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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 28, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-71449
----------------
GSI Lumonics Inc.
(Exact name of registrant as specified in its charter)
New Brunswick, Canada 98-0110412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39 Auriga Drive,
Nepean, Ontario, Canada K2E 7Y8
(Address of principal executive offices) (Zip Code)
(613) 224-4868
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [_]
As at August 9, 2002, there were 40,699,519 shares of the Common Stock of GSI
Lumonics Inc., no par value, issued and outstanding.
GSI LUMONICS INC.
TABLE OF CONTENTS
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION ........................................................ 3
ITEM 1. FINANCIAL STATEMENTS ....................................................... 3
CONSOLIDATED BALANCE SHEETS (unaudited) .................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) .......................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) .......................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) ............................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................................... 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ............................................................... 27
PART II - OTHER INFORMATION ........................................................... 28
ITEM 1. LEGAL PROCEEDINGS ....................................................... 28
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS .................... 28
ITEM 5. OTHER INFORMATION ....................................................... 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................ 29
SIGNATURES ............................................................................ 30
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(U.S. GAAP and in thousands of U.S. dollars, except share amounts)
June 28, December 31,
2002 2001
--------- ------------
ASSETS
------
Current
Cash and cash equivalents ...................................................... $ 95,487 $102,959
Short-term investments ......................................................... 44,088 43,541
Accounts receivable, less allowance of $3,286 (December 31, 2001 - $3,034) ..... 32,341 39,919
Income taxes receivable ........................................................ 4,342 9,224
Inventories .................................................................... 57,723 57,794
Deferred tax assets ............................................................ 14,089 15,097
Other current assets ........................................................... 5,085 8,528
--------- -----------
Total current assets ....................................................... 253,155 277,062
Property, plant and equipment, net of accumulated depreciation of $21,373
(December 31, 2001 - $20,575) .................................................. 29,445 32,482
Deferred tax assets ............................................................... 6,191 6,537
Other assets ...................................................................... 3,179 1,539
Other investment (note 9) ......................................................... 18,924 -
Intangible assets, net of amortization of $13,635
(December 31, 2001 - $11,857) .................................................. 15,996 19,067
--------- -----------
$326,890 $336,687
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current
Bank indebtedness ............................................................... $ 9,735 $ 6,171
Accounts payable ................................................................ 13,298 10,839
Accrued compensation and benefits ............................................... 8,331 7,515
Other accrued expenses .......................................................... 23,377 25,096
Current portion of long-term debt ............................................... 2,654 2,654
--------- -----------
Total current liabilities ................................................... 57,395 52,275
Deferred compensation .............................................................. 2,080 2,082
--------- -----------
Total liabilities ........................................................... 59,475 54,357
Commitments and contingencies (note 9)
Stockholders' equity
Common shares, no par value; Authorized shares: unlimited; Issued and
outstanding: 40,686,383 (December 31, 2001 - 40,556,130) ..................... 304,224 303,504
Additional paid-in capital ...................................................... 2,592 2,592
Deficit ......................................................................... (31,278) (13,546)
Accumulated other comprehensive loss ............................................ (8,123) (10,220)
--------- -----------
Total stockholders' equity .................................................. 267,415 282,330
--------- -----------
$326,890 $336,687
========= ===========
The accompanying notes are an integral part of these financial statements
3
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(U.S. GAAP and in thousands of U.S. dollars, except per share amounts)
Three months ended Six months ended
-------------------------- -------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
--------- --------- --------- ---------
Sales ................................................. $ 39,664 $76,542 $ 76,552 $164,249
Cost of goods sold .................................... 26,955 45,625 51,570 99,199
--------- --------- --------- --------
Gross profit .......................................... 12,709 30,917 24,982 65,050
Operating expenses:
Research and development ......................... 5,044 6,844 10,874 13,818
Selling, service and administrative .............. 15,631 19,252 29,160 39,885
Amortization of purchased intangibles ............ 1,279 1,331 2,557 2,664
Restructuring and other .......................... 1,407 - 4,152 (1,400)
--------- --------- --------- --------
Income (loss) from operations ......................... (10,652) 3,490 (21,761) 10,083
Other ............................................ (203) - (203) -
Interest income .................................. 554 1,913 1,199 3,171
Interest expense ................................. (213) (439) (353) (548)
Foreign exchange transaction gains (losses) ...... (1,268) 463 (884) 247
--------- --------- --------- --------
Income (loss) before income taxes ..................... (11,782) 5,427 (22,002) 12,953
Income tax provision (benefit) ........................ (670) 1,842 (4,270) 4,589
--------- --------- --------- --------
Net income (loss) ..................................... $(11,112) $ 3,585 $(17,732) $ 8,364
======== ========= ======== =======
Net income (loss) per common share:
Basic ......................................... $ (0.27) $ 0.09 $ (0.44) $ 0.21
Diluted ....................................... $ (0.27) $ 0.09 $ (0.44) $ 0.20
Weighted average common shares outstanding (000's) .... 40,638 40,288 40,615 40,251
Weighted average common shares outstanding and dilutive
potential common shares (000's) .................. 40,638 40,946 40,615 40,952
The accompanying notes are an integral part of these financial statements
4
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(U.S. GAAP and in thousands of U.S. dollars)
Three months ended Six months ended
-------------------------- -------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
-------- --------- -------- ---------
Cash flows from operating activities:
Net income (loss) ....................................... $(11,112) $ 3,585 $(17,732) $ 8,364
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Loss on disposal of assets ......................... - - 62 -
Stock-based compensation ........................... - - - 200
Reduction of long-lived assets ..................... 800 - 1,130 -
Depreciation and amortization ...................... 2,862 2,883 5,602 6,237
Deferred income taxes .............................. 2,483 3,955 2,292 3,027
Changes in current assets and liabilities:
Accounts receivable ................................ (729) 8,037 8,876 17,161
Inventories ........................................ (180) 567 1,445 (4,554)
Other current assets ............................... 133 (3,527) 558 (3,380)
Accounts payable, accrued expenses, and taxes
(receivable) payable ............................... 11,676 (18,272) 5,586 (50,018)
-------- -------- ------- --------
Cash provided by (used in) operating activities ......... 5,933 (2,772) 7,819 (22,963)
-------- -------- ------- --------
Cash flows from investing activities:
Sale of assets ..................................... - 6,000 - 6,000
Additions to property, plant and equipment ......... (1,365) (1,394) (1,987) (5,027)
Maturity of short-term investments ................. 19,806 28,134 58,874 48,154
Purchase of short-term investments ................. (26,482) (32,727) (78,345) (60,860)
Decrease (increase) in other assets ................ 477 (466) 2,075 (2,242)
-------- -------- ------- --------
Cash used in investing activities ....................... (7,564) (453) (19,383) (13,975)
-------- -------- ------- --------
Cash flows from financing activities:
Proceeds (payments) of bank indebtedness ........... (151) (174) 2,817 (912)
Issue of share capital ............................. 499 276 720 764
-------- -------- ------- --------
Cash provided by (used in) financing activities ......... 348 102 3,537 (148)
-------- -------- ------- --------
Effect of exchange rates on cash and cash equivalents ... 555 271 555 397
-------- -------- ------- --------
Decrease in cash and cash equivalents ................... (728) (2,852) (7,472) (36,689)
Cash and cash equivalents, beginning of period .......... 96,215 80,021 102,959 113,858
-------- -------- ------- --------
Cash and cash equivalents, end of period ................ $ 95,487 $ 77,169 $ 95,487 $ 77,169
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
5
GSI LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of June 28, 2002
(U.S. GAAP and tabular amounts in thousands of U.S. dollars, except
share amounts)
1. Basis of Presentation
These unaudited interim consolidated financial statements have been prepared by
the Company in United States (U.S.) dollars and in accordance with accounting
principles generally accepted in the U.S. for interim financial statements and
with the instructions to Form 10-Q and Regulation S-X pertaining to interim
financial statements. Accordingly, these interim consolidated financial
statements do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. The
consolidated financial statements reflect all adjustments and accruals,
consisting only of adjustments and accruals of a normal recurring nature, which
management considers necessary for a fair presentation of financial position and
results of operations for the periods presented. The consolidated financial
statements include the accounts of GSI Lumonics Inc. and its wholly-owned
subsidiaries (the "Company"). Intercompany transactions and balances have been
eliminated. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2001. The results for
interim periods are not necessarily indicative of results to be expected for the
year or any future periods.
Comparative amounts
Certain comparative amounts have been reclassified to conform to the
presentation of the financial statements for the quarter ended June 28, 2002.
2. Inventories
Inventories consist of the following:
June 28, December 31,
2002 2001
-------- ------------
Raw materials ...................... $28,116 $29,779
Work-in-process .................... 11,583 8,028
Finished goods ..................... 10,443 12,918
Demo inventory ..................... 7,581 7,069
------- -------
Total inventories ............. $57,723 $57,794
======= =======
3. New Accounting Pronouncements
Business Combinations
On January 1, 2002, the Company implemented, on a prospective basis, Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. As a
result, all business combinations initiated in the future will be accounted for
under the purchase method. Also, SFAS 141 does not permit the Company to
recognize an assembled workforce asset. Therefore, the Company reallocated its
assembled workforce asset with a cost of $2.8 million and a net carrying value
of $2.0 million at January 1, 2002 to other remaining long-lived assets arising
on the merger with General Scanning, Inc. in 1999, including $1.4 million to
developed technology, $0.5 million to property, plant and equipment and $0.1
million to trademarks and trade names. The adoption of SFAS 141 did not have any
other material impact on the Company's financial position or cash flows. It will
accelerate amortization by $0.6 million per year for the next two years and
reduce amortization thereafter.
Intangible Assets
On January 1, 2002, the Company implemented, on a prospective basis, Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. As a result, intangible assets with finite useful lives must
now be amortized and goodwill and intangible assets with indefinite lives will
not be amortized, but will
6
rather be tested at least annually for impairment. The adoption of SFAS 142 did
not have a material impact on the Company's financial position, as it does not
possess goodwill or intangible assets with indefinite lives. It also did not
have a material impact on the Company's results of operations or cash flows.
Intangible assets consist of the following:
June 28, 2002 December 31, 2001
-------------------------- -------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------
Patents and acquired technology ......... $ 10,397 $ (1,942) $ 10,384 $ (1,429)
Developed technology .................... 18,210 (11,379) 16,790 (9,380)
Assembled workforce ..................... - - 2,814 (786)
Trademarks and trade names .............. 1,024 (314) 936 (262)
-------- --------- -------- ---------
Total cost ......................... 29,631 $ (13,635) 30,924 $ (11,857)
========= =========
Accumulated amortization ................ (13,635) (11,857)
-------- --------
Net intangible assets .............. $ 15,996 $ 19,067
======== ========
Impairment or Disposal of Long-Lived Assets
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS 144 applies to all long-lived assets, including
discontinued operations, and develops one accounting model for long-lived assets
to be disposed of by sale. SFAS 144 supersedes SFAS 121, and the accounting and
reporting provisions of APB No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions ("APB 30"), for the
disposal of a segment of a business. The adoption of SFAS 144 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
4. Bank Indebtedness
During the quarter ended June 28, 2002, the Company negotiated new lines of
credit with Fleet National Bank ("Fleet") and Canadian Imperial Bank of Commerce
("CIBC") and allowed an unused portion of an existing line of credit with Bank
One to expire, reducing the total amount of available credit from $32.4 million
at December 31, 2001 to $24.7 million at June 28, 2002. The Company's agreement
with Fleet provides for an $8 million line of credit and its agreement with CIBC
provides for a $4 million line of credit. The previous $19 million line of
credit with CIBC expired on June 28, 2002 and the new CIBC credit facility
eliminated the Company's requirement to meet certain financial covenants which
were required under the previous credit facility. Marketable securities totaling
$14 million have been pledged as collateral for the Fleet and CIBC credit
facilities under security agreements. The line of credit with Fleet expires on
June 28, 2003 and the new line of credit with CIBC is subject to review by CIBC
on May 31, 2003 and if extended, may be cancelled at any time by the Company on
appropriate advance notice at no cost, excluding breakage fees relating to the
used and outstanding amounts under fixed loan instruments. In addition to the
customary representations, warranties and reporting covenants, the borrowings
under the Fleet credit facility require the Company to maintain a quarterly
minimum tangible net worth of $200 million. A portion of the Company's existing
credit facility with Bank One expired and was not renewed. The terms of the
remaining credit facility with Bank One provide for an $11.7 million line of
credit. Borrowings under the remaining Bank One credit facility are limited to
the sum of eligible accounts receivable under 90 days. North American
inventories and accounts receivable and inventories have been pledged as
collateral for the Bank One credit facility. In addition to the customary
representations, warranties and financial reporting requirements, the borrowings
under the Bank One credit facility require the Company to seek consent of the
bank for the redemption, repurchase or acquisition of Company shares of common
stock, the declaration and payment of certain dividends, and the ability to
incur borrowed money debt in excess of $10 million. The Company is currently
re-negotiating the terms of its remaining line of credit with Bank One. In
addition to the credit facilities with Fleet, CIBC and Bank One, the Company has
outstanding letters of credit totaling $1.0 million with National Westminster
Bank, ABN Amro Bank, Bank One and Fleet.
7
At June 28, 2002, the Company has approximately $24.7 million denominated in
Canadian dollars, US dollars, UK Pound sterling, and Japanese yen that are
available for general purposes, under the credit facilities and letters of
credit discussed above. Of the available $24.7 million, $13.1 million was in
use, consisting of $9.7 million of borrowings in Japan and Rugby, U.K. under the
CIBC and Bank One credit facilities and $3.4 million of bank guarantees and
outstanding letters of credit under the CIBC credit facility and the various
letter of credit arrangements discussed above. The Bank One credit facility is a
demand facility with interest based on the bank's Floating Rate and/or
Eurodollar Rate. The CIBC credit facility is currently a demand facility with
interest based on the prime rate, which will be converted to a revolving credit
facility no later than August 30, 2002. At June 28, 2002, the aggregate unused
portion of credit available under the credit facilities amounts to $11.6
million.
5. Stockholders' Equity
Capital stock
The authorized capital of the Company consists of an unlimited number of common
shares without nominal or par value. During the six months ended June 28, 2002,
130,253 shares of common stock were issued pursuant to exercised share options
and the employee share purchase plan for proceeds of $0.7 million.
Accumulated other comprehensive loss
At June 28, 2002, accumulated other comprehensive loss was comprised of an
unrealized loss of $0.3 million (net of tax) on cash flow hedging instruments
and accumulated foreign currency translation adjustments of ($7.8 million). At
December 31, 2001, accumulated other comprehensive loss was comprised of an
unrealized gain on cash flow hedging instruments of $0.8 million (net of tax of
$0.6 million) and accumulated foreign currency translation adjustments of ($11.0
million).
The components of comprehensive income (loss) are as follows:
Three months ended Six months ended
------------------------ ------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) .................................. $(11,112) $3,585 $(17,732) $8,364
Other comprehensive income (loss)
Cumulative effect of change in accounting
policy for cash flow hedges ................... - - - (164)
Realized (gain) loss on cash flow hedging
instruments, net of tax of $435 (note 7) ...... (606) - (793) 164
Unrealized gain (loss) on cash flow hedging
instruments, net of tax of $139 (June 29,
2001 - $584 (note 7) .......................... (266) 806 (266) 806
Foreign currency translation adjustments ...... 3,338 290 3,156 (2,365)
Change in unrealized loss on equity
securities, net of tax ........................ - 2,566 - 1,523
-------- ------ -------- ------
Comprehensive income (loss) ........................ $(8,646) $7,247 $(15,635) $8,328
======== ====== ======== ======
Net income (loss) per common share
Basic net income (loss) per common share was computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period. For diluted net income (loss) per common share, the denominator also
includes dilutive outstanding stock options and warrants determined using the
treasury stock method. As a result of the net loss for the three months and six
months ended June 28, 2002, the effect of converting options and warrants was
anti-dilutive.
8
Common and common share equivalent disclosures are:
(in thousands) Three months ended Six months ended
---------------------- -----------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
-------- ------- -------- ------
Weighted average common shares outstanding ........... 40,638 40,288 40,615 40,251
Dilutive potential common shares ..................... - 658 - 701
------- ------- -------- ------
Diluted common shares ................................ 40,638 40,946 40,615 40,952
======= ======= ====== ======
At June 28, 2002, the Company had options and warrants outstanding entitling
holders to up to 4,044,917 and 51,186 common shares, respectively.
6. Related Party Transactions
The Company recorded sales revenue from Sumitomo Heavy Industries, Ltd., a
significant shareholder, of $0.5 million in the six months ended June 28, 2002
and $2.8 million in the six months ended June 29, 2001 at amounts and terms
approximately equivalent to third-party transactions. Transactions with Sumitomo
are at normal trade terms. Receivables from Sumitomo of $0.4 million and $0.6
million as at June 28, 2002 and December 31, 2001, respectively, are included in
accounts receivable on the balance sheet.
In January of 2001, the Company made an investment of $2.0 million in a
technology fund, managed by OpNet Partners, L.P. During the six months ended
June 28, 2002, the Company received approximately $1.4 million of the investment
and recorded a write-down to fair market value of $0.2 million. The remaining
investment made by the Company continues to be maintained in OpNet Partners
private investment portfolio. Richard B. Black, a member of the Company's Board
of Directors, is a General Partner for OpNet Partners, L.P. This investment is
reflected in other assets on the balance sheet.
The Company has an Agreement with V2Air LLC relating to the use of the V2 Air
LLC aircraft for Company purposes. The Company's President and Chief Executive
Officer, Charles D. Winston owns V2Air LLC. Pursuant to the terms of the
Agreement, the Company is required to reimburse V2Air LLC for certain expenses
associated with the use of the aircraft for Company business travel. During the
six months ended June 28, 2002, the Company reimbursed V2Air LLC approximately
$98 thousand for expenses associated with business use of the aircraft by the
Company's Chief Executive Officer under the terms of the Agreement.
On April 26, 2002 the Company entered into an agreement with Photoniko, Inc, a
private photonics company in which one of the Company's directors, Richard B.
Black is also a director and stock option holder. Under the agreement, the
Company provided a non-interest bearing unsecured loan of $75 thousand to
Photoniko, Inc. to fund designated business activities at Photoniko, Inc. in
exchange for an exclusive 90 day period to evaluate potential strategic
alliances. In accordance with the terms of the agreement and the promissory note
which was signed by Photoniko, Inc. on April 26, 2002, the loan is to be repaid
in full to the Company no later than August 28, 2002.
7. Financial Instruments
Cash equivalents and short-term investments
At June 28, 2002, the Company had $75.2 million invested in cash equivalents
denominated in U.S. dollars with maturity dates between July 1, 2002 and
September 12, 2002. At December 31, 2001, the Company had $79.8 million invested
in cash equivalents denominated in U.S. dollars with maturity dates between
January 7, 2002 and March 1, 2002. Cash equivalents, stated at amortized cost,
approximate fair value.
At June 28, 2002, the Company had $63.0 million invested in short-term and other
investments denominated in U.S. dollars with maturity dates between July 5, 2002
and April 25, 2003. This $63.0 million includes $14 million pledged as security
in connection with the new credit facilities discussed in note 4 and $18.9
million pledged as security and classified as long-term in connection with the
operating leases discussed in note 9. At December 31, 2001, the Company had
$43.5 million invested in short-term investments denominated in U.S. dollars
with maturity
9
dates between January 24, 2002 and May 6, 2002. The carrying value of short-term
investments approximates fair value.
Derivative financial instruments
At June 28, 2002, the Company had eleven foreign exchange forward contracts to
purchase $17.8 million U.S. dollars with an aggregate fair value loss of $0.3
million after-tax recorded in accumulated other comprehensive income and
maturing at varying dates in 2002 and 2003. At December 31, 2001, the Company
had eight foreign exchange forward contracts to purchase $17.8 million U.S.
dollars and one foreign exchange option contract to purchase $6.5 million U.S.
dollars with an aggregate fair value gain of $0.8 million after-tax recorded in
accumulated other comprehensive income and maturing at varying dates in 2002.
8. Restructuring and other
Restructuring charges
2002
In connection with a restructuring plan to align the Company's manufacturing
costs and operating expenses with the prevailing economic environment, the
Company recorded a pre-tax restructuring charge of $2.7 million during the first
quarter of fiscal 2002. The Company consolidated its Electronics systems
business from its facility in Kanata, Ontario into the Company's existing
systems manufacturing facility in Wilmington, MA and transferred its laser
sources business from the Company's Kanata, Ontario facility to its existing
facility in Rugby, UK. In addition, the Company closed its Kanata, Ontario
facility and moved its principal office from Kanata, Ontario to its existing
Nepean, Ontario facility. Restructuring provisions relate to severance and
benefits of $2.2 million for the termination of approximately 90 employees, $0.3
million for the write-off of furniture, equipment and system software, and $0.2
million for plant closure and other related costs. During the second quarter of
fiscal 2002, the Company recorded additional restructuring charges of $1.4
million related to cancellation fees on contractual obligations of $0.3 million
and a write-down of land and building in Kanata, Ontario and Rugby, UK of $0.8
million, and also leased facility costs of $0.3 million at the Farmington Hills
and Oxnard locations. At June 28, 2002, the net book value of the Kanata,
Ontario facility is reclassified as held for sale and included in other
long-term assets.
Cumulative cash draw-downs of approximately $0.5 million and non-cash draw-down
of $1.1 million have been applied against the provision, resulting in a
remaining provision balance of $2.5 million as at June 28, 2002.
2001
During the fourth quarter of fiscal 2001, a charge of $3.4 million was recorded
to accrue employee severance of $0.9 million for approximately 35 employees at
our Farmington Hills, MI and Oxnard, CA locations, leased facilities costs of
$1.8 million associated with restructuring for excess capacity at five leased
locations in the United States, Canada, and Germany and write-down of leasehold
improvements and certain equipment of $0.7 million associated with the exiting
of leased facilities.
Cumulative cash draw-downs of approximately $1.5 million and a non-cash
draw-down of $0.7 million have been applied against the provision, resulting in
a remaining provision balance of $1.2 million as at June 28, 2002.
2000
During the fourth quarter of fiscal 2000, a charge of $12.5 million was taken to
accrue employee severance of $1.0 million for approximately 50 employees and
other exit costs of $3.8 million for the Company's United Kingdom operation and
worldwide distribution system related to high-power laser systems for certain
automotive applications; costs of $7.7 million associated with restructuring for
excess capacity at three leased facility locations in the United States and
Germany. The Company also recorded a write-down of land and building in the
United Kingdom of $2.0 million. Compensation expense of $0.6 million arising on
the acceleration of vesting of options upon the sale of businesses during the
year was also charged to restructuring. In addition, an inventory write-down to
net realizable value of $8.5 million was recorded in cost of goods sold related
to the high-power laser system product line.
10
Cumulative cash draw-downs of $5.8 million, reversal of $0.5 million for
restructuring costs that will not be incurred and a non-cash draw-down of $2.6
million have been applied against the provision, resulting in a remaining
provision balance of $6.2 million as at June 28, 2002.
The following table summarizes changes in the restructuring provision included
in other accrued expenses on the balance sheet.
Total Severance Facilities Other
(in millions) ----------- ------------ ------------ ------------
Provision at December 31, 2001 .......... $ 8.9 $ 0.9 $ 8.0 $ -
Cash draw-downs during Q1 2002 .......... (0.6) (0.2) (0.4) -
Charge during Q1 2002 ................... 2.7 2.2 0.3 0.2
Non-cash draw-down during Q1 2002 ....... (0.3) - (0.3) -
Charge during Q2 2002 ................... 1.4 - 1.1 0.3
Cash draw-downs during Q2 2002 .......... (1.4) (0.6) (0.8) -
Non-cash draw-down during Q2 2002 ....... (0.8) - (0.8) -
----------- ------------ ------------ ------------
Provision at June 28, 2002 .............. $ 9.9 $ 2.3 $ 7.1 $ 0.5
=========== ============ ============ ============
Other
During the first quarter of 2001, the Company adjusted an accrual related to
litigation with Electro Scientific Industries, Inc. and recorded a benefit of
$1.4 million.
9. Commitments and Contingencies
Operating Leases
The Company leases two facilities under operating lease agreements that expire
in 2003. At the end of the initial lease term, these leases require the Company
to renew the lease for a defined number of years at the fair market rental rate
or purchase the property at the then fair market value. The lessor may sell the
facilities to a third party but the leases provide for a residual value
guarantee of the first 85% of any loss the lessor may incur on its $19.1 million
investment in the building, which may become payable by the Company upon the
termination of the transaction, or the Company may exercise its option to
purchase the facilities for approximately $19 million. As of June 28, 2002,
residual value guarantees in connection with these leases totaled approximately
$16 million. Upon termination of the leases, the Company expects the fair market
value of the leased properties to reduce substantially the payment under the
residual value guarantees and, during the fourth quarter of fiscal 2000, the
Company took a charge of $6 million associated with restructuring for excess
capacity at the two leased facility locations, including the estimated residual
value guarantees. The lease agreement requires, among other things, the Company
to maintain specified quarterly financial ratios and conditions. On April 30,
2002, the Company entered into a Security Agreement with the Bank of Montreal
("BMO") pursuant to which the Company deposited with BMO and pledged
approximately $18.9 million as security in connection with the operating leases
discussed above in exchange for a written waiver from BMO and BMO Global
Capital Solutions for any Company defaults of or obligations to satisfy the
specified financial covenants relating to the operating lease agreements until
June 30, 2003. This item is reflected on the balance sheet as other investment.
Legal proceedings and disputes
Electro Scientific Industries, Inc. v. GSI Lumonics, Inc. et al. On March 16,
2000, Electro Scientific Industries, Inc. filed an action for patent
infringement in the United States District Court for the Central District of
California against the Company and Dynamic Details Inc., an unrelated party that
is one of the Company's customers. Electro Scientific alleged that the Company
offered to sell and import into the United States the GS-600 high speed laser
drilling system and that Dynamic Details possessed and used a GS-600 System. It
further alleged that Dynamic Details' use of the GS-600 laser system infringed
Electro Scientific's U.S. patent 5,847,960 and that the Company had actively
induced the infringement of, and contributorily infringed, the patent. Electro
Scientific sought an injunction, unspecified damages, trebling of those damages,
and attorney's fees. GSI Lumonics indemnified Dynamic
11
Details with respect to these allegations. On August 14, 2001, the United States
District Court for the Central District of California granted the Company's
motion for summary judgment of non-infringement and denied Electro Scientific's
motion for summary judgment of infringement. In the ruling, the Court concluded
that the GS-600 system did not literally infringe the asserted claims of the
alleged Electro Scientific patent, nor did it infringe under the doctrine of
equivalents. On September 7, 2001, Electro Scientific appealed the District
Court's decision on the summary judgment motions and oral arguments were heard
on May 7, 2002. The Company is currently awaiting a decision from the Court of
Appeals.
Carl Baasel Lasertecknik Gmbh & Co. KG and Rofin Baasel Inc. vs. GSI Lumonics
Corporation. On May 17, 2002, Carl Baasel Lasertechnik Gmbh and Co. KG ("CBL")
and Rofin Baasel Inc. ("RBI") filed an antitrust case in the United District
Court for the District of Massachusetts against the Company's U.S. subsidiary,
GSI Lumonics Corporation ("GSLI Corp") for violations of Sections 1 and 2 of the
Sherman Act and Section 7 of the Clayton Act as a result of GSLI Corp's
acquisition of U.S. Patent No. 4,522,656 (the "656 patent") and its enforcement
of the "656 patent" against CBL and RBI in a consolidated patent infringement
action against CBL and RBI currently pending in the United States District Court
for the Eastern District of Michigan. Prior to the filing of this complaint, CBL
filed, in the United States District Court for the Eastern District of Michigan,
a motion for leave to amend its answer in the pending "656 patent" infringement
case to assert antitrust violations by GSLI Corp; which motion was denied on
April 25, 2002 by that District Court. The immediate complaint, filed shortly
after the denial, alleges that GSLI Corp held monopoly power in the laser wafer
softmarking systems market prior to and since 1990, that GSLI Corp's purchase in
1990 of the "656 patent", its filing of the "656 patent" infringement claim in
the United States District Court for the Eastern District of Michigan against AB
Lasers Inc. (nka RBI.) and CBL and its alleged refusal to license the "656
patent" to CBL or any other competitor, decreased competition, maintained GSLI
Corp's market monopoly and unreasonably restrained trade in the relevant market.
CBL and RBI seek declaratory relief as to the violations they assert and
permanent injunctive relief enjoining GSLI Corp from initiating, maintaining or
threatening infringement litigation to enforce the "656 patent," together with
treble damages and costs. On June 11, 2002 CBL and RBI filed a motion for
partial summary judgment seeking declaratory relief as to the violations they
assert. On June 17,2002 GSLI Corp filed a motion to dismiss the case on the
grounds that the case is barred by denial of the same claims raised in the
pending "656 patent" infringement case and an emergency motion to stay the
briefing on CBL's and RBI's partial summary judgment motion pending a decision
on GSLI Corp's motion to dismiss. On July 25, 2002 oral arguments were heard on
the motion to dismiss and the parties are currently awaiting a decision on the
motion to dismiss. The Company believes that this lawsuit is without merit, that
there has been no antitrust violation and that the damages sought are excessive.
In the event CBL and RBI prevail and their claims are upheld as filed, this
would have a material adverse effect on the Company's financial position and
results of operations.
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 the Company. The
plaintiff in the proceedings has alleged that certain equipment used by these
manufacturers infringes patents claimed to be held by the plaintiff. While the
Company is not a defendant in any of the proceedings, several of the Company's
customers have notified the Company that, if the party successfully pursues
infringement claims against them, they may require the Company to indemnify them
to the extent that any of their losses can be attributed to systems sold to them
by the Company.
The Company is also a party in and subject to various legal proceedings and
claims that arise in the ordinary course of business. The Company does not
believe that the outcome of these claims will have a material adverse effect
upon the Company's financial conditions or results of operations but there can
be no assurance that any such claims, or any similar claims, would not have a
material adverse effect upon the Company's financial condition or results of
operations.
10. Income Taxes
During the three months ended June 28, 2002, the income tax benefit was reduced
by approximately $3.5 million as a result of increases in valuation allowances
related to the Company's geographic distribution of its operating loss
carry-forwards. This was primarily related to the closure of the Kanata, Ontario
facility described in note 8 and its effect on the Company's ability to generate
future profit in Canada.
12
11. Segment Information
General description
During the fourth quarter of fiscal 2001, the Company changed the way it manages
its business to reflect a growing focus on providing precision optics and laser
systems to its customers. 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. Segment information for the 2001 year has been restated
to conform to the current year's presentation.
The Executive Committee ("EC") is the chief operating decision maker in
assessing the performance of the segments and the allocation of resources to the
segments. The EC evaluates financial performance based on measures of profit or
loss from operations before income taxes excluding the impact of amortization of
purchased intangibles, restructuring and other, interest income, interest
expense, and foreign exchange transaction gains (losses). Certain
corporate-level operating expenses, including sales, marketing, finance, legal,
information technology, communications and administrative expenses, are not
allocated to operating segments. Intersegment sales are based on fair market
values. All intersegment profit, including any unrealized profit on ending
inventories, is eliminated on consolidation.
GSI Lumonics operations include two reportable operating segments: the Laser
Systems segment (Laser Systems); and the WavePrecision segment (WavePrecision).
Laser Systems designs, develops, manufactures and markets laser-based advanced
manufacturing systems and components as enabling tools for a wide range of
high-technology applications, including computer-chip memory repair processing,
wafer and die marking, inspection systems for solder paste and component
placement on surface-mount printed circuits, via drilling of printed circuit
boards, hybrid circuit trim, circuit trim on silicon, and laser printing for
medical applications. Major markets for its products include the semiconductor
and electronics industries. WavePrecision provides precision optics for Dense
Wave Division Multiplexing networks. Major markets for its products include the
telecommunications industry.
Segments
Information on reportable segments is as follows:
Three months ended Six months ended
------------------------- ------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
Sales -------- -------- -------- --------
Laser Systems ........................................ $ 37,624 $ 71,795 $ 72,072 $153,001
WavePrecision ........................................ 2,177 5,128 4,732 12,089
Intersegment sales elimination ....................... (137) (381) (252) (841)
-------- -------- ------- --------
Total ................................................ $ 39,664 $ 76,542 $ 76,552 $164,249
======== ======== ======== ========
Segment income (loss) from operations
Laser Systems ........................................ $ (852) $ 8,297 $ (2,490) $ 16,200
WavePrecision ........................................ (859) (127) (1,972) 1,671
-------- -------- ------- --------
Total by segment ..................................... (1,711) 8,170 (4,462) 17,871
Unallocated amounts:
Corporate expenses .............................. 6,255 3,349 10,590 6,524
Amortization of purchased intangibles ........... 1,279 1,331 2,557 2,664
Restructuring and other ......................... 1,407 - 4,152 (1,400)
-------- -------- ------- --------
Income (loss) from operations ........................ $(10,652) $ 3,490 $(21,761) $ 10,083
======== ======== ======== ========
13
As at
---------------------------
June 28, December
2002 31, 2001
Assets --------- ---------
Laser Systems .................................. $ 108,553 $ 115,387
WavePrecision .................................. 10,517 11,506
Corporate ...................................... 207,820 209,794
--------- ---------
Total assets ................................... $ 326,890 $ 336,687
========= =========
Total assets for corporate include treasury controlled, income tax, other and
intangible assets.
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.
(in millions) Three months ended
----------------------------------------------------------
June 28, 2002 June 29, 2001
--------------------------- ------------------------------
Revenues from external customers:
United States ................ $22.8 57% $33.6 44%
Canada ....................... 0.3 1% 3.4 4%
Europe ....................... 6.2 16% 16.1 21%
Japan ........................ 3.9 9% 14.4 19%
Asia-Pacific, other .......... 6.2 16% 9.0 12%
Latin and South America ...... 0.3 1% - -
----- ---- ----- ---
Total ................... $39.7 100% $76.5 100%
===== =====
Six months ended
----------------------------------------------------------
June 28, 2002 June 29, 2001
--------------------------- ------------------------------
United States $46.9 61% $70.0 43%
Canada 1.1 2% 10.2 6%
Europe 12.5 16% 36.9 23%
Japan 6.4 8% 28.4 17%
Asia-Pacific, other 9.3 12% 18.1 11%
Latin and South America 0.4 1% 0.6 -
----- --- ------ ---
Total $76.6 100% $164.2 100%
===== ======
As at
-------------------------------------
June 28, 2002 December 31, 2001
------------- -----------------
Long-lived assets:
United States ................ $27.1 $29.7
Canada ....................... 5.9 9.4
Europe ....................... 11.5 11.5
Japan ........................ 0.7 0.7
Asia-Pacific, other .......... 0.2 0.2
----- -----
Total ................... $45.4 $51.5
===== =====
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in United States dollars, and in accordance with U.S. GAAP)
You should read this discussion together with the consolidated financial
statements and other financial information included in this report. This report
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in the forward-looking
statements. Please see the special note set forth below under "Forward-Looking
Statements."
Overview
We design, develop, manufacture and market laser-based advanced manufacturing
systems and components as enabling tools for a wide range of high-technology
applications. Laser-based systems are designed, manufactured and sold for
applications in the semiconductor and electronics industries such as:
computer-chip memory yield enhancement, silicon wafer marking, circuit trim on
silicon wafers, inspection of solder paste and component placement on
surface-mount ("SMT") printed circuits, via drilling of printed circuit boards,
and hybrid circuit trim. Component level technology products are provided to
OEMs in a variety of markets and applications. Major markets for our products
include the semiconductor, electronics, and telecommunications industries. Other
significant markets include industrial, medical and aerospace. Our systems sales
depend on our customers' capital expenditures that are affected by business
cycles in the markets they serve. Component sales depend on the design cycle for
new products developed by our OEM customers.
Operational Highlights for the Three Months Ended June 28, 2002 and Outlook
Sales for the quarter increased to $39.7 million from $36.9 million in the first
quarter of 2002. However, sales dropped significantly from $76.5 million in the
second quarter of 2001.
Net loss for the quarter was $11.1 million and net loss per share was $0.27
compared to net income of $3.6 million and $0.09 diluted net income per share in
the second quarter of last year.
Orders were $35 million in the second quarter of 2002 compared to $43 million in
the first quarter of 2002 and $27 million in the second quarter of 2001. Ending
backlog was $52 million as compared with $57 million at the end of the first
quarter of this year and $65 million at the end of the second quarter of last
year.
The change in cash, cash equivalents, and short-term investments for the second
quarter of 2002 was an increase of $5.9 million. Cash, cash equivalents, and
short-term investments were $158.5 million (this includes $14 million pledged as
security in connection with the new credit facilities and $18.9 million pledged
as security in connection with operating leases) at June 28, 2002.
Of the reported loss of $0.27 per share for the quarter, approximately $0.13 per
share was attributed, in the aggregate, to additional restructuring expenses, a
foreign exchange loss and a reduced tax benefit.
As previously announced, during the first quarter the Company reduced excess
manufacturing capacity and associated overhead expense by the closure of the
Company's facility in Kanata, Ontario and the relocation of its manufacturing
operations to the Company's facilities in Wilmington, MA and Rugby, UK and the
relocation of its principal office from Kanata, Ontario to its existing Nepean,
Ontario facility. An additional restructuring charge of $1.4 million, or
approximately $0.02 per share after tax, was taken during the quarter just ended
to cover supplier contract cancellations resulting from this relocation, as well
as a write down to market and accrual of additional carrying costs for certain
facilities, including Kanata, Ontario which the Company plans to sell or
sub-lease.
The Company incurred a foreign exchange loss in the quarter of approximately
$1.3 million or $0.02 per share after tax due to unfavorable exchange rate
fluctuations of the US dollar compared to the Canadian dollar and Euro. Foreign
currency translation gains of $3.3 million were credited directly to accumulated
other comprehensive income in stockholders' equity on the Balance Sheet.
The income tax benefit was reduced by approximately $3.5 million, or $0.09 per
share after tax, as a result of
15
increases in valuation allowances related to the Company's geographic
distribution of its operating loss carry-forwards. This was primarily related to
the closure of the Kanata, Ontario facility and its effect on the Company's
ability to generate future profit in Canada.
We appear to continue to be in a rolling cyclical trough. Our systems business
continues to benefit from technology buys in semiconductor due to the transition
to 300 mm wafers, dimensional shrinks and the beginning of a transition to chip
scale packaging. But, capacity buys, in both semiconductor and electronics
sectors, remain soft and the timing of their projected recovery is still
uncertain. On the other hand, a continued bright spot is the performance of our
component products that are, in general, performing well in a difficult economic
environment.
We continue to streamline our business by aligning our cost structure with
current market conditions and by strengthening our financial position. In
conjunction with this plan, we completed the consolidation of our product lines
at the Kanata, Ontario facility to other manufacturing sites as discussed above,
closed our Kanata, Ontario facility and moved the Company's principal office
from Kanata, Ontario to its existing Nepean, Ontario facility. Savings from this
consolidation are expected to fully cover the restructuring costs during the
remainder of fiscal 2002. The Company is committed to a series of cost
reductions. However, the investment in new product development will not be
impacted by these actions, as we believe this is critical to the Company's
success going forward.
We anticipate the third quarter operating results to improve compared to the
second quarter just ended. Based upon the profile of our current backlog, sales
should be in the range of $40 to $45 million, with gross margins improving and
operating expenses returning to the run rate incurred in the first quarter of
the current year.
Results of Operations for the Three Months Ended June 28, 2002
The following table sets forth items in the unaudited consolidated quarterly
statement of operations as a percentage of sales for the periods indicated:
Three months ended
-----------------------
June 28, June 29,
2002 2001
-------- --------
Sales ................................................. 100.0% 100.0%
Cost of goods sold .................................... 68.0 59.6
----- -----
Gross profit .......................................... 32.0 40.4
Research and development .............................. 12.7 8.9
Selling, service and administrative ................... 39.4 25.2
Amortization of purchased intangibles ................. 3.2 1.7
Restructuring and other ............................... 3.6 -
----- -----
Income (loss) from operations ......................... (26.9) 4.6
Other ................................................. (0.5) -
Interest income ....................................... 1.4 2.5
Interest expense ...................................... (0.5) (0.6)
Foreign exchange transaction gains (losses) ........... (3.2) 0.6
----- -----
Income (loss) before income taxes ..................... (29.7) 7.1
Income tax provision (benefit) ........................ (1.7) 2.4
----- -----
Net income (loss) ..................................... (28.0)% 4.7%
===== =====
Commencing in the first quarter of 2002, we classified technical support and
service management costs as selling, service and administrative expenses. In
prior years, we classified these costs as cost of goods sold and such costs have
been reclassified in the comparative statement of operations. Field service
management costs were $1.6 million or 4.0% of sales and $1.5 million or 2.0% of
sales during the three months ended June 28, 2002 and June 29, 2001,
respectively.
16
Sales by Market. The following table sets forth sales to our primary markets for
the three months ended June 28, 2002 and June 29, 2001, respectively.
Three months ended
--------------------------------
(in millions) June 28, 2002 June 29, 2001
------------- -------------
% of % of
Sales Total Sales Total
-------------------------------
Semiconductor ...................................... $14.1 36% $27.2 36%
Electronics ........................................ 4.5 11 18.6 24
Medical ............................................ 9.7 24 12.5 16
Components ......................................... 5.7 15 7.2 10
Optics ............................................. 2.1 5 4.7 6
Other .............................................. 3.6 9 6.3 8
----- --- ----- ---
Total ........................................... $39.7 100% $76.5 100%
===== === ===== ===
Sales for the three months ended June 28, 2002 decreased substantially compared
to the same period in 2001, primarily due to the significant downturn in both
the semiconductor and electronics markets which we serve with our laser systems
products. Following a period of strong economic conditions in 1999 and 2000, we
saw tighter capital markets and a rapid and severe slowdown in the economy in
2001 and continuing into 2002. Purchases of components, while not as severely
affected as systems, did experience slower sales to OEM customers in these same
markets.
Semiconductor systems sales for the second quarter of 2002 decreased by $13.1
million or 48% compared to the same period of 2001 and electronic systems sales
decreased by $14.1 million or 76% due to the decline in market conditions since
2001. In particular, the decline in semiconductor sales was due primarily to a
weakness in demand for semiconductor marker and trim-and-test products, offset
slightly by some growth in our memory repair applications. With respect to the
electronics market, driven mainly by the wireless telecommunications sector, the
decline in sales was due primarily to continuing weakness in demand for our
laser drilling, electronics marker, circuit trim and SMT applications. Sales to
the medical market decreased by $2.8 million or 22% and sales of components
decreased by $1.5 million or 21% compared to the same period of 2001 due to
general economic conditions. Sales of optics for the second quarter of 2002
decreased by $2.6 million or 55% compared to the same period of 2001 due to a
sharp decline in sales to the telecommunications market. Sales to the other
markets (including aerospace, packaging and automotive) decreased by $2.7
million or 43% from the same period of 2001.
Sales by Region. We distribute our systems and services via our global direct
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 the ASEAN countries, China
and other Asia-Pacific countries. Revenues are attributed to these geographic
areas on the basis of customer location. The following table shows sales to each
geographic region for the three months ended June 28, 2002 and June 29, 2001,
respectively.
Three months ended
---------------------------------
(in millions) June 28, 2002 June 29, 2001
-------------- --------------
% of % of
Sales Total Sales Total
------ ---- ------ ----
United States .............................. $22.8 57% $33.6 44%
Canada ..................................... 0.3 1 3.4 4
Europe ..................................... 6.2 16 16.1 21
Japan ...................................... 3.9 9 14.4 19
Asia-Pacific, other ........................ 6.2 16 9.0 12
Latin and South America .................... 0.3 1 - -
------ ---- ------ ----
Total ................................... $39.7 100% $76.5 100%
====== ==== ====== ====
Backlog. We define backlog as purchase orders or other contractual agreements
for products for which customers have requested delivery within the next twelve
months. Order backlog at June 28, 2002 was $52 million, as
17
compared with $57 million at the end of the first quarter of this year and $65
million at the end of the second quarter of last year, with over 55% in the
semiconductor and electronics market, 17% in the medical market and 20% in the
components market.
Gross Margin. Gross margin was 32.0% in the three months ended June 28, 2002
compared to 40.4% in the same period of 2001. Lower gross margins reflect the
impact of the economic downturn, including downward pricing pressures, lower
volumes and inventory loss provisions. Also, margins were affected by factory
consolidation costs and higher fixed cost per unit. The previously anticipated
improvement in gross margin in the second quarter was not realized as result of
a change in electronic and semiconductor system product mix, including lower
margins on new product introductions.
Research and Development Expenses. Research and development expenses for the
three months ended June 28, 2002 were 12.7% of sales or $5 million compared with
8.9% of sales or $6.8 million in the three months ended June 29, 2001. Expenses
reflect a credit of approximately $0.7 million for development component parts
that were recoverable to production inventory during the quarter ended June 28,
2002. Overall, the decrease in spending reflects our focus on key potential
growth areas. Research and development expenses as a percentage of sales have
actually increased due to lower sales volume and continued investment in new
product development during this down cycle, which is critical to the Company's
success going forward. During the second quarter of 2002, research and
development activities focused on products targeted at the semiconductor,
electronics and telecommunications markets.
Selling, Service and Administrative Expenses. Selling, service and
administrative expenses were 39.4% of sales or $15.6 million in the three months
ended June 28, 2002, compared with 25.2% of sales or $19.3 million in the three
months ended June 29, 2001. The decrease in spending reflects the impact of
restructuring activities, lower sales, divested product lines, cost reduction
measures and other cost savings initiatives undertaken in 2002 and 2001.
Operating expenses in the second quarter of 2002 were approximately $1.3 million
higher than the previous quarterly amount of $13.5 million due to additional
severance, legal and selling expenses.
Amortization of Purchased Intangibles. Amortization of purchased intangibles was
3.2% of sales or $1.3 million, primarily as a result of amortizing intangible
assets from acquisitions undertaken in previous years.
Restructuring and other. In connection with a restructuring plan to align the
Company's manufacturing costs and operating expenses with the prevailing
economic environment, the Company recorded restructuring charges of $1.4 million
during the second quarter of fiscal 2002 related to cancellation fees on
contractual obligations of $0.3 million and a write-down of land and building in
Kanata, Ontario and Rugby, U.K. of $0.8 million, and also leased facility costs
of $0.3 million at the Farmington Hills and Oxnard locations. These charges are
in addition to a restructuring charge of $2.7 million recorded during the first
quarter of fiscal 2002. The Company consolidated the Electronics systems
business from its facility in Kanata, Ontario into the Company's existing
systems manufacturing facility in Wilmington, MA and transferred its laser
sources business from the Company's Kanata, Ontario facility to its existing
Rugby, UK facility. In addition, the Company closed its Kanata, Ontario facility
and moved its principal office from Kanata, Ontario to its existing Nepean,
Ontario facility. Provisions in the first quarter relate to severance and
benefits for the termination of approximately 90 employees, write-off of
furniture, equipment and system software, and plant closure and other related
costs.
Other. During the second quarter, the Company adjusted the cost of an investment
in a technology fund and recorded a write-down to fair market value of $0.2
million.
Interest Income. Interest income was $0.6 million in the three months ended June
28, 2002, compared to $1.9 million in the three months ended June 29, 2001. The
decrease was due to a significant decline in interest rates over the past year,
partially offset by an increase in the average investment balance compared to
2001.
Interest Expense. Interest expense was $0.2 million in the three months ended
June 28, 2002, compared to $0.4 million in the three months ended June 29, 2001.
Income Taxes. The effective tax rate was 5.7% for the second quarter of 2002,
compared with 33.9% in the same period in 2001 and 34.6% for fiscal 2001. Our
tax rate in the second quarter of 2002 includes a valuation allowance
18
increase against the Canadian Company's deferred tax asset in accordance with
the closure of the Kanata facility described in note 8. It is expected that
operations and income in Canada in the foreseeable future will not be sufficient
to offset existing loss carryforwards.
Net Income (Loss). As a result of the foregoing factors, net loss for the second
quarter of 2002 was $11.1 million, compared with net income of $3.6 million in
the same period in 2001.
Results of Operations for the Six Months Ended June 28, 2002
The following table sets forth items in the unaudited consolidated quarterly
statement of operations as a percentage of sales for the periods indicated:
Six months ended
-----------------------
June 28, June 29,
2002 2001
-------- --------
Sales ............................................ 100.0% 100.0%
Cost of goods sold ............................... 67.4 60.4
----- -----
Gross profit ..................................... 32.6 39.6
Research and development ......................... 14.2 8.4
Selling, service and administrative .............. 38.1 24.3
Amortization of purchased intangibles ............ 3.3 1.6
Restructuring and other .......................... 5.4 (0.8)
----- -----
Income (loss) from operations .................... (28.4) 6.1
Other ............................................ (0.2) -
Interest income .................................. 1.6 1.9
Interest expense ................................. (0.5) (0.3)
Foreign exchange transaction gains (losses) ...... (1.2) 0.2
----- -----
Income (loss) before income taxes ................ (28.7) 7.9
Income tax provision (benefit) ................... (5.6) 2.8
----- -----
Net income (loss) ................................ (23.1)% 5.1%
===== =====
Our sales were $76.6 million for the first six months of 2002 compared to $164.2
million for the first six months of 2001. Commencing in the first quarter of
2002, we classified technical support and service management costs as selling,
service and administrative expenses. In prior years, we classified these costs
as cost of goods sold and such costs have been reclassified in the comparative
statement of operations. Field service management costs were $3.1 million or
4.0% of sales and $3.1 million or 1.9% of sales during the six months ended June
28, 2002 and June 29, 2001, respectively.
Sales by Market. The following table sets forth sales to our primary markets for
the six months ended June 28, 2002 and June 29, 2001, respectively.
(in millions) Six months ended
----------------------------------
June 28, 2002 June 29, 2001
--------------- --------------
% of % of
Sales Total Sales Total
----- ----- ----- -----
Semiconductor ............................ $22.5 30% $57.8 35%
Electronics .............................. 11.0 14 44.7 27
Medical .................................. 19.9 26 21.0 13
Components ............................... 10.9 14 15.1 9
Optics ................................... 4.5 6 11.2 7
Other .................................... 7.8 10 14.4 9
----- --- ------ ---
Total ................................. $76.6 100% $164.2 100%
===== === ====== ===
Sales declined significantly for the six months ended June 28, 2002 compared to
the same period in 2001, primarily due to the significant downturn in the
markets we serve, especially in the semiconductor and electronics markets,
19
and the impact of reduced and/or deferred capital spending by our customers due
to excess of manufacturing capacity and their customers' excess inventories of
components.
The decline of new orders during the first six months of 2002 reflected a
continued slowdown in demand for systems and products in the semiconductor,
electronics and telecom optics markets. Bookings were approximately $79 million
resulting in an ending backlog of approximately $52 million, as compared with
bookings of $117 million and ending backlog of $65 million for the first six
months of last year.
Sales by Region. The following table shows sales to each geographic region for
the six months ended June 28, 2002 and June 29, 2001, respectively.
(in millions) Six months ended
--------------------------------
June 28, 2002 June 29, 2001
--------------------------------
% of % of
Sales Total Sales Total
----- ----- ----- -----
United States ............................. $46.9 61% $70.0 43%
Canada .................................... 1.1 2 10.2 6
Europe .................................... 12.5 16 36.9 23
Japan ..................................... 6.4 8 28.4 17
Asia-Pacific, other ....................... 9.3 12 18.1 11
Latin and South America ................... 0.4 1 0.6 -
----- --- ------ ---
Total .................................. $76.6 100% $164.2 100%
===== === ====== ===
Gross Margin. Gross margin was 32.6% for the six months ended June 28, 2002
compared to 39.6% for the six months ended June 29, 2001. Lower gross margins
reflect the impact of the economic downturn, including downward pricing
pressures, lower volumes and inventory loss provisions. Also, margins were
affected by factory consolidation costs, higher fixed cost per unit, changes in
electronic and semiconductor system product mix, and new product introductions.
Research and Development Expenses. Research and development expenses for the six
months ended June 28, 2002 were 14.2% of sales or $10.9 million compared with
8.4% of sales or $13.8 million for the six months ended June 29, 2001. The
decrease in the number of dollars spent on research and development activities
reflects the impact of initiatives undertaken by us to focus our spending on key
potential growth areas and the impact of divested product lines. However,
research and development expenses as a percentage of sales have not declined, as
the investment in new product development is critical to the Company's success
going forward. Research and development activities focused on products targeted
at the electronics, semiconductor and telecommunications markets.
Selling, Service and Administrative Expenses. Selling, service and
administrative expenses were 38.1% of sales or $29.2 million for the six months
ended June 28, 2002, compared with 24.3% of sales or $39.9 million for the six
months ended June 29, 2001. The decrease in spending reflects the impact of
restructuring activities, lower sales, divested product lines, cost reduction
measures and other cost savings initiatives undertaken in 2002 and 2001.
Amortization of Purchased Intangibles. Amortization of purchased intangibles was
3.3% of sales or $2.6 million for the six months ended June 28, 2002, compared
with 1.6% of sales or $2.7 million for the six months ended June 29, 2001.
Restructuring and other. In connection with a restructuring plan to align the
Company's manufacturing costs and operating expenses with the prevailing
economic environment, the Company recorded restructuring charges of $1.4 million
during the second quarter of fiscal 2002 related to cancellation fees on
contractual obligations of $0.3 million and a write-down of land and building in
Kanata, Ontario and Rugby, U.K. of $0.8 million, and also leased facility costs
of $0.3 million at the Farmington Hills, MI and Oxnard, CA locations. These
charges are in addition to a restructuring charge of $2.7 million recorded
during the first quarter of fiscal 2002. The Company consolidated the
Electronics systems business from its facility in Kanata, Ontario into the
Company's existing systems manufacturing facility in Wilmington, MA and
transferred its laser sources business from the Company's Kanata, Ontario
facility to its existing Rugby, UK facility. In addition, the Company closed is
Kanata, Ontario facility and moved its principal office from Kanata, Ontario to
its existing Nepean, Ontario facility. Provisions in the first
20
quarter relate to severance and benefits for the termination of approximately 90
employees, write-off of furniture, equipment and system software, and plant
closure and other related costs.
During the first six months of 2001, the Company adjusted an accrual related to
litigation with Electro Scientific Industries, Inc. and recorded a benefit of
$1.4 million or 0.8% of sales.
Other. During the second quarter, the Company adjusted the cost of an investment
in a technology fund and recorded a write-down to fair market value of $0.2
million.
Interest Income. Interest income was $1.2 million in the six months ended June
28, 2002, compared to $3.2 million in the six months ended June 29, 2001. The
decrease was due to a significant decline in interest rates over the past year,
partially offset by an increase in the average investment balance compared to
2001.
Interest Expense. Interest expense was $0.4 million in the six months ended June
28, 2002, compared to $0.5 million in the six months ended June 29, 2001.
Income Taxes. The effective tax rate was 19.4% for the six months ended June 28,
2002, compared with 35.4% for the same period in 2001. Our tax rate reflects the
fact that we do not recognize the tax benefit from losses in certain countries
where future use of the losses is uncertain and other deductible costs. During
the second quarter of 2002, we booked a valuation allowance increase against the
Canadian Company's deferred tax asset in light of the recent closure of the
Kanata, Ontario facility described in note 8. It is expected that the remaining
Canadian operations will not generate sufficient income in the foreseeable
future to offset tax loss carryforwards.
Net Income (Loss). As a result of the foregoing factors, net loss for the six
months ended June 28, 2002 was $17.7 million, compared with net income of $8.4
million for the same period in 2001.
Segment Results of Operations
Our customers and markets continue to evolve. As a result, during the fourth
quarter of fiscal 2001, we changed the way we manage our business to reflect a
growing focus on providing precision optics and laser systems to our customers.
Financial information by segment was reported on the new basis for the 2001
Annual Report and on a quarterly basis commencing in the three months ended
March 29, 2002.
Our operations include two reportable operating segments: the Laser Systems
segment (Laser Systems); and the WavePrecision segment (WavePrecision). Laser
Systems designs, develops, manufactures and markets laser-based advanced
manufacturing systems and components as enabling tools for a wide range of
high-technology applications, including computer-chip memory repair processing,
wafer and die marking, inspection systems for solder paste and component
placement on surface-mount printed circuits, via drilling of printed circuit
boards, hybrid circuit trim, circuit trim on silicon, and laser printing for
medical applications. Major markets for its products include the semiconductor
and electronics industries. WavePrecision provides precision optics for Dense
Wave Division Multiplexing networks. Major markets for its products include the
telecommunications industry.
21
The following table sets forth sales by reportable segment for the three and six
months ended June 28, 2002 and June 29, 2001, respectively.
Three months ended Six months ended
------------------------- --------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
Sales --------- -------- -------- ---------
Laser Systems ....................................... $ 37,624 $71,795 $ 72,072 $153,001
WavePrecision ....................................... 2,177 5,128 4,732 12,089
Intersegment sales elimination ...................... (137) (381) (252) (841)
-------- ------- -------- --------
Total ............................................... $ 39,664 $76,542 $ 76,552 $164,249
======== ======= ======== ========
Segment income (loss) from operations
Laser Systems ....................................... $ (852) $ 8,297 $ (2,490) $ 16,200
WavePrecision ....................................... (859) (127) (1,972) 1,671
-------- ------- -------- --------
Total by segment .................................... (1,711) 8,170 (4,462) 17,871
Unallocated amounts:
Corporate expenses ............................. 6,255 3,349 10,590 6,524
Amortization of purchased intangibles .......... 1,279 1,331 2,557 2,664
Restructuring and other ........................ 1,407 - 4,152 (1,400)
-------- ------- -------- --------
Income (loss) from operations ....................... $(10,652) $ 3,490 $(21,761) $ 10,083
======== ======= ======== ========
Sales of the Laser Systems segment are discussed under Sales by Market and
represent all market sectors, except optics. WavePrecision sells to the optics
market. Loss from operations in both segments for the three and six months ended
June 28, 2002 resulted from the significant downturn in the markets they serve.
Critical Accounting Policies and Estimates
Our consolidated financial statements are based on the selection and application
of significant accounting policies, which require management to make significant
estimates and assumptions. There is no change in our critical accounting
policies included in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of the Company's Form 10-K for the year
ended December 31, 2001.
Liquidity and Capital Resources
Cash and cash equivalents totaled $95.5 million at June 28, 2002 compared to
$103.0 million at December 31, 2001. In addition, short-term and other
investments were $63.0 million at June 28, 2002 compared to $43.5 million at
December 31, 2001. This $63.0 million includes $14 million pledged as security
in connection with the new credit facilities discussed in note 4 to the
financial statements and $18.9 million pledged as security and classified as
long-term in connection with the operating leases discussed in note 9 to the
financial statements.
Cash flows provided by operating activities for the six months ended June 28,
2002 were $7.8 million, compared to $23.0 million that was used in operating
activities during the same period in 2001. Net loss, after adjustment for
non-cash items, used cash of $8.6 million in the first half of 2002. Decreases
in accounts receivable, inventories and other current assets and increases in
current liabilities provided $16.4 million, including income tax refunds of
$12.3 million. During the six months ended June 29, 2001, net income, after
adjustment for non-cash items, provided cash of $17.8 million. Decreases in
accounts receivable provided $17.1 million, offset by increases of inventories
and other assets using $7.9 million and decreases in current liabilities using
$50.0 million. The use of cash by current liabilities was due primarily to the
payment of taxes in March 2001 on the gain on sale of the Life Sciences business
recognized in October of 2000.
Cash flows used in investing activities were $19.4 million during the six months
ended June 28, 2002, primarily from net purchases of $19.5 million of short-term
and other investments and $2.0 million of property, plant and
22
equipment. This was offset by a $2.1 million reduction of other assets. During
the first half of 2001, investing activities used $14.0 million, primarily from
net purchases of $12.7 million of short-term investments and $7.3 million of
property, plant and equipment and other assets. This was offset by $6.0 million
cash proceeds on the sale of assets.
Cash flows provided by financing activities during the six months ended June 28,
2002 were $3.5 million, compared to $0.1 million used during the same period in
2001.
During the quarter ended June 28, 2002, the Company negotiated new lines of
credit with Fleet National Bank ("Fleet") and Canadian Imperial Bank of Commerce
("CIBC") and allowed an unused portion of an existing line of credit with Bank
One to expire, reducing the total amount of available credit from $32.4 million
at December 31, 2001 to $24.7 million at June 28, 2002. The Company's agreement
with Fleet provides for an $8 million line of credit and its agreement with CIBC
provides for a $4 million line of credit. The previous $19 million line of
credit with CIBC expired on June 28, 2002 and the new CIBC credit facility
eliminated the Company's requirement to meet certain financial covenants which
were required under the previous credit facility. Marketable securities totaling
$14 million have been pledged as collateral for the Fleet and CIBC credit
facilities under security agreements. The line of credit with Fleet expires on
June 28, 2003 and the new line of credit with CIBC is subject to review by CIBC
on May 31, 2003 and if extended, may be cancelled at any time by the Company on
appropriate advance notice at no cost, excluding breakage fees relating to the
used and outstanding amounts under fixed loan instruments. In addition to the
customary representations, warranties and reporting covenants, the borrowings
under the Fleet credit facility require the Company to maintain a quarterly
minimum tangible net worth of $200 million. A portion of the Company's existing
credit facility with Bank One expired and was not renewed. The terms of the
remaining credit facility with Bank One provide for an $11.7 million line of
credit. Borrowings under the remaining Bank One credit facility are limited to
the sum of eligible accounts receivable under 90 days. North American
inventories and accounts receivable and inventories have been pledged as
collateral for the Bank One credit facility. In addition to the customary
representations, warranties and financial reporting requirements, the borrowings
under the Bank One credit facility require the Company to seek consent of the
bank for the redemption, repurchase or acquisition of Company shares of common
stock, the declaration and payment of certain dividends, and the ability to
incur borrowed money debt in excess of $10 million. The Company is currently
re-negotiating the terms of its remaining line of credit with Bank One. In
addition to the credit facilities with Fleet, CIBC and Bank One, the Company has
outstanding letters of credit totaling $1.0 million with National Westminster
Bank, ABN Amro Bank, Bank One and Fleet.
At June 28, 2002, the Company has approximately $24.7 million denominated in
Canadian dollars, US dollars, UK Pound sterling, and Japanese yen that are
available for general purposes, under the credit facilities and letters of
credit discussed above. Of the available $24.7 million, $13.1 million was in
use, consisting of $9.7 million of borrowings in Japan and Rugby, U.K. under the
CIBC and Bank One credit facilities and $3.4 million of bank guarantees and
outstanding letters of credit under the CIBC credit facility and the various
letter of credit arrangements discussed above. The Bank One credit facility is a
demand facility with interest based on the bank's Floating Rate and/or
Eurodollar Rate. The CIBC credit facility is currently a demand facility with
interest based on the prime rate, which will be converted to a revolving credit
facility no later than August 30, 2002. At June 28, 2002, the aggregate unused
portion of credit available under the credit facilities amounts to $11.6
million.
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 twelve months.
We lease certain equipment and facilities under operating lease agreements that
expire through 2013. At the end of the initial lease term in 2003, two of these
facility leases require the Company to renew the lease for a defined number of
years at the fair market rental rate or purchase the property at the then fair
market value. The lessor may sell the facilities to a third party but the leases
provide for a residual value guarantee of the first 85% of any loss the lessor
may incur on its $19.1 million investment in the building, which may become
payable by the Company upon the termination of the transaction, or the Company
may exercise its option to purchase the facilities for approximately $19
million. As at June 28, 2002, residual value guarantees in connection with these
leases totaled approximately $16 million. Upon termination of the leases, we
expect the fair market value of the leased properties to reduce substantially
the payment under the residual value guarantees and, during the fourth quarter
of fiscal 2000,
23
we took a charge of $6 million associated with restructuring for excess capacity
at the two leased facility locations, including the estimated residual value
guarantees. The lease agreement requires, among other things, the Company to
maintain specified quarterly financial ratios and conditions. As at March 29,
2002, the Company was in breach of the fixed charge coverage ratio, but on April
30, 2002, the Company entered into a Security Agreement with the Bank of
Montreal ("BMO") pursuant to which the Company deposited with BMO and pledged
approximately $18.9 million as security in connection with the operating leases
discussed herein, in exchange for a written waiver from BMO and BMO Global
Capital Solutions for any Company defaults of or obligations to satisfy the
specified financial covenants relating to the operating leases agreements until
June 30, 2003. The Security Agreement and Waiver are attached hereto as Exhibits
4.10 and 4.11 respectively. This item is reflected on the balance sheet as other
investment.
Forward-Looking Statements
Certain statements in this report on Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance or achievements, expressed or implied by
such forward-looking statements. In making these forward-looking statements,
which are identified by words such as "will", "expects", "intends",
"anticipates" and similar expressions, the Company claims the protection of the
safe-harbor for forward-looking statements contained in the Reform Act. The
Company does not assume any obligation to update these forward-looking
statements to reflect actual results, changes in assumptions, or changes in
other factors affecting such forward-looking statements.
Customers' Cyclical Fluctuations. Several significant markets for our products
have historically been subject to economic fluctuations due to the substantial
capital investment required in the industries served. The timing, length and
severity of these cycles are difficult to predict. Most businesses in the
semiconductor industry have announced a slowdown in new orders as market
conditions weaken. 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. 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 is limited by our need for continued investment in
engineering and research and development and extensive ongoing customer service
and support requirements. In addition, 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. 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.
Quarterly Fluctuations in Operations. 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 production volumes,
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, or failure to meet our revenue recognition
criteria, near the end of a fiscal quarter or year, due, for example, to
rescheduling or cancellations by customers or to unexpected 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 of new products and
technologies by either us or by our competitors 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 results of
operations for any quarter are not necessarily indicative of results to be
expected in future periods. Our future operating results may be affected by
various trends and factors that must be managed in order to achieve favorable
operating results.
24
Proprietary Rights; Infringement Claims. 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. Claims or litigation could seriously harm our business
or require us to incur significant costs whether or not such claims are
substantiated in the courts. 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 claims and actions referred to in note 9
to the consolidated financial statements in this report.
Competition. 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. 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.
Reliance on Key Personnel. 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. 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.
Rapid Technological Change. 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 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.
Acquisitions. We have made, and continue to pursue, strategic acquisitions,
involving significant risks and uncertainties. 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
liabilities. Should we 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 must manage the growth of our business effectively.
Dependence on limited source suppliers. We depend on limited source suppliers
that 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.
Operating in Foreign Countries. 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 risks
which could materially impact our results of operations, including foreign
exchange rate fluctuations, longer payment cycles, greater difficulty in
collecting accounts receivable,
25
utilization of different systems and equipment, and difficulties in staffing and
managing foreign operations and diverse cultures.
Interest Rate Risk. Our exposure to market risk associated with changes in
interest rates relates primarily to our investment portfolio. The investment of
cash is regulated by our investment policy of which the primary objective is
security of principal. Due to the average maturities and the short-term nature
of the investment portfolio, a change in interest rates is not expected to have
a material effect on the value of the portfolio.
Foreign Currency Risk. We have substantial sales and expenses and working
capital in currencies other than U.S. dollars. As a result, we have exposure to
foreign exchange fluctuations, which may be material. To reduce the Company's
exposure to exchange gains and losses, we generally transact sales and costs and
related assets and liabilities in the functional currencies of the operations.
We have a foreign currency-hedging program using currency forwards and currency
options to hedge exposure to foreign currencies. These financial instruments are
used to fix the cash flow variable of local currency costs or selling prices
denominated in currencies other than the functional currency.
General Economic, Political and Market Conditions. Our business is subject to
the effects of general economic and political conditions in the United States
and globally. Our revenues and operating results have declined and been
adversely affected as a result of unfavorable economic conditions and reduced
capital spending in the United States, Europe, Japan, and Asia. If the economic
and political conditions in the United States and globally do not improve or if
the economic slowdown continues to deteriorate, we may continue to experience
material adverse impacts on our business, operating results and the financial
condition of the Company.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to market risk associated with changes in
interest rates relates primarily to our investment portfolio. At June 28, 2002,
the Company had $75.2 million invested in cash equivalents and $63.0 million
(this includes $14 million pledged as security in connection with the new credit
facilities discussed in note 4 and $18.9 million pledged as security and
classified as long term in connection with operating leases discussed in note 9)
invested in short-term and other investments. Due to the average maturities and
the short-term nature of the investment portfolio, a change in interest rates is
not expected to have a material effect on the value of the portfolio. For the
quarter ended June 28, 2002, a 100 basis-point adverse change in interest rates
would not have a material effect on our consolidated financial position,
earnings, or cash flows.
Foreign Currency Risk. We have substantial sales and expenses and working
capital in currencies other than U.S. dollars. As a result, we have exposure to
foreign exchange fluctuations, which may be material. To reduce the Company's
exposure to exchange gains and losses, we generally transact sales and costs and
related assets and liabilities in the functional currencies of the operations.
We have a foreign currency-hedging program using currency forwards and currency
options to hedge exposure to foreign currencies. These financial instruments are
used to fix the cash flow variable of local currency costs or selling prices
denominated in currencies other than the functional currency. We do not
currently use currency forwards or currency options for trading purposes. At
June 28, 2002, we have eleven foreign exchange forward contracts to purchase
$17.8 million US dollars with an aggregate fair value loss after-tax of $266
thousand recorded in accumulated other comprehensive income and maturing at
varying dates in 2002 and 2003.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the description of legal proceedings in Note 9 to the
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual and special meeting of shareholders on May 9,
2002. The matters submitted to vote at this meeting were the
election of directors, the appointment of Ernst & Young LLP as the
Company's auditors and authorization for the board of directors to
fix their remuneration, and the ratification of the continued
existence of the Company's Shareholder Rights Plan. The board of
directors together with management of the Company, upon receiving
input from the shareholders, decided to reconsider and withdraw the
two (2) additional proposals appearing in the Company's 2002 Proxy
Circular relating to an amendment to the Company's articles of
continuance to increase the share ownership requirement necessary
for submitting shareholder proposals nominating persons for
election to the Company's board of directors and an amendment to
the Company's 1995 Stock Option Plan to increase the number of
shares reserved for issuance under the plan by 2,000,000. The table
below sets forth information concerning proxies received and votes
given at the meeting.
Votes for Votes against or Abstention and
withheld broker non-votes
------------------------ ---------------------- -------------------------
Election of Directors:
Richard B. Black 29,396,262 289,005 56,623
Paul F. Ferrari 29,398,523 286,744 56,623
Phillip A. Griffiths, Ph.D. 29,400,947 284,320 56,623
Byron O. Pond 29,390,875 294,392 56,623
Benjamin J. Virgilio 29,397,437 287,830 56,623
Charles D. Winston 29,084,667 600,600 56,623
------------------------ ---------------------- -------------------------
The appointment of Ernst & 28,532,433 1,049,110 160,347
Young LLP as the Company's
auditors and authorizing the
board of directors to fix
their remuneration.
------------------------ ---------------------- -------------------------
Resolution No. 2 - Proposal to 23,150,536 3,085,714 2,505,640
ratify, confirm and approve
the continued existence of the
Company's Shareholder Rights
Plan.
------------------------ ---------------------- -------------------------
ITEM 5: OTHER INFORMATION
On April 30, 2002, the Company entered into a Security Agreement with the Bank
of Montreal ("BMO") pursuant to which the Company deposited with BMO and pledged
approximately $18.9 million as security in connection with the operating lease
discussed in Note 4 to the Consolidated Financial Statements in exchange for a
written waiver from BMO and BMO Global Capital Solutions for any Company
defaults of or obligations to satisfy certain financial covenants relating to
the operating lease agreement discussed therein. The Security Agreement and
Waiver are attached hereto as Exhibits 4.10 and 4.11 respectively.
The Severance Agreement dated May 24, 2001 between Victor H. Woolley, V.P.
Strategic Planning and the Company was terminated as of June 25, 2002. The
Termination Amendment to the Severance Agreement is attached hereto as Exhibit
10.31. The Company entered into an employment agreement with Mr. Woolley on June
25, 2002 pursuant to which the Company agreed to employ Mr. Woolley on a part
time basis until May 24, 2004. The agreement provides for Mr.
28
Woolley to receive his current annual base salary, prorated for the part time
position, and health and insurance benefits at levels and with Company
contributions for a full time position; a copy of which is attached hereto as
Exhibit 10.30. The agreement also provides for a severance payment and provision
of certain benefits, if Mr. Woolley's employment with the Company is terminated
without cause, equivalent to the compensation and benefits Mr. Woolley would
have received for the remaining term of the employment agreement.
On June 28, 2002, the Company entered into agreements with a Fleet National Bank
("Fleet") for an $8 million line of credit and with Canadian Imperial Bank of
Commerce ("CIBC") for a $6 million line of credit; copies of which are attached
hereto as Exhibits 4.12 - 4.16. Marketable securities totaling $14 million have
been pledged as collateral for each of these new credit facilities under
security agreements. The line of credit with Fleet expires on June 28, 2003 and
the line of credit with CIBC is subject to review by CIBC on May 31, 2003 and if
extended, may be cancelled at any time by the Company on appropriate advance
notice at no cost, excluding breakage fees relating to the used and outstanding
amounts under fixed loan instruments. In addition to the customary
representations, warranties and reporting covenants, the borrowings under the
Fleet credit facility require the Company to maintain a quarterly minimum
tangible net worth of $200 million. The new CIBC credit facility eliminated the
Company's requirement to meet certain financial covenants which were required
under the previous CIBC credit facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) List of Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.10 Security Agreement between the Registrant and Bank of Montreal dated
April 30, 2002.
4.11 Waiver to Certain of the Operative Agreements between the Registrant
and GSI Lumonics Corporation on one part and BMO Global Capital
Solutions and Bank of Montreal on the other part dated April 30,
2002.
4.12 Loan Agreement between General Scanning Inc. and GSI Lumonics
Corporation and Fleet National Bank dated June 28, 2002.
4.13 Secured Revolving Time Note between General Scanning Inc. and Fleet
National Bank dated June 28, 2002.
4.14 Security Agreement between General Scanning Inc. and Fleet National
Bank dated June 28, 2002.
4.15 Credit Line Letter Agreement between the Registrant and Canadian
Imperial Bank of Commerce dated June 28, 2002.
4.16 Amendment to Credit Line Letter Agreement between the Registrant and
Canadian Imperial Bank of Commerce dated August 12, 2002.
10.30 Employment Agreement between the Registrant and Victor H. Woolley
dated June 25, 2002.
10.31 Termination Amendment to the Severance Agreement between the
Registrant and Victor H. Woolley dated June 25, 2002.
99 Selected Consolidated Financial Statements and Notes in U.S.
Dollars and in accordance with Canadian Generally Accepted
Accounting Principles.
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations - Canadian Supplement.
99.2 Chief Executive Officer Certification pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Chief Financial Officer Certification pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
None
29
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, GSI Lumonics Inc., has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GSI Lumonics Inc.
(Registrant)
Name Title Date
- -------------------------------------- ---------------------------------------------- ----------------------
/s/ CHARLES D. WINSTON Director and Chief Executive Officer August 15, 2002
- ---------------------- (Principal Executive Officer)
Charles D. Winston
/s/ THOMAS R. SWAIN Vice President Finance and Chief Financial August 15, 2002
- ------------------- Officer (Principal Financial and Accounting
Thomas R. Swain Officer)
30