-----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, BlkfhQBZ0pCUTKYvPEuGspWHod2oVgKBhuw8I04AJx9fymypgv2VtOE03IArbxzm K9CH06TV7dQwH7JROA0ZaQ== 0000950130-00-001987.txt : 20000411 0000950130-00-001987.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950130-00-001987 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000410 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-32966 FILM NUMBER: 597867 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 S-3/A 1 AMENDMENT #1 As filed with the Securities and Exchange Commission on April 10, 2000. Registration No. 333-32966 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- GSI Lumonics Inc. (Exact Name of Registrant as Specified in its Charter) New Brunswick, Canada 38-1859358 (State or Other (I.R.S. Employer Jurisdiction of Identification Incorporation or Number) Organization) ---------------------- 105 Schneider Road Kanata, Ontario, Canada K2K 1Y3 (613) 592-1460 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------------- Charles D. Winston 39 Manning Road Billerica, MA 01821 (978) 439-5511 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------------- With a copy to: Deborah L. Mark L. Weissler James D. Scarlett Robert A. Weinstein Milbank, Tweed, Torys Ouimette LaBarge Weinstein Hadley & McCloy Suite 3000, Torys Xerox Tower LLP Maritime Life 237 Park Avenue 333 Preston One Chase Tower 20th Floor Street, Manhattan Plaza P.O. Box 270 New York, NY 11th Floor New York, NY Toronto Dominion 10017 Ottawa, ON K1S 10005 Centre (212) 880-6000 5N4 (212) 530-5000 79 Wellington (613) 231-3000 Street West Toronto, ON M5K 1N2 (416) 865-0040 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Title of each Class of Amount Proposed Maximum Aggregate Amount of Securities to be to be Offering Price Offering Registration Registered Registered(1) per Unit(2) Price(2) Fee(3) - ---------------------------------------------------------------------------------------- Common Shares, no par value.................. 4,600,000 shares $16.88 $77,625,000 $20,493 - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
(1) Includes 600,000 shares to be issued pursuant to the underwriters' over- allotment option. (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933. (3) Previously paid. ---------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, Dated April 10, 2000 The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. 4,000,000 Common Shares US$ per share - -------------------------------------------------------------------------------- GSI Lumonics Inc. is offering 4,000,000 common shares in the United States and Canada. This is a firm commitment underwriting. The common shares are listed on the Nasdaq National Market under the symbol "GSLI" and on The Toronto Stock Exchange under the symbol "LSI." On April 7, 2000, the last reported sale price of the common shares was US$19.50 on the Nasdaq National Market and Cdn$27.75 on The Toronto Stock Exchange. Investing in the common shares involves risks. See "Risk Factors" beginning on page 6.
Per Share Total ------ ------ Price to the public............................... US$ US$ Underwriting discount............................. Proceeds to GSI Lumonics..........................
GSI Lumonics and the selling shareholders identified in this prospectus have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 305,083 additional shares from us and 294,917 additional shares from the selling shareholders within 30 days following the date of this prospectus to cover over-allotments. We will not receive any of the proceeds from the sale of shares by the selling shareholders. - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CIBC World Markets Chase H&Q Needham & Company, Inc. The date of this prospectus is April , 2000. Table of Contents
Page ---- Prospectus Summary..................................................... 1 Risk Factors........................................................... 6 Special Note Regarding Forward-Looking Statements...................... 14 Use of Proceeds........................................................ 15 Dividend Policy........................................................ 15 Capitalization......................................................... 16 Price Range of Common Shares........................................... 17 Selected Consolidated Financial Data................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 19 Business............................................................... 27 Management............................................................. 37 Selling Shareholders................................................... 39 Description of Common Shares........................................... 40 Tax Considerations..................................................... 41 Underwriting........................................................... 45 Legal Matters.......................................................... 48 Experts................................................................ 48 Where You Can Find More Information.................................... 48 Documents Incorporated by Reference.................................... 48 Index to Consolidated Financial Statements............................. F-1
------------------------- As used in this prospectus, the terms "we," "us," "our," "GSI Lumonics" and the "Company" mean GSI Lumonics Inc. and its subsidiaries, unless the context indicates another meaning, and the term "common shares" means our common shares, no par value. In this prospectus unless stated otherwise, all references to "US$" or "$" are to U.S. dollars and all references to "Cdn$" are to Canadian dollars. Our principal executive offices are located at 105 Schneider Road, Kanata, Ontario, Canada K2K 1Y3. Our telephone number is (613) 592-1460. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option granted to the underwriters. The underwriters are offering the common shares subject to various conditions and may reject all or part of any order. The shares should be ready for delivery on or about , 2000 against payment in immediately available funds. The following trademarks and trade names of GSI Lumonics are used in this prospectus: WaferMark(R), LightWriter(R), ScreenCut(R), SoftMark(R), LuxStar(R), PC-Mark(R), Laserdyne(R), Xymark(R), LaserMark(R) and ScanArray(R). Prospectus Summary This summary highlights information contained in other parts of this prospectus. Because it is a summary, it may not contain all of the information that you should consider before investing in our common shares. You should read the entire prospectus carefully, including "Risk Factors," the consolidated financial statements and the related notes, and the documents to which we have referred you, before making an investment decision. GSI Lumonics Inc. 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. Laser systems offer manufacturers precision, lower production costs, fast solutions and production line flexibility. Semiconductor manufacturers face demands for greater throughput, reduced device size, and increased device complexity, performance, traceability, and quality. They use our laser systems in several production process steps, including product marking and memory repair. In the electronics industry, producers of electronic components and assemblies use our laser systems to support their process requirements. Features of these laser systems include precision laser spot size, precision laser power control, high-speed parts handling, and applications adaptability. We also manufacture laser systems for the automotive, aerospace and certain other industrial markets which require advanced manufacturing applications, including cutting, drilling, welding, scribing and machining. In addition, we design and manufacture precision optics used in fiber optics telecommunications networks. 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%. Our competitive advantages include our continuing commitment to technical advancement, thirty years of applications experience, and our global presence which consists of eleven operations facilities located in the United States, Canada and the United Kingdom, as well as a direct sales and service presence at those locations plus an additional ten offices in Europe and the Pacific Rim. We have over 1,000 customers. Our customers in 1999 included: A.T.&S., Ericsson, Intel, Kodak, Maxim Integrated Products, Medtronic Physio-Control, Samsung and Sumitomo Heavy Industries. We intend to accelerate our growth and increase our 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; 1 . Concentrate on high value-added systems that have a global market; . Enhance our capabilities to supply 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 technologies. We have built and continue to extend our patent portfolio. We own 85 United States patents and 52 foreign patents, and currently have 43 United States and 89 foreign patents pending. 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 again listed on The Toronto Stock Exchange. 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, and 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 under the name GSI Lumonics Inc. Our shares commenced trading on the Nasdaq National Market and continued to trade on The Toronto Stock Exchange. 2 The Offering Common shares offered by us........ 4,000,000 shares Common shares to be outstanding after this offering............... 38,546,875 shares(1) Over-allotment option.............. 600,000 shares, to be satisfied first by us up to 305,083 shares, with the balance of up to 294,917 shares to be satisfied by the selling shareholders. Use of proceeds.................... We intend to use the net proceeds for capital expenditures, working capital and general corporate purposes, including possible future acquisitions. Pending these uses, the net proceeds will be added to our cash resources. Nasdaq National Market symbol...... GSLI The Toronto Stock Exchange symbol.. LSI
(1) This share number is based on 34,546,875 common shares outstanding as of February 29, 2000 and excludes 3,687,425 common shares that are issuable upon the exercise of currently outstanding options and warrants, and 320,718 common shares reserved for future grant under our option plan. 3 Summary Consolidated Financial Data (in thousands, except per share data) You should read the following summary of selected consolidated financial data together with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the other information in this prospectus, as well as the documents incorporated by reference. On March 22, 1999, Lumonics and General Scanning completed a merger of equals. We recorded this transaction as a purchase for accounting purposes. Accordingly, our 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 our consolidated financial statements includes, for illustrative purposes, unaudited pro forma information as if the merger had occurred on January 1, 1998.
Years ended December 31, ------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- 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 sale 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 taxes provision (benefit).................... (2,556) (3,260) 5,074 4,635 3,304 -------- -------- -------- -------- -------- Net income (loss)............. $(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 ----------------------------------- Actual As adjusted(1) -------- -------------- Consolidated Balance Sheet Data: Working capital............................ $103,727 Total assets............................... 289,722 Long-term liabilities, including current portion................................... 10,022 Total shareholders' equity................. 171,730
- ------------------ (1) The "as adjusted" column reflects the sale by us of 4,000,000 common shares in this offering at an assumed offering price of $ per share, after deducting the estimated underwriting discount and offering expenses, and the application of the net proceeds from the offering. 4 The following table presents 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 prospectus. Results of 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 management believes that the unaudited quarterly data reflected in the following table contains all adjustments necessary to present fairly the information included in the table, and that the adjustments made consist of only normal reoccurring adjustments. 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.
Three months ended ----------------------------------------- December 31, October 1, July 2, April 2, 1999 1999 1999 1999 ------------ ---------- ------- -------- Quarterly Consolidated 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
5 Risk Factors You should carefully consider the following risk factors and other information contained or incorporated by reference in this prospectus before deciding to invest in our common shares. Investing in our common shares involves a high degree of risk. The risks and uncertainties described below may not be the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed, the trading price of our common shares could decline, and you might lose all or part of your investment. Please see the "Special Note Regarding Forward-Looking Statements" on page 14 of this prospectus. Risks Relating to Our Business Our customers' cyclical fluctuations may adversely affect our operations, which may result in volatility or a decrease in the price of our common shares. Several significant markets for our products have historically been subject to economic fluctuations due to the substantial capital investment required in the industries served. In the past, this has led to significant short-term over- or under-capacity in some markets, particularly in the semiconductor, aerospace and automotive industries where we generated 23% of our revenues during 1999. These fluctuations may continue and could have an adverse impact on our operations. For example, and most importantly, we sell many of our products to the semiconductor industry, which is subject to sudden, extreme, cyclical variations in product supply and demand. The timing, length and severity of these cycles are difficult to predict. In some cases, these cycles have lasted more than a year. Semiconductor manufacturers may contribute to these cycles by misinterpreting the conditions in the industry and over- or under-investing in semiconductor manufacturing capacity and equipment. We may not be able to respond effectively to these industry cycles. Downturns in the semiconductor industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. Industry downturns have been characterized by reduced demand for semiconductor devices and equipment, production over-capacity and accelerated decline in average selling prices. During a period of declining demand, we must be able to quickly and effectively reduce expenses while continuing to motivate and retain key employees. Our ability to reduce expenses in response to any downturn in the semiconductor industry is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements. In addition, although we order materials and subassemblies in response to firm orders, the long lead time for production and delivery of some of our products creates a risk that we may incur expenditures or purchase inventories for products which we cannot sell. A downturn in the semiconductor industry could therefore harm our sales and revenues if demand drops or if our gross margins or our average selling prices decline. Industry upturns have been characterized by abrupt increases in demand for semiconductor devices and equipment and production under-capacity. During a period of increasing demand and rapid growth, we must be able to quickly increase manufacturing capacity to meet customer demand and hire and assimilate a sufficient number of qualified personnel. Our inability to ramp up in times of increased demand could harm our reputation and cause some of our existing or potential customers to place orders with our competitors rather than us. We are subject to quarterly fluctuations in operations, and our inability to anticipate these fluctuations may adversely affect our operations in a given quarter. We have experienced and expect to continue to experience significant fluctuations in our quarterly operating results due to factors like the following: . cycles in the markets we serve; 6 . mix of products sold; . timing and shipment of significant orders; . disruption in sources of supply; . changing market acceptance of new and enhanced products; . seasonality and changing demand; . exchange rate fluctuations; and . length of sales cycles. We expect our operating results to fluctuate in the future as a result of these factors and a variety of other factors, including: . the emergence of new industry standards; . product obsolescence; and . economic conditions generally or in various geographic areas where we or our customers do business. These factors are difficult or impossible to forecast. We derive a substantial portion of our sales from products that have a high average selling price and significant lead times between the initial order and delivery of the product. The timing and recognition of sales from customer orders can cause significant fluctuations in our operating results from quarter to quarter. Gross margins realized on product sales vary depending upon a variety of factors, including the mix of products sold during a particular period, negotiated selling prices, the timing of new product introductions and enhancements and manufacturing costs. A delay in a shipment near the end of a fiscal quarter or year, due, for example, to rescheduling or cancellations by customers or to unexpected manufacturing difficulties experienced by us, may cause sales in a particular period to fall significantly below our expectations and may materially adversely affect our operations for that period. Our inability to adjust spending quickly enough to compensate for any sales shortfall would magnify the adverse impact of that sales shortfall on our results of operations. In addition, announcements by us or our competitors of new products and technologies could cause customers to defer purchases of our existing systems, which could negatively impact our earnings and our financial position. As a result of these factors, our operating results may vary significantly from quarter to quarter. Any shortfall in revenues or net income from levels expected by securities analysts and investors could cause a decrease in the trading price of our common shares. If we cannot protect or lawfully use our proprietary technology, we may not be able to compete successfully. We protect our intellectual property through patent filings, confidentiality agreements and the like. However, these methods of protection are uncertain and costly. In addition, we may face allegations that we are violating the intellectual property rights of third parties. These types of allegations are common in the industry. Monitoring unauthorized use of our products is difficult. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology. The laws of some foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely in these countries. If competitors are able to use our technology, our ability to compete effectively could be harmed. 7 Claims or litigation could seriously harm our business or require us to incur significant costs. We are subject to litigation from time to time, some of which is material to our business. If, in any of these actions, there is a final adverse ruling against us, it could seriously harm our business and have a material adverse effect on our operating results and financial condition, as well as having a significant negative impact on our liquidity. Among other things, we are currently subject to the following claims and actions: 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 no. 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 a motion for summary judgment in favor of Electro Scientific and against General Scanning in this case on a claim of infringement and on the issue of whether Electro Scientific committed inequitable conduct by intentionally failing to cite prior art to the United States 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 U.S. patent no. 5,473,624 was invalid and that Electro Scientific's U.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. 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, 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, Inc. v. View Engineering, Inc. We are involved in a patent infringement complaint filed 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. Robotic Vision alleged infringement relating to lead inspection machines formerly sold by View Engineering and sought damages of $60.5 million. In March 2000, the Court found that Robotic Vision's patent was invalid. Robotic Vision may appeal the Court's decision. As of the date of this prospectus, Robotic Vision has not initiated an appeal. 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. 8 Potential Claims. In 1994, a party commenced legal proceedings in the United States against a number of United States manufacturing companies, including companies that have purchased systems from us. The plaintiff has alleged that 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 depend on limited source suppliers which could cause substantial manufacturing delays and additional cost if a disruption of supply occurs. We obtain some components from a single source. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products. If suppliers or subcontractors experience difficulties that result in a reduction or interruption in supply to us or fail to meet any of our manufacturing requirements, our business would be harmed until we are able to secure alternative sources. These components and manufacturing services may not continue to be available to us at favorable prices, if at all. The loss of key personnel could negatively impact our operations. Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. Availability of qualified technical personnel varies from country to country and may affect our operations in some parts of the world. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed. In particular, if our growth strategies are successful, we may not have sufficient operational personnel to manage that growth and may not be able to attract the personnel needed. In addition, we do not maintain insurance to protect against the loss of key executives or employees. Our future growth and operating results will depend on: . our ability to continue to broaden our senior management group; . our ability to attract, hire and retain skilled employees; and . the ability of our officers and key technical employees to continue to expand, train and manage our employee base. We must introduce new and enhanced products on a timely basis, or we may not be able to compete successfully. The markets for our products experience rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Developing new technology is a complex and uncertain process requiring us to be innovative and to accurately anticipate technological and market trends. We may have to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excess inventory and ensure adequate supplies of new products. We may not successfully develop, introduce or manage the transition to new products. Failed market acceptance of new products or problems associated with new product transitions could harm our business. If we fail to adequately invest in research and development, we may be unable to compete effectively. We have limited resources to allocate to research and development, and must allocate our resources among a wide variety of projects. Because of intense competition in the industries in which we compete, the cost of 9 failing to invest in strategic products is high. If we fail to adequately invest in research and development, we may be unable to compete effectively in the markets in which we operate. A loss of major customers could adversely affect us. Our ten largest customers represented approximately 26% of sales during 1999. A loss of one or more of these or other large customers could have an adverse effect on our business. We face competition or potential competition from companies with greater resources than ours, and, if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. The industries in which we operate are highly competitive. We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products. Furthermore, competition in our markets could intensify, or our technological advantages may be reduced or lost as a result of technological advances by our competitors. Their greater capabilities in these areas may enable them to: . better withstand periodic downturns; . compete more effectively on the basis of price and technology; . more quickly develop enhancements to and new generations of products; and . more effectively retain existing customers and obtain new customers. In addition, new companies may in the future enter the markets in which we compete, further increasing competition in those markets. We believe that our ability to compete successfully depends on a number of factors, including: . performance of our products; . quality of our products; . reliabilty of our products; . cost of using our products; . our ability to ship products on the schedule required; . quality of the technical service we provide; . timeliness of the services we provide; . our success in developing new products and enhancements; . existing market and economic conditions; and . price of our products as compared to our competitors' products. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share, and an inability to generate cash flows that are sufficient to maintain or expand our development of new products. 10 Operating in foreign countries exposes us to increased risks. In addition to operating in the United States, Canada and the United Kingdom, we have sales and service offices in France, Germany, Italy, Japan, Singapore, Hong Kong, Korea, Taiwan, Malaysia and the Philippines. We may in the future expand into other international regions. Because of the scope of our international operations, we are subject to the following risks which could materially impact our results of operations: . foreign exchange rate fluctuations; . longer payment cycles; . greater difficulty in collecting accounts receivable; . utilization of different systems and equipment; and . difficulties in staffing and managing foreign operations and diverse cultures. In addition, changes in government policies could negatively affect our operating results due to: . increased regulatory requirements; . higher taxation; . currency conversion limitations; . restrictions on the transfer of funds; . the imposition of, or increase in, tariffs; or . limitations on imports or exports. We may need additional funds to finance our future growth, and if we are unable to obtain such funds, we may not be able to expand our business as planned. We may require additional capital to finance our future growth and fund our ongoing research and development activities. Our capital requirements depend on many factors, including acceptance of, and demand for, our products, and the extent to which we invest in new technology and research and development projects. To the extent that our existing sources of liquidity and cash flow from operations are insufficient to fund our activities, we may need to raise additional funds. If we raise additional funds through the issuance of equity securities, the percentage ownership of our existing shareholders would be diluted. If we finance our capital requirements with debt we may incur significant interest costs. Additional financing may not be available to us when needed or, if available, it may not be available on terms favorable to us. Our business may be harmed by acquisitions we complete in the future. We plan to continue to pursue additional acquisitions. Our identification of suitable acquisition candidates involves risks inherent in assessing the values, strengths, weaknesses, risks and profitability of acquisition candidates, including the effects of the possible acquisition on our business, diversion of our management's attention and risks associated with unanticipated problems or latent liabilities. If we are successful in pursuing future acquisitions, we may be required to expend significant funds, incur additional debt or issue additional securities, which may negatively affect our results of operations and be dilutive to our shareholders. If we spend significant funds or incur additional debt, our ability to obtain financing for working capital or other purposes could decline, and we may be more vulnerable to economic downturns and competitive pressures. We 11 cannot guarantee that we will be able to finance additional acquisitions or that we will realize any anticipated benefits from acquisitions that we complete. Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing business. We have significant fixed costs which are not easily reduced if revenues fall below expectations. Our expense levels are based in part on our future revenue expectations. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. If we do not meet our sales goals, we may be unable to rapidly reduce these fixed costs. Our ability to reduce expenses is further constrained, because we must continue to invest in research and development to maintain our competitive position and to maintain service and support for our existing global customer base. Accordingly, if we suffer an unexpected downturn in revenue, our inability to reduce fixed costs rapidly could increase the adverse impact on our results of operations. We do not have long-term contracts with most of our customers and therefore there is no assurance of future sales. Our agreements with customers generally do not provide any assurance of future sales. Accordingly: . our customers can cease purchasing our products at any time without penalty; . our customers are free to purchase products from our competitors; . we are exposed to competitive price pressure on each order; and . our customers are not required to make minimum purchases. Sales are typically made pursuant to individual purchase orders and may occur with short lead times. If we are unable to fulfill these orders in a timely manner, we may lose future sales and customers. Our operations are subject to environmental laws that may expose us to liabilities for noncompliance. We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, manufacture and disposal of toxic or other hazardous chemical by-products of, and water used in, our manufacturing processes. Environmental claims against us or our failure to comply with any present or future regulations could result in: .the assessment of damages or imposition of fines against us; .the suspension of production of our products; or .the cessation of our operations. New regulations could require us to acquire costly equipment or to incur other significant expenses. Our failure to control the use or adequately restrict the discharge of hazardous substances could subject us to future liabilities, which could negatively impact our earnings and financial position. Risks Relating to this Offering and the Market for our Common Shares Our share price may be volatile. The stock markets on which our common shares are traded have fluctuated widely in the past. The securities of many technology companies, including our own, have experienced substantial price and volume fluctuations. 12 These broad market fluctuations may adversely affect the market price of our common shares. More specifically, the trading price of our common shares could fluctuate in response to: . quarterly variations in our operations and financial results; . announcements by us or our competitors of technological innovations, new products, new contracts or acquisitions; . general conditions in the markets we serve; and . systemic fluctuations in the stock markets. Enforcement of United States legal judgments outside the United States may be difficult. We are a corporation existing under the laws of the Province of New Brunswick, Canada. Several of our current directors and officers, and several experts named in this prospectus, are residents of Canada, and all, or a substantial portion of, their assets and a substantial part of our assets are located outside the United States. Consequently, it may be difficult for United States investors to effect service of process within the United States on such person or to realize, in the United States, on judgments rendered against us or these persons based on the civil liability provisions of the United States federal securities laws. In addition, there is substantial doubt as to the enforceability in Canada against us or these persons, in original actions or in actions for enforcement of judgments of United States courts, of liabilities based solely upon the United States federal securities laws. No treaty exists between the United States and Canada for the reciprocal enforcement of foreign court judgments. Management has discretion in spending our proceeds from this offering. We have broad discretion in allocating our proceeds from this offering. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decision on how to use the proceeds we receive from this offering. 13 Special Note Regarding Forward-Looking Statements Some of the information in this prospectus contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, among other things, statements concerning our product development plans, use of proceeds, projected capital expenditures, liquidity and business strategy. These statements may be found under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements typically are identified by use of terms such as "believes," "estimates," "expects," "intends," "may," "will," "should" or "anticipates" or the negative forms of these expressions, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the matters discussed under "Risk Factors" and in other sections of this prospectus, which address various factors that could cause our actual results to differ from those set forth in the forward-looking statements. 14 Use of Proceeds We estimate that the net proceeds from the sale of the 4,000,000 common shares we are offering will be approximately $ million. If the underwriters fully exercise the over-allotment option, the net proceeds will be approximately $ million. "Net proceeds" is what we expect to receive after we pay the underwriting discount and other estimated expenses for this offering. For the purpose of estimating net proceeds, we are assuming that the public offering price will be $ per share. We expect to use the net proceeds for working capital and general corporate purposes, which may include the purchase of equipment and the expansion of facilities. We also may use a portion of the net proceeds to acquire or invest in businesses, technologies, products or services that are complementary to our business. We are not currently in discussions regarding any material acquisitions or investments and have no agreements or commitments to complete any such material transaction. Pending our uses of the proceeds, we intend to invest the net proceeds of this offering primarily in short-term, investment- grade, interest-bearing instruments. If the selling shareholders sell any common shares in connection with the underwriters' exercise of their over-allotment option, all of the net proceeds from the sale of those common shares by those selling shareholders will go to the selling shareholders. We will not receive any proceeds from the sale of those shares. Dividend Policy We have never declared cash dividends on our common shares. We anticipate that we will retain earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. 15 Capitalization The following table shows our capitalization at December 31, 1999, on an actual basis and as adjusted to reflect the sale of the 4,000,000 common shares that we are offering, assuming the over-allotment option is not exercised, at an assumed per share offering price of $ , after deducting the underwriting discount and estimated offering expenses, and the application of the net proceeds from the offering.
December 31, 1999 ---------------------- As Actual adjusted --------- --------- (in thousands) Debt Bank indebtedness, due on demand(1)................... $ 23,100 $ Japanese yen term loans maturing October 31, 2000(2).. 3,917 Mortgage loan(2)...................................... 1,508 -------- -------- Total debt.......................................... 28,525 -------- -------- Stockholders' equity Common shares: no par value; unlimited number of shares authorized, 34,298,942 shares issued and outstanding, actual; 38,298,942 shares issued and outstanding, as adjusted............................................. 222,865(3) Deficit............................................... (44,225) Accumulated other comprehensive income................ (6,910) --------- -------- Total shareholders' equity.......................... 171,730 -------- -------- Total capitalization(4)................................. $200,255 $ ======== =========
- ------------------ (1) See note 7 to the consolidated financial statements. (2) See note 8 to the consolidated financial statements. (3) Does not include 3,978,000 common shares issuable upon exercise of outstanding options granted under our stock option plans or up to 70,818 common shares that may be issued for outstanding warrants as of December 31, 1999. Subsequent to December 31, 1999, 93,000 additional options have been issued under our stock option plan. (4) See note 17 to the consolidated financial statements for our obligations under operating leases. 16 Price Range of Common Shares Our common shares are quoted on the Nasdaq National Market under the symbol "GSLI" and on The Toronto Stock Exchange under the symbol "LSI." The following table gives, for the periods indicated, the high ask and low bid prices of our common shares as reported on the Nasdaq National Market in U.S. dollars and The Toronto Stock Exchange in Canadian dollars.
Toronto Stock Nasdaq Exchange price range price range US$ Cdn$ --------------- ------------- High Low High Low ------- ------- ------ ------ 2000: First quarter................................. $29.375 $ 8.250 $40.00 $ 7.60 Second quarter through April 7, 2000.......... 19.688 14.250 28.59 20.50 1999: First quarter................................. $ 6.375 $ 4.500 $10.50 $ 6.75 Second quarter................................ 4.875 3.250 7.25 5.00 Third quarter................................. 6.875 3.813 10.25 5.60 Fourth quarter................................ 11.250 4.188 16.20 7.60 1998: First quarter................................. -- -- $27.75 $21.50 Second quarter................................ -- -- 23.00 11.80 Third quarter................................. -- -- 13.75 7.50 Fourth quarter................................ -- -- 9.10 6.50
The closing price of the shares on April 7, 2000 was US$19.50 on the Nasdaq National Market and Cdn$27.75 on The Toronto Stock Exchange. The following table gives in Canadian dollars the exchange rates for the United States dollar, determined based on publicly available information from the Federal Reserve Bank of New York for the calendar years 1999 and 1998.
Cdn$ per US$ --------------- 1999 1998 ------- ------- High......................................................... $1.5300 $1.5770 Low.......................................................... 1.4440 1.4075 End of period................................................ 1.4440 1.5375 Average...................................................... 1.4827 1.4898
The average exchange rate is calculated on the last business day of each month for the applicable period. On April 7, 2000, the noon buying rate in New York for cable transfers in Canadian dollars was US$1.00 = Cdn$1.4574 as certified for customer purposes by the Federal Reserve Bank of New York. 17 Selected Consolidated Financial Data This section presents our selected historical consolidated financial data. You should read carefully the consolidated financial statements included in this prospectus, 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 prospectus. 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, 1997, December 31, 1996 and December 31, 1995 from audited consolidated financial statements that are not included in this prospectus. 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 on 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 data) 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)............. $(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) Consolidated 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 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 prospectus. This prospectus 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 prospectus. 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. 20 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. 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 prior % of over prior % of Sales total year Sales total year Sales total ------ ----- ---------- ------ ----- ---------- ------ ----- United States........... $143.0 52% 133% $ 61.3 43% (33)% $ 91.8 52% Canada.................. 10.8 4 30 8.3 6 (14) 9.7 5 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 12 (16) 21.0 12 ------ --- --- ------ --- --- ------ --- 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. 21 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. 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. 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 22 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 prospectus. 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(1) ------------ ---------- ------- -------- (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
The following table sets forth sales in millions of dollars to our primary markets for the quarters ended December 31, 1999, October 1, 1999, July 2, 1999 and April 2, 1999.
Three months ended ------------------------------------------ December 31, October 1, July 2, April 2, 1999 1999 1999 1999(1) ------------- ----------- ------- -------- (in 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 23 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 totalled $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 totalled $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 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 24 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%). 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. Market Risk Disclosure 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 25 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 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. 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. 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. 26 Business 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 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. 27 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 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 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 technologies. 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. 28 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. 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 29 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. 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. 30 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 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 fibre 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. 31 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. 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. 32 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 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 33 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. 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. 34 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. 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% ===== ===
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 no. 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. We were aware of this patent in March, 1999, and first investigated the matter at that time. We intend to vigorously defend this claim and, based on our investigation of the patent to date, we believe that we will prevail. 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 award plus accrued interest and related costs. The court also affirmed the jury's decision to invalidate one of the two patents asserted by Electro Scientific in the case. We have appealed the decisions on infringement, the validity of the second patent, 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. 35 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. Robotic Vision alleged infringement relating to lead inspection machines formerly sold by View and sought damages of $60.5 million. In March 2000, the Court found that Robotic Vision's patent was invalid. Robotic Vision may appeal the Court's decision. As of the date of this prospectus, Robotic Vision has not initiated an appeal. 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. As we have 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 us. The plaintiff has alleged that 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. 36 Management The following table sets forth information with respect to our executive officers and directors:
Name Age Position ---- --- -------- Paul F. Ferrari......... 69 Chairman of the Board of Directors Charles D. Winston...... 59 President and Chief Executive Officer and Director 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 Richard Black........... 66 Director Woodie Flowers ......... 56 Director Byron O. Pond........... 63 Director Benjamin J. Virgilio.... 60 Director William B. Waite........ 62 Director
Mr. Ferrari has been an independent consultant since 1991. Previously, he was Vice President of Thermo Electron Corporation from 1988 to 1991 and was Treasurer of Thermo Electron Corporation from 1967 to 1988. He also serves as a Director of Thermedics Inc. and ThermoTrex Inc. Mr. Winston has served as our Chief Executive Officer 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. Mr. 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. Mr. Austin has held his current position since March 1999 and has served as our Vice President, Sales since January 1996. Prior to that time he was our Vice President, Market Development and before October 1992 was Vice President, Laser Marking Division. Mr. George has held his position since March 1999 and has served as our Vice President, Customer Support since January 1997. Prior to that time he was Director, North American Service. Mr. 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. Mr. 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. Ms. Palmer assumed her current role in December 1999, having served as the Vice President, Integration from March 1999 through December 1999. She had been General Scanning's Vice President, Human Resources since joining General Scanning in 1996. Prior to that time, Ms. Palmer served as Director of Human Resources of Analog Devices. 37 Mr. Pelsue assumed his current position in March 1999, having served since 1997 as Vice President, Corporate Engineering for General Scanning. Before that time, Mr. Pelsue held numerous senior level engineering assignments within General Scanning. He joined the firm in 1976. Mr. 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. Mr. Black has served as Vice Chairman of Oak Technology, Inc., a developer of semiconductors and software, since March 1999, as President of Oak from January 1998 to March 1999 and as a Director of Oak since 1988. He has served as Chairman of the Board of Directors of ECRM Incorporated since 1983. He also serves as a Director of Altigen Communications, Inc., Morgan Group, Inc., Gabelli Funds, Inc., Benedetto Gartland, Inc. and Grand Eagle Companies. Mr. Flowers is the Pappalardo Professor of Mechanical Engineering at Massachusetts Institute of Technology. Professor Flowers served as a Professor of Teaching Innovation at the MIT School of Engineering from 1991 to 1993 and was Head of the Systems Design Division at MIT from 1989 to 1991. He also serves as a director of Nypro, Inc. and is a member of the National Academy of Engineering. Mr. Pond is Chairman Emeritus of Arvin Industries, Inc., an automotive parts company. Mr. Pond has been a senior executive with Arvin Industries, Inc. since 1990 serving as its President and Chief Executive Officer from 1993 to 1996 and its Chairman and Chief Executive Officer from 1996 to 1998. Mr. Virgilio is the President and Chief Executive Officer of Rea International Inc., an automotive fuel systems manufacturer. Prior to May 1995, Mr. Virgilio was a business consultant. Prior to November 1993, he was President and Chief Executive Officer of A.G. Simpson Limited. Mr. Waite has been a retired executive since 1995. Prior to September 1995, Mr. Waite was President and Chief Executive Officer of Siemens Electric Limited. 38 Selling Shareholders Certain of our officers and directors may be selling common shares as part of the underwriters' over-allotment option, if exercised. Under these arrangements, we will sell the initial 305,083 common shares taken under the over-allotment option, and the selling shareholders will sell the balance. No selling shareholder beneficially owns as much as 1% of the common shares. No selling shareholder will be selling more than 20% of his total holdings, including all options. The following table contains information regarding the beneficial ownership of common shares as of March 20, 2000 with respect to the selling shareholders. This information provided in the table below with respect to the selling shareholders has been obtained from the selling shareholders.
Common shares Common Selling owned prior Common shares shares owned shareholder Relationship with GSI Lumonics Inc. to offering(1) being offered after offering(2) - ----------- ------------------------------------- -------------- ------------- ----------------- Patrick Austin Vice President, Sales, Advanced Manufacturing Systems 115,834 34,500 81,334 Desmond Bradley Vice President, Finance & Chief Financial Officer 164,583 40,000 124,583 Charles Gardner General Counsel & Corporate Secretary 15,500 2,500 13,000 John George Vice President, Customer Support, Advanced Manufacturing Systems 93,000 5,000 88,000 Michael Kampfe Vice President, Operations, Advanced Manufacturing Systems 145,298 59,769 85,529 Kurt Pelsue Vice President, Technology 114,411 40,000 74,411 Charles Winston President & Chief Executive Officer 235,735 113,148 122,587 ------- ------- ------- Total 884,361 294,917 589,444 ======= ======= =======
- ------------------ /1/ Includes currently exercisable options and options that will become exercisable within 60 days. /2/Assumes that the underwriters have exercised their over-allotment option to purchase 600,000 common shares satisfied first by us up to 305,083 common shares and the balance from the selling shareholders. 39 Description of Common Shares We have authority to issue an unlimited number of common shares. As at February 29, 2000, 34,546,875 of our common shares were issued and outstanding. Each outstanding common share will be entitled to one vote at all meetings of our shareholders, to participate ratably in any dividends which may be declared by the board of directors and, in the event of liquidation, dissolution or winding-up or other distribution of our assets or property, to a pro rata share of our assets after payment of all our liabilities and obligations. Shareholders have cumulative voting rights in the election of directors. Cumulative voting rights permit each shareholder entitled to vote at a meeting of shareholders to cast a number of votes equal to the number of shares held by the shareholder multiplied by that number of directors to be elected. The shareholder is entitled to cast all such votes in favor of one candidate for director or distribute them among the candidates in any manner. Shareholder rights plan On April 12, 1999, our board of directors adopted a shareholders rights plan. Under this shareholders rights 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. Each right, when exercisable, entitles the holder to purchase one common share from us at the exercise price of Cdn$200, subject to adjustment and certain anti-dilution provisions. 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 of directors, after the earlier of: . 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 . 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 person or group of affiliated or associated persons becomes an "acquiring person," each right will constitute the right to purchase from us that number of common shares having an aggregate market price on that date 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, we 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 us on terms not approved by our board of directors. 40 Tax Considerations Canadian Tax Considerations In the opinion of LaBarge Weinstein, our Canadian counsel, the following is a summary of the principal Canadian federal income tax considerations generally applicable to a U.S. holder who acquires common shares pursuant to this offering. In this summary, a "U.S. holder" means a person who, for the purposes of the Canada-United States Income Tax Convention (1980), is a resident of the United States and not of Canada and who, for purposes of the Income Tax Act (Canada) (the "Tax Act"), (1) is neither resident nor deemed to be resident in Canada, (2) does not use or hold, and is not deemed to use or hold, the common shares in carrying on a business in Canada, (3) holds such common shares as capital property, and (4) deals at arm's length with us. Additional considerations, which are not discussed below, may be relevant to a U.S. holder that is an insurer carrying on business in Canada and elsewhere. This summary is based on the current provisions of the Tax Act, the regulations thereunder, all specific proposals to amend the Tax Act or the regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof and counsel's understanding of the current administrative practices of the Canada Customs and Revenue Agency. The Tax Act contains certain "mark-to-market rules" relating to securities held by certain financial institutions. This summary does not take into account those mark-to-market rules, and U.S. holders that are "financial institutions" for purposes of such rules should consult their own tax advisors. This summary is not exhaustive of all possible Canadian federal income tax considerations and, except as mentioned above, does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account tax legislation or considerations of any province or territory of Canada, which may differ from the Canadian federal income tax considerations described herein. This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. holder, and no representation with respect to the income tax consequences to any particular U.S. holder is made. Consequently, prospective purchasers should consult their own tax advisors with respect to their particular circumstances. Taxation of dividends Dividends on a common share paid or credited to a U.S. holder will be subject to Canadian withholding tax at the rate of 25% of the gross amount of such dividends, although such rate may be reduced under the provisions of an applicable income tax treaty. Under the Convention, U.S. holders will generally be subject to a 15% withholding tax on the gross amount of dividends paid or credited on a common share. Disposition of offered shares A U.S. holder of a common share will not be subject to tax under the Tax Act in respect of any gain realized on the disposition of the common share unless the common share constitutes or is deemed to constitute "taxable Canadian property" (as defined in the Tax Act). Taxable Canadian property will generally include any common share listed on a prescribed stock exchange for purposes of the Tax Act held by a U.S. holder if, at any time during the five-year period immediately preceding the disposition of the common share, the U.S. holder, persons with whom the U.S. holder did not deal at arm's length or the U.S. holder together with such persons owned or is considered to have owned 25% or more of the issued shares of any class or series of our shares. Even if a common share is taxable Canadian property to a U.S. holder, any capital gain realized by the U.S. holder on a disposition may be exempt from tax under the Convention. 41 United States Tax Considerations The following summary describes the material United States federal income tax consequences relating to an investment in our common shares as of the date hereof. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), existing final, temporary and proposed Treasury Regulations, rulings and judicial decisions, all of which are subject to prospective and retroactive changes. We will not seek a ruling from the Internal Revenue Service (the "IRS") with regard to the United States federal income tax treatment relating to investment in common shares, and, therefore, we cannot assure you that the IRS will agree with the conclusions set forth below. This summary does not purport to address all United States federal income tax consequences that may be relevant to a particular investor, and you may want to consult your own tax advisor regarding your specific tax situation. This summary, to the extent that it states matters of law or legal conclusions and subject to the qualifications herein, represents the opinion of Milbank, Tweed, Hadley & McCloy LLP, United States counsel to GSI Lumonics. This summary applies only to holders who hold common shares as capital assets within the meaning of Code section 1221 and does not address the tax consequences that may be relevant to investors in special tax situations including, for example: . life insurance companies, . tax-exempt entities, . dealers in securities or currency, . traders in securities that elect to use a mark-to-market method of accounting for their securities holding, . banks or other financial institutions, . investors that hold our common shares as part of a hedging, integrated, conversion or construction sale transaction or a straddle, . holders that own, directly or indirectly, ten percent or more of the total combined voting power of our common shares, or . investors whose "functional" currency is not the United States dollar. Further, this summary does not address the alternative minimum tax consequences of an investment in common shares or the indirect consequences to holders of equity interests in entities that own common shares. In addition, this summary does not address the state, local and foreign tax consequences of an investment in the common shares. You are urged to consult your tax advisors regarding the United States federal, state, local and non-United States income and other tax consequences of acquiring, holding and disposing of common shares. Taxation of U.S. Holders The following discussion applies to you if you are: . a citizen or resident of the United States, . a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof, . an estate, the income of which is subject to United States federal income tax regardless of its source, or 42 . a trust if (a) a court within the United States is able to exercise primary supervision over its administration as described in Code section 7701(a)(30) or (b) it has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. Distributions on common shares Distributions made by us with respect to common shares, without reduction for any Canadian tax withheld, generally will be taxable to you as ordinary income to the extent paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). Distributions in excess of our current or accumulated earnings and profits will be treated first as a non-taxable return of capital reducing your tax basis in the common shares. Any such distribution in excess of your tax basis in the common shares will be treated as capital gain and will be either long-term or short-term capital gain depending upon whether you have held the common shares for more than one year. Such income will be includable in your gross income as ordinary income on the day received by you. Dividends paid by us generally will not be eligible for the dividends received deduction available to certain United States corporate shareholders under Code sections 243 and 245. The amount of any cash distribution paid in Canadian dollars will equal the United States dollar value of the distribution, calculated by reference to the exchange rate in effect on the date the dividends are received. You should not recognize any foreign currency gain or loss if such foreign currency is converted into United States dollars on the date received by you. If the Canadian dollars are not converted into United States dollars on the date of receipt, however, gain or loss may be recognized upon a subsequent sale or other disposition of the Canadian dollars. Such foreign currency gain or loss, if any, will be United States source ordinary income or loss for United States federal income tax purposes. You will have a basis in the Canadian dollar equal to the United States dollar value on the date of receipt. Generally, you will have the option of claiming the amount of Canadian tax withheld at the source on the distribution of dividends with respect to our common stock as either a deduction from adjusted gross income or as a credit against your United States federal income tax liability. If you elect to claim a credit for such Canadian taxes, the election will be binding for all foreign taxes paid or accrued by you for the taxable year for which the election is made. If you claim the standard deduction rather than itemized deductions, you may not claim a deduction for foreign taxes withheld, but you may claim such amount as a credit against your United States federal tax liability. Dividends received with respect to the common shares will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends paid with respect to the common shares generally will constitute "passive income" or, in the case of certain holders, "financial services income." Special rules apply to certain individuals whose foreign source income during the taxable year consists entirely of "qualified passive income" and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). Further, in certain circumstances, a U.S. holder that (a) has held common shares for less than a specified minimum period during which it is not protected from risk or loss, (b) is obligated under a short sale or otherwise to make payments related to the dividends for posititions in substantially similar or related property or (c) holds the ordinary shares in arrangements in which the U.S. holder's expected economic profit, after non-United States taxes, is insubstantial will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on common shares. Distributions in excess of our current and accumulated earnings and profits will not give rise to foreign source income, and you will not be able to use the foreign tax credit arising from any Canadian withholding tax imposed on such distribution unless such credit can be applied (subject to applicable limitations) against United States federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes. 43 Sale or exchange of common shares You will generally recognize capital gain or loss upon the sale or exchange of the common shares measured by the difference between the amount you receive and your tax basis in the common shares. Such gain or loss will be long-term capital gain or loss if the common shares have been held for more than one year. Non-corporate taxpayers may be subject to reduced rates of tax on long- term capital gains. In general, any capital gain or loss recognized upon the sale or exchange of common shares will be treated as United States source income or loss, for United States foreign tax credit purposes. Taxation of Non-U.S. Holders The following discussion applies to you if you are not described in the previous section. Distributions on common shares You generally will not be subject to United States federal income tax or withholding tax on dividends received from us with respect to common shares unless such income is considered as effectively connected with the conduct of a United States trade or business. Sale or exchange of common shares You generally will not be subject to United States federal income tax on any gain realized upon the sale or exchange of common shares, unless: . such gain is effectively connected with the conduct of a United States trade or business; or . if you are an individual, you are present in the United States for 183 days or more during the taxable year of disposition and certain other conditions are met. If you are engaged in a United States trade or business, the income from the common shares (including dividends and the gain from the sale or exchange thereof) that is effectively connected with the conduct of such trade or business will generally be subject to regular United States federal income tax on such income in the same manner as discussed in the previous section. In addition, if you are a corporation, your earnings and profits that are attributable to such effectively connected income (subject to certain adjustments) may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable treaty). Backup Withholding and Information Reporting "Backup" withholding and information reporting requirements may apply to payments made within the United States of dividends on common stock and to certain payments of proceeds of a sale or redemption of common shares paid to a U.S. holder. We, a broker or any paying agent, as the case may be, may be required to withhold tax from any payment that is subject to backup withholding at a rate of 31% of such payment if the U.S. holder fails to furnish the U.S. holder's taxpayer identification number, to certify that the U.S. holder is not subject to backup withholding or to otherwise comply with the applicable requirements of the backup withholding rules. Certain U.S. holders, including, among others, corporations, are not subject to the backup withholding and information reporting requirements. Any amounts withheld under the backup withholding rules from a payment to a U.S. holder may generally be claimed as a credit against such U.S. holder's United States federal income tax liability, provided that the required information is furnished to the IRS. Treasury regulations, generally effective for payments made after December 31, 2000, modify certain of the certification requirements for backup withholding. It is possible that we and other withholding agents may request a new withholding certificate from U.S. holders in order to qualify for continued exemption from backup withholding under Treasury regulations when they become effective. 44 Underwriting GSI Lumonics and the selling shareholders have entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp., Chase Securities Inc. and Needham & Company, Inc. are acting as representatives of the underwriters. The underwriting agreement provides for the purchase of a specific number of common shares by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase common shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of common shares set forth opposite its name below:
Number Underwriter of Shares - ----------- --------- CIBC World Markets Corp. ............................................. Chase Securities Inc. ................................................ Needham & Company, Inc. .............................................. BMO Nesbitt Burns Inc. ............................................... --- Total............................................................... ===
The underwriters have agreed to purchase all of the shares offered by this prospectus, other than those covered by the over-allotment option described below, if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase common shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. This offering is being made concurrently in the United States and all of the provinces of Canada. The common shares will be offered in the United States through the underwriters either directly or through their respective U.S. broker-dealer affiliates or agents. The common shares will be offered in all of the provinces of Canada by CIBC World Markets Inc., BMO Nesbitt Burns Inc., and other registered dealers that may be designated by the underwriters. Subject to applicable law, the underwriters may offer the common shares outside of Canada and the United States. The common shares should be ready for delivery on or about , 2000 against payment in immediately available funds. The representatives have advised us that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the common shares to other securities dealers at such price less a concession of $ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $ per share to other dealers. After the common shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times. We and the selling shareholders have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of 600,000 additional common shares, 305,083 common shares to be bought from us first and 294,917 common shares from the selling shareholders to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase common shares covered by the option at the offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to public will be $ , the total proceeds to us will be $ and the total proceeds to the selling shareholders will be $ . The underwriters have severally agreed that, to the extent the over- allotment option is exercised, they will each purchase a number of additional common shares proportionate to the underwriters' initial amounts reflected in the foregoing table. 45 The following table provides information regarding the amount of the discount to be paid to the underwriters by us and the selling shareholders:
Total Total without with full exercise exercise of over- of over- Per allotment allotment Share option option ----- --------- --------- GSI Lumonics.......................................... $ $ $ Selling shareholders.................................. ------ ------ Total............................................... $ $ ====== ======
We estimate that total expenses of the offering, excluding the underwriting discount, will be approximately $ . We will pay all expenses of the offering. GSI Lumonics and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933 and applicable Canadian provincial securities legislation. GSI Lumonics, its officers and directors and Sumitomo Heavy Industries Ltd. have agreed to a 90-day "lock up" with respect to common shares that they beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for common shares. This means that, subject to certain exceptions, for a period of 90 days following the date of this prospectus, GSI Lumonics and such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of CIBC World Markets Corp. CIBC World Markets Corp., however, may in its sole discretion and at any time without notice, release all or any portion of the common shares subject to these agreements. Pursuant to policy statements of the Ontario Securities Commission and the Commission des valeurs mobilieres du Quebec, the underwriters may not, throughout the period of distribution, bid for or purchase our common shares. This restriction is subject to certain exceptions, on the condition that the bid or purchase not be engaged in for the purpose of creating actual or apparent active trading in, or raising the price of, the common shares. These exceptions include a bid or purchase permitted under the by-laws and rules of The Toronto Stock Exchange relating to market stabilization and passive market making activities and a bid or purchase made for and on behalf of a customer where the order was not solicited during the period of distribution. Rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for or purchase common shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules: . Stabilizing transactions--The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the common shares, so long as stabilizing bids do not exceed a specified maximum. . Over-allotments and syndicate covering transactions--The underwriters may create a short position in the common shares by selling more common shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing common shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over- allotment option. . Penalty bids--If the representatives purchase common shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those common shares as part of this offering. . Passive market making--Market makers in the common shares who are underwriters or prospective underwriters may make bids for or purchases of common shares, subject to limitations, until the time, if ever, at which a stabilizing bid is made. 46 Stabilization and syndicate covering transactions may cause the price of the common shares to be higher than it would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the common shares if it discourages resales of the shares. Neither GSI Lumonics nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market, The Toronto Stock Exchange or otherwise. If such transactions are commenced, they may be discontinued without notice at any time. We have a $13.1 million credit facility with an affiliate of CIBC World Markets. The amount outstanding to the affiliate is approximately $4 million. We are not using any part of the proceeds of the offering to repay any amount payable to the affiliate. 47 Legal Matters The validity of the common shares offered by this prospectus will be passed upon for us by Stewart McKelvey Stirling Scales. Legal matters in connection with the offering will be passed upon for the underwriters by Torys, New York, New York. Experts Ernst & Young LLP, independent auditors, have audited our consolidated financial statements as at December 31, 1999 and 1998 and for each of the three years ended December 31, 1999 included in this prospectus, as stated in their report, and incorporated by reference in this prospectus and elsewhere in this registration statement. Our financial statements and schedule are included and incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The consolidated financial statements of General Scanning Inc. included in this prospectus, to the extent and for the periods indicated in their report, have been audited by Arthur Andersen, LLP and are included in this prospectus in reliance on the authority of that firm as experts in giving said report. Where You Can Find More Information We have filed with the Securities and Exchange Commission a registration statement on Form S-3 with the Securities and Exchange Commission in connection with this offering. In addition, we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the registration statement and any other documents filed by us at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission's internet site at "http://www.sec.gov". This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to our contracts or other documents the reference may not be complete, and you should refer to the exhibits that are a part of the registration statement for a copy of the contract or document. Documents Incorporated by Reference The Securities and Exchange Commission allows us to "incorporate by reference" into this prospectus the information we file with it, which means that we can disclose important information to you by referring you to those documents. Information incorporated by reference is part of this prospectus. Later information filed with the Securities and Exchange Commission will update automatically and supersede this information. We incorporate by reference the documents listed below and any future filings made with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this offering is completed: . Our Annual Report on Form 10-K for the year ended December 31, 1999, and . The description of our common shares contained in our registration statement on Form 8-A declared effective by the Securities and Exchange Commission on April 2, 1999. You may request a copy of these filings, at no cost, by writing or telephoning the following address and telephone number: GSI Lumonics Inc. 105 Schneider Road, Kanata, Ontario, Canada K2K 1Y3 (613) 592-1468 48 Index to Consolidated Financial Statements
GSI Lumonics Inc. Page - ----------------- ---- Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as at December 31, 1999 and 1998.............. F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997...................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999......................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999...................................................... F-6 Notes to Consolidated Financial Statements................................ F-7 General Scanning Inc. - --------------------- Report of Independent Public Accountants.................................. F-27 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998...................................................... F-28 Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-29 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998......................................... F-30 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998...................................................... F-31 Notes to Consolidated Financial Statements................................ F-33
F-1 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. 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. Ottawa, Canada, Ernst & Young LLP February 11, 2000 Chartered Accountants (except with respect to note 19, which is as at March 17, 2000) F-2 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--$24,299) (note 5)................... 45,278 32,209 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 Long-term debt due after one year (note 8).............. -- 3,541 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 (1998--17,056,001)....... 222,865 138,871 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. F-3 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: (note 10) 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. F-4 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 --merger with General Scanning Inc., net.... 17,079 83,528 83,528 --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. F-5 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. F-6 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. 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. F-7 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. 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. F-8 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. Comparative figures Certain comparative figures have been reclassified from statements previously presented to conform to the presentation of the 1999 financial statements. Recent Pronouncement In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin #101 on revenue recognition which is effective for the Company's fiscal period beginning January 1, 2000. The Company believes this bulletin will not have a significant impact on reported sales. 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. 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 approximately 50% of the outstanding shares of the Company. The merger transaction has been accounted for F-9 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 paid 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. F-10 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. F-11 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 3. Accounts Receivable Accounts receivable include unbilled receivables on long-term contracts of $0 (1998--$5,531 thousand). 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 ====== ======
F-12 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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). F-13 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. 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 ====== ====== ======
F-14 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 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. F-15 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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.
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
F-16 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 Scanning......... 2,123 9.86 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 ====== ======
The following summarizes outstanding and exercisable options outstanding on December 31, 1999:
Options outstanding Exercisable options ---------------------------------------- -------------------------- Number Number Weighted Weighted of options Weighted Range of of options average average exercisable average exercise prices (000's) remaining life exercise price (000's) exercise 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. F-17 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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:
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). F-18 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 ======== ======= ======
F-19 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. F-20 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 ====== ======
F-21 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) The Company is exposed to credit-related losses with respect to the positive fair value of the swap contracts in the event of non-performance by the Canadian Imperial Bank of Commerce and the Industrial Bank of Japan as counterparties. The Company does not expect any counterparties to fail to meet their obligations. As of 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.
Total Severance Facilities Integration ----- --------- ---------- ----------- (in millions) 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). F-22 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 =======
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 F-23 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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 sold by View 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(R) 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 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; F-24 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. 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, ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues from external customers: Canada................... $ 10,782 4% $ 8,264 6% $ 9,750 5% USA...................... 143,034 52% 61,269 42% 91,835 52% Europe................... 65,296 24% 40,427 28% 33,385 19% Japan.................... 32,648 12% 15,987 11% 19,806 11% Asia-Pacific, other...... 22,790 8% 18,245 13% 22,552 13% -------- -------- -------- Total................... $274,550 100% $144,192 100% $177,328 100% ======== ======== ======== Long-lived assets: Canada................... $ 7,726 $ 9,567 $ 11,307 US....................... 42,424 5,548 5,342 Europe................... 17,484 20,848 10,757 Japan.................... 591 -- -- Asia-Pacific, other...... 400 318 301 -------- -------- -------- Total................... $ 68,625 $ 36,281 $ 27,707 ======== ======== ========
F-25 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 1999 (tabular amounts in thousands of U.S. dollars except share amounts) 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. F-26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of General Scanning Inc.: We have audited the accompanying consolidated balance sheets of General Scanning Inc. (a Massachusetts corporation) and subsidiaries as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about 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. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Scanning Inc. and subsidiaries as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 12, 1999 (except with respect to the matter discussed in Note 12, as to which the date is March 22, 1999, and the matters discussed in Note 10(c), as to which the date is November 18, 1999) F-27 GENERAL SCANNING INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data)
Year ended December 31, ------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Net sales: Laser systems and components.......... $ 131,867 $ 154,536 $ 148,141 Printers.............................. 24,666 26,994 33,256 ----------- ----------- ----------- Total sales......................... 156,533 181,530 181,397 ----------- ----------- ----------- Cost of sales: Laser systems and components.......... 71,038 79,850 78,951 Printers.............................. 13,815 14,955 18,580 ----------- ----------- ----------- Total cost of sales................. 84,853 94,805 97,531 ----------- ----------- ----------- Gross profit: Laser systems and components.......... 60,829 74,686 69,190 Printers.............................. 10,851 12,039 14,676 ----------- ----------- ----------- Total gross profit.................. 71,680 86,725 83,866 ----------- ----------- ----------- Operating expenses: Research and product development...... 18,400 22,302 26,873 Selling, general and administrative... 39,475 46,169 51,049 Restructuring, litigation and other charges.............................. -- -- 7,654 Acquired in-process research and development.......................... -- 10,600 -- ----------- ----------- ----------- Total operating expenses............ 57,875 79,071 85,576 ----------- ----------- ----------- Income (loss) from operations........... 13,805 7,654 (1,710) Merger expenses......................... (1,950) -- (900) Interest income (expense), net.......... 272 464 (454) Foreign exchange transaction gains (losses)............................... (159) (507) 191 ----------- ----------- ----------- Income (loss) before income taxes....... 11,968 7,611 (2,873) Income tax provision (benefit).......... 5,367 2,502 (999) ----------- ----------- ----------- Net income (loss)....................... $ 6,601 $ 5,109 $ (1,874) ----------- ----------- ----------- Foreign currency translation adjustment. (139) (305) 370 Change in unrealized gain (loss) on marketable equity securities........... -- -- (736) ----------- ----------- ----------- Comprehensive income (loss)............. $ 6,462 $ 4,804 $ (2,240) =========== =========== =========== Basic income (loss) per common share.... $ 0.56 $ 0.42 $ (0.15) =========== =========== =========== Diluted income (loss) per common share.. $ 0.53 $ 0.40 $ (0.15) =========== =========== =========== Weighted average common shares outstanding............................ 11,774,000 12,065,387 12,583,993 =========== =========== =========== Weighted average common shares outstanding and dilutive potential common shares.......................... 12,476,237 12,656,763 12,583,993 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements F-28 GENERAL SCANNING INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
As of December 31, ------------------ 1997 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 8,418 $ 6,145 Accounts receivable, less allowance of $1,203 in 1997 and $2,295 in 1998........................................... 44,425 35,431 Inventories............................................... 34,051 34,887 Deferred income taxes..................................... 7,857 11,518 Other current assets...................................... 1,517 1,183 -------- -------- Total current assets..................................... 96,268 89,164 -------- -------- Property, plant and equipment, net......................... 14,611 14,973 Other assets............................................... 437 3,445 Intangible assets, net of amortization of $1,863 in 1997 and $2,239 in 1998........................................ 3,726 3,150 -------- -------- $115,042 $110,732 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks and current portion of long-term debt..................................................... $ 4,169 $ 4,722 Current portion of deferred compensation.................. 582 757 Accounts payable.......................................... 12,775 7,667 Accrued expenses.......................................... 16,079 16,992 -------- -------- Total current liabilities................................ 33,605 30,138 -------- -------- Long-term debt due after one year.......................... 1,530 1,543 Deferred compensation, less current portion................ 1,678 1,326 Commitments and contingencies (Note 10) Stockholders' equity: Preferred stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding--none..................... -- -- Common stock, $.01 par value; authorized 15,000,000 shares; issued 12,791,796 in 1997 and 13,032,549 in 1998. 128 130 Additional paid-in capital................................. 48,788 50,522 Retained earnings.......................................... 30,794 28,920 Cumulative translation adjustment.......................... (892) (522) Unrealized (loss) on marketable equity securities.......... -- (736) Treasury stock, at cost; 366,073 shares.................... (589) (589) -------- -------- Total stockholders' equity................................ 78,229 77,725 -------- -------- $115,042 $110,732 ======== ========
The accompanying notes are an integral part of these consolidated financial statements F-29 GENERAL SCANNING INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Unrealized Treasury Common Stock loss on stock --------------- Additional Cumulative marketable ------------ $.01 Par paid-in Retained translation equity Shares value capital earnings adjustment securities Shares Cost ------ -------- ---------- -------- ----------- ---------- ------ ----- Balance, December 31, 1995................... 11,968 $119 $41,587 $19,084 $(448) $ -- (366) $(588) Net income.............. -- -- -- 6,601 -- -- -- -- Stock option and warrant exercises, including tax effects............ 278 3 2,070 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (139) -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, December 31, 1996................... 12,246 122 43,657 25,685 (587) -- (366) (588) Net income.............. -- -- -- 5,109 -- -- -- -- Stock option and warrant exercises, including tax effects............ 471 5 3,132 -- -- -- -- -- Fractional shares from View Engineering, Inc. merger................. -- -- -- -- -- -- -- (1) Shares issued in acquiring Reel-Tech, Inc.................... 75 1 1,999 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (305) -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, December 31, 1997................... 12,792 128 48,788 30,794 (892) -- (366) (589) Net loss................ -- -- -- (1,874) -- -- -- -- Stock option and warrant exercises, including tax effects............ 241 2 1,734 -- -- -- -- -- Unrealized loss on marketable equity securities............. -- -- -- -- -- (736) -- -- Cumulative translation adjustment............. -- -- -- -- 370 -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, December 31, 1998................... 13,033 $130 $50,522 $28,920 $(522) $(736) (366) $(589) ====== ==== ======= ======= ===== ===== ==== =====
The accompanying notes are an integral part of these consolidated financial statements F-30 GENERAL SCANNING INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, -------------------------- 1996 1997 1998 ------- -------- ------- Cash flows from operating activities: Net income (loss).................................. $ 6,601 $ 5,109 $(1,874) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Acquired in-process research and development...... -- 10,600 -- Depreciation and amortization..................... 3,180 3,941 5,113 Deferred compensation............................. 347 367 (177) Deferred income taxes............................. (646) (3,837) (3,661) Subordinated note and equity securities received for non-competition agreement and technology license pursuant to litigation settlement........ -- -- (3,750) Changes in current assets and liabilities, net of effects of Reel-Tech, Inc. acquisition-- Accounts receivable............................... (9,444) (13,659) 9,896 Inventories....................................... (1,119) (6,271) (683) Other current assets.............................. 2 (42) 455 Accounts payable and accrued expenses............. (592) 6,977 (4,405) ------- -------- ------- Net cash provided by (used in) operating activities........................................ (1,671) 3,185 914 ------- -------- ------- Cash flows from investing activities: Purchase of Reel-Tech, Inc. (1)................... -- (12,446) -- Additions to property, plant and equipment, net... (6,902) (5,335) (4,985) Decrease (increase) in other assets............... 15 20 164 ------- -------- ------- Net cash (used in) investing activities.......... (6,887) (17,761) (4,821) ------- -------- ------- Cash flows from financing activities: Proceeds from notes payable to banks and others.... 13,633 16,662 35,859 (Payments) on notes payable to banks and others... (15,567) (15,087) (35,859) Net (payments) on long-term debt.................. (7) (19) (19) Stock option and warrant exercises, including tax effects.......................................... 2,073 3,136 1,736 ------- -------- ------- Net cash provided by financing activities........ 132 4,692 1,717 ------- -------- ------- Effect of exchange rate changes on cash and cash equivalents....................................... 386 647 (83) ------- -------- ------- Increase (decrease) in cash and cash equivalents... (8,040) (9,237) (2,273) Cash and cash equivalents, beginning of period..... 25,695 17,655 8,418 ------- -------- ------- Cash and cash equivalents, end of period........... $17,655 $ 8,418 $ 6,145 ======= ======== ======= Supplemental disclosure of cash flow information: Cash paid during the period for-- Interest.......................................... $ 862 $ 478 $ 566 ======= ======== ======= Income taxes...................................... $ 4,834 $ 4,485 $ 151 ======= ======== ======= (1) Acquisition of Reel-Tech, Inc.: Net assets and in-process research and development acquired......................................... $ -- $(14,446) $ -- Issuance of common stock.......................... -- 2,000 -- ------- -------- ------- Net cash used to acquire business.................. $ -- $(12,446) $ -- ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-31 GENERAL SCANNING INC. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
97Q1 97Q2 97Q3 97Q4 98Q1 98Q2 98Q3 98Q4 ------- ------- ------- ------- ------- ------- ------- ------- (in thousands, except per share data) Net sales: Laser systems and components............ $31,109 $37,504 $40,515 $45,408 $44,504 $39,753 $31,877 $32,007 Printers............... 6,608 5,210 7,041 8,135 6,068 9,319 10,163 7,706 ------- ------- ------- ------- ------- ------- ------- ------- Total sales........... 37,717 42,714 47,556 53,543 50,572 49,072 42,040 39,713 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit: Laser systems and components............ 15,012 17,527 19,810 22,337 21,757 19,377 13,561 14,495 Printers............... 3,061 2,291 3,031 3,656 2,745 3,984 4,402 3,545 ------- ------- ------- ------- ------- ------- ------- ------- Total gross profit.... 18,073 19,818 22,841 25,993 24,502 23,361 17,963 18,040 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and product development........... 4,952 4,978 6,126 6,246 7,461 7,269 6,139 6,004 Selling, general and administrative........ 10,321 11,103 11,357 13,388 13,385 14,447 12,211 11,006 Restructuring, litigation and other charges............... -- -- -- -- -- 5,060 717 1,877 Acquired in-process research and development........... -- -- -- 10,600 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............. 15,273 16,081 17,483 30,234 20,846 26,776 19,067 18,887 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations............. 2,800 3,737 5,358 (4,241) 3,656 (3,415) (1,104) (847) Merger (expenses)....... -- -- -- -- -- -- -- (900) Interest income (expense), net......... 98 165 135 66 (34) (240) (104) (76) Foreign exchange transaction gains (losses)............... (110) 11 (227) (181) (82) 62 115 96 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes........... 2,788 3,913 5,266 (4,356) 3,540 (3,593) (1,093) (1,727) Income taxes............ 978 1,367 1,685 (1,528) 1,239 (1,261) (382) (595) ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 1,810 $ 2,546 $ 3,581 $(2,828) $ 2,301 $(2,332) $ (711) $(1,132) ======= ======= ======= ======= ======= ======= ======= ======= Basic income (loss) per common share........... $ 0.15 $ 0.21 $ 0.30 $ (0.23) $ 0.18 $ (0.19) $ (0.06) $ (0.09) ======= ======= ======= ======= ======= ======= ======= ======= Diluted income (loss) per common share....... $ 0.15 $ 0.20 $ 0.28 $ (0.23) $ 0.18 $ (0.19) $ (0.06) $ (0.09) ======= ======= ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding and dilutive potential common shares.......... 12,465 12,553 12,739 12,310 12,870 12,571 12,637 12,656 ======= ======= ======= ======= ======= ======= ======= =======
F-32 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 1. Significant Accounting Policies Nature of operations General Scanning Inc. develops, manufactures and sells its products on a worldwide basis through two industry segments: laser systems and components; and printers. The laser systems and components segment provides products for a wide range of applications in the automotive, electronics, semiconductor, medical and aircraft industries. The Company's core technological expertise which is employed in each of these applications is high speed micropositioning and precise power control of lasers, as well as 2D and 3D image processing. The printer segment provides printers for the medical and photo-finishing industries. Basis of presentation The consolidated financial statements include the accounts of General Scanning Inc. and its wholly-owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. In August 1996, the Company acquired View Engineering, Inc. ("View") by issuing 1,437,060 shares of General Scanning Inc. common stock (after giving effect to certain adjustments at the closing) in exchange for all of View's outstanding shares of capital stock, accrued preferred dividends and the net value of warrants and options. View uses laser image processing technology to serve applications requiring precision inspection, measurement and process control. The transaction has been accounted for as a pooling of interests for accounting purposes and, accordingly, the accompanying consolidated financial statements include the accounts of View for all periods presented. Merger expenses include primarily brokers' fees and legal and accounting costs. On November 28, 1997, the Company acquired the assets of Reel-Tech, Inc. for $14.4 million, which consisted of $12.4 million of cash and 75,118 shares of General Scanning Inc. common stock. Reel-Tech is an integrator of electronics components handling systems for marking, lead inspection, parts sorting and parts packaging. The transaction was accounted for as a purchase for accounting purposes and, accordingly, the operations of Reel-Tech have been included in the consolidated financial statements from the date of acquisition. Goodwill arising from the transaction of $3.1 million is being amortized on a straight- line basis over a 10-year period. Results of operations would not have changed materially for 1997 or 1996 if Reel-Tech had been acquired on January 1, 1996. Upon consummation of the Reel-Tech acquisition, the Company immediately expensed $10.6 million representing purchased in-process technology that had not yet reached technological feasibility and had no alternative future use. The value was based on an independent appraisal and was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. The in-process projects were expected to be commercially viable on dates ranging from the end of calendar year 1998 through calendar year 1999. Expenditures to complete these projects were expected to total approximately $3.2 million (see Note 11). 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 F-33 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 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. 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 and printers; 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. Cash and cash equivalents Cash and cash equivalents include cash in banks and highly liquid investments having original maturity dates not exceeding three months. The investments 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 and cash equivalents. Inventories Inventories, which include materials and conversion costs, are stated at the lower of cost (primarily first-in, first-out) or market. Inventories consist of the following:
December 31, --------------- 1997 1998 ------- ------- (in thousands) Purchased parts.............................................. $14,992 $15,901 Work-in-process.............................................. 8,127 7,358 Finished goods............................................... 10,932 11,628 ------- ------- Total inventory............................................ $34,051 $34,887 ======= =======
Depreciation and amortization Depreciation and amortization are determined by the straight-line and declining-balance methods over the estimated useful lives of the owned assets. Estimated useful lives for buildings and improvements range from 5 to 31 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. Other Assets Other assets at December 31, 1998 consist primarily of a subordinated note of $2.25 million and common stock of $764 thousand, received as part of a litigation settlement during 1998 (see Note 11). The subordinated note F-34 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 is carried at face value, which approximates fair market value. The common stock is considered to be available for sale and is carried at fair value based on quoted market price. The difference between the cost and market value of the common stock is recorded as "Unrealized gain (loss) on marketable equity securities" in the accompanying consolidated financial statements. Foreign currency 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 recorded as a component of stockholders' equity. Foreign exchange forward contracts and local currency borrowings are used to reduce the impact of certain foreign currency balance sheet fluctuations. Gains and losses from the 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 transaction gains (losses). At December 31, 1998, the Company had contracts to exchange foreign currencies (yen, French francs and Deutsche marks) for U.S. dollars totaling $4.7 million maturing through April, 1999. The fair value of losses from these contracts was approximately $0.3 million at December 31, 1998, which is based on the market price of offsetting forward exchange contracts at December 31, 1998. To the extent the Company utilizes foreign exchange forward contracts, it purchases them from major financial institutions for terms that have not exceeded six months. 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, 1999. 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. Income (loss) per share of common stock In 1997, the Company adopted SFAS No. 128, Earnings per Share. Amounts reported herein for 1996 as "Diluted income per common share" are the same as those reported previously as "Net income per common and common equivalent share outstanding." 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. F-35 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 Common and common equivalent share disclosures are:
Year ended December 31, -------------------- 1996 1997 1998 ------ ------ ------ (in thousands) Weighted average common shares outstanding............. 11,774 12,065 12,584 Dilutive potential common shares....................... 702 592 -- ------ ------ ------ Diluted common shares.................................. 12,476 12,657 12,584 ====== ====== ====== Options and warrants excluded from diluted income per common share as their effect would be antidilutive.... 76 104 1,252 ====== ====== ======
Revenue recognition The Company recognizes product revenues generally at the later of the time of shipment or when substantially all terms and conditions of the sale have been met. For certain long-term contracts, revenues and profits are recognized using the percentage-of-completion method. The Company provides for estimated warranty costs at the time of revenue recognition. Research and product development expense Expenditures for research and development of products and manufacturing processes are expensed as incurred. Interest Interest expense in 1998 is net of $280 thousand of interest income. Interest income in 1997 and 1996 is net of $498 thousand and $845 thousand of interest expense, respectively. Impairment of long-lived assets The Company periodically 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 does not believe that any material impairment of its long-lived assets has occurred. Comprehensive income SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The statement is effective for fiscal years beginning after December 15, 1997 and the Company adopted the statement in 1998. 2. Intangible Assets Purchase price in excess of the fair market value of tangible assets acquired is recorded as intangible assets. Such assets arising from the acquisition of the minority interest in Teradyne Laser Systems, Inc. in 1991 are being amortized on a straight-line basis over their estimated useful lives of from 3 to 15 years. Goodwill arising in connection with the acquisition of the assets of Reel-Tech in 1997 is being amortized on a straight-line basis over 10 years. During 1998, the Company wrote off $178 thousand of net intangible assets associated with the F-36 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 Reel-Tech assembled workforce when operations were relocated. Amortization expense was $84 thousand in 1996, $109 thousand in 1997 and $398 thousand in 1998. 3. Property, Plant and Equipment Property, plant and equipment consists of the following:
December 31, ------------------ 1997 1998 -------- -------- (in thousands) Cost: Land, buildings and improvements......................... $ 13,134 $ 13,375 Machinery and equipment.................................. 28,955 33,075 -------- -------- Total cost............................................. 42,089 46,450 Accumulated depreciation................................. (27,478) (31,477) -------- -------- Net property, plant and equipment...................... $ 14,611 $ 14,973 ======== ========
4. Accrued Expenses Accrued expenses consists of the following:
December 31, --------------- 1997 1998 ------- ------- (in thousands) Accrued compensation and benefits........................... $ 8,448 $ 5,822 Income taxes................................................ 3,404 4,803 Other....................................................... 4,227 6,367 ------- ------- Total accrued expenses.................................... $16,079 $16,992 ======= ======= 5. Debt Notes payable to banks and current portion of long-term debt Notes payable to banks and current portion of long-term debt consist of the following: December 31, --------------- 1997 1998 ------- ------- (in thousands) Lines of credit............................................. $ 4,150 $ 4,703 Current portion of long-term debt........................... 19 19 ------- ------- Total..................................................... $ 4,169 $ 4,722 ======= =======
The Company's revolving credit agreement with its lending bank was amended on November 28, 1997. Under its amended terms, the agreement provides for borrowings of up to $20 million and will expire on F-37 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 December 31, 1999. Interest on outstanding borrowings is charged at the London InterBank Offered Rate (LIBOR) plus 1.25% or prime, determined at the time of borrowing. No such debt was outstanding at December 31, 1998 or 1997. A commitment fee of 3/8% per annum is paid quarterly in arrears on the unused portion. Among other restrictions, the agreement requires a minimum level of tangible net worth and compliance with certain financial covenants. Under the terms of the revolving credit agreement, the Company's foreign operations may borrow up to a maximum of $6 million under lines of credit. Such debt outstanding at December 31, 1998 was denominated in yen with a weighted average interest rate of 1.6%. Long-term debt Long-term debt consists of a mortgage payable at 10 3/8% interest, collateralized by certain land and building. Interest and principal are payable at $14,906 per month until maturity in February 2000, at which time the remaining principal of $1,507,516 will be payable. The portion of principal payable within one year, which is included in current liabilities, is $19 thousand. Fair value of financial instruments 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. 6. Deferred Compensation Officers and certain employees may defer payment of their compensation until termination of employment or later. Interest on the outstanding balance is credited quarterly at the prime rate. The portion of deferred compensation estimated to be due within one year is included in current liabilities. 7. Stockholders' Equity Preferred stock In August 1995, the stockholders approved an amendment to the Articles of Organization which authorizes 1,000,000 shares of preferred stock, $.01 par value. The preferred stock is divisible and issuable into one or more series. The rights and preferences of the different series may be established by the Board of Directors without further action by the stockholders. The Board of Directors is authorized, with respect to each series, to fix and determine, among other things, (i) the dividend rate, (ii) the liquidation preference, (iii) whether such shares will be convertible into, or exchangeable for, any other securities and (iv) whether such shares will have voting rights and, if so, the conditions under which such shares will vote as a separate class. Shareholder rights plan On April 30, 1997, the Board of Directors adopted a Shareholders Rights Plan (the "Plan") and declared a dividend distribution, payable on May 1, 1997, of one preferred share purchase right under the Plan (each a "Right") for each outstanding share of common stock of the Company. Under the Plan, each Right, when exercisable, entitles the holder to purchase from the Company one ten- thousandth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $70 per one ten-thousandth of a Preferred Share, F-38 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 subject to adjustment and to certain exceptions. The value of the one ten- thousandth interest in a share of Preferred Stock purchasable upon exercise of each Right is intended to approximate the value of one share of common stock. The rights are not exercisable and cannot be transferred separately from the common stock until the first to occur of (a) 10 business days after a 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 stock (the date of such an announcement, a "Shares Acquisition Date"), or (b) 10 business days (subject to extension by the Board) after the start or announcement of a tender or exchange offer, the consummation of which would result in beneficial ownership by a person or group of 20% or more of the outstanding common stock. Prior to the earlier of (a) the tenth day after the Shares Acquisition Date, or (b) the expiration of the Rights, the Company may under certain circumstances redeem the Rights at a price of $0.001 per Right. In certain cases a Right will entitle the holder to purchase common stock of the Company or an acquiring company having a value of two times the exercise price of the Right. Under certain conditions the Company may exchange the Rights for common stock or preferred stock. The Rights expire on May 1, 2007 unless they are redeemed by the Company. So long as the Rights are not transferable separately from the common stock, the Company will issue one Right with each new share of common stock 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 1992 Stock Option Plan, as amended in April 1998, provides for the issuance of nonqualified and incentive stock options to purchase up to 2,000,000 shares of the Company's common stock, of which 271,194 were available for future grant at December 31, 1998. Under this plan, options are granted at the fair value per share as determined by the Board of Directors at the date of grant. Outstanding options vest over periods of three or four years beginning on the date of grant and expire ten years from the date of grant. The Company's 1981 Stock Option Plan has terminated; however, options to purchase 72,750 shares of common stock were outstanding under the 1981 Plan at December 31, 1998. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, which defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation costs for those plans using the method of accounting prescribed by APB 25. Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share as if the fair value based method of accounting defined in the statement had been applied. The Company has elected to account for its stock-based compensation plans under APB 25, under which 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. F-39 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998
1996 1997 1998 ------ ------ ------- Net income (loss) (in thousands): As reported $6,601 $5,109 $(1,874) Pro forma $6,354 $4,410 $(3,351) Diluted income (loss) per share: As reported $ 0.53 $ 0.40 $ (0.15) Pro forma $ 0.51 $ 0.35 $ (0.27)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 6.3% in 1996, 5.5% in 1997 and 4.7% in 1998; expected dividend yield of zero; expected lives upon vesting of 2 years in 1998, 4 years in 1997 and 1996; and expected volatility of 50%. The weighted average fair value per share of options granted was $4.47 in 1996, $6.74 in 1997 and $5.86 in 1998. Stock option activity for the years ended December 31, 1996, 1997 and 1998 is presented below.
Wtd. Avg. Options Ex. Price --------- --------- Outstanding at December 31, 1995........................ 1,080,974 2.81 Granted................................................ 166,250 14.33 Exercised.............................................. (212,810) 2.32 Canceled............................................... (6,250) 7.65 --------- ------ Outstanding at December 31, 1996........................ 1,028,164 4.75 Granted................................................ 287,000 14.78 Exercised.............................................. (449,523) 2.71 Canceled............................................... (11,065) 10.97 --------- ------ Outstanding at December 31, 1997........................ 854,576 9.10 Granted................................................ 973,950 14.56 Exercised.............................................. (215,753) 2.75 Canceled............................................... (70,533) 14.41 --------- ------ Outstanding at December 31, 1998........................ 1,542,240 $13.19 ========= ====== Exercisable at December 31, 1998........................ 512,809 $10.48 ========= ======
Additional information regarding the options outstanding at December 31, 1998 follows:
Range of Exercise No. of Wtd. avg. Wtd. avg. Number Wtd. avg. prices options exercise price remaining life exercisable exercise price -------- ------- -------------- -------------- ----------- -------------- $2.24- $5.00 275,425 $ 3.91 6.8 years 157,825 $ 3.13 $ 6.00- $10.00 311,445 $ 6.53 9.1 years 104,216 $ 6.90 $10.88- $15.00 327,580 $13.88 8.1 years 155,228 $14.00 $15.13- $20.00 446,180 $19.76 7.9 years 51,650 $19.73 $20.31- $32.63 181,610 $21.32 9.3 years 43,890 $22.10
Warrants The Company has issued warrants for the purchase of common stock to the nonemployee members of the Board of Directors. Warrants issued through 1995 vested over periods of three or four years, beginning on the F-40 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 date of grant, and expire ten years from the date of grant. In 1996, 65,000 of such warrants were exercised at prices ranging from $1.75 to $2.50 per share, in 1997, 17,500 of such warrants were exercised at $1.75 per share, and in 1998, 25,000 of such warrants were exercised at prices ranging from $2.36 to $2.50 per share. At December 31, 1998, 12,500 of such warrants, all of which are exercisable, remain outstanding at $2.36 per share. During 1995, the stockholders adopted the 1995 Directors' Warrant Plan and reserved 100,000 shares for future issuance of warrants to nonemployee directors under the Plan. The exercise price of such warrants is the fair market value per share as determined by a committee of the Board of Directors at the date of grant. The warrants are subject to vesting as determined by such committee and expire ten years from the date of grant. In 1996, 8,000 such warrants were granted at an exercise price of $20.75 per share, in 1997, 8,000 such warrants were granted at an exercise price of $13.00 per share, and in 1998, 32,000 such warrants were granted at exercise prices ranging from $14.13 to $20.44 per share. In 1997, 4,000 such warrants were exercised at prices ranging from $13.00 to $20.75 per share. At December 31, 1998, 40,000 of such warrants, all of which are exercisable, remain outstanding at exercise prices ranging from $13.00 to $20.75 per share. 8. Defined Contribution Plan The Company has a defined contribution employee savings plan under the provisions of Section 401(k) of the Internal Revenue Code under which contributions may be made by its domestic employees. The Company matches the contributions of participating employees on the basis of the percentages specified in the plan. Company matching contributions to the plan were $1,080 thousand, $1,379 thousand and $1,444 thousand for the years ended December 31, 1996, 1997 and 1998, respectively. 9. Income Taxes The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the currently enacted tax rates. The components of income (loss) before income taxes for the years ended December 31 are as follows:
Year ended December 31, ---------------------- 1996 1997 1998 ------- ------ ------- (in thousands) United States........................................ $10,348 $3,860 $(4,095) Foreign.............................................. 1,620 3,751 1,222 ------- ------ ------- Total.............................................. $11,968 $7,611 $(2,873) ======= ====== =======
F-41 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 The provision (benefit) for income taxes for the years ended December 31 consists of the following:
Year ended December 31, ------------------------ 1996 1997 1998 ------ ------- ------- (in thousands) Current: Federal and State................................. $5,209 $ 4,165 $ 1,076 Foreign........................................... 804 2,174 1,586 ------ ------- ------- Total current.................................... 6,013 6,339 2,662 Deferred.......................................... (646) (3,837) (3,661) ------ ------- ------- Total............................................ $5,367 $ 2,502 $ (999) ====== ======= =======
The income tax provision (benefit) for the years ended December 31 is different from that which would be computed by applying the U.S. federal income tax rate to income (loss) before taxes as follows:
Year ended December 31, ------------------ 1996 1997 1998 ---- ----- ----- U.S. federal statutory tax rate........................ 34.0% 34.0% (34.0)% State income taxes, net................................ 3.9 6.0 (6.0) Foreign sales corporation.............................. (3.0) (5.0) (14.9) Research and development credits....................... (3.3) (10.5) (17.2) Foreign tax rate differential.......................... 2.1 12.5 28.3 Foreign loss not benefited............................. -- -- 8.9 Merger expenses not deductible for tax purposes........ 4.0 -- 8.9 Change in valuation allowance for View pre-acquisition losses................................................ 6.8 (6.0) -- Other, net............................................. 0.3 1.9 (8.8) ---- ----- ----- Effective tax rate..................................... 44.8% 32.9% (34.8)% ==== ===== =====
F-42 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 Significant components of deferred income tax assets as of December 31 are as follows:
December 31, ---------------- 1997 1998 ------- ------- (in thousands) Deferred compensation...................................... $ 814 $ 496 Vacation and sick pay benefit.............................. 576 535 Inventory valuation........................................ 1,577 2,858 Warranty costs............................................. 357 474 Depreciation............................................... (260) (273) Deferred revenue........................................... -- 411 Operating loss and tax credit carryforwards................ 2,248 3,698 Acquired in-process research and development............... 3,816 3,583 Accounts receivable valuation.............................. 356 1,179 Other...................................................... 621 805 ------- ------- Total deferred income tax assets........................... 10,105 13,766 Less valuation allowance................................... (2,248) (2,248) ------- ------- Net deferred income tax assets............................. $ 7,857 $11,518 ======= =======
The Company has provided a valuation allowance of $2,248 thousand as of December 31, 1997 and 1998 on the net operating loss and tax credit carryforwards 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 tax laws and regulations. The operating loss carryforwards expire from 2005 through 2011 and the tax credit carryforwards expire in 1999 and 2000. Utilization of these operating loss and tax credit carryforwards is limited to approximately $1.2 million per year. In addition, the Company has other federal and state tax credit carryforwards of $1,450 thousand at December 31, 1998 which expire from 2002 through 2013. 10. Commitments and Contingencies (a) Operating leases The Company leases certain equipment and facilities under operating lease agreements that expire through 2008. The facility leases require the Company to pay real estate taxes and other operating costs. For the years ended December 31, 1996, 1997 and 1998, lease expense was approximately $1,787 thousand, $1,948 thousand and $2,717 thousand, respectively. Minimum lease payments under operating leases expiring subsequent to December 31, 1998 are:
(in thousands) 1999.......................................................... $ 2,654 2000.......................................................... 2,178 2001.......................................................... 1,741 2002.......................................................... 1,590 2003.......................................................... 1,140 Thereafter.................................................... 3,491 ------- Total minimum lease payments.................................. $12,794 =======
F-43 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 (b) Recourse receivables In Japan, where it is customary to do so, the Company discounts certain notes receivable at a bank with recourse. The Company's maximum exposure was $5,668 thousand at December 31, 1998. The fair value of the recourse receivables was not determinable. The Company received cash proceeds relating to the discounted receivables of $4,144 thousand, $5,262 thousand and $11,203 thousand during the years ended December 31, 1996, 1997 and 1998, respectively. (c) Legal proceedings and disputes, including subsequent events During April 1999, the Company recorded a provision of $19 million 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. This amount is not reflected in the Company's consolidated financial statements as of and for the year ended December 31, 1998. In September 1998, the U.S. District Court for the Northern District of California granted Electro Scientific's motions for summary judgment against General Scanning Inc. 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 the Company's 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 Inc. 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 5,473,624 was invalid, and that Electro Scientific's patent 5,265,114 was valid, and awarded a $13.1 million damage judgment against the Company. In July 1999, the court refused Electro Scientific's requests to increase damages awarded by the jury in April, and for attorney's 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. Robotic Vision Systems, Inc. v. View Engineering Inc., involves a complaint by Robotic Vision Systems, Inc. ("RVSI") alleging infringement of a patent by View Engineering, Inc., a wholly-owned subsidiary of General Scanning Inc. The matter was tried before a judge sitting in the U.S. District Court for the Central District of California in November 1999, and the Company is currently awaiting the court's decision. RVSI alleges infringement relating to lead inspection machines formerly sold by View 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 inspections. (See Note 11). The Company believes that the claims in this action are without merit and are vigorously defending these proceedings. However, if the Company loses on one or more of these claims and damages are awarded, there could be a material adverse effect on the Company's operating results and/or financial condition. Voxel, a prior customer of the Company, asserted in December 1996 that the Company may not have met certain product specifications. The Company believes its product has met the necessary specifications. Pursuant to the dispute resolution section in the Development Agreement between Voxel and the Company, the matter was submitted to binding arbitration. In May 1998, a three-member panel of the American Arbitration Association decided in favor of the Company with respect to the dispute with Voxel and awarded the Company $1.9 million plus applicable post-judgement interest. Following the arbitration decision Voxel filed a voluntary F-44 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 petition under Chapter 11, which was subsequently converted to a proceeding under Chapter 7 of the Federal Bankruptcy Code. Net accounts receivable at December 31, 1997 included approximately $1,012 thousand of billed and unbilled amounts due from Voxel. As of December 31, 1998, this amount has been written off. During 1998, a party commenced legal proceedings in the U.S. District Court for the District of Arizona against a number of U.S. semiconductor manufacturing companies, including companies that have purchased systems from the Company. The complaint alleges that methods used by these manufacturers infringe patents held by this party. While the Company is not named as a defendant in any of the proceedings, several of the Company's customers are involved. A few of these customers have notified the Company of the allegations and have asked the Company about the actions the Company plans to take in light of patent indemnification provisions under which the Company's equipment was purchased for the operations involved in the alleged infringements. The Company has certain other contingent liabilities resulting from litigation and claims incidental to its business, including patent infringement suits relating to products currently sold or expected to be sold by the Company. Management believes that the probable resolution of such contingencies will not have a materially adverse effect on the Company's results of operations or financial position. 11. Restructuring, Litigation and Other Charges The $7.7 million restructuring, litigation and other charges in 1998 include $3.7 million relating to the settlement with Robotic Vision Systems, Inc. ("RVSI") and $4.0 million relating to reductions in the Company's cost structure. In August 1996, RVSI commenced an action against General Scanning in the United States District Court for the Eastern District of New York. RVSI claimed that General Scanning improperly obtained proprietary information from RVSI for the purpose of obtaining ownership of View and of thwarting RVSI's attempts to acquire View. The plaintiff was seeking compensatory and punitive damages in an unspecified amount. In September 1997 and January 1998, that same Court issued a series of decisions on General Scanning's motion for summary judgment. Claims were dismissed for: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) violations under the Massachusetts Unfair and Deceptive Business Practices Statute. Claims were not dismissed for: (1) tortious interference with business relations, (2) fraud of confidential business information, and (3) unfair competition in contravention of New York common law. In June 1998, the Company settled the remaining litigation claims with RVSI. Under the terms of the settlement, the Company has agreed not to compete and has granted an exclusive technology license to RVSI in the field of semiconductor interconnection inspection. RVSI agreed not to compete in the field of solder paste inspection. Costs associated with the RVSI settlement were $7.4 million including unsaleable inventory of $5.1 million, legal fees of $1.3 million, employee severance of $210 thousand, leased facility costs of $188 thousand and other related costs of $602 thousand. Partially offsetting these costs is $3.75 million consideration RVSI agreed to pay the Company for the non-competition agreement and technology license. The consideration consists of a subordinated note of $2.25 million and 271,493 shares of RVSI common stock valued at $1.5 million at the settlement date based on quoted market price. The subordinated note bears interest at the prime rate with quarterly pro-rata principal payments from September 2001 through June 2003. The Company considers the common stock to be available-for-sale and, accordingly, is recording changes in its fair market value as a component of stockholders' equity. F-45 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 In addition, as a result of the RVSI settlement, the Company has not achieved the expected economic benefits from the purchase of Reel-Tech's in-process research and development. The Company's original objective in acquiring the assets of Reel-Tech was to implement a strategy of combining certain functions performed at the back end of the semiconductor component manufacturing process, specifically marking, inspection and packaging. The Company planned to combine its laser marking capability and View Engineering's vision inspection technology with Reel-Tech's new component parts handling/packaging systems. The settlement agreement with RVSI limits the Company's ability to offer certain of these features to its customers. As a result, the in-process research and development projects at Reel-Tech were discontinued. The resulting impact is included in the Company's restructuring charges recorded during 1998. The Company does not expect any future revenue or cash flow from Reel-Tech's in- process research and development. Charges of $4.0 million relating to reductions in the Company's cost structure include $1.4 million of leased facility costs, $178 thousand write-off of net intangible asset from acquisition of Reel-Tech assembled workforce and $2.4 million for severance of 230 employees. Accruals remaining on the balance sheet as of December 31, 1998 include $710 thousand for leased facility costs and $748 thousand related to employee severance. 12. Merger Agreement On October 27, 1998 the Company and Lumonics Inc. ("Lumonics") entered into an Agreement and Plan of Merger (the "Agreement") to combine the companies in a merger of equals transaction. The merger was approved by the stockholders of each company on March 17, 1999 and was consummated on March 22, 1999. Pursuant to the terms of the Agreement, a wholly-owned subsidiary of Lumonics was merged with and into the Company and each outstanding share of the Company was exchanged for 1.347 shares of GSI Lumonics stock. Upon consummation of the transaction, the stockholders of General Scanning own approximately 50% of the combined company. 13. Related Party Transaction In 1992, the Company's Board of Directors authorized a loan to an officer in the amount of $160 thousand as a reimbursement for certain relocation expenses. Under the agreement, as amended, the loan has been forgiven and charged as compensation expense on a pro-rata basis over the five years ended December 31, 1997. 14. Segment Information In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The new disclosure requirements established revised standards for public companies relating to the reporting of financial and descriptive information in financial statements about their operating segments. Business segment information The Company has two reportable segments as set forth in the table below. In classifying operational entities into a particular segment, the Company aggregated businesses with similar economic characteristics, products and services, production processes, customers and methods of distribution. The accounting policies for segments are the same as the Company's accounting policies as described in Note 1. There are no transfers F-46 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 between segments. Management evaluates segment performance based on segment income (loss) from operations before interest income and expense, foreign exchange transaction gains (losses), certain non-recurring items such as merger expenses, and income taxes.
Year ended December 31, ---------------------------- 1996 1997 1998 -------- -------- -------- (in thousands) Sales to unaffiliated customers: Laser systems and components................. $131,867 $154,536 $148,141 Printers..................................... 24,666 26,994 33,256 -------- -------- -------- Total....................................... $156,533 $181,530 $181,397 ======== ======== ======== Income (loss) from operations: Laser systems and components (1,2)........... $ 11,967 $ 6,075 $ (3,927) Printers..................................... 4,321 5,034 5,825 Corporate expenses........................... (2,483) (3,455) (3,608) -------- -------- -------- Total....................................... $ 13,805 $ 7,654 $ (1,710) ======== ======== ======== Total assets: Laser systems and components................. $ 64,836 $ 91,923 $ 84,795 Printers..................................... 8,150 6,844 8,274 Corporate assets (3)......................... 22,587 16,275 17,663 -------- -------- -------- Total....................................... $ 95,573 $115,042 $110,732 ======== ======== ======== Capital expenditures: Laser systems and components................. $ 5,704 $ 5,244 $ 4,359 Printers..................................... 1,198 91 626 -------- -------- -------- Total....................................... $ 6,902 $ 5,335 $ 4,985 ======== ======== ======== Depreciation and amortization: Laser systems and components................. $ 2,773 $ 3,459 $ 4,707 Printers..................................... 407 482 406 -------- -------- -------- Total....................................... $ 3,180 $ 3,941 $ 5,113 ======== ======== ========
- ------------------ (1) Includes $10,600 charge for acquired in-process research and development in 1997. (2) Includes $7,654 charges for restructuring, litigation and other charges in 1998. (3) Consists primarily of cash, cash equivalents and deferred tax assets. F-47 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 Geographic segment information The Company attributes revenues to geographic areas on the basis of the customer bill to location. Long-lived assets are attributed to geographic areas in which Company assets reside.
Year ended December 31, -------------------------- 1996 1997 1998 -------- -------- -------- (in thousands) Sales to unaffiliated customers: US.............................................. $ 91,833 $101,685 $108,677 Europe.......................................... 25,900 30,754 36,120 Japan........................................... 22,100 25,523 19,955 Asia, other..................................... 16,700 23,568 16,645 -------- -------- -------- Total.......................................... $156,533 $181,530 $181,397 ======== ======== ======== Long-lived assets: US.............................................. $ 12,491 $ 13,960 $ 14,338 Europe.......................................... 334 382 370 Japan........................................... 97 78 62 Asia, other..................................... -- 191 203 -------- -------- -------- Total.......................................... $ 12,922 $ 14,611 $ 14,973 ======== ======== ========
Major customers The Company has revenues in 1998 from two divisions of one customer that represent $19.6 million or 10.8% of consolidated revenues. The printer and laser systems/components segments serve these divisions. F-48 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ - --------------------------------------------------------------- 4,000,000 Common Shares -------------- PROSPECTUS -------------- April , 2000 CIBC World Markets Chase H&Q Needham & Company, Inc. - --------------------------------------------------------------- You should rely only on the information contained or incorporated by reference in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other expenses of issuance and distribution The following table sets forth the estimated costs and expenses, other than the underwriting discounts and commissions, payable in connection with the sale of the common shares being registered, all of which will be paid by the registrant.
Amount to be Paid ----------------- SEC registration fee..................................... $ 20,493 NASD filing fee.......................................... 8,263 Nasdaq National Market listing fee....................... 17,500 The Toronto Stock Exchange listing fee................... 13,000 Legal fees and expenses.................................. 150,000 Accounting fees and expenses............................. 300,000 Printing and engraving................................... 700,000 Transfer agent fees...................................... 5,000 Miscellaneous............................................ 10,744 ---------- Total.................................................. $1,225,000 ==========
Item 15. Indemnification of directors and officers Subject to section 81 of the Business Corporations Act, New Brunswick, as from time to time amended, except in respect of an action by or on behalf of the registrant or Another Body Corporate (as defined below) to procure a judgment in its favor, the registrant must indemnify each director and officer and each former director and officer and each person who acts or acted at the registrant's request as a director or officer of Another Body Corporate, and his heirs and legal representatives, against all costs, charges and expenses, including any amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation or Another Body Corporate, as the case may be, if (a) he acted honestly and in good faith with a view to the best interests of the registrant; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. "Another Body Corporate" as used herein means a body corporate of which the registrant is or was a shareholder or creditor. We maintain directors' and officers' liability insurance in the aggregate principal amount of $35,000,000 subject to a $1,000,000 deductible per loss payable by us. The premium payable for such insurance is currently $104,000 per year which is paid by us. II-1 Item 16. Exhibits See Exhibit Index following the Signatures page which is incorporated into this prospectus by reference. Item 17. Undertakings The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act of 1933, shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ottawa, Province of Ontario, on April 10, 2000. GSI Lumonics Inc. /s/ Charles D. Winston By: _________________________________ Name: Charles D. Winston Title: Chief Executive Officer Pursuant to the requirements of the Securities Act, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Charles D. Winston Chief Executive Officer April 10, 2000 ______________________________________ and authorized Charles D. Winston representative in the United States (Principal Executive Officer) /s/ Desmond J. Bradley* Chief Financial Officer April 10, 2000 ______________________________________ (Principal Financial and Desmond J. Bradley Accounting Officer) /s/ Richard Black* Director April 10, 2000 ______________________________________ Richard Black /s/ Paul F. Ferrari* Director April 10, 2000 ______________________________________ Paul F. Ferrari /s/ Woodie Flowers* Director April 10, 2000 ______________________________________ Woodie Flowers /s/ Byron O. Pond* Director April 10, 2000 ______________________________________ Byron O. Pond /s/ Benjamin J. Virgilio* Director April 10, 2000 ______________________________________ Benjamin J. Virgilio /s/ William B. Waite* - Director April 10, 2000 ______________________________________ William B. Waite
/s/ Charles J. Gardner *By: _______________________ Charles J. Gardner Attorney-in-Fact II-3 EXHIBIT INDEX
Exhibit Number Exhibit Description ------- ------------------- 1.1 Form of Underwriting Agreement. 5 Opinion of Stewart McKelvey Stirling Scales with respect to the validity of securities being offered. 8 Opinion of Milbank, Tweed, Hadley & McCloy LLP with respect to tax matters. 23.1 Consent of Stewart McKelvey Stirling Scales (included in Exhibit 5). 23.2 Consent of Milbank, Tweed, Hadley & McCloy LLP (included in Exhibit 8). 23.3 Consent of Ernst & Young LLP* 23.4 Consent of Arthur Andersen, LLP* 24 Power of Attorney (included on the signature page of this registration statement).*
- ------------------ *Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 4,000,000 Common Shares GSI Lumonics Inc. UNDERWRITING AGREEMENT ---------------------- April 11, 2000 CIBC World Markets Corp. Chase Securities Inc. Needham & Company, Inc. c/o CIBC World Markets Corp. One World Financial Center New York, New York 10281 On behalf of the Several Underwriters named on Schedule I attached hereto. Ladies and Gentlemen: GSI Lumonics Inc., a corporation organized and existing under the laws of New Brunswick, Canada (the "Company"), proposes, subject to the terms and conditions contained herein, to sell to you and the other underwriters named on Schedule I to this Agreement (the "Underwriters"), for whom you are acting as Representatives (the "Representatives"), an aggregate of 4,000,000 shares (the "Firm Shares") of the Company's common shares (the "Common Shares"). All of the Firm Shares are to be issued and sold by the Company. The respective amounts of the Firm Shares to be purchased by each of the several Underwriters are set forth opposite their names on Schedule I hereto. In addition, the Company and the persons listed on Schedule II hereto (the "Selling Shareholders") propose to grant to the Underwriters an option to purchase up to an aggregate of 600,000 additional Common Shares (the "Option Shares") from it and the Selling Shareholders for the purpose of covering over-allotments in connection with the sale of the Firm Shares. Of the 600,000 Option Shares, up to 296,612 are first to be sold by the Company and then up to 303,388 are to be sold by the Selling Shareholders. The Firm Shares and the Option Shares are together called the "Shares." The public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the several Underwriters shall be agreed upon by the Company, acting on behalf of itself and the Selling Shareholders, and the Representatives, acting on behalf of the several Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "Price Determination Agreement"). The Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication among the Company, the Selling Shareholders and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Price Determination Agreement. From and after the date of the execution and delivery of the Price Determination Agreement, this Agreement shall be deemed to incorporate, and, unless the context otherwise indicates, all references contained herein to "this Agreement" and to the phrase "herein" shall be deemed to include, the Price Determination Agreement. 1. Sale and Purchase of the Shares. ------------------------------- On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, the number of Firm Shares set forth opposite the name of such Underwriter under the column "Number of Firm Shares to be Purchased from the Company" on Schedule I to this Agreement, subject to adjustment in accordance with Section 11 hereof. The purchase price for the Firm Shares (the "Initial Price") shall be as set out in the Price Determination Agreement. (b) The Company and the Selling Shareholders grant to the several Underwriters an option to purchase, severally and not jointly, all or any part of the Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriter as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and from time to time thereafter within 30 days after the date of this Agreement, in each case upon written, facsimile or telegraphic notice, or verbal or telephonic notice confirmed by written, facsimile or telegraphic notice, by the Representatives to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before the Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. Such option, if exercised in part, shall first be satisfied by purchase of Option Shares to be sold by the Company and then by purchase of Option Shares to be sold by the Selling Shareholders, on a pro rata basis. (c) The Company understands that the Underwriters, other than Nesbitt Burns Inc. ("Nesbitt Burns"), propose to make a public offering of Shares in the United States and CIBC World Markets Inc. ("CIBC Inc."), the Canadian affiliate of CIBC World Markets Corp. and Nesbitt Burns, propose to make a public offering of Shares in Canada, as set out in the Prospectus (defined below), all as soon as the Representatives deem advisable after this Agreement has been executed and delivered. -2- CIBC Inc. and Nesbitt Burns shall offer Shares directly in Canada only as permitted by the Canadian Securities Laws (as hereinafter defined). 2. Delivery and Payment. Delivery by the Company to the -------------------- Representatives for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (same day) funds or immediately available funds by wire transfer drawn to the order of the Company for the shares purchased from the Company, against delivery of the respective certificates therefor to the Representatives, shall take place at the offices of CIBC World Markets Corp., One World Financial Center, New York, New York 10281, or such other location as agreed to by the Company and the Representatives, at 10:00 a.m., New York City time, on the fifth business day following the date of this Agreement, or at such time on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). In the event the option with respect to the Option Shares is exercised in whole or on one or more occasions in part, delivery by the Company and the Selling Shareholders of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price thereof in immediately available funds by wire transfer or by certified or official bank check or checks payable in New York Clearing House (same day) funds or immediately available funds by wire transfer to the Company and to the Selling Shareholders for the shares purchased from the Selling Shareholders shall take place at the offices specified above of CIBC World Markets Corp., or such other location as agreed to by the Company and the Representatives, at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment are called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representatives shall request, in the case of the Firm Shares, at least two full business days before the Firm Shares Closing Date or, in the case of Option Shares, on the day of notice of exercise of the option as described in Section l(b) and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, on the full business day before the Firm Shares Closing Date (or the Option Shares Closing Date in the case of the Option Shares). 3. Registration Statement and Prospectus; Public Offering. The ------------------------------------------------------ Company has prepared and filed in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the published rules and regulations thereunder (the "Rules") adopted by the Securities and Exchange Commission (the "Commission") a Registration Statement (as hereinafter defined) on Form S-3 (No. 333-32966), including a preliminary prospectus relating to the Shares, and such amendments thereof as may have been required to the -3- date of this Agreement. Copies of such Registration Statement (including all amendments thereof) and of the related U.S. Preliminary Prospectus (as hereinafter defined) have heretofore been delivered by the Company to you. The term "U.S. Preliminary Prospectus" means any preliminary prospectus (as described in Rule 430 of the Rules) included at any time as a part of the Registration Statement or filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules. The term "Registration Statement" as used in this Agreement means the initial registration statement (including all exhibits, financial schedules and information deemed to be a part of the Registration Statement through incorporation by reference or otherwise), as amended at the time and on the date it becomes effective (the "Effective Date") including the information (if any) deemed to be part thereof at the time of effectiveness pursuant to Rule 430A of the Rules. If the Company has filed an abbreviated registration statement to register additional Shares pursuant to Rule 462(b) under the Rules (the "462(b) Registration Statement") then any reference herein to the Registration Statement shall also be deemed to include such 462(b) Registration Statement. The term "U.S. Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement at the time of effectiveness; or, if Rule 430A of the Rules is relied on, the term U.S. Prospectus shall also include the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules. The Company also has prepared and filed with the Canadian securities regulatory authorities in all the provinces of Canada (the "Qualifying Provinces") a preliminary short form prospectus relating to the Shares (in the English and French languages, as applicable, including any documents incorporated therein by reference, the "Canadian Preliminary Prospectus") and has obtained from the Ontario Securities Commission (the "OSC") a mutual reliance review system decision document, evidencing that receipts of securities regulatory authorities in each of the Qualifying Provinces have been issued in respect of the Canadian Preliminary Prospectus. In addition, the Company (a) has prepared and filed with the Canadian securities regulatory authorities in all of the Qualifying Provinces, a final short form prospectus relating to the Shares (in the English and French languages, as applicable, including any documents incorporated therein by reference, the "Canadian Final Prospectus") omitting the PREP Information (as hereinafter defined) in accordance with the rules and procedures established pursuant to the Canadian Securities Administrators' National Policy No. 44 (incorporated by reference into Rule 44-1C (In the Matter of Rules for Shelf Prospectus Offerings and for Pricing Offerings after the Prospectus is Receipted)) for the pricing of securities after the final receipt for a prospectus has been obtained (the "PREP Procedures") and (b) will prepare and file, promptly after the execution and delivery of this Agreement, (i) with the Canadian securities regulatory authorities in all of the Qualifying Provinces, in accordance with the PREP Procedures, a supplemented prospectus setting forth the PREP Information (in the English and French languages, as applicable, including any documents incorporated therein by reference, the "Canadian Supplemented Prospectus"). The information, if any, included in the Canadian Supplemented Prospectus that is omitted from the Canadian Final Prospectus for which a final receipt has been obtained from the OSC, but that is deemed under the PREP Procedures to be incorporated by reference into the Canadian Final Prospectus as of the date of the Canadian Supplemented Prospectus is referred to herein as the "PREP Information". The Canadian Final -4- Prospectus for which a final receipt has been obtained from the OSC is herein referred to as the "Canadian Prospectus," except that, if, after the execution of this Agreement, a Canadian Supplemented Prospectus containing the PREP Information is thereafter filed with the Canadian securities regulatory authorities in all of the Qualifying Provinces, the term "Canadian Prospectus" shall refer to such Canadian Supplemented Prospectus, including the documents incorporated by reference therein. The U.S. Prospectus and the Canadian Prospectus in the respective forms used to confirm sales of Shares are hereinafter collectively referred to as the "Prospectus". The Company and the Selling Shareholders understand that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the U.S. Prospectus, as soon after the Effective Date and the date of this Agreement as the Representatives deem advisable. The Company and the Selling Shareholders hereby confirm that the Underwriters and dealers have been authorized to distribute or cause to be distributed each U.S. Preliminary Prospectus and Canadian Preliminary Prospectus and are authorized to distribute the U.S. Prospectus, the Canadian Final Prospectus and the Canadian Supplemented Prospectus, as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters in each case in accordance with the rules and regulations governing the distribution in the United States and Canada. 4. Covenants, Representations and Warranties of the Company. The -------------------------------------------------------- Company covenants, represents and warrants to each Underwriter as follows: (a) The Company shall, as soon as possible, comply with the PREP Procedures and file with the securities regulatory authorities in each of the Qualifying Provinces the Canadian Supplemented Prospectus relating to the Shares and otherwise fulfill and comply with, to the satisfaction of the Representatives, all applicable securities laws in each of the Qualifying Provinces and the respective regulations and rules under such laws together with applicable published policy statements of the Canadian Securities Administrators and the securities regulatory authorities in the Qualifying Provinces (the "Canadian Securities Laws") required to be fulfilled or complied with by the Company to enable the Shares to be lawfully distributed in the Qualifying Provinces through investment dealers or brokers registered as such in the Qualifying Provinces. These requirements shall be fulfilled in each of the Qualifying Provinces not later than 5:00 p.m. (Toronto Time) on the next business day following the date hereof, or by such later date or dates as may be determined by the Representatives in their sole discretion. (b) On the Effective Date, the Registration Statement (in such form as at the Effective Date) complied, and on the date of the U.S. Prospectus, the date any post-effective amendment to the Registration Statement becomes effective, the date any supplement or amendment to the U.S. Prospectus is filed with the Commission and each Closing Date, the Registration Statement and the U.S. Prospectus (and any amendment thereof or supplement thereto) will comply, in all material respects, with -5- the applicable provisions of the Securities Act and the Rules and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. The Registration Statement did not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and on the Effective Date and the other dates referred to above neither the Registration Statement nor the U.S. Prospectus nor any amendment thereof or supplement thereto will contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the Registration Statement or any amendment thereto or pursuant to Rule 424(a) of the Rules) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus as amended or supplemented complied in all material respects with the applicable provisions of the Securities Act and the Rules and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. Notwithstanding the foregoing, none of the representations and warranties in this paragraph 4(b) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon, and in conformity with, information herein or otherwise furnished in writing by the Representatives on behalf of the several Underwriters expressly for use in the Registration Statement or the Prospectus. With respect to the preceding sentence, the Company acknowledges that the only information furnished in writing by the Representatives on behalf of the several Underwriters for use in the Registration Statement or the Prospectus are the sections with respect to "Underwriting" in the U.S. Prospectus and in the Canadian Prospectus (other than the information therein with respect to the Company's $13.1 million credit facility) and information about orders and delivery on the inside covers thereof. (c) The Registration Statement is effective under the Securities Act; and no stop order preventing or suspending the effectiveness of the Registration Statement or suspending or preventing the use of the U.S. Prospectus has been issued; and no proceedings for that purpose have been instituted or, to the Company's knowledge after due inquiry are threatened under the Securities Act. Any required filing of the U.S. Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules has been or will be made in the manner and within the time period required by such Rule 424(b). (d) The documents incorporated by reference in the Registration Statement and the U.S. Prospectus, at the time they were filed with the Commission, complied in all material respects with the requirements of the Exchange Act and, when read together and with the other information in the Registration Statement and the U.S. Prospectus, do not contain an untrue statement of a material fact or omit to state a -6- material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (e) The financial statements of the Company (including all notes and schedules thereto) included or incorporated by reference in the Registration Statement, the U.S. Prospectus and the Canadian Prospectus present fairly, in all material respects, the financial position, the results of operations, the statements of cash flows and the statements of stockholders' equity and the other information purported to be shown therein of the Company at the respective dates and for the respective periods to which they apply in conformity with U.S. generally accepted accounting principles in the case of the U.S. Prospectus and Canadian generally accepted accounting principles in the case of the Canadian Prospectus, consistently applied throughout the periods involved, except as indicated therein. The summary and selected financial data included in the U.S. Prospectus and the Canadian Prospectus present fairly the information shown therein as at the respective dates and for the respective periods specified; and the summary and selected financial data have been presented on a basis consistent with the consolidated financial statements so set forth in or incorporated by reference in the U.S. Prospectus and the Canadian Prospectus and other financial information. (f) Ernst & Young LLP and Arthur Andersen LLP, whose reports are filed with the Commission as a part of the Registration Statement, are and, during the periods covered by their reports, were independent public auditors as required by the Securities Act and the Rules. (g) The Company and each of its subsidiaries other than those subsidiaries that, in aggregate, total less than 10% of consolidated revenues and individually are less than 2% of consolidated revenues (the "Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Company does not control directly or indirectly any entities, other than the Subsidiaries. The Company and each Subsidiary is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted by it or location of the assets or properties owned, leased or licensed by it requires such qualification, except for such jurisdictions where the failure to so qualify would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company and each of its subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company and each of its Subsidiaries has all requisite corporate power and authority, and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits of and from all governmental or regulatory bodies or any other person or entity (collectively, the "Permits"), to own, lease and license its assets and properties and conduct its business, all of which are valid and in full force and effect, as described in the Registration Statement and the Prospectus, except where the lack of such Permits, individually or in the aggregate, would not have a Material Adverse -7- Effect. The Company and each of its Subsidiaries has fulfilled and performed in all material respects all of its material obligations with respect to such Permits; and no event has occurred that could reasonably be expected to result in revocation or termination thereof or results in any other material impairment of the rights of the Company or any Subsidiaries, as the case may be thereunder. Except as may be required under the Securities Act, Canadian Securities Laws and state and foreign Blue Sky laws, no other Permits are required on the part of the Company or any Subsidiary to enter into, deliver and perform this Agreement and to issue and sell the Shares. (h) The Company and each of its Subsidiaries owns or possesses adequate and enforceable rights to use all patents, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how and other similar rights and proprietary knowledge (collectively, "Intangibles") described in the Prospectus as being owned by it necessary for the conduct of its business. Except as expressly set forth in the Registration Statement and the Prospectus or as otherwise disclosed in writing to the Underwriters, neither the Company nor any of its Subsidiaries has received any notice of, or is aware of, any infringement of or conflict with asserted rights of others with respect to any Intangibles. (i) The Company and each of its Subsidiaries has good and marketable title in fee simple to all items of real property and good and marketable title to all personal property described in the Prospectus as being owned by it subject to defects that would not result in a Material Adverse Effect. Any real property and buildings described in the Prospectus as being held under lease by the Company and each of its Subsidiaries is held by it under valid, existing and enforceable leases, free and clear of all liens, encumbrances, claims, security interests and defects, except such as are described in the Registration Statement and the Prospectus or would not have a Material Adverse Effect. (j) Except as expressly set forth in the Registration Statement and the Prospectus, there are no litigation or governmental proceedings to which the Company or its Subsidiaries is subject or which is pending or, to the knowledge of the Company, threatened, against the Company or any of its Subsidiaries, which, individually or in the aggregate, might reasonably be expected to have a Material Adverse Effect, adversely affect the consummation of this Agreement or which is required to be disclosed in the Registration Statement and the Prospectus that is not so disclosed. (k) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described therein (a) there has not been any material adverse change with regard to the assets or properties, business, results of operations or financial condition of the Company; (b) neither the Company nor its Subsidiaries has sustained any loss or interference with its assets, businesses or properties (whether owned or leased) from fire, explosion, earthquake, -8- flood or other calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree which would have a Material Adverse Effect; and (c) since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected therein, neither the Company nor its Subsidiaries has (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except such options or shares issued in the ordinary course of business under existing stock option or similar plans since the date referred to in the Prospectus, liabilities or obligations incurred in the ordinary course of business, (ii) entered into any material transaction not in the ordinary course of business or (iii) declared or paid any dividend or made any distribution on any shares of its stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its stock. (l) There is no document, contract or other agreement of a character required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required by the Securities Act, the Rules or Canadian Securities Laws. Each description of a contract, document or other agreement in the Registration Statement and the Prospectus accurately reflects in all material respects the terms of the underlying document, contract or agreement. Each agreement described in the Registration Statement and Prospectus or listed in the Exhibits to the Registration Statement or incorporated by reference to which the Company or a Subsidiary is a party, subject to customary exceptions, is in full force and effect and is valid and enforceable by and against the Company or a Subsidiary, as the case may be, in accordance with its terms. Neither the Company nor any Subsidiary, if such Subsidiary is a party, nor to the Company's knowledge, any other party is in default in the observance or performance of any term or obligation to be performed by it under any such agreement, and no event has occurred which with notice or lapse of time or both would constitute such a default, in any such case which default or event, individually or in the aggregate, would have a Material Adverse Effect. No default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company or any Subsidiary, if such Subsidiary is a party thereto, of any other agreement or instrument to which the Company or such Subsidiary is a party or by which the Company, any Subsidiary or their respective properties or business may be bound or affected which default or event, individually or in the aggregate, would have a Material Adverse Effect. (m) Neither the Company nor any of its Subsidiaries is in violation of any term or provision of its charter or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation, individually or in the aggregate, would have a Material Adverse Effect. -9- (n) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any Subsidiary pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which either the Company or any Subsidiary or any of their respective properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or any Subsidiary or violate any provision of the charter or by- laws of the Company or any Subsidiary, except for such consents or waivers which have already been obtained and are in full force and effect or which if not obtained would not have a Material Adverse Effect. (o) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus. The certificates evidencing the Shares are in due and proper legal form and have been duly authorized for issuance by the Company. All of the issued and outstanding Common Shares have been duly and validly issued and are fully paid and nonassessable. There are no statutory preemptive or other similar rights to subscribe for or to purchase or acquire any Common Shares of the Company or any Subsidiaries or any such rights pursuant to their certificate of incorporation, articles or by-laws or any agreement or instrument to or by which the Company or any of its Subsidiaries is a party or bound. The Shares, when issued and sold pursuant to this Agreement, will be duly and validly issued, fully paid and nonassessable; and none of them will be issued in violation of any preemptive or other similar right. Except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and there is no commitment, plan or arrangement to issue, any shares of the Company or any Subsidiaries or any security convertible into, or exercisable or exchangeable for, such shares other than options or shares issued in the ordinary course of business under existing stock option or similar plans since the date referred to in the Prospectus. The Common Shares and the Shares conform in all material respects to all statements in relation thereto contained in the Registration Statement and the Prospectus. All outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable and are owned directly by the Company or by another wholly owned subsidiary of the Company, free and clear of any security interests, liens, encumbrances, equities or claims, other than those described in the Prospectus. (p) No holder of any security of the Company has the right to have any security owned by such holder included in the Registration Statement or to demand -10- registration of any security owned by such holder during the period ending 90 days after the date of this Agreement. Each director and officer of the Company and Sumitomo Heavy Industries Ltd. have delivered to the Representatives its or his written lock-up agreement in the form attached to this Agreement ("Lock-Up Agreement"). (q) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares by the Company. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes and will constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (r) Neither the Company nor any of its Subsidiaries are involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened, which dispute would have a Material Adverse Effect. The Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers or contractors which would have a Material Adverse Effect. The Company is not aware of any threatened or pending litigation between the Company or any of its Subsidiaries and any of its executive officers which, if adversely determined, could have a Material Adverse Effect and has not been informed that such officers will not remain in the employment of the Company. (s) No material transaction has occurred between or among the Company and any of its officers or directors or five percent shareholders or any affiliate or affiliates of any such officer or director or five percent shareholders that is required to be described in and is not described in the Registration Statement and the Prospectus. (t) The Company has not taken, nor will it take, directly or indirectly, any action designed to or which would reasonably be expected to cause or result in, or which has constituted or which would reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Shares to facilitate the sale or resale of any of the Shares. (u) The Company and its Subsidiaries have filed all material federal, state, provincial, local and foreign tax returns which are required to be filed through the date hereof, or have received extensions thereof, and have paid all taxes shown on such returns and all assessments received by them to the extent that the same are material and have become due other than those taxes and assessments that are currently being challenged and for which a reserve has been taken. There are no tax audits or investigations pending, which if adversely determined would have a Material Adverse -11- Effect; nor are there any material proposed additional tax assessments against the Company or any of its Subsidiaries. (v) The Shares have been duly authorized for quotation on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market System, subject to official Notice of Issuance and have been approved for listing on The Toronto Stock Exchange. (w) The books, records and accounts of the Company and its Subsidiaries accurately and fairly reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the results of operations of, the Company and its Subsidiaries. The Company and each of its Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. and Canadian generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (x) The Company and its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which it or they are engaged; all policies of insurance and fidelity or surety bonds insuring the Company or any of its Subsidiaries or the Company's or its Subsidiaries' respective businesses, assets, employees, officers and directors are in full force and effect; the Company and each of its Subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and neither the Company nor any Subsidiary of the Company believes that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (y) Each approval, consent, order, authorization, designation, declaration or filing of, by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated required to be obtained or performed by the Company (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public offering by the Underwriters under the state securities or Blue Sky laws) has been obtained or made and is in full force and effect. -12- (z) To the best of the knowledge of the Company, there are no affiliations with the NASD among the Company's officers, directors or, any five percent or greater stockholder of the Company, except as set forth in the Registration Statement or otherwise disclosed in writing to the Representatives. (aa) (i) Each of the Company and its Subsidiaries is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Law") which are applicable to its business except for non-compliance that would not have a Material Adverse Effect; (ii) neither the Company nor any of its Subsidiaries has received any notice from (x) any third party of an asserted claim under Environmental Laws which would have a Material Adverse Effect, or (y) any governmental authority of an asserted claim under Environmental Laws; (iii) each of the Company and its Subsidiaries has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business, except where the failure to obtain such permit, license or approval would not have a Material Adverse Effect, and is in compliance with all terms and conditions of any such permit, license or approval; (iv) to the Company's knowledge, no facts currently exist that will require the Company or any of its Subsidiaries to make future material capital expenditures to comply with Environmental Laws; and (v) no property which is or has been owned, leased or occupied by the Company or its Subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et. seq.) ("CERCLA"), or otherwise designated as a contaminated site under applicable state, provincial or local law. Neither the Company nor any of its Subsidiaries has been named as a "potentially responsible party" under CERCLA. (bb) In the ordinary course of its business, the Company periodically reviews the effect of Environmental Laws on the business, operations and properties of the Company and its Subsidiaries, in the course of which the Company identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws, or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has in good faith concluded that such associated costs and liabilities would not, singly or in the aggregate, have a Material Adverse Effect. (cc) The Company is not and, after giving effect to the offering and sale of the Shares and the application of proceeds thereof as described in the Prospectus, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (dd) None of the Company, any of its Subsidiaries or any other person acting on behalf of the Company or any of its Subsidiaries, including, without -13- limitation, any director, officer, agent or employee of the Company or any of its Subsidiaries has directly or indirectly, while acting on behalf of the Company or any of its Subsidiaries (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful payment; except to the extent that any such unlawful contribution, payment or act would not be material. (ee) The Company shall use the net proceeds of the offering of the Shares to be sold by it pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds". (ff) The Company is eligible to use the PREP Procedures and a receipt has been obtained from the OSC in respect of the Canadian Prospectus. (gg) Filing of the Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Supplemented Prospectus shall constitute a representation and warranty by the Company to the Underwriters that as of the date of filing: (i) all information and statements (except information relating solely to the Underwriters) contained in the Canadian Final Prospectus or the Canadian Supplemented Prospectus, as the case may be, including the documents incorporated therein by reference and any other management information circular, financial statements or material change reports (other than confidential material change reports) filed by the Company with any securities regulatory authority in any of the Qualifying Provinces after the date of the Canadian Prospectus and prior to the termination of the distribution of the Shares (collectively, the "Documents Incorporated by Reference"), are true and correct and contain no misrepresentation and constitute full, true and plain disclosure of all material facts relating to the Company and the Shares; (ii) no material fact or information has been omitted from such disclosure (except facts or information relating solely to the Underwriters) which is required to be stated in such disclosure or is necessary to make the statements or information contained in such disclosure not misleading in light of the circumstances under which they were made; and (iii) such documents comply fully with the requirements of the Canadian Securities Laws. Such filings shall also constitute the Company's consent to the Underwriters' use of the Canadian Preliminary Prospectus, Canadian Final Prospectus, the Documents -14- Incorporated by Reference and the Canadian Supplemented Prospectus in connection with distribution of the Shares in the Qualifying Provinces in compliance with the provisions of this Agreement and the Canadian Securities Laws. 5. Covenants, Representations and Warranties of the Selling -------------------------------------------------------- Shareholders. Each Selling Shareholder hereby severally covenants, represents - ------------ and warrants to each Underwriter as follows: (a) Such Selling Shareholder (i) has caused certificates or (ii) has executed a Power of Attorney (as hereinafter defined) authorizing the person named therein to exercise such number of options and cause the certificates, for the number of Option Shares to be sold by such Selling Shareholder hereunder to be delivered to LaBarge Weinstein (the "Custodian"), endorsed in blank or with blank stock powers duly executed, with a signature appropriately guaranteed, such certificates to be held in custody by the Custodian for delivery, pursuant to the provisions of this Agreement and agreements dated March 2000 between the Custodian and each Selling Shareholder (together, the "Custody Agreement"). (b) Such Selling Shareholder has granted an irrevocable power of attorney (the "Power of Attorney") to the person named therein, on behalf of such Selling Shareholder, to execute and deliver this Agreement and any other document necessary or desirable in connection with the transactions contemplated hereby and to deliver the Option Shares to be sold by the Selling Shareholder pursuant hereto. (c) This Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement have each been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and, assuming due authorization, execution and delivery by the other parties hereto or thereto, constitutes the valid and legally binding agreement of such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms. If a Selling Shareholder is an individual, he or she is of the age of majority, of sound mind and does not have the status of a bankrupt. (d) The execution and delivery by such Selling Shareholder of this Agreement and the performance by such Selling Shareholder of its obligations under this Agreement (i) will not contravene any provision of applicable law, statute, regulation or filing or any agreement or other instrument binding upon such Selling Shareholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, (ii) does not require any consent, approval, authorization or order of or registration or filing with any court or governmental agency or body having jurisdiction over it, except such as may be required by the Blue Sky laws of the various states in connection with the offer and sale of the Shares which have been or will be effected in accordance with this Agreement, (iii) does not and will not violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to such Selling Shareholder or (iv) -15- will not result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of such Selling Shareholder pursuant to the terms of any agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder may be bound or to which any of the property or assets of such Selling Shareholder is subject in any case in such a manner as to impair the ability of such Selling Shareholder to perform this Agreement. (e) Such Selling Shareholder has (or upon exercise of such Selling Shareholder's options will have) valid and marketable title to the Option Shares to be sold by such Selling Shareholder free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer other than restrictions on transfer pursuant to the Lock-Up Agreement or securities laws (except that there is no restriction on transfer under securities laws in the case of the Option Shares in connection with this Offering). (f) Such Selling Shareholder has full legal right, power and authorization, and any approval required by law, to sell, assign, transfer and deliver the Option Shares to be sold by such Selling Shareholder in the manner provided by this Agreement. (g) Upon delivery of and payment for the Option Shares to be sold by such Selling Shareholder pursuant to this Agreement, the several Underwriters will receive valid and marketable title to such Option Shares free and clear of any lien, claim, security interest or other encumbrance other than as created or permitted to exist by the Underwriters. (h) All information relating to such Selling Shareholder furnished in writing by such Selling Shareholder expressly for use in the Registration Statement and the Prospectus is, and on each Closing Date will be, true, correct, and complete, and does not, and on each Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (i) Such Selling Shareholder has reviewed the Registration Statement and Prospectus and, although such Selling Shareholder has not independently verified the accuracy or completeness of all the information contained therein, nothing has come to the attention of such Selling Shareholder that causes such Selling Shareholder to believe that (i) on the Effective Date, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein in order to make the statements made therein not misleading and (ii) on the Effective Date, the Prospectus contained and, on each Closing Date contains, any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. -16- (j) The sale of Option Shares by such Selling Shareholder pursuant to this Agreement is not prompted by such Selling Shareholder's knowledge of any material information concerning the Company or any of its Subsidiaries which is required to be but is not set forth in the Prospectus. (k) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed or that would reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (l) The representations and warranties of such Selling Shareholder in the Custody Agreement are true and correct. 6. Conditions of the Underwriters' Obligations. The obligations ------------------------------------------- of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject to each of the following terms and conditions: (a) Notification that the Registration Statement has become effective shall have been received by the Representatives and the U.S. Prospectus shall have been timely filed with the Commission in accordance with Section 7(a)(i) of this Agreement. (b) No order preventing or suspending the use of any preliminary prospectus, the U.S. Prospectus or the Canadian Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the U.S. Prospectus or otherwise) shall have been complied with to the satisfaction of the Commission and the Representatives. (c) The Underwriters shall be provided with evidence satisfactory to them, acting reasonably, that the Shares have been approved for designation upon notice of issuance on the Nasdaq National Market. (d) The representations and warranties of the Company and the Selling Shareholders contained in this Agreement and in the certificates delivered pursuant to Section 6(e) and (f), if qualified by any materiality qualifier whatsoever shall be true and correct, and otherwise shall be true and correct in all material respects on and as of each Closing Date as if made on such date. The Company and the Selling Shareholders shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by them at or before such Closing Date. -17- (e) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, executed by the chief executive or chief operating officer and the chief financial officer or chief accounting officer of the Company on the Company's behalf to the effect that (i) the signers of such certificate have carefully examined the Registration Statement, the U.S. Prospectus, the Canadian Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date, and (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and to the best of their knowledge, no proceedings for that or any similar purpose have been instituted or are pending under the Securities Act or under Canadian Securities Laws. (f) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, of each Selling Shareholder, to the effect that the representations and warranties of such Selling Shareholder in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and such Selling Shareholder has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by him at or prior to such Closing Date. (g) The Representatives shall have received, at the time this Agreement is executed and on each Closing Date a signed letter from Ernst & Young LLP addressed to the Representatives, and dated, respectively, the date of this Agreement and each such Closing Date, in form and substance reasonably satisfactory to the Representatives confirming that they are independent accountants within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating in effect that: (i) in their opinion the audited financial statements and financial statement schedules included or incorporated by reference in the Registration Statement, the U.S. Prospectus and the Canadian Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules and Canadian Securities Laws, as applicable; (ii) on the basis of a reading of the amounts included in the Registration Statement and the U.S. Prospectus or incorporated by reference in the Canadian Prospectus under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data," carrying out certain procedures (but not an examination in accordance with generally accepted -18- auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the stockholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (A) the amounts in "Summary Consolidated Financial Data," and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited and unaudited financial statements from which such amounts were derived; or (B) with respect to the Company, there were, at a specified date not more than three business days prior to the date of the letter, any increases in the current liabilities and long-term liabilities of the Company or any decreases in net income or in working capital or the stockholders' equity of the Company, as compared with the amounts shown on the Company's audited balance sheet for the fiscal year ended December 31, 1999 included in the Registration Statement and U.S. Prospectus and incorporated by reference in the Canadian Prospectus; (iii) they have performed certain other procedures as may be permitted under generally acceptable auditing standards as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company; and (iv) based upon the procedures set forth in Sections 6(g)(ii) and (iii) above and a reading of the amounts included in the Registration Statement under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus and a reading of the financial statements from which certain of such data were derived, nothing has come to their attention that gives them reason to believe that the "Summary Consolidated Financial" and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus do not comply as to the form in all material respects with the applicable accounting requirements of the Securities Act, Canadian Securities -19- Laws and the Rules or that the information set forth therein is not fairly stated in relation to the financial statements included in the Registration Statement or the Prospectus from which certain of such data were derived. References to the Registration Statement and the Prospectus in this Section 6(g) are to such documents as amended and supplemented at the date of the letter. (h) The Representatives shall have received on each Closing Date from Milbank, Tweed, Hadley & McCloy LLP, U.S. counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) Each of the Lock-Up Agreements, assuming it has been duly executed by the Company's stockholders, directors and officers and duly and validly delivered by such persons, constitutes the legal, valid and binding obligation of each such person enforceable against each such person in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally (and the possible judicial application of foreign laws or governmental action affecting the rights of creditors generally) and except as enforceability is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. (ii) No consent, approval, authorization or order of any New York or United States Federal court or governmental agency or regulatory body is required for the execution, delivery or performance of this Agreement by the Company or the consummation of the transactions contemplated hereby, except such as have been obtained under the Securities Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. (iii) The statements in the U.S. Prospectus under the caption "Tax Considerations," excluding "Canadian Tax Considerations" insofar as such statements constitute a summary of documents referred to therein or matters of law, are fair summaries in all material respects and accurately present the information called for with respect to such documents and matters. (iv) The Registration Statement, all preliminary prospectuses and the U.S. Prospectus and each amendment or supplement thereto (except for the -20- financial statements and schedules and other financial and statistical data included therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules. (v) The Registration Statement is effective under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement has been issued and to such counsel's knowledge no proceedings for that purpose have been instituted or are threatened, pending or contemplated. Any required filing of the U.S. Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (vi) The Company is not an "investment company" or an entity controlled by an "investment company" as such terms are defined in the Investment Company Act of 1940. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of responsible officers of the Company and public officials and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the State of New York, the General Corporation Law of the State of Delaware and the federal laws of the United States; provided that such counsel shall state that in their opinion that the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to the attention of such counsel which cause such counsel to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial data, as to which such counsel need express no belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements, notes and schedules thereto and other financial data, as to which such counsel need make no statement) on the date thereof contained any untrue statement of a material fact or -21- omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) The Representatives shall have received on each Closing Date from LaBarge Weinstein or Stewart McKelvy Stirling Scales, each Canadian counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) The Company has been duly continued and is validly existing as a corporation under the laws of its jurisdiction of continuance. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its businesses makes such qualification necessary, except for such jurisdictions where the failure to so qualify, individually or in the aggregate, would not have a Material Adverse Effect. (ii) The Company has all requisite corporate power and authority to own, lease and license its assets and properties and conduct its business as now being conducted and as described in the Registration Statement, the U.S. Prospectus and the Canadian Prospectus and with respect to the Company to enter into, deliver and perform this Agreement and to issue and sell the Shares other than those required under the state and foreign Blue Sky laws. (iii) The Company has authorized and issued capital stock as set forth in the Registration Statement and the Prospectus under the caption "Capitalization"; the certificates evidencing the Shares are in due and proper legal form and have been duly authorized for issuance by the Company; all of the outstanding Common Shares of the Company have been duly and validly authorized and issued and are fully paid and nonassessable and none of them was issued in violation of any preemptive or other similar right. The Shares when issued and sold pursuant to this Agreement will be duly and validly issued, outstanding, fully paid and nonassessable and none of them will have been issued in violation of any preemptive or other similar right. To the best of such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus, there are no preemptive or other rights to subscribe for or to purchase or any restriction upon the voting or transfer of any securities of the Company pursuant to the Company's Memorandum of Association, articles or by-laws or other governing documents or any agreements or other instruments to which the Company is a party or by which it is bound. To the best of such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of stock of the Company or any security convertible into, -22- exercisable for, or exchangeable for stock of the Company other than as may have been issued in the ordinary course since the date thereof. The Common Shares conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. (iv) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares. This Agreement has been duly and validly authorized, executed and delivered by the Company, and this Agreement constitutes the legal, valid and binding obligation of the Company. (v) To the best of such counsel's knowledge, neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or any event which with notice or lapse of time, or both, would constitute a default) under, or require consent or waiver under, or result in the execution or imposition of any lien, charge, claim, security interest or encumbrance upon any properties or assets of the Company or any of the Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, note or other agreement or instrument of which such counsel is aware and to which the Company or any of the Subsidiaries is a party or by which either the Company or any of the Subsidiaries or any of its respective properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation of which such counsel is aware or violate any provision of the charter or by-laws of the Company. (vi) To the best of such counsel's knowledge, no default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a default, in the due performance and observance of any term, covenant or condition by the Company or any of the Subsidiaries of any indenture, mortgage, deed of trust, note or any other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which it or any of the Subsidiaries or any of their respective assets or properties or businesses may be bound or affected, where the consequences of such default, individually or in the aggregate, would have a Material Adverse Effect. (vii) To the best of such counsel's knowledge, the Company is not in violation of any term or provision of its charter or by- laws and is not in violation of any terms or provisions of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of -23- such violation, individually or in the aggregate, would have a Material Adverse Effect. (viii) No consent, approval, authorization or order of any court or governmental agency or regulatory body is required for the execution, delivery or performance of this Agreement by the Company or the consummation of the transactions contemplated hereby, except such as have been obtained under the Canadian Securities Laws in connection with the purchase and distribution of the Shares by the several Underwriters. (ix) To the best of such counsel's knowledge, there is no litigation or governmental or other proceeding or investigation, before any court or before or by any public body or board pending or threatened against, or involving the assets, properties or businesses of, the Company or any of the Subsidiaries which would have a Material Adverse Effect. (x) The statements in the U.S. Prospectus under the caption "Tax Considerations," excluding "U.S. Tax Considerations" and in the Canadian Prospectus under the caption "Certain Canadian Federal Income Tax Considerations" insofar as such statements constitute a summary of documents referred to therein or matters of law, are fair summaries in all material respects and accurately present the information called for with respect to such documents and matters. (xi) All of the documents incorporated by reference in the Canadian Prospectus have been filed (in English and French, as applicable) in each of the Qualifying Provinces. (xii) The Canadian Supplemented Prospectus, Canadian Final Prospectus and the Canadian Preliminary Prospectus and each amendment or supplement thereto (except for the financial statements and schedules and other financial and statistical data included therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Canadian Securities Laws. (xiii) All necessary documents and proceedings have been filed and taken and all other legal requirements have been fulfilled under the laws of each of the provinces of Canada to qualify the Shares to be offered and sold to the public in each province of Canada by or through registrants, investment dealers or brokers registered under applicable legislation of such provinces who have complied with the relevant provisions of such legislation. -24- (xiv) Montreal Trust Company of Canada has been duly appointed the registrar and transfer agent of the Shares at its principal transfer office in the cities of Toronto. (xv) The Shares have been approved for listing on The Toronto Stock Exchange. (xvi) The capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectus under the caption "Description of Common Shares." To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of responsible officers of the Company and public officials and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the Province of Ontario and the federal laws of Canada provided that such counsel shall state that in their opinion the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to the attention of such counsel which cause such counsel to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial data, as to which such counsel need express no belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements, notes and schedules thereto and other financial data, as to which such counsel need make no statement) on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (j) The Representatives shall have received on each Closing Date from counsel for the Company in the jurisdiction listed opposite the name of each of the Subsidiaries listed on Schedule III (the "Material Subsidiaries"), an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: -25- (i) Each Material Subsidiary has been duly organized and is validly existing as a corporation under the laws of its jurisdiction of incorporation. Each such Material Subsidiary is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its businesses makes such qualification necessary, except for such jurisdictions where the failure to so qualify, individually or in the aggregate, would not have a Material Adverse Effect. (ii) Each such Material Subsidiary has all requisite corporate power and authority to own, lease and license its assets and properties and conduct its business as now being conducted. (iii) The issued and outstanding shares of capital stock of each such Material Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company or by another wholly owned subsidiary of the Company, free and clear of any perfected security interest or, to the knowledge of such counsel, any other security interests, liens, encumbrances, equities or claims, other than those described in the Registration Statement or the Prospectus. (iv) To the best of such counsel's knowledge, there is no litigation or governmental or other proceeding or investigation, before any court or before or by any public body or board pending or threatened against, or involving the assets, properties or businesses of, such Material Subsidiary which would have a Material Adverse Effect. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of responsible officers of such Material Subsidiary and public officials. Copies of such certificates shall be furnished to the Representatives and counsel for the Underwriters. (k) The Representatives shall have received on each Option Shares Closing Date from Milbank, Tweed, Hadley & McCloy LLP an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) Assuming that they have been duly and validly executed and delivered by or on behalf of the Selling Shareholders, this Agreement, the Custody Agreement, the Power of Attorney and the Lock- Up Agreement each constitutes the legal, valid and binding obligation of the Selling Shareholders enforceable against the Selling Shareholders in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the -26- enforcement of creditors' rights generally (and the possible judicial application of foreign laws or governmental action affecting the rights of creditors generally) and except as enforceability is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. (ii) To the extent that the laws of the State of New York or the federal laws of the United States applies, all of the Selling Shareholders' rights in the Option Shares to be sold by the Selling Shareholders pursuant to this Agreement, have been transferred to the Underwriters who have severally purchased such Option Shares pursuant to this Agreement, free and clear of adverse claims, assuming for purposes of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims. (iii) No consent, approval, authorization, license, certificate, permit or order of any New York or United States federal court, governmental or regulatory agency, authority or body is required in connection with the performance of this Agreement by the Selling Shareholders or the consummation of the transactions contemplated hereby, including the delivery and sale of the Option Shares to be delivered and sold by the Selling Shareholders, except such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of the Selling Shareholders and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the State of New York, the General Corporation Law of the State of Delaware or the federal laws of the United States in the case of Milbank, Tweed, Hadley & McCloy and the laws of the Province of Ontario and the federal laws of Canada applicable therein in the case of LaBarge Weinstein; provided that such counsel shall state that in their opinion the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. (l) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives, and their counsel and the Underwriters shall have received from Torys a favorable opinion, addressed to the Representatives and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably -27- request, and the Company shall have furnished to Torys such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (m) The Representatives shall have received copies of the Lock-up Agreements executed by each entity or person described in Section 4(p). (n) The Company and the Selling Shareholders shall have furnished or caused to be furnished to the Representatives such further certificates or documents as the Representatives shall have reasonably requested. 7. Covenants of the Company. ------------------------ (a) The Company covenants and agrees as follows: (i) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective as promptly as possible. The Company shall prepare the U.S. Prospectus in a form approved by the Representatives (such approval not to be unreasonably withheld) and file such U.S. Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act. (ii) The Company shall promptly advise the Representatives in writing (i) when any amendment to the Registration Statement shall have become effective, (ii) of any request by the Commission for any amendment of the Registration Statement or the U.S. Prospectus or for any additional information, (iii) of the prevention or suspension of the use of any preliminary prospectus or the U.S. Prospectus or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding known to it for that purpose and (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representatives a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (iii) If, at any time within one year after the date hereof when a prospectus relating to the Shares is required to be delivered under the -28- Securities Act and the Rules, any event occurs as a result of which the U.S. Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the U.S. Prospectus to comply with the Securities Act or the Rules, the Company promptly shall prepare and file with the Commission, subject to the second sentence of paragraph (ii) of this Section 7(a), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. (iv) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs (or 90 days if such 12-month period coincides with the Company's fiscal year), an earning statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 of the Rules. (v) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits thereto and amendments thereof) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Securities Act or the Rules, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (vi) The Company shall cooperate with the Representatives and their counsel in endeavoring to qualify the Shares for offer and sale to the extent required by law in connection with the offering under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vii) Without the prior written consent of CIBC World Markets Corp., for a period of 90 days after the date of this Agreement, the Company shall not issue, sell or register with the Commission (other than on Form S-8 or on any successor form), or otherwise dispose of, directly or indirectly, any -29- equity securities of the Company (or any securities convertible into, exercisable for or exchangeable for equity securities of the Company), except for the issuance of the Shares pursuant to the Registration Statement and the issuance of options and shares pursuant to the Company's existing stock option plan or bonus plan or shareholder rights plan as described in the Registration Statement and the Prospectus. In the event that during this period, (i) any shares are issued pursuant to the Company's existing stock option plan or bonus plan or (ii) any registration is effected on Form S-8 or on any successor form relating to shares that are issuable during such 90 period, the Company shall obtain the written agreement of such grantee or purchaser or holder of such registered securities if it is a director or executive officer of the Company, that, for a period of 90 days after the date of this Agreement, such person will not, without the prior written consent of CIBC World Markets Corp. which would not be unreasonably withheld or delayed, offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or exercise any registration rights with respect to, any shares of Common Shares (or any securities convertible into, exercisable for, or exchangeable for any shares of Common Shares) owned by such person. (viii) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market. (ix) The Company will apply the net proceeds from the offering of the Shares in the manner set forth under "Use of Proceeds" in the Prospectus. (x) To furnish to each of the Underwriters prior to or as soon as possible following the filing of the Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Supplemented Prospectus, as the case may be: (A) a copy of the Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Supplemented Prospectus in the English language signed and certified as required by the Canadian Securities Laws applicable in the Qualifying Provinces other than Quebec; (B) a copy of the Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Supplemented Prospectus in the French language signed and certified as required by the Canadian Securities Laws applicable in Quebec; (C) a copy of any other document required to be filed by the Company in compliance with the Canadian Securities Laws; -30- (D) opinions of Quebec counsel to the Company addressed to the Underwriters, the Company, LaBarge Weinstein and Torys in form and substance satisfactory to the Underwriters, acting reasonably, dated in the case of the Canadian Preliminary Prospectus, as of the date of the Canadian Preliminary Prospectus, in the case of the Canadian Final Prospectus, as of the date of the Canadian Final Prospectus, and, in the case of the Canadian Supplemented Prospectus, as of the date of the Canadian Supplemented Prospectus to the effect that the French language version of the Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Supplemented Prospectus, including in each case the Documents Incorporated by Reference, as the case may be, except for the consolidated financial statements of the Company included in the Prospectus, together with the reports of Ernst & Young LLP on such financial statements as at and for the periods included in the Prospectus and including the notes with respect to such financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Prospectus (the "Financial Information") as to which no opinion need be expressed, is in all material respects a complete and accurate translation of the English language version thereof, and that such English and French language versions are not susceptible of any materially different interpretation with respect to any matter contained therein; and (E) an opinion of Ernst & Young LLP addressed to the Underwriters, the Company, LaBarge Weinstein and Torys, dated in the case of the Canadian Preliminary Prospectus, as of the date of the Canadian Preliminary Prospectus, in the case of the Canadian Final Prospectus, as of the date of the Canadian Final Prospectus and, in the case of the Canadian Supplemented Prospectus, as of the date of the Canadian Supplemented Prospectus, to the effect that the French language version of the Financial Information is in all material respects, a complete and proper translation of the English language version thereof. (xi) During the period from the date of this Agreement to the completion of distribution of the Shares, to promptly notify, whether directly or through public announcement, the Underwriters in writing of: (A) any material change (actual, anticipated, contemplated or threatened, financial or otherwise) known to it in the business, affairs, operations, assets, liabilities (contingent or otherwise) or capital of the Corporation and its Subsidiaries taken as a whole; or -31- (B) any material fact which has arisen or been discovered and would have been required to have been stated in the Prospectus had the fact arisen or been discovered on, or prior to, the date of such document; and any change in any material fact (which for the purposes of this Agreement shall be deemed to include the disclosure of any previously undisclosed material fact) contained in the Canadian Prospectus or any Canadian Prospectus Amendment, including all Documents Incorporated by Reference, which fact or change is, or may be, of such a nature as to render any statements in the Prospectus misleading or untrue or which would result in a misrepresentation in the Prospectus or which would result in the Prospectus not complying (to the extent that such compliance is required) with the Canadian Securities Laws. The Company shall promptly, and in any event within any applicable time limitation, comply, to the reasonable satisfaction of the Underwriters, with all applicable filings and other requirements under the Canadian Securities Laws as a result of such fact or change. However, the Company shall not file any amendment to the Canadian Prospectus (a "Canadian Prospectus Amendment") or other document without first obtaining approval from the Underwriters, after consultation with the Underwriters with respect to the form and content thereof, which approval will not be unreasonably withheld. The Company shall in good faith discuss with the Underwriters any fact or change in circumstances (actual, anticipated, contemplated or threatened, financial or otherwise) which is of such a nature that there is reasonable doubt whether written notice need be given under this paragraph. (xii) If during the period of distribution to the public of the Shares, there shall be any change in the Canadian Securities Laws which, in the opinion of the Underwriters, requires the filing of a Canadian Prospectus Amendment, the Company shall, to the satisfaction of the Underwriters, acting reasonably, promptly prepare and file such Canadian Prospectus Amendment with the appropriate securities regulatory authority in each of the Qualifying Provinces where such filing is required. (xiii) When the Company is required to prepare or prepares any Canadian Prospectus Amendment, the Company shall also prepare and deliver promptly to each of the Underwriters signed and certified copies of all Canadian Prospectus Amendments in the English and French language which have not been previously delivered. The Canadian Prospectus Amendments shall be in form and substance satisfactory to the Underwriters acting reasonably. Concurrently with the delivery of any Canadian Prospectus Amendments, the Company shall deliver to each of the Underwriters, with respect to such Canadian Prospectus Amendments, documents similar to those -32- referred to in Sections 7(a)(xi)(C), (D) and (E). The Company shall promptly furnish the Underwriters, without charge, with commercial copies of the English and French language versions of such Canadian Prospectus Amendment, in such quantities and at such cities as the Representatives may from time to time reasonably request. (xiv) To cause commercial copies of the Canadian Prospectus in the English and French languages to be delivered to the Underwriters without charge, in such numbers and in such cities as the Underwriters may reasonably request by oral instructions to the printer of the Prospectus given forthwith after the Underwriters have been advised that the Company has complied with the Canadian Securities Laws with respect to the filing thereof. Such delivery shall be effected as soon as possible and, in any event, on or before a date one Business Day after compliance with the Canadian Securities Laws with respect to the filing thereof. (b) The Company agrees to pay, or reimburse if paid by the Representatives, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the performance of the obligations of the Company under this Agreement including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus if required during the one year period after the date hereof, and the printing, filing and distribution of this Agreement; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 7(a)(vi), including the reasonable fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda (of not more than U.S.$5,000); (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the NASD in connection with its review of the terms of the public offering and reasonable fees and disbursements of counsel for the Underwriters in connection with such review; (vi) inclusion of the Shares for quotation on the Nasdaq National Market; (vii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company and the Selling Shareholders to the Underwriters; and (viii) all costs and expenses incident to listing the Shares on the Nasdaq National Market and The Toronto Stock Exchange. Subject to the provisions of Section 10, the Underwriters agree to pay, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the -33- performance of the obligations of the Underwriters under this Agreement not payable by the Company pursuant to the preceding sentence, including, without limitation, the fees and disbursements of counsel for the Underwriters. 8. Indemnification. ---------------- (a) The Company, and each Selling Shareholder agrees, jointly and severally, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or who is an affiliate of a Representative against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act, Canadian Securities Laws or other federal, provincial or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto required within one year from the date hereof, or in any Blue Sky application or other information or other documents executed by the Company filed in any state or other jurisdiction to qualify any or all of the Shares under the securities laws thereof (any such application, document or information being hereinafter referred to as a "Blue Sky Application") or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement thereto, or in any Blue Sky Application in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein; provided, further, that with respect to any such untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this Section 8(a) shall not inure to the benefit of the Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased the Shares concerned if any such loss, claim, damage or liability of such Underwriter is a result of the fact that both (A) a copy of the Prospectus was not sent or given to such person at or prior to written confirmation of the sale of such Share to such person and (B) the untrue statement or omission in the preliminary prospectus was corrected in the Prospectus. Notwithstanding the foregoing, -34- liability of any Selling Shareholder pursuant to the provisions of this Section 8(a) shall be limited to an amount equal to the aggregate net proceeds received by such Selling Shareholder from the sale of the Option Shares sold by such Selling Shareholders hereunder. This indemnity agreement will be in addition to any liability which the Company and Selling Shareholders may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholders and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company, and the Selling Shareholders to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any preliminary prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, contained in the sections with respect to "Underwriting" in the U.S. Prospectus and in the Canadian Prospectus (other than the information therein with respect to the Company's $13.1 million credit facility) and information about orders and delivery on the inside covers thereof; provided however, that the obligation of each Underwriter to indemnify the Company or the Selling Shareholders (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company or the Selling Shareholder from such Underwriter. (c) Any party that proposes to assert the right to be indemnified under this Section 8 will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 8, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 8(a) or 8(b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section 8. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying parties shall not be liable to such indemnified party for any legal or other expenses, -35- except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or in addition to those available to the indemnifying party (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. In no event shall the indemnifying parties be responsible for fees and expenses of more than one firm for all indemnified parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent, which consent shall not be unreasonably withheld or delayed. 9. Contribution. In order to provide for just and equitable ------------ contribution in circumstances in which the indemnification provided for in Section 8(a) or 8(b) is due in accordance with its terms but for any reason is held to be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b), then each indemnifying party shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by any person entitled hereunder to contribution from any person who may be liable for contribution) to which the indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 8 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Shareholders and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts but before deducting expenses) received by the Company or the Selling Shareholders, as set forth in the table on the cover page of the Prospectus, bear to (y) the underwriting discounts received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Shareholders or the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company and the Selling Shareholders or the Underwriters and the parties' relative intent, knowledge, access -36- to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 9, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder; (ii) the Company shall be liable and responsible for any amount in excess of such underwriting discount; and (iii) in no case shall any Selling Shareholders be liable and responsible for any amount in excess of the aggregate net proceeds of the sale of Shares received by such Selling Shareholders; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 9. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section 9, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section 9. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriter's obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. 10. Termination. This Agreement may be terminated with respect to ----------- the Shares to be purchased on a Closing Date by the Representatives by notifying the Company and the Selling Shareholders at any time: (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States or Canada is such as to make it, in the judgment of the Representatives, inadvisable to proceed with the offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets -37- in the United States or Canada is such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission, the Ontario Securities Commission or The Toronto Stock Exchange, or trading generally on the New York Stock Exchange, Inc., the American Stock Exchange, Inc., the Nasdaq National Market or The Toronto Stock Exchange has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; (v) if a banking moratorium has been declared by any state or federal authority; or (vi) if, in the judgment of the Representatives, there has occurred since the date hereof a Material Adverse Effect, or (b) at or before any Closing Date, that any of the conditions specified in Section 6 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, neither the Company nor the Selling Shareholders shall be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representatives or the Underwriters because of any failure, refusal or inability on the part of the Company or the Selling Shareholders to comply with the terms or to fulfill any of the conditions of this Agreement, the Company or, if applicable, the defaulting Selling Shareholders will reimburse the Underwriters for all reasonable out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company, the Selling Shareholders or to the other Underwriters for damages occasioned by its failure or refusal. 11. Substitution of Underwriters. If one or more of the ---------------------------- Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 10) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date, (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting -38- Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 11 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to one additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section 11 within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company or the Selling Shareholders and without liability on the part of the Company, except in both cases as provided in Sections 7(b), 8, 9 and 10. The provisions of this Section 11 shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 12. Miscellaneous. The respective agreements, representations, ------------- warranties, indemnities and other statements of the Company or its officers, of the Selling Shareholders and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or the Selling Shareholders or any of the officers, directors or controlling persons referred to in Sections 8 and 9 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 7(b), 8, 9 and 10 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters, the Company and the Selling Shareholders and their respective successors and assigns, and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. -39- The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered or by telephone or telegraph if subsequently confirmed in writing, (a) if to the Representatives, c/o CIBC World Markets Corp., One World Financial Center, New York, New York; 10281 Attention: Ido Stern, with a copy to Torys, 237 Park Avenue, New York, New York; 10017, Attention: Robert A. Ouimette, Esq. and (b) if to the Company, to its agent for service as such agent's address appears on the cover page of the Registration Statement with a copy to Milbank Tweed Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, New York, 10005, Attention: Mark L. Weissler, Esq. and to LaBarge Weinstein, Xerox Tower, 333 Preston Street, 11th Floor, Ottawa, Ontario, K1S 5N4 Attention: Deborah L. Weinstein and (c) if to the Selling Shareholders to GSI Lumonics Inc., 105 Schneider Road, Kanata, Ontario, K2K 1Y3, Attention: Charles J. Gardner with a copy to Milbank Tweed Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, New York, 10005, Attention: Mark L. Weissler, Esq. and to LaBarge Weinstein, Xerox Tower, 333 Preston Street, 11th Floor, Ottawa, Ontario, K1S 5N4 Attention: Deborah L. Weinstein. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -40- Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, GSI LUMONICS INC. By: -------------------------- Name: Title: SELLING SHAREHOLDERS By: -------------------------- Title: Attorney-in-Fact Confirmed: CIBC WORLD MARKETS CORP., Acting severally on behalf of itself and as representative of the several Underwriters named in Schedule I annexed hereto. By: CIBC WORLD MARKETS CORP. By: -------------------------- Name: Title: -41- SCHEDULE I Name to be Purchased from the Company - --------------------------------- ------------------------------------------ CIBC World Markets Corp. . Chase Securities Inc. . Needham & Company, Inc. . Nesbitt Burns Inc. . Banc of America Securities LLC . Deutsche Bank Securities Inc. . ING Barings LLC . Prudential Securities . Incorporated Adams, Harkness & Hill, Inc. . Dain Ramscher Wessels . First Albany Corporation . McDonald Investments Inc., a . KeyCorp Company Parker/Hunter Incorporated . Pennsylvania Merchant Group . Preferred Capital Markets, Inc. . Ragen Mackenzie Incorporated . --- Total . === SCHEDULE II SELLING SHAREHOLDERS Name Number of Firm Shares to be Sold - ----------------------------- -------------------------------- Patrick Austin 34,500 Desmond Bradley 40,000 Charles Gardner 2,500 John George 5,000 Michael Kampfe 59,769 Kurt Pelsue 40,000 Charles Winston 121,619 ------- Total 303,388 ======= SCHEDULE III MATERIAL SUBSIDIARIES GSI Lumonics Corporation (formerly Lumonics Corp.) (US) General Scanning Inc. (US) GSI Lumonics GmbH (formerly Lumonics GmbH) (Germany) GSI Lumonics Limited (formerly Lumonics Limited) (UK) GSI Lumonics Japan (formerly General Scanning Japan KK) EXHIBIT A GSI Lumonics Inc. PRICE DETERMINATION AGREEMENT ----------------------------- ., 2000 CIBC World Markets Corp. Chase Securities Inc. Needham & Company, Inc. c/o CIBC World Markets Corp. One World Financial Center New York, New York 10281 On behalf of the Several Underwriters named on Schedule I attached hereto Ladies and Gentlemen: Reference is made to the Underwriting Agreement, dated April 11, 2000 (the "Underwriting Agreement"), among GSI Lumonics Inc., a New Brunswick corporation (the "Company"), the Selling Shareholders named therein and the several Underwriters named in Schedule I thereto and hereto (the "Underwriters"), for whom you are acting as Representatives (the "Representatives"). The Underwriting Agreement provides for the purchase by the Underwriters from the Company, subject to the terms and conditions set forth therein, of an aggregate of 4,000,000 of the Company's common shares (the "Firm Shares") and for the Company and the Selling Shareholders to grant to the Underwriters an option to purchase up to an aggregate of 600,000 additional Common Shares (the "Option Shares") from it and the Selling Shareholders as contemplated in the Underwriting Agreement for the purposes of covering over-allotments in connection with the sale of the Firm Shares. This Agreement is the Price Determination Agreement referred to in the Underwriting Agreement. Pursuant to second paragraph of the Underwriting Agreement, the undersigned agree with the Representatives as follows: The initial public offering price per share for the Firm Shares shall be U.S.$.. The purchase price per share for the Firm Shares to be paid by the several Underwriters to the Company on the Closing Date shall be U.S.$.; and the underwriting discounts and commissions per share for the Firm Shares to be paid by the Company to the several Underwriters on the Closing Date shall be U.S.$.. Any Option Shares shall be sold for the same price per share and with the same underwriting discounts and commissions per share as apply to the Firm Shares. The price, commission and net proceeds for the Firm Shares to be sold in Canada will be calculated in Canadian dollars at the approximate equivalent of the U.S. dollar amount set out above, based on the prevailing U.S. dollar exchange rates as of the date of pricing of the Offering. The Company and the Selling Shareholders represent and warrant to each of the Underwriters, and the Selling Shareholders represent and warrant to the Company, that their representations and warranties set forth in Section 4 and Section 5 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by the Underwriting Agreement, attached as Schedule I is a completed list of the several Underwriters, which shall be a part of this Agreement and the Underwriting Agreement. This agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflict of laws principles of such state. If the foregoing is in accordance with your understanding of the agreement among the Underwriters, the Company and the Selling Shareholders, please sign and return to the Company a counterpart hereof; whereupon this instrument along with all counterparts and together with the Underwriting Agreement shall be a binding agreement among the Underwriters, the Company and the Selling Shareholders in accordance with its terms and the terms of the Underwriting Agreement. Very truly yours, GSI LUMONICS INC. By: ----------------------- Name: Title: SELLING SHAREHOLDERS By: ----------------------- Title: Attorney-in-Fact Confirmed: CIBC WORLD MARKETS CORP., Acting severally on behalf of itself and as representative of the several Underwriters named in Schedule I annexed hereto. By: CIBC WORLD MARKETS CORP. By: ----------------------- Name: Title: EX-5 3 OPINION OF STEWART MCKELVEY STIRLING SCALES EXHIBIT 5 10th Floor, Brunswick House Correspondence: Telephone: 506.632.1970 44 Chipman Hill P.O. Box 7289 Fax: 506.652.1989 Saint John, NB Postal Station A saint-john@smss.com Canada E2L 2A9 Saint John, NB www.smss.com Canada E2L 4S6 April 10, 2000 GSI Lumonics Inc. 105 Schneider Road Kanata, Ontario Canada K2K 1Y3 Ladies and Gentlemen: We have acted as New Brunswick counsel to GSI Lumonics Inc. (the "Company") in connection with the registration of up to 4,600,000 common shares (the "Shares") of the Company, inclusive of an over-allotment option, under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-3,as amended (the "Registration Statement"), filed with the United States Securities and Exchange Commission pursuant to an Underwriting Agreement dated on or about April 11, 2000 (the "Underwriting Agreement"). In rendering the opinion below, we have examined originals or copies certified or otherwise identified to our satisfaction of all such records of the Company, agreements and other instruments, certificates of public officials, certificates of officers and representatives of the Company and such other documents as we have deemed necessary as a basis for the opinion expressed below. In our examination we have assumed and have not verified that the signatures on all documents which we have examined are genuine, the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. Based on the foregoing, and having regard to legal considerations we deem relevant, we are of the opinion that when the Shares have been issued and sold by the Company as contemplated in the Registration Statement and the Underwriting Agreement referred to therein against payment of the purchase price contemplated therein, they will constitute legally issued, fully paid and nonassessable shares of the Company's common stock. The opinions set forth herein are limited to the laws of the Province of New Brunswick and we express no opinion as to the laws of any other jurisdiction. We consent to your filing of this opinion as an exhibit to the Registration Statement and to the reference to our name in the section of the Registration Statement entitled "Legal Matters". Yours truly, STEWART McKELVEY STIRLING SCALES EX-8 4 OPINION OF MILBANK, TWEED, HADLEY & MCCLOY LLP Exhibit 8 Milbank, Tweed, Hadley & McCloy LLP 1 Chase Manhattan Plaza New York, N.Y. 10005-1413 April 7, 2000 GSI Lumonics Inc. 105 Schneider Road Kanata, Ontario Canada K2K 1Y3 Ladies and Gentlemen: You have requested our opinion regarding certain United States tax considerations in connection with the offering of common shares, at no par value per share, of GSI Lumonics Inc., a company incorporated under the laws of New Brunswick, pursuant to a registration statement (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), on Form S-3. In our opinion, the discussion in the prospectus forming part of the Registration Statement under the heading "Tax Considerations - United States Federal Income Tax Considerations" to the extent it states matters of law or legal conclusions and subject to the qualifications and limitations contained therein, describes the principal United States federal income tax consequences that are likely to be material to a beneficial owner of the common shares, and are incorporated and adopted herein as our opinion. We express no opinion in respect of those matters governed by or construed in accordance with the law of any jurisdiction other than the federal laws of the United States of America. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and the reference to the name of our firm therein, without thereby admitting that we are "experts" under the Act or the rules and regulations of the Securities and Exchange Commission thereunder for the purposes of any part of the Registration Statement. Very truly yours, Milbank, Tweed, Hadley & McCloy LLP -----END PRIVACY-ENHANCED MESSAGE-----