Right, when exercisable, entitles the holder to purchase from the Company one common share at the exercise price of Cdn$200, subject to adjustment and certain anti-dilution provisions (the "Exercise Price"). The Rights are not exercisable and cannot be transferred separately from the common shares until the "Separation Time", which is defined as the eighth business day (subject to extension by the Board) after the earlier of (a) the "Stock Acquisition Date" which is generally the first date of public announcement that a person or group of affiliated or associated persons (excluding certain persons and groups) has acquired beneficial ownership of 20% or more of the outstanding common shares, or (b) the date of commencement of, or first public announcement of the intent of any person or group of affiliated or associated persons to commence, a Take-over Bid. At such time as any 40 person or group of affiliated or associated persons becomes an "Acquiring Person" (a "Flip-In Event"), each Right shall constitute the right to purchase from the Company that number of common shares having an aggregate Market Price on the date of the Flip-In Event equal to twice the Exercise Price, for the Exercise Price (such Right being subject to anti-dilution adjustments). So long as the Rights are not transferable separately from the common shares, the Company will issue one Right with each new common share issued. The Rights could have certain anti-takeover effects, in that they would cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors. Stock Options The Company has stock option plans providing for the issue of options to purchase the Company's common shares. Outstanding options vest over periods of one to four years beginning on the date of grant. The options expire over a period of two to seven years beginning at the date of grant. Of the 4.7 million (1998 - 3.7 million) options authorized under these plans, 408,178 (1998 - 103,425) options were available for grant as at December 31, 1999. The 1995 Stock Option Plan (the "1995 Plan"), as amended, provides for the issuance of nonqualified and incentive stock options to purchase up to 2,906,000 shares of the Company's common stock, of which 408,178 were available for future grant at December 31, 1999. Under this plan, options are granted at the closing price of the Company's common shares on the Toronto Stock Exchange or in lieu thereof, Nasdaq, on the trading date of the grant. The exercise period of each option is determined by the Compensation Committee but may not exceed 10 years. The Company's 1994 Stock Option Plan has terminated; however, options to purchase 247,325 shares of common stock were outstanding under the 1994 Plan at December 31, 1999. In conjunction with the merger with General Scanning Inc. the Company adopted outstanding options held by employees under nonqualified and incentive stock options, and issued 2,051,903 stock options in exchange. In July 1999, the Company offered employee option holders an exchange of one option for each two options outstanding with exercise prices over US$9.00 or Cdn$13.32. Under this exchange 281,483 options with exercise price of US$4.63 or Cdn$6.95 per share were granted with new vesting schedule, and 562,966 options were cancelled. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, which defines a fair value based method of accounting for employee stock options or similar equity instruments. The Company has elected to continue to apply APB 25 in accounting for its stock option plans, and immaterial amounts of compensation have been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts below. Because the method of accounting under SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation costs may not be representative of that to be expected in future years. 41
1999 1998 1997 ----------- ------------ ----------- Net income (loss): As reported......................... $(34,774) $(7,916) $11,912 Pro forma........................... $(36,117) $(8,976) $11,145 Basic net income (loss) per share: As reported......................... $ (1.14) $ (0.46) $ 0.75 Pro forma........................... $ (1.19) $ (0.53) $ 0.70 Diluted income (loss) per share: As reported......................... $ (1.14) $ (0.46) $ 0.72 Pro forma........................... $ (1.19) $ (0.53) $ 0.68
The fair value of options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 ---------- ---------- ------------ Risk-free interest rate........... 6.7% 4.6% 5.8% Expected dividend yield........... - - - Expected lives upon vesting....... 1.0 years 1.2 years 1.8 years Expected volatility............... 60% 40% 30% Weighted average fair value per share............................. $1.85 $1.00 $3.76
Stock option activity for the years ended December 31, 1999, 1998 and 1997 is presented below.
Options Weighted Avg. (thousands) Exercise Price ------------ --------------- Outstanding at December 31, 1996....... 951 $ 5.71 Granted................................ 833 18.40 Exercised.............................. (387) 4.91 Canceled............................... (76) 0.34 ------ ------ Outstanding at December 31, 1997....... 1,321 13.15 Granted................................ 879 5.16 Exercised.............................. (50) 4.72 Canceled............................... (146) 15.63 ------ ------ Outstanding at December 31, 1998....... 2,004 9.11 Exchanged in merger with General 2,123 9.86 Scanning............................... Granted................................ 1,627 4.61 Exercised.............................. (164) 3.36 Canceled............................... (1,612) 12.66 ------ ------ Outstanding at December 31, 1999....... 3,978 $ 6.71 ====== ====== Exercisable at December 31, 1999....... 1,165 $ 7.64 ====== ======
42 The following summarizes outstanding and exercisable options outstanding on December 31, 1999:
Options Outstanding Exercisable Options ----------------------------------------- -------------------------- Number Weighted Weighted Number of Weighted of Average Average Options Average Range of Options Remaining Exercise Exercisable exercise Exercise prices (000's) Life Price (000's) Price --------------- ------- ---- ----- ------- ----- $ 1.75 to $ 3.75 370 4.9 years $ 2.83 281 $ 2.56 $ 4.25 to $ 4.50 809 9.0 years $ 4.41 111 $ 4.46 $ 4.60 to $ 5.00 1,175 4.3 years $ 4.75 211 $ 4.85 $ 5.01 to $10.00 871 4.6 years $ 6.15 242 $ 8.00 $ 10.40 to $19.70 753 6.8 years $16.40 320 $14.79 -------- ----- 3,978 1,165 ======== =====
Repurchase of common shares On April 29, 1998, the Board of Directors authorized a program to repurchase up to 5% of its issued and outstanding common shares. Pursuant to provisions of the Agreement and Plan of Merger with General Scanning Inc., the Company suspended its repurchase program in October 1998. During 1998, the Company repurchased 94,900 common shares for approximately $627 thousand. Warrants In conjunction with the merger with General Scanning Inc. the Company adopted outstanding warrants for the purchase of common stock issued to non-employee members of the General Scanning Inc. Board of Directors. The warrants are subject to vesting as determined by a committee of the Board of Directors at the date of grant and expire ten years from the date of grant. During the year ended December 31, 1999, none were granted, exercised or cancelled. At December 31, 1999, 70,718 warrants, of which 57,248 are exercisable, remain outstanding at prices ranging from $1.75 to $15.41 per share. 11. DEFINED CONTRIBUTION PLANS The Company has defined contribution employee savings plans in Canada, the United Kingdom, and the United States. In the United States, the plan is governed by the provisions of Section 401(k) of the Internal Revenue Code under which contributions may be made by its United States employees. The Company matches the contributions of participating employees on the basis of the percentages specified in each plan. Company matching contributions to the plans during 1999 were $2.3 million (1998 - $1.1 million; 1997 - $0.9 million). 12. DEFINED BENEFIT PENSION PLAN The Company's subsidiary in the United Kingdom maintains a pension plan, known as the GSI Lumonics Ltd. UK Pension Scheme. The plan has two components: the Final Salary Plan, which is a defined benefit plan, and the Retirement Savings Plan, which is a defined contribution plan. Effective April 1997, membership to the Final Salary Plan was closed. The most recent actuarial valuation of the plan was performed as at November 30, 1997. The extrapolation as at December 1, 1999 indicates the actuarial present value of the accrued pension benefits and the net assets available to provide for these benefits, at market value, were as follows: 43
1999 1998 --------------- --------------- Pension fund assets ........................................ 13,700 12,000 Accrued pension benefits ................................... 13,700 9,500
The assumptions used to develop the actuarial present value of the accrued pension benefits were as follows:
1999 1998 --------- -------- Discount rate .................................................... 6.5% 8.5% Compensation increases rate ...................................... 5.5% 6.5% Investment returns assumption .................................... 6.5% 8.5% Average remaining service life of employees ...................... 18 years 18 years
The estimates are based on actuarially computed best estimates of pension asset long-term rates of return and long-term rate of obligation escalation. Variances between these estimates and actual experience are amortized over the employees' average remaining service life. Pension expense under this plan during fiscal 1999 was $520 thousand (1998 - $670 thousand; 1997 -$500 thousand). 13. INCOME TAXES Details of the income tax provision (benefit) are as follows:
1999 1998 1997 ------- ------- ------- Current Canadian ................. $ 724 $ 1,687 $ 2,513 International ............ (1,576) (3,641) 2,995 ------- ------- ------- (852) (1,954) 5,508 Deferred Canadian ................. (2,084) (247) 384 International ............ 380 (1,059) (818) ------- ------- ------- (1,704) (1,306) (434) ------- ------- ------- Income tax provision (benefit) $(2,556) $(3,260) $ 5,074 ======= ======= =======
The income tax provision (benefit) reported differs from the amounts computed by applying the Canadian rate to income (loss) before income taxes. The reasons for this difference and the related tax effects are as follows:
1999 1998 1997 -------- ------- ------- Expected Canadian tax rate ................................... 44.6% 44.6% 44.0% Expected income tax provision (benefit) ...................... $(16,649) $(4,984) $ 7,474 Non-deductible research and development and other expenses ... 4,325 -- -- International tax rate differences ........................... 3,461 (97) (868) Losses and temporary timing differences the benefit of which has not been recognized ................................... 5,374 1,377 577 Previously unrecognized losses and timing differences ........ (569) (161) (807) Settlement of Canadian and foreign tax matters ............... -- (423) Other items .................................................. 1,502 605 (879) -------- ------- ------- Reported income tax provision (benefit) ...................... $ (2,556) $(3,260) $ 5,074 ======== ======= =======
44 Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and tax reporting purposes. Significant components of the Company's deferred tax assets and liabilities as at December 31 are as follows:
1999 1998 -------- -------- Deferred tax assets Operating tax loss carryforwards .......... $ 12,468 $ 6,539 Compensation related deductions ........... 2,312 -- Tax credits ............................... 2,431 582 Restructuring and other accrued liabilities 13,452 1,312 Deferred revenue .......................... 1,834 1,231 Inventory ................................. 3,702 734 Other ..................................... 227 535 -------- -------- Total deferred tax assets .................... 36,426 10,933 Valuation allowance for deferred tax assets .. (9,756) (5,731) -------- -------- Net deferred tax assets ...................... 26,670 5,202 -------- -------- Deferred tax liabilities Book and tax differences on fixed assets .. 824 1,076 Intangibles ............................... 3,770 -- -------- -------- Net deferred income tax asset ................ $ 22,076 $ 4,126 ======== ========
The Company has provided a valuation allowance against losses in subsidiaries with an inconsistent history of taxable income and loss due to the uncertainty of their realization. In addition, the Company has provided a valuation allowance on net operating loss carryforwards and tax credits related to its wholly-owned subsidiary, View Engineering, Inc., due to the uncertainty of their realizability as a result of limitations on their utilization in accordance with certain US tax laws and regulations. As at December 31, 1999, the Company had loss carryforwards of approximately $34 million available to reduce future years' income for tax purposes. Of this amount, approximately $8.5 million expires by the end of 2005 and a further $7.5 million expires by the end of 2019, with the remainder carried forward indefinitely. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $3,133 thousand at December 31, 1999. The Company has not recorded a provision for withholding tax on undistributed earnings of foreign subsidiaries, as the Company currently has no plans to repatriate those earnings. Income taxes paid during 1999 were $810 thousand (1998 - $2,316 thousand; 1997 - - $2,531 thousand). 14. 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 $11.7 million in the twelve months ended December 31, 1999 (1998 - $15.5 million; 1997 $18.9 million) 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. 45 15. FINANCIAL INSTRUMENTS Short-term Investments At December 31, 1999, the Company had $7,342 thousand invested in short-term investments denominated in both U.S. and Canadian dollars with maturity dates between January 13, 2000 and February 23, 2000. At December 31, 1998, the Company had $8,098 thousand invested in short-term investments denominated in Canadian dollars. Derivative 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.
December 31, --------------------- 1999 1998 ------ ------ Long term debt, including current portion: Sumitomo Heavy Industries, Ltd., Japanese yen term loans...... $3,917 $7,082 Favorable value of swaps: To convert 100 million yen (1998 - 200 million yen) to U.S. $683, (1998 - U.S. 1,365), semi-annual interest at the six-month LIBOR less 1.56%................................ 296 406 To convert 150 million yen (1998 - 300 million yen) to Canadian $1,163 (1998 - Cdn $2,326), semi-annual interest at the three month bankers acceptance rate less 1.62%......................................................... 669 1,136 To convert 150 million yen (1998 - 300 million yen) to U.S. $1,023 (1998 - U.S. $2,046), interest payable semi-annually at 8.20%........................................ 446 610 ------ ------ Favorable Value of swaps ..................................... 1,411 2,152 ------ ------ Economic Value ............................................... $2,506 $4,930 ====== ======
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. 46 As of December 31, 1999 and 1998, the Company had no foreign exchange forward contracts. 16. 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. 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. During 1999, severance was paid to 130 employees in various locations worldwide. Actual costs for employee severance for some activities have been less than estimated in the accrual due to redeployment of personnel and voluntary terminations. In addition, some facility exit costs and other integration costs have been less than originally estimated. These reductions are reflected in a $2.1 million reversal of restructuring charges during the three months ended December 31, 1999. Offsetting this reduction is an additional charge of $2.1 million for leased facilities costs in Oxnard, and elsewhere worldwide, additional employee severance costs worldwide, and other integration costs. The following table summarizes activity during the year ended December 31, 1999.
(in millions) Total Severance Facilities Integration --------- ---------- ----------- ------------ Charge during Q1 1999............. $19.6 $ 5.6 $ 4.0 $10.0 1999 Actions...................... (9.5) (2.4) (0.2) (6.9) Reversals during Q4 1999.......... (2.1) (0.8) (1.1) (0.2) Charge during Q4 1999............. 2.1 0.4 1.2 0.5 ----- ----- ----- ----- Accrual remaining December 31, 1999............................ $10.1 $ 2.8 $ 3.9 $ 3.4 ===== ===== ===== =====
The remaining accrual is for further reduction of redundant resources worldwide, including severance for approximately 160 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. 17. 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; 1997 - $1,645 thousand). Minimum lease payments under operating leases expiring subsequent to December 31, 1999 are:
2000 ................................... $ 4,849 2001 ................................... 4,041 2002 ................................... 3,327 2003 ................................... 2,595 2004 ................................... 2,535 Thereafter.............................. 7,602 ------- Total minimum lease payments............ $24,949 =======
47 Recourse receivables In Japan, where it is customary to do so, the Company discounts certain customer notes receivable at a bank with recourse. The Company's maximum exposure was $2,961 thousand at December 31, 1999. The book value of the recourse receivables approximates fair value. During 1999, the Company received cash proceeds relating to the discounted receivables of $6,661 thousand. Legal proceedings and disputes 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 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 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. At GSI Lumonics' request, the U.S. Patent and Trademark Office ("PTO") has agreed to reexamine ESI's Patent No. 5,265,114, indicating in its November 18, 1999 Order that information not previously considered raised "a substantial new question of patentability." The PTO reexamination is a separate proceeding from GSI Lumonics' pending appeal of the ESI judgement. GSI Lumonics intends to present evidence in the reexamination that may invalidate ESI's `114 patent. The outcome is not determinable at this time. 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 by View Engineering, Inc. ("View"), a wholly-owned subsidiary of General Scanning Inc. The matter was tried before a judge sitting in the United States District Court for the Central District of California in November 1999, and the parties are currently awaiting the court's decision. RVSI alleges infringement relating to lead inspection machines formerly sold by View Engineering and seeks damages of $60.5 million. 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. GSI Lumonics believes that RVSI's claims in the above action are without merit and GSI Lumonics Inc. is vigorously defending these proceedings. However, if RVSI prevails on one or more of its claims and damages are awarded, there could be a material adverse effect on GSI Lumonics Inc.'s operating results and/or financial condition. The outcome is not determinable at this time. Commencement of Copyright Infringement Declaratory Judgement Action. 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, Soheil Shams. 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 48 enhancements to stay abreast of industry trends, especially in the field of multi-channel scanning. GSI Lumonics felt compelled to file suit to resolve these copyright issues and is confident in its position. On December 21, 1999, BioDiscovery and its President, Soheil Shams, responded to the GSI Lumonics' declaratory judgement action by filing a separate suit in the Federal Court in Los Angeles, CA, alleging that GSI Lumonics reverse engineered software and also sued for copyright infringement. GSI Lumonics has applied to the California court to seek the prompt dismissal of the California action in favor of its prior pending action. In the matter before the United States District Court for the District of Massachusetts, the court denied BioDiscovery's motion to dismiss and has scheduled the trial for May 2000. 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 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. Risks and Uncertainties The Company has experienced, and may continue to experience, fluctuations in operating results due to a variety of factors, including: the rate of growth of the markets for laser systems and components; industry cycles in target markets; market acceptance of the Company's products and those of its competitors; development and promotional expenses relating to the introductions of new products or new versions of existing products; changes in pricing policies by the Company and its competitors; the timing of the receipt of orders from major customers; the timing of shipments and economic conditions in foreign markets. Certain of the components and materials included in the Company's laser systems and optical products are currently obtained from single source suppliers. There can be no assurance that a disruption of this outside supply would not create substantial manufacturing delays and additional cost to the Company. There is no concentration of credit risk related to the Company's position in trade accounts receivable other than the amount due from Sumitomo Heavy Industries, Ltd., a related party. Credit risk, with respect to trade receivables, is minimized because of the diversification of the Company's operations, as well as its large customer base and its geographical dispersion. 18. 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 printers are used in the medical and photo-finishing industries. The Company's principal markets are in the United States, Canada, Europe, Japan and Asia-Pacific. During the three months ended December 31, 1999, the Company re-evaluated its reportable segments and concluded it has one reportable segment. 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. 49 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.
Year ended December 31, ----------------------------------------------------------------------- Revenues from external customers: 1999 1998 1997 ------------------- ------------------- --------------------- USA........................... $143,034 52% $ 61,269 42% $ 91,835 52% Canada........................ 10,782 4% 8,264 6% 9,750 5% Europe........................ 65,296 24% 40,427 28% 33,385 19% Japan......................... 32,648 12% 15,987 11% 19,806 11% Latin and South America....... 1,631 0% 657 1% 1,577 1% Asia-Pacific, other........... 21,159 8% 17,588 12% 20,975 12% ----------- ----------- ------------ Total......................... $274,550 100% $144,192 100% $177,328 100% =========== =========== ============ Long-lived assets: US............................ $ 42,424 $ 5,548 $ 5,342 Canada........................ 7,726 9,567 11,307 Europe........................ 17,484 20,848 10,757 Japan......................... 591 - - Asia-Pacific, other........... 400 318 301 ----------- ----------- ------------ Total......................... $ 68,625 $ 36,281 $ 27,707 =========== =========== ============
19. SUBSEQUENT EVENTS 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 who 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. They further allege that Dynamic Details 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, an unspecified amount of 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. The outcome is not determinable at this time. 50 GSI LUMONICS INC. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Three months ended ----------------------------------------------------------------- December 31, October 1, July 2, April 2, 1999 1999 1999 1999 -------- -------- -------- -------- Sales ............................................ $ 88,667 $ 78,041 $ 69,248 $ 38,594 Cost of goods sold ............................... 54,273 47,553 45,872 31,075 -------- -------- -------- -------- Gross profit ..................................... 34,394 30,488 23,376 7,519 Operating expenses: Research and development ....................... 8,676 8,104 8,584 3,336 Selling, general and administrative ............ 17,931 17,704 18,521 10,497 Amortization of technology and other intangibles 1,251 1,251 1,251 317 Acquired in-process research and development ... -- -- -- 14,830 Restructuring and other charges ................ -- -- -- 19,631 -------- -------- -------- -------- Income (loss) from operations .................... 6,536 3,429 (4,980) (41,092) Gain on sale of assets ......................... 1,599 -- -- -- Interest income (expense), net ................. (14) 2 (93) 194 Foreign exchange transaction gains (losses) .... (1,767) (514) 157 (787) -------- -------- -------- -------- Income (loss) before income taxes ................ 6,354 2,917 (4,916) (41,685) Income taxes provision (benefit) ................. 2,115 874 (1,174) (4,371) -------- -------- -------- -------- Net income (loss) ................................ $ 4,239 $ 2,043 $ (3,742) $(37,314) ======== ======== ======== ======== Foreign currency translation adjustments ....... (2) 2,499 (1,462) 718 Change in unrealized gain (loss) on marketable . (380) 58 467 (145) equity securities, net ........................ -- -- -- -- -------- -------- -------- -------- Comprehensive income (loss) ...................... $ 3,857 $ 4,600 $ (4,737) $(36,741) ======== ======== ======== ======== Net income (loss) per common share: Basic .......................................... $ 0.12 $ 0.06 $ (0.11) $ (1.94) Diluted ........................................ $ 0.12 $ 0.06 $ (0.11) $ (1.94) Weighted average common shares outstanding (000's) 34,222 34,173 34,167 19,204 Weighted average common shares outstanding and dilutive potential common shares (000's)......... 35,755 35,085 34,167 19,204
The quarterly amounts differ from results of operations published in interim financial reports on form 10-Q due to changes in the purchase accounting for the merger with General Scanning Inc. The valuation of intangible assets, land and deferred taxes was completed at different amounts than estimated resulting in negative goodwill which was allocated to the long term assets. The following reconciles net income changes:
Net income (loss) as reported on form 10-Q ............................ $1,999 $(3,786) $(35,491) Less: additional in-process research and development ............. - - (1,830) Less: additional intangibles amortization expense ................ (378) (378) (63) Plus: reduced depreciation expense ............................... 422 422 70 ------ ------- -------- Net income (loss) restated ............................................ $2,043 $(3,742) $(37,314) ====== ======= ========
51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISRANT Directors The information with respect to directors is contained in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2000 (the "2000 Proxy Statement") and is incorporated herein by reference. Executive Officers The information with respect to executive officers is set forth under the caption "Executive Officers" in Part I of this report. Reports of Beneficial Ownership The information required by this item is contained in the 2000 Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The response to this item is contained in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT The response to this item is contained in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is contained in the Company's 2000 Proxy Statement and is incorporated herein by reference. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K LIST OF FINANCIAL STATEMENTS The financial statements required by this item are listed in Item 8, "Financial Statements and Supplementary Data" herein. LIST OF FINANCIAL STATEMENT SCHEDULES See Schedule II-Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto. LIST OF EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.1 Amended and Restated Agreement and Plan of Merger, dated as of October 27, 1998, by and among the Registrant, Grizzly Acquisition Corp., New Grizzly Acquisition Corp. and General Scanning Inc. Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules referred to in the Merger Agreement are omitted. The Registrant hereby undertakes to furnish supplementally a copy of any omitted Schedule to the Commission upon request. (4) 3.1 Certificate and Articles of Continuance of the Registrant dated March 22, 1999. (4) 3.2 By-Law No.1 of the Registrant. (4) 10.1 Line of Credit Agreement between the Registrant and CIBC dated April 8, 1998 and accepted April 15, 1998. (4) 10.2 Loan Agreement between Sumitomo Heavy Industries, Ltd. and the Registrant dated August 10, 1990. (4) 10.3 Lease Agreement between JRF II Associates Ltd. Partnership and Lumonics Corporation dated September 24, 1991. (4) 10.4 Industrial Space Lease between Lumonics Corporation and The Travelers Insurance Company dated March 17, 1992. (4) 10.5 Lease Agreement between Lumonics Corporation and Sisilli dated June 1994. (4) 10.6 GSI Lease dated July 31, 1996, as amended to date, between View Engineering, Inc. and Donald J. Devine as Trustee under the Donald J. Devine Trust Agreement. (2) 10.7 Lease dated July 15, 1997, as amended to date, between GSI and The Wilmington Realty Trust. (3) 10.8 1998 Management Incentive Plan of the Registrant. (4) 10.9 1998 Executive Management Incentive Plan of the Registrant. (4) 10.10 Severance Agreement between the Registrant and Patrick D. Austin dated April 13, 1998. (4) 10.11 Severance Agreement between the Registrant and John W. George dated April 13, 1998. (4) 10.12 Severance Agreement between the Registrant and Desmond J. Bradley dated April 13, 1998. (4) 10.13 Split Dollar Compensation Agreement dated September 13, 1997 between GSI and Charles D. Winston. (3) 10.14 Key Employee Retention Agreement between GSI and Victor H. Woolley, dated May 1, 1997. (4) 53 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.15 Settlement Agreement dated June 12, 1998 between GSI and Robotic Vision Systems, Inc. (4) 10.16 Severance Agreement between the Registrant and Charles D. Winston dated April 21, 1999. 10.17 Severance Agreement between the Registrant and Michael R. Kampfe dated April 21, 1999. 10.18 Severance Agreement between the Registrant and Kurt Pelsue dated April 21, 1999. 10.19 Severance Agreement between the Registrant and Warren Scott Nix dated October 26, 1999. 10.20 Severance Agreement between the Registrant and Gregory S. Baletsa dated May 18, 1999. 10.21 OEM Supply Agreement between the Registrant and Sumitomo Heavy Industries, Ltd. dated August 31, 1999. 21.1 Subsidiaries of the Registrant. (4) 21.2 Subsidiaries of GSI. (3) 23.1 Consent of Independent Chartered Accountants. 24.1 Powers of Attorney. (4) 99.1 Amended and Restated Stock Option Agreement dated October 27, 1998 by and among GSI, Lumonics and Grizzly Acquisition Corp. (4) 99.2 Stock Option Agreement dated October 27, 1998 by and among GSI and Lumonics. (4) 99.3 Form of Proxy for GSI common stock. (4) 99.4 1981 Stock Option Plan of GSI. (1) 99.5 1992 Stock Option Plan of GSI. (1) 99.6 1995 Directors' Warrant Plan of GSI. (1) 99.7 1994 Executive Management Stock Option Plan of the Registrant. (4) 99.8 1994 Key Employees and Directors Stock Option Plan of the Registrant. (4) 99.9 1995 Employees and Directors Stock Option Plan of the Registrant. (4) - --------- (1) Incorporated by reference to GSI's registration statement on Form S-1, filed August 11, 1995 (33-95718) (2) Incorporated by reference to GSI's Current Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to GSI's Current Report on Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to Lumonics' registration statement on Form S- 4/A Amendment No. 2, filed February 11, 1999 (333-71449) REPORTS ON FORM 8-K On March 9, 2000 the Company filed a Current Report on Form 8-K relating to a private ruling received by the company from the Internal Revenue Service concerning the taxability of the merger transaction for General Scanning Inc. shareholders. 54 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. (Registrant) By: /s/ Charles D. Winston -------------------------------------------- Charles D. Winston President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date - -------------------------- --------------------------------- -------------- /s/ Charles D. Winston Director and Chief March 21, 2000 - -------------------------- Executive Officer Charles D. Winston (Principal Executive Officer) /s/ Desmond J. Bradley Vice President Finance and March 21, 2000 - -------------------------- Chief Financial Officer Desmond J. Bradley (Principal Financial and Accounting Officer) /s/ Richard Black Director March 21, 2000 - -------------------------- Richard Black /s/ Paul F. Ferrari Director March 21, 2000 - -------------------------- Paul F. Ferrari /s/ Woodie Flowers Director March 21, 2000 - -------------------------- Woodie Flowers /s/ Byron O. Pond Director March 21, 2000 - -------------------------- Byron O. Pond /s/ Benjamin J. Virgilio Director March 21, 2000 - -------------------------- Benjamin J. Virgilio /s/ William B. Waite Director March 21, 2000 - -------------------------- William B. Waite 55 LUMONICS INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Description BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 Allowance for doubtful accounts......... $221 $ 15 $ - $ 45 $ 191 - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998 Allowance for doubtful accounts......... $191 $109 $ - $ (11) $ 311 - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 Allowance for doubtful accounts......... $311 $615 $2,799 * $(528) $3,197 - ----------------------------------------------------------------------------------------------------------------
* Increase due to merger with General Scanning Inc. 56 EX-10.16 2 SEVERANCE AGREEMENT BETWEEN REG & CHARLES WINSTON Personal and Confidential - ------------------------- April 21, 1999 Mr. Charles D. Winston c/o GSI Lumonics Inc. 130 Lombard Street Oxnard, CA, 93030, U.S.A. Dear Mr. Winston: GSI Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any 2 reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons 3 intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means GSI Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(q)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Period" means a period of 24 consecutive months commencing on the first day of the month following the Date of Termination. Provided if Termination takes place within 24 months of the first occurrence of a Change of Control, "Payment Period" shall mean a period of 36 consecutive months commencing on the first day of the month following the Date of Termination. (l) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. 4 (m) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (n) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (o) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (p) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (q) "Total Compensation" means the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree 5 that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take-over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from May 1, 1999 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, 6 which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be 7 paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ---------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services, provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ---------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the 8 attention of the Chairman of the Board, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of which ------------ shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, GSI LUMONICS INC. by: "Benjamin J. Virgilio" ------------------------------------------------- Member of the Board of Directors and Chairman of the Compensation Committee by: "Robert J. Atkinson" ------------------------------------------------- Chairman 9 Agreed to this day of , 19 ------ ------------- ----- "Charles D. Winston" --------------------------------------- Signature Charles D. Winston --------------------------------------- Print Name --------------------------------------- Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to two times your Total Compensation. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, then you shall be entitled to an amount equal to three times your Total Compensation; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.17 3 SEVERANCE AGREEMENT BETWEEN REG & MICHAEL KAMPFE Personal and Confidential - ------------------------- April 21, 1999 Mr. Michael R. Kampfe c/o GSI Lumonics Inc. 60 Fordham Road Wilmington, MA, 01887, U.S.A. Dear Mr. Kampfe: GSI Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). 2 (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the 3 Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means GSI Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(r)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Factor" means the number of complete years, subject to a minimum of 12 and a maximum of 24, that you have been a full time employee of the Company. (l) "Payment Period" means the period of time commencing on the first day of the month following the Date of Termination and continuing for that number of months equal to the Payment Factor. (m) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. 4 (n) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (o) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (p) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (q) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (r) "Total Compensation" means 1/12th of the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree 5 that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take-over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from May 1, 1999 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, 6 which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be 7 paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in --------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the 8 attention of the Chairman of the Board or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board, and either the Chief Executive Officer or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of which ------------ shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, GSI LUMONICS INC. by: "W.S. Nix" --------------------------------------------- President & Chief Operating Officer by: "R.J. Atkinson" --------------------------------------------- Chairman 9 Agreed to this day of , 19 -------- -------- --- "Michael R. Kampfe" ----------------------------------------- Signature Michael R. Kampfe ----------------------------------------- Print Name ----------------------------------------- Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to your Total Compensation multiplied by the Payment Factor. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, the Payment Factor shall be increased by 12; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.18 4 SEVERANCE AGREEMENT BETWEEN REG & KURT PELSUE Personal and Confidential - ------------------------- April 21, 1999 Mr. Kurt Pelsue c/o GSI Lumonics Inc. 500 Arsenal Street Watertown, MA, 02472, U.S.A. Dear Mr. Pelsue: GSI Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). 2 (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the 3 Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means GSI Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(r)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Factor" means the number of complete years, subject to a minimum of 12 and a maximum of 24, that you have been a full time employee of the Company. (l) "Payment Period" means the period of time commencing on the first day of the month following the Date of Termination and continuing for that number of months equal to the Payment Factor. (m) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. 4 (n) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (o) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (p) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (q) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (r) "Total Compensation" means 1/12th of the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree 5 that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take-over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from May 1, 1999 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 6 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be 7 paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ---------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the 8 attention of the Chairman of the Board or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board, and either the Chief Executive Officer or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of which ------------ shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, GSI LUMONICS INC. by: "Charles D. Winston" ------------------------------------ Chief Executive Officer by: "R.J. Atkinson" ----------------------------------- Chairman 9 Agreed to this day of , 19 ------- ---------- ---- "Kurt Pelsue" ---------------------------- Signature Kurt Pelsue ---------------------------- Print Name ---------------------------- Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to your Total Compensation multiplied by the Payment Factor. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, the Payment Factor shall be increased by 12; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.19 5 SEVERANCE AGREEMENT BETWEEN REG & WARREN SCOTT NIX THIS AGREEMENT made this 26th day of October, 1999. BETWEEN: GSI LUMONICS INC. (the "Company") - and - WARREN SCOTT NIX ("Nix") WHEREAS the parties have mutually agreed for Nix to resign from the Company on the terms and conditions herein set out: NOW THEREFORE THIS AGREEMENT WITNESSETH that for good and valuable consideration, the receipt and sufficiency of which is acknowledged by each party, the parties hereto agree as follows: 1. Nix agrees: (a) to resign, and does hereby resign, as a director and as an officer of the Company, as may be applicable, effective immediately and as an employee of the Company effective January 1, 2000 (the "Effective Date"); (b) until the Effective Date, to devote sufficient time and attention to accomplish the business tasks assigned to him by Chuck Winston and to use his best efforts in assisting with the transfer of his responsibilities to other employees. For greater certainty, it is agreed that Nix may, at his cost, work from premises other than his office at the Company; (c) on the Effective Date to purge from his personal computers any information relating to the business and affairs of the Company; (d) on or before the Effective Date to return to the Company all written material relating to the business and affairs of the Company that is in his possession whether or not such material was prepared by him or by any other person, including, without limiting the foregoing, all manuals, documents, reports and working papers; (e) that for and during the period of twelve (12) months from the Effective Date he will not directly or indirectly engage in or carry on individually or in partnership or in conjunction with any one or more persons or firms or bodies corporate, as principal, agent, or shareholder of any body corporate, any business that competes with the -2- laser marking, laser industrial materials processing, medical diagnostic equipment manufacturing and optics manufacturing business (the "Business") of the Company in any area of the world in which any part of the Business is being carried on at the date hereof; (f) that for a period of twelve (12) months from the end of the Effective Date he will not solicit or induce or attempt to induce any employee of the Company engaged in any part of the Business to terminate their employment with the Company and he will not directly or indirectly hire any such employee of the Company; (g) that for the purpose of this Agreement, the term the "Company" shall include GSI Lumonics Inc. and each subsidiary and affiliate of GSI Lumonics Inc. 2. Nix agrees that neither his resignation as provided for herein nor anything in this Agreement shall operate so as to release him from any provisions of any patent release agreement previously entered into by him with the Company. 3. Nix hereby releases and forever discharges the Company and all of its officers, directors, agents, employees and other representatives from any and all claims, howsoever arising and of whatsoever nature or kind which to date may have been or may in future be sustained by Nix in consequence of his employment by the Company and the termination of that employment. Without limiting the generality of the foregoing, Nix releases and discharges the Company from any claims by Nix under a Change of Control Agreement dated April 13, 1998, entered into between the Company and Nix. Notwithstanding anything in this paragraph to the contrary, nothing herein shall disentitle Nix from seeking indemnity from the Company in respect of any claim made by any third party against Nix for actions taken in good faith in the course of his employment with the Company. Moreover, the Company on behalf of its officers, directors, agents, employees and other representatives, releases all claims against Nix of whatsoever nature or kind which to date may have been or may in future be sustained by the Company in consequence of Nix's employment save and except for claims arising out of any fraudulent act by Nix. 4. Nix agrees to keep the contents of this agreement confidential and not to disclose the provisions of same to persons other than his immediate family and professional advisors. 5. The Company agrees: (a) to pay Nix for a period of 12 months from the Effective Date (the "Severance Period") an amount equal to his base salary as of the date hereof. Such payments shall be made at the same times as they would have been made had Nix's employment by the Company continued during the Severance Period. Such payments shall be subject to withholding tax and any other deduction that the Company is required, by law, to make; -3- (b) on January 1, 2001 to pay to Nix a bonus of US$60,000 less any withholding tax and any other deductions that the Company is required by law to make; (c) to continue in force until the end of the Severance Period or until the date on which Nix becomes re-employed, whichever occurs first, all health and medical benefits to which Nix is entitled at the date hereof except for sick leave, short-term disability and long-term disability coverage; (d) to continue in force until the end of the Severance Period Nix's 401K benefit plan; (e) to continue in force until the end of the Severance Period the car lease arrangement entered into for the benefit of Nix. Nix's use of such leased vehicle shall be subject to the Company's current policy respecting leased vehicles for executives. At the end of the Severance Period, or on the date Nix becomes re-employed, whichever occurs first, Nix shall return the vehicle to the Company in good condition and with no greater mileage than is allowed for under the terms of the car lease pro-rated to the length of time the lease has been in force; (f) to pay Nix on January 1, 2001 vacation pay for 200 hours based on Nix's annual base salary for 1999 less any withholding tax and any other deductions that the Company is required by law to make. For greater certainty, Nix acknowledges that no vacation time shall accrue during the Severance Period; (g) to contract with a third party selected by Nix and acceptable to Company acting reasonably, to provide Nix with outplacement services and re-employment counseling up to a maximum cost to the Company of US$25,000; (h) to reimburse Nix up to US$5,000 for legal and accounting advice pertaining to his resignation from the Company; (i) to allow Nix to permanently keep his current laptop computer. 6. Nix agrees to surrender, and does thereby surrender all of his options to purchase shares of the Company that are shown on Schedule "A" to this Agreement. The Company agrees that all other options belonging to Nix to purchase shares of the Company that are now exercisable or that become exercisable on or before March 31, 2000 may be exercised by Nix up to, but not after March 31, 2000. Nix further agrees to consult with the Company's Chief Financial Officer prior to selling more than 5,000 shares of the Company acquired by the exercise of his options in any period of 30 consecutive days with a view to minimizing the impact of such sales on the market price of the Company's shares. -4- 7. In the event of the death of Nix prior to the payment of any amounts due under this Agreement, such amounts will be paid directly to Nix's Estate. 8. The Company will prepare a public announcement of Nix's resignation from the Company and will consult Nix with respect to the timing and wording of such public announcement. In the event of any disagreement, the Company shall have the right to make such public disclosure of Nix's resignation as is required to satisfy any applicable statutory requirement. 9. Nix agrees that at the request of the Company he will execute such further or other instruments in writing as may reasonably be required to give full force and effect to this Agreement. 10. The making, execution and delivery of this Agreement by Nix have been induced by no representations, statements or agreements other than those herein expressed. This Agreement embodies the entire understanding of the parties and there are no further agreements or understandings, written or oral, in effect between the parties, relating to the subject matter hereof. This Agreement may be amended or modified only by an instrument in writing signed by the parties. 11. If any provision of this Agreement is held to be unenforceable, the remaining provisions shall remain in full force and effect. 12. This Agreement shall be read with all changes in gender and/or number that may reasonably be required by the context. 13. This Agreement shall be interpreted in accordance with the laws of the Province of Ontario. IN WITNESS WHEREOF the parties have executed this Agreement. GSI LUMONICS INC. Per: /s/ Robert J. Atkinson ---------------------------------- Robert J. Atkinson /s/ Warren Scott Nix ---------------------------------- Warren Scott Nix -5- SCHEDULE "A" Date of Grant No. of Shares ------------- ------------- January 1997 100,000 February 1997 50,000 December 1997 90,000 August 1999 140,000 EX-10.20 6 SEVERANCE AGREEMENT BETWEEN REG & GREGORY BALESTA May 18, 1999 Mr. Gregory S. Baletsa c/o GSI Lumonics Inc. 39 Manning Road Billerica, MA, 01821, U.S.A. Dear Greg: We refer you to the letter agreement dated April 21, 1999, sent to you by GSI Lumonics and accepted by you, which sets out certain severance and termination benefits which you will be entitled to in certain circumstances (the "Original Agreement"). This letter (the "Amending Agreement") is intended to amend that Original Agreement as follows: 1. The term "Company" as defined in the Original Agreement shall include any corporation that is a direct or indirect subsidiary of GSI Lumonics Inc. 2. Notwithstanding anything to the contrary contained in the Original Agreement, in the event that you voluntarily terminate your employment with the Company at any time on or before September 22, 1999, you shall be entitled to receive from the Company an amount equal to your Total Compensation multiplied by a factor of 12. Such amount shall be payable as follows: (a) 50% 30 days after the Date of Termination; (b) the balance in equal consecutive monthly payments which shall be paid on the first day of each month without interest commencing on the 1st day of the month following the Date of Termination; Any term used herein shall have the meaning ascribed to such term in the Original Agreement. Please signify your acceptance of the amendments set out herein by signing and returning to the Company the enclosed copy of this letter. Sincerely yours, GSI LUMONICS INC. Per: "Michael W. Lupiano" -------------------------------- Agreed to this 1st day of June , 1999. /s/ "Greg S. Baletsa" - ---------------------------------------- Signature Greg S. Baletsa - ---------------------------------------- Print Name EX-10.21 7 OEM SUPPLY AGREEMENT GSI LUMONICS INC. - AND - SUMITOMO HEAVY INDUSTRIES, LTD. OEM SUPPLY AGREEMENT DATED AS OF AUGUST 31, 1999 ARTICLE 1 INTERPRETATION 1.1 Definitions 1.2 Headings and Table of Contents 1.3 Number 1.4 Business Days 1.5 Currency and Payment Obligations 1.6 Section and Schedule References ARTICLE 2 SUPPLY OF STANDARD LASERS 2.1 Agreement to Purchase and Sell 2.2 Restriction on Resale 2.3 Permitted Resales of Standard Lasers 2.4 SHI Referrals 2.5 Sale of SHI Products 2.6 Nature of Relationship 2.7 Competition 2.8 License to Manufacture 2.9 Intellectual Property Rights ARTICLE 3 PRICES, PAYMENT TERMS AND COMMISSIONS 3.1 General 3.2 Standard Lasers 3.3 Resale Prices 3.4 Payment and Title ARTICLE 4 PURCHASE ORDERS 4.1 General 4.2 Notice of Acceptance 4.3 Discontinuance of Standard Lasers -2- ARTICLE 5 SHIPMENTS 5.1 Time of Shipment 5.2 Test Reports ARTICLE 6 TECHNICAL AND MARKETING ACTIVITIES 6.1 Technical Assistance 6.2 Publications, Advertising, etc 6.3 Training ARTICLE 7 PRODUCT WARRANTY AND AFTER-SALES SUPPORT AND SERVICING 7.1 Warranty 7.2 Defects 7.3 Warranty Claims on Standard Lasers Incorporated in SHI Products 7.4 Standard Lasers Warranty Claims 7.5 Exclusion of Warranty 7.6 Pre-Existing Warranty Obligations 7.7 After-Sales Support and Servicing 7.8 Spare Parts 7.9 Intellectual Property and Technology Warranty ARTICLE 8 COVENANTS 8.1 Confidentiality 8.2 GSLI Covenants ARTICLE 9 TERM AND TERMINATION 9.1 Term 9.2 Termination 9.3 Return of Documents 9.4 Use of Trademarks 9.5 Survival -3- 9.6 Existing Liabilities ARTICLE 10 GENERAL 10.1 Force Majeure 10.2 Assignment 10.3 Entire Agreement 10.4 Amendments 10.5 Governing Law 10.6 Arbitration 10.7 Waiver 10.8 Notices 10.9 Severability 10.10 Counterparts 10.11 Further Assurances 10.12 Government Approval OEM SUPPLY AGREEMENT -------------------- This Agreement dated as of August 31, 1999 BETWEEN: GSI LUMONICS INC., a corporation incorporated under the laws of New Brunswick (which, together with its subsidiaries, is hereinafter referred to as "GSLI") - and - SUMITOMO HEAVY INDUSTRIES, LTD., a corporation incorporated under the laws of Japan ("SHI") RECITALS A. GSLI is engaged in, among other things, the business of manufacturing, selling and servicing Standard Lasers (as hereinafter defined). B. SHI is engaged in, among other things, the business of manufacturing, selling and servicing SHI Products (as hereinafter defined). C. GSLI wishes to sell and SHI wishes to purchase certain GSLI Lasers on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS. In this Agreement, the following terms shall have the meanings set out below. 1 "AFFILIATE" shall have the same meaning as that term is given in the Ordinance of the Ministry of Finance relative to the Financial Statement Rule in Japan. "BUSINESS DAY" means any day except Saturday, Sunday or any day on which banks are generally not open for business in either Kanata, Ontartio or Tokyo, Japan. "INCLUDING" means including without limitation, and "INCLUDES" means includes without limitation. "LPKK PURCHASE AGREEMENT" means the agreement dated as of August 31, 1999 between the Parties relating to the sale by SHI to GSI Lumonics Inc. of all of the shares of Lumonics Pacific Kabushiki Kaisha. "PARTY" means a party to this Agreement a predecessor to and any reference to a Party includes its heirs, executors, administrators, successors and permitted assigns; and "PARTIES" means every Party. "PERSON" is to be broadly interpreted and includes an individual, a corporation, a partnership, a trust, an unincorporated organization, the government of a country or any political subdivision thereof, or any agency or department of any such government, and the executors, administrators or other legal representatives of an individual in such capacity. "SHI PRODUCTS" means lasers, laser-based products, laser systems and related components manufactured or developed by SHI from time to time. "STANDARD LASERS" means the lasers listed in Schedule A manufactured by GSLI or Affiliates of GSLI, and any upgrades or new generations of such lasers that may be added to Schedule A by agreement of the Parties from time to time during the term of this Agreement and any spare or replacement parts for any Standard Lasers. "TERMINATION AND RELEASE AGREEMENT" means the agreement dated August 31, 1999 between, among others, the Parties relating to the termination of certain agreements and understandings between the Parties (or their predecessors or Affiliates) relating to laser products manufactured or developed by GSLI and Affiliates of GSLI and the release of all obligations thereunder. "TRANSFER PRICE" means, for any Standard Laser, the most recent price for which the Standard Laser was sold by GSLI to SHI prior to the effective date of this Agreement. "PRIOR AGREEMENTS" means, collectively, the six sales distribution agreements between Lumonics Inc. (subsequently renamed GSLI), or a subsidiary of Lumonics Inc., on the one hand, and SHI, on the other hand, each dated January 1, 1990, as amended, and any other agreements or understandings between the 2 Parties prior to the date hereof relating to the purchase and sale of lasers and laser-related products. "TERRITORY" means all countries, regions and markets worldwide, including Japan. 1.2 HEADINGS AND TABLE OF CONTENTS. The division of this Agreement into Articles and Sections, the insertion of headings and the provision of any table of contents are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.3 NUMBER. Unless the context requires otherwise, words importing the singular include the plural and vice versa. 1.4 BUSINESS DAYS. If any payment is required to be made or other action is required to be taken pursuant to this Agreement on a day which is not a Business Day, then such payment or action shall be made or taken on the next Business Day. 1.5 CURRENCY AND PAYMENT OBLIGATIONS. Any payment contemplated by this Agreement shall be made by cash, certified cheque or any other method that provides immediately available funds and in United Stated dollars unless otherwise agreed in writing between the Parties. 1.6 SECTION AND SCHEDULE REFERENCES. Unless the context requires otherwise, references in this Agreement to Articles, Sections or Schedules are to Articles, Sections or Schedules of this Agreement. ARTICLE 2 SUPPLY OF STANDARD LASERS 2.1 AGREEMENT TO PURCHASE AND SELL. During the term of this Agreement, SHI shall from time to time purchase from GSLI, and GSLI shall sell to SHI, Standard Lasers on the terms and conditions contained in this Agreement. SHI shall have no minimum purchase obligations for Standard Lasers or any other products of GSLI. 2.2 RESTRICTION ON RESALE. SHI shall not sell Standard Lasers in the form received from GSLI ("as is") to any other Person without the prior written consent of GSLI. 2.3 PERMITTED RESALES OF STANDARD LASERS. Despite Section 2.2, SHI, without the prior consent of GSLI, may: (a) incorporate any Standard Lasers into any SHI Products for sale or use by any Person in the Territory and/or modify a Standard Laser if it is incorporated into an 3 SHI Product to comply with a customer specification or local standards or criteria applicable to such customer; (b) sell Standard Lasers to any Person in the Territory if the Standard Lasers are to be used by such Person as spare products or replacement products for Standard Lasers purchased from SHI and owned or used by such Person; (c) sell Standard Lasers to any Person in the Territory who specifically requests SHI to supply the Standard Laser even after having been referred to GSLI pursuant to Section 2.4, provided that in any such case SHI must have (i) in good faith referred such Person to GSLI, (ii) negotiated with GSLI in good faith as to which Party should supply such Person, and (iii) after completing (i) and (ii), have concluded that the Person refuses to deal directly with GSLI and will purchase Standard Lasers only from SHI; and (d) sell Standard Lasers to Affiliates of SHI, but only if the Affiliate agrees to be bound by the terms of this Agreement. 2.4 SHI REFERRALS. If a Person other than an SHI or an Affiliate of SHI requests Standard Lasers from SHI, SHI shall refer such request to GSLI and, if GSLI ultimately sells Standard Lasers to such Person such that paragraph 2.3(c) does not apply, GSLI shall pay a sales commission to SHI to be agreed between the Parties, such commission to be not less than 5% of the net sale price of the Standard Lasers sold to such Person. No sales commission shall be payable to SHI for sales of Standard Lasers pursuant to paragraph 2.3(c). For purposes of this section, "net sale price" is the price received by GSLI for a Standard Laser net of distributor or representative commissions (other than the commission payable to SHI under this section), freight, duty charges and any other applicable taxes (other than income taxes). 2.5 SALE OF SHI PRODUCTS. (a) If a Person in the Territory requests GSLI or an Affiliate of GSLI to supply SHI Products to such Person, GSLI shall notify SHI in writing forthwith, following which GSLI and SHI shall discuss with each other appropriate ways to deal with the request. (b) If a Person in the Territory requests SHI or an Affiliate of SHI to supply SHI Products to such Person through GSLI or an Affiliate of GSLI, SHI and GSLI shall discuss with each other appropriate ways to deal with the request. 2.6 NATURE OF RELATIONSHIP. The relationship between GSLI and SHI created hereby is that of vendor and purchaser only, and nothing contained herein shall be deemed or construed as constituting either Party as an agent of the other for any purpose whatsoever, and neither Party has any right or authority to assume or create any obligation or responsibility, express or implied, orally or in writing, on behalf of or in the name of the other Party or to bind the other Party in any manner whatsoever. 4 2.7 COMPETITION. SHI agrees that during the term of this Agreement, it will not develop or purchase from a Person other than GSLI lasers that are competitive with Standard Lasers or cooperate with other Persons for the purpose of developing such lasers, provided however that: (a) despite the foregoing, after notification to the other Party and a good faith attempt to discuss the matter with each other, either Party can make contacts with other Persons (including entering into confidentiality agreements) to enable such Party to procure from, supply to or enter into alliance, collaboration or joint venture agreements with, such other Persons in the Territory with respect to lasers that are competitive with Standard Lasers; (b) SHI may proceed to develop a laser technology based on Standard Lasers, or to cause another Person to develop such technology, if specifications or performance requirements for the new laser technology have been proposed to GSLI and GSLI has not provided a proposal to develop such technology to SHI to satisfaction of SHI, acting reasonably, within 30 days of receipt of request from SHI; and (c) neither Party shall be required to disclose any information to the other Party concerning any matters in paragraphs (a) or (b), above to the extent such disclosure is prohibited (i) by law or (ii) by a confidentiality agreement with another Person that has been entered into after compliance by the relevant Party with paragraph (a), above. 2.8 LICENSE TO MANUFACTURE. Without limiting the provisions of section 2.7, either Party may from time to time propose to the other Party an arrangement whereby one Party shall be granted the right to manufacture products of the other Party. 2.9 INTELLECTUAL PROPERTY RIGHTS. The Parties agree that: (a) GSLI shall own all intellectual property rights relating to inventions, works, designs, semiconductor topographies and trade secrets developed by or for GSLI in connection with the Standard Lasers, except to the extent the Standard Lasers incorporate the intellectual property rights of other Persons; (b) SHI shall own all intellectual property rights relating to inventions, works, designs, semiconductor topographies and trade secrets developed by or for SHI in connection with the SHI Products, except to the extent that SHI Products incorporate Standard Lasers or the intellectual property rights of other Persons; (c) SHI and GSLI shall jointly own all intellectual property rights relating to inventions, works, designs, semiconductor topographies and trade secrets developed by or for GSLI and SHI jointly in connection with the Standard Lasers and modifications to any Standard Lasers that are made in accordance with this Agreement, except to the extent the Standard Lasers incorporate the intellectual property rights of other Persons; and 5 (d) Neither Party shall violate or attack the intellectual property rights of the other Party in connection with the Standard Lasers and the modifications to the Standard Lasers made in accordance with this Agreement. ARTICLE 3 PRICES, PAYMENT TERMS AND COMMISSIONS 3.1 GENERAL. The prices for all Standard Lasers sold by GSLI to SHI shall be F.O.B. place of shipment by GSLI (as the term F.O.B. is defined by INCOTERMS 1953, as amended). 3.2 STANDARD LASERS. The price of a Standard Laser shall be the Transfer Price for such Standard Laser. At any time after 180 days from the date of this Agreement, GSLI may revise its pricing of Standard Lasers on not less than 90 days notice to SHI. For greater certainty, GSLI may send a notice of price change prior to the expiry of the 180 day period as long as the effective date of the notice is on or after the 180th day. 3.3 RESALE PRICES. SHI shall have the right to determine the prices for all Standard Lasers sold by it pursuant to Section 2.3. 3.4 PAYMENT AND TITLE. Payments for Standard Lasers sold by GSLI to SHI shall be made within 50 days of the date of their shipment from GSLI. Title to all Standard Lasers or parts shall remain the property of GSLI until payment for the Standard Lasers or parts by SHI has been made in full provided that risk of loss of any Standard Laser shall pass to SHI upon delivery thereof by GSLI in accordance with the terms of the applicable purchase order and acceptance. Payment terms shall be reviewed in good faith by the Parties at the time of any change in prices under Section 3.2. ARTICLE 4 PURCHASE ORDERS 4.1 GENERAL. Purchase orders from SHI for Standard Lasers shall be in writing and shall not be binding upon GSLI until accepted by GSLI as provided in Section 4.2. 4.2 NOTICE OF ACCEPTANCE. Promptly after GSLI receives a purchase order from SHI, GSLI shall notify SHI whether or not GSLI has accepted the purchase order. GSLI shall accept all purchase orders for Standard Lasers, provided that GSLI may elect to refuse purchase orders for Standard Lasers the specifications for which have been modified, improved or replaced or that are no longer manufactured by GSLI, in each case after the expiry of the notice period referred to in Section 4.3. 6 4.3 DISCONTINUANCE OF STANDARD LASERS. GSLI shall have the right to modify, improve, replace or discontinue the manufacture of any Standard Lasers upon not less than 180 days' notice to SHI. Upon receipt of such notice, SHI shall have the opportunity to order any number of the relevant Standard Lasers or parts therefor. GSLI shall deliver such Standard Lasers and parts in accordance with the agreed upon delivery date. ARTICLE 5 SHIPMENTS 5.1 TIME OF SHIPMENT. GSLI shall ship all Standard Lasers after a purchase order therefor has been accepted by GSLI under section 4.2 in accordance with the delivery date quoted by GSLI in its acceptance. 5.2 TEST REPORTS. GSLI shall send to SHI the final test report, if any, for each Standard Laser sold to SHI at the same time as the Standard Laser is shipped. ARTICLE 6 TECHNICAL AND MARKETING ACTIVITIES 6.1 TECHNICAL ASSISTANCE. GSLI, upon request by SHI, shall render all reasonable technical services necessary in conjunction with the use by SHI of the Standard Lasers as contemplated in this Agreement. Such services shall be provided at a fee based on GSLI's standard engineering rates. In addition, SHI shall reimburse GSLI for all reasonable travel, living and other expenses incurred by GSLI in providing the services. GSLI shall provide SHI with all reasonable and customary technical information relating to the Standard Lasers free of charge. 6.2 PUBLICATIONS, ADVERTISING, ETC. GSLI shall make available and deliver, upon request by SHI, to SHI, free of charge, all advertising materials, product information bulletins, technical literature and other documentation relating to Standard Lasers. 6.3 TRAINING. SHI agrees that one or more employees of SHI shall participate in training sessions conducted by GSLI from time to time and at its facilities with respect to the installation, technical support and general servicing of Standard Lasers. GSLI shall provide such training at no charge. SHI shall pay all out-of-pocket travel and living expenses incurred by its employees. 7 ARTICLE 7 PRODUCT WARRANTY AND AFTER-SALES SUPPORT AND SERVICING 7.1 WARRANTY. GSLI warrants to SHI that the Standard Lasers sold hereunder shall conform to any and all specifications, descriptions, drawings, data, samples or models furnished by or to SHI (collectively, the "Specifications") and shall be merchantable, new and of first-class quality. In particular, unless otherwise explicitly agreed to by the Parties with respect to any particular order or orders, GSLI warrants that for a warranty period commencing from GSLI's shipment of the Standard Lasers to SHI and ending 12 months from the date of acceptance by SHI or 15 months from the date of shipment, whichever comes first, the Standard Lasers shall be free from defects in materials and workmanship and shall be capable of the standard of performance specified in the relevant specifications. 7.2 DEFECTS. If during the warranty period provided for in Section 7.1 a Standard Laser is found to be defective or otherwise does not meet the standard set out in Section 7.1, GSLI shall, within 45 days after receipt of notice of the defect from SHI, expeditiously repair or replace, at GSLI's sole option, the defective Standard Laser, free of charge. Defects discovered after the warranty period will be remedied by GSLI in the same manner but at the expense of SHI based on GSLI's then current service and other applicable charges. 7.3 WARRANTY CLAIMS ON STANDARD LASERS INCORPORATED IN SHI PRODUCTS. SHI shall service the Standard Lasers that it incorporates into SHI Products pursuant to paragraph 2.3(a) but shall refer all matters giving rise to possible warranty claims relating to such Standard Lasers to GSLI. SHI shall be responsible for all warranty claims on all portions of SHI Products except Standard Lasers incorporated therein. 7.4 STANDARD LASERS WARRANTY CLAIMS. When repairs under warranty are effected on Standard Lasers, SHI and GSLI agree that: (a) GSLI shall ship replacement Standard Lasers or parts thereof to SHI free of charge FOB the GSLI factory; (b) defective parts shall be returned to GSLI by SHI at GSLI's expense, if required by GSLI; (c) subject to paragraph (e) below, each of GSLI and SHI shall be responsible for their respective labour costs incurred in connection with warranty claims; (d) if requested by SHI and agreed to by GSLI, GSLI shall assist SHI in carrying out repairs at GSLI's expense; and (e) if the warranty period for Standard Lasers has expired and after-warranty servicing is requested by SHI, GSLI shall provide the servicing at its standard service rates plus all reasonable travel and living expenses of its personnel. 8 7.5 EXCLUSION OF WARRANTY. GSLI shall have no warranty obligations in respect of Standard Lasers that have been modified by SHI pursuant to paragraph 2.3(a) except as may be agreed between the Parties on a case-by-case basis. 7.6 PRE-EXISTING WARRANTY OBLIGATIONS. Nothing in this Agreement shall affect warranty obligations existing immediately prior to the date of this Agreement in respect of Standard Lasers and other GSLI products sold prior to such date under the Prior Agreements, which obligations shall continue in effect in accordance with their terms. 7.7 AFTER-SALES SUPPORT AND SERVICING. The Parties agree that: (a) GSLI shall be responsible for all after-sales support and servicing of customers who purchased Standard Lasers and other GSLI products from GSLI or SHI on "as is" basis prior to the date of this Agreement or who, on or after the date of this Agreement, purchase Standard Lasers from GSLI; (b) SHI shall be responsible for all after-sales support and servicing of customers of SHI who have purchased any Standard Lasers and other products from SHI, except Standard Lasers referred to in section 7.7(a) and Standard Lasers sold by SHI in the circumstances provided in Section 2.3; (c) despite paragraphs (a) and (b), if one party wishes after-sales support and servicing from the other, the Parties shall in good faith accommodate such wish; and (d) the after-sales support and servicing obligations described in paragraphs (a), (b) and (c), above, are distinct from, and do not apply to, warranty obligations of the Parties for SHI Products and Standard Lasers. 7.8 SPARE PARTS. In connection with laser products which were sold to SHI prior to the date of this Agreement but which are not Standard Lasers, the Parties agree that GSLI shall sell spare parts for such products to SHI on the following basis: (a) payment conditions for parts shall be on the same terms as provided in section 3.4; (b) the warranty provisions in Sections 7.1, 7.2, 7.3 and 7.4 shall apply; and (c) GSLI shall continue to supply spare parts for seven years after termination of this Agreement. 7.9 INTELLECTUAL PROPERTY AND TECHNOLOGY WARRANTY. GSLI represents, warrants and covenants to SHI that: (a) to its knowledge, the Standard Lasers: 9 (i) do not violate the intellectual property rights of any other Person, and may be manufactured, advertised, offered for sale, sold and repaired in the Territory; (ii) are not subject to any export or import restrictions or prohibitions in Canada or any other country in the Territory; and (iii) conform to all industry and technical standards in the Territory. (b) GSLI will not, during the term of this Agreement, sell any Standard Lasers to SHI if, at the time of sale, to do so would breach paragraph (a) of this section; and (c) if any Person claims that any Standard Laser sold to SHI violates the intellectual property rights of such Person or otherwise constitutes a breach of paragraph (a) of this section, then GSLI shall, at its expense, assume the defence of such claim on behalf of SHI and either, (i) obtain a licence or permit from such Party permitting SHI to use the Standard Laser; or (ii) provide a substitute product that meets the same technical standards as the Standard Laser in question and that does not violate the intellectual property rights of such Person; or (iii) failing a good faith attempt to achieve (i) and/or (ii), refund the purchase price paid by SHI for the Standard Laser. Without limiting the foregoing, GSLI shall indemnify SHI and hold SHI harmless from and against all damages and related expenses, including any award of an "accounting of profits" to a Person other than SHI and including legal expenses, ("Loss") incurred by SHI in respect of or arising from any breach of the foregoing representations, warranties and covenants; provided that this indemnity does not extend to (i) a Loss incurred by SHI to the extent that such Loss results from the use to which a Standard Laser is put, or (ii) consequential damages (including lost profits) incurred by SHI. For greater certainty, the foregoing indemnity will apply to a Loss relating to a Standard Laser that is included in an SHI Product except to the extent that such Loss is based on a claim by a Person based on the use of the Standard Laser. ARTICLE 8 COVENANTS 8.1 CONFIDENTIALITY. Each Party covenants that during the term of this Agreement, it shall observe strict confidentiality in respect of confidential information received from the other Party and not use or divulge, other than in accordance with this Agreement, any confidential 10 information or technical data regarding the other Party, the Standard Lasers or SHI Products, as the case may be, except (i) as to the disclosure of any confidential information or technical data where such disclosure is required by applicable law or regulatory authority, (ii) disclosure that is necessary in connection with the marketing, sales and servicing rights and obligations of the Parties hereunder, or (iii) disclosure of information or data that is or becomes generally available to the public other than as a result of non-authorized disclosure by the first Party. 8.2 GSLI COVENANTS. GSLI covenants that during the term of this Agreement, it shall: (a) permit SHI to use GSLI's service marks, trade-marks, trade names and logo types in accordance with GSLI's policies in effect from time-to-time with respect to stationary, business cards, advertising, merchandise, signs and literature; and (b) provide SHI with all reasonable and customary assistance, guidance and advice as required by SHI with respect to the Standard Lasers. ARTICLE 9 TERM AND TERMINATION 9.1 TERM. This Agreement shall become effective on the date first above written and shall continue in effect until terminated by either Party under Section 9.2. 9.2 TERMINATION. Anything contained herein to the contrary notwithstanding, either Party may terminate this Agreement, by giving written notice to the other Party, as follows: (a) either Party may terminate this Agreement forthwith if any of the following should occur: (i) a court order is made or an effective resolution passed by the other Party for the winding up, liquidation or dissolution of the other Party; (ii) the other Party becomes bankrupt or insolvent, takes action to become a voluntary bankrupt, or consents to the filing of a bankruptcy proceeding against it, or files a petition or other proceeding seeking reorganization, readjustment, arrangement, composition or similar relief under any bankruptcy law or insolvency law, or consents to the filing of any such petition or other proceeding, or consents to the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of all or any part of the other Party's assets or makes an assignment for the benefit of creditors; (iii) proceedings are instituted in any court of competent jurisdiction by any Person other than the other Party for the winding up, liquidation or 11 dissolution of the other Party, or for any reorganization, readjustment, arrangement, composition or similar relief with respect to the other Party under any bankruptcy law or any other applicable insolvency law, or for the appointment of a receiver, liquidator trustee or assignee in bankruptcy or insolvency of all or part of the other Party's assets and such proceedings are not discontinued or terminated within a period of 30 days; and (iv) a receiver or receiver-manager or agent or other official having similar functions is appointed over all or part of the other Party's assets, or an encumbrancer takes possession of all or part of the other Party's assets or a distress or execution or similar process is levied or enforced against all or part of the other Party's assets; and (b) either Party may terminate this Agreement at any time for any reason upon six month's prior written notice to the other Party. 9.3 RETURN OF DOCUMENTS. Any documentation, price lists, advertising material or other sales promotional material supplied by GSLI to SHI shall be returned to GSLI if requested by GSLI, at SHI's cost, in the event that this Agreement is terminated, except to the extent necessary for SHI to perform after-sales support and servicing. 9.4 USE OF TRADEMARKS. If this Agreement is terminated, SHI shall cease to make further use of GSLI's name, association or trademarks and all rights or claims that SHI has in such items will cease except to the extent such rights are required in connection with the sale of Standard Lasers previously ordered by SHI. 9.5 SURVIVAL. The provisions of Article 7 shall survive any expiry or termination of this Agreement. 9.6 EXISTING LIABILITIES. The termination of this Agreement shall not affect the liability of one Party to the other existing at the time of termination and settlement of all outstanding business shall be upon the same terms as if this Agreement had not been terminated. In particular, upon termination of this Agreement, (i) all unfilled orders of SHI acknowledged and accepted by GSLI before such termination shall be fulfilled and paid for in accordance with the terms of this Agreement; and (ii) GSLI shall continue to supply spare parts (at GSLI's standard OEM supplier prices) for Standard Lasers sold by SHI or incorporated in SHI Products pursuant to sections 2.3, such obligation to continue for a period of seven years after the termination date. 12 ARTICLE 10 GENERAL 10.1 FORCE MAJEURE. Neither Party shall be liable in any manner for failure to fulfil or delay in fulfilling all or any part of this Agreement or of any individual purchase order entered into pursuant to Article 4 which is, directly or indirectly, due to any cause of circumstance beyond the control of such Party, including, but not limited to, acts of God, governmental orders, regulations or restrictions, war (whether declared or not), threat of war, warlike conditions, hostilities, sanctions, mobilization, blockade, embargo, detention, revolution, riot, looting, strike, lockout, plague or other epidemics, fire or flood. 10.2 ASSIGNMENT. Neither Party shall assign its right or delegate its duties hereunder without the prior written consent of the other Party, provided that SHI acknowledges that subsidiaries of GSI Lumonics Inc. may perform the obligations of GSLI hereunder on the basis that GSLI Lumonics Inc. shall guarantee the obligations of any such subsidiary. Subject to the foregoing, any attempted assignment or delegation without such consent shall be null and void. 10.3 ENTIRE AGREEMENT. This Agreement, the LPKK Purchase Agreement and the Termination and Release Agreement together constitute the entire agreement between the Parties with respect to the subject matter hereof and wholly cancel, terminate and supersede all previous negotiations, agreements, understandings and commitments, whether formal or informal, oral or written, with respect to the subject matter hereof. 10.4 AMENDMENTS. No change, modification or amendment of this Agreement shall be binding upon either Party unless made in writing and signed by a duly authorized representative of the Party against whom enforcement is sought. 10.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of Province of Ontario, Canada therein. The uniform laws on international sales shall not apply. 10.6 ARBITRATION. All disputes, controversies or differences which may arise between the Parties or in relation to or in connection with this Agreement or any individual purchase order entered into pursuant hereto, or for the breach hereof or thereof, other than disputes, controversies or differences relating solely to the payment of monies due hereunder or thereunder, which cannot be resolved amicably by the Parties shall be finally settled by arbitration in accordance with the then existing Rules of Conciliation and Arbitration of the International Chamber of Commerce by three (3) arbitrators to be selected in accordance with said rules. The award rendered therein shall be final and binding upon both Parties 10.7 WAIVER. No failure or delay by either Party to exercise any right, power or privilege precludes any further exercise thereof of any other power and privilege which such Party may have hereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights and remedies provided by law, in equity or otherwise. 13 10.8 NOTICES. (1) Any notice or other communication required or permitted to be given by this Agreement shall be in writing and shall be effectively given and made if (i) delivered personally; or (ii) sent by prepaid courier service; or (iii) sent by registered mail; or (iv) sent prepaid by fax or other similar means of electronic communication, in each case to the applicable address set out below: (a) if to GSLI, to: GSI Lumonics Inc. 105 Schneider Road Kanata, Ontario, Canada K2K 1Y3 Attention: Chief Financial Officer Fax: 613-592-7549 (b) if to SHI, to: Sumitomo Heavy Industries, Ltd. 9-11, Kitashinagawa 5-chome Shinagawa, Tokyo 141 Japan Attention: Senior Executive Vice President Fax: 011-81-3-5488-8032 (2) Any notice or other communication so given shall be deemed to have been given and received on the day of delivery if delivered, or on the day of faxing or sending by other means of recorded electronic communication, provided that such day is a Business Day and such notice or other communication is so delivered, faxed or sent prior to 4:30 p.m. on such day. Otherwise, such notice or communication shall be deemed to have been given and received on the next following Business Day. Any notice or other communication sent by registered mail shall be deemed to have been given and received on the tenth Business Day following the mailing thereof; provided however that no such notice or other communication shall be mailed during any actual or apprehended disruption of postal services. Any such notice or other communication given in any other manner shall be deemed to have been given and received only upon actual receipt. (3) Any Party may from time to time change its address under this section by notice to the other Party given in the manner provided by this section. 10.9 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such prohibition or unenforceability and shall be severed from the balance of this Agreement, all 14 without affecting the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 10.10 COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which taken together shall be deemed to constitute one and the same instrument. Counterparts may be executed either in original or faxed form and the Parties adopt any signatures received by a receiving fax machine as original signatures of the Parties. 10.11 FURTHER ASSURANCES. Each Party shall promptly do, execute, deliver or cause to be done, executed and delivered all further acts, documents and things in connection with this Agreement that the other Party may require for the purposes of giving effect to this Agreement. 10.12 GOVERNMENT APPROVAL. Other than the permits or licenses contemplated by section 7.8(b), GSLI shall, as considered appropriate by SHI, register or obtain any necessary government approval in any relevant countries within the Territory. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective duly authorized representatives as of the day and year first above written. GSI LUMONICS INC. By: /s/ Warren Scott Nix ------------------------------------ Authorized Officer By: /s/ Desmond J. Bradley ------------------------------------ Authorized Officer SUMITOMO HEAVY INDUSTRIES, LTD. By: /s/ H. Taniguchi ------------------------------------ H. Taniguchi Senior Executive Vice President 15 SCHEDULE A STANDARD LASERS GSLI LASERS (1) Mid and high power range YAG JK family and AM & MultiWave family of lasers (Excluding low power range (lower than 100W mean power) YAG LuxStar family of lasers). (2) Excimer lasers (including industrial excimer lasers) below 100W mean power. (3) Impact family of lasers. 16 EX-23.1 8 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS -------------------------------------------- We consent to the use in this Annual Report (Form 10-K) of GSI Lumonics Inc. of our report with respect to the Company's consolidated financial statements for the year ended December 31, 1999 and the related financial statement schedule included therein. /s/ Ernst & Young LLP Chartered Accountants Ottawa, Canada March 21, 2000 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 25,272 7,342 83,645 3,197 72,727 217,246 73,302 28,024 289,722 113,519 0 0 0 222,865 (51,135) 289,722 274,550 274,550 178,773 178,773 133,196 0 (89) (37,330) (2,556) (34,774) 0 0 0 (34,774) (1.14) (1.14)
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