Back to GetFilings.com

Table of Contents

Form 10-K

Commission File No. 000-25705

(978) 439-5511

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

(Title of class)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES þ          NO o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      The aggregate market value of the Registrant’s common shares held by non-affiliates of the Registrant, based on the closing price of the common shares on The NASDAQ Stock Market on the last business day of the Registrant’s most recently completed second fiscal quarter (June 27, 2003) was approximately $220,268,104 (assumes officers, directors, and all shareholders beneficially owning 5% or more of the outstanding common shares are affiliates).

      There were approximately 40,956,258 of the Registrant’s common shares, no par value, issued and outstanding on February 27, 2004.

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Securities Exchange Act of 1934).     YES þ          NO o

Documents Incorporated by Reference.

      Portions of the Proxy Statement for the Registrant’s 2004 Annual Meeting of Stockholders to be filed on or about April 23, 2004 are incorporated into Part III of this report.

GSI LUMONICS INC.

TABLE OF CONTENTS

      As used in this report, the terms “we,” “us,” “our,” “GSI Lumonics” and the “Company” mean GSI Lumonics Inc. and its subsidiaries, unless the context indicates another meaning.

      Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.

      The following trademarks and trade names of GSI Lumonics are used in this report: WaferMark®, Super SoftMark®, DrillStar®, WavePrecision^TM, M430^TM, GMAX^TM, TrimSmart^TM, CSP300^TM, JK Series^TM, Sigma Series^TM and Westwind^TM.

1

Table of Contents

PART I

Overview

      We design, develop, manufacture and market components, lasers and laser-based advanced manufacturing systems as enabling tools for a wide range of applications. Our products allow customers to meet demanding manufacturing specifications, including device complexity and miniaturization, as well as advances in materials and process technology. Major markets for our products include the medical, automotive, semiconductor and electronics industries. In addition, we sell our products and services to other markets such as light industrial and aerospace.

Corporate History

      GSI Lumonics Inc., a New Brunswick corporation, is the product of a merger of equals between General Scanning, Inc. and Lumonics Inc. that was completed on March 22, 1999. Our shares trade on The NASDAQ Stock Market under the symbol GSLI and on the Toronto Stock Exchange under the symbol LSI. Immediately following the merger, the General Scanning shareholders and the Lumonics shareholders each, as a group, owned approximately half of the combined company’s common shares.

      General Scanning, Inc. was incorporated in 1968 in Massachusetts. In its early years, General Scanning developed, manufactured and sold components and subsystems for high-speed micro positioning of laser beams. Starting in 1989, General Scanning began manufacturing complete laser-based advanced manufacturing systems for the semiconductor and electronics markets.

      Lumonics Inc., incorporated in 1970 under the laws of the Province of Ontario, Canada, initially produced lasers for scientific and research applications. By the 1980s, the Company was developing, manufacturing and selling laser-based, advanced manufacturing systems for electronics, semiconductor, and general industrial applications.

      During the past three years, we have divested non-core businesses, developed an array of new products and consolidated facilities and operations with the purpose of redirecting our resources on our three major business segments: Components, Lasers, and Laser Systems. We manage the Company within these three major business segments. All of these segments share some common characteristics and incorporate similar core technologies and competencies. There are important distinguishing factors, however, such as products and services, distribution channels, customers, production processes and operational economics, that we believe require different perspectives. In 2003, we focused on our strategy of expanding products and technologies in the laser and precision components segments. To this end we completed three acquisitions: the encoder division of Dynamic Research Corporation (“DRC”) in May 2003, the principal assets of Spectron Laser Systems Limited, a subsidiary of Lumenis Ltd (“Spectron”) in May 2003, and Westwind Air Bearings Inc and Westwind Air Bearings Limited (collectively “Westwind”) in December 2003.

      The Company’s component products are designed and manufactured at our facilities in Billerica, Massachusetts, Moorpark, California, Poole, England, and Suzhou, China. The products are sold directly, or, in some territories, through distributors, to original equipment manufacturers, or OEMs. Products include optical scanners and subsystems used by OEMs for applications in materials processing, test and measurement, alignment, inspection, displays, imaging, graphics, vision, rapid prototyping, and medical use such as ophthalmology. The Components Group also manufactures printers for certain medical end products such as defibrillators, patient care monitors and cardiac pacemaker programmers, as well as film imaging subsystems for use in medical imaging systems. Under the trade name, WavePrecision, we also manufacture precision optics supplied to OEM customers for applications in the aerospace and semiconductor industries. Typical selling prices for Components products range from $200 to $4,000. In May 2003, the Company acquired the principal assets of the Encoder division of DRC, which was integrated into the manufacturing operations in

2

Table of Contents

      The Company designs and manufactures a wide range of lasers at our Rugby, United Kingdom facility for sale in the merchant market to OEMs and both captive and merchant systems integrators. We also use some lasers in the Company’s own laser systems. In addition, the Laser Group derives significant revenues from providing parts and technical support for lasers in its installed base at customer locations. Our lasers are primarily used in material processing applications (cutting, welding and drilling) in light automotive, electronics, aerospace, medical and light industrial markets. Our lasers are sold worldwide directly in North America and the United Kingdom, and through distributors in Europe, Japan, Asia Pacific and China. Sumitomo Heavy Industries (a significant shareholder of the Company) is our distributor in Japan. Specifically, our pulsed and continuous wave Nd:YAG lasers are used in a variety of medical, light automotive and industrial applications. Typical selling prices for our lasers range from $2,000 to $180,000. In addition to our continued development of our existing laser range, in May 2003 we acquired Spectron, a United Kingdom company, which specializes in the manufacture and sale of low power diode pumped and lamp pumped lasers, which are predominantly used in marking applications. This acquisition was successfully incorporated into the existing operations of the Laser Group site in Rugby during the second and third quarters of 2003.

      The Company’s laser systems are designed and manufactured at our Wilmington, Massachusetts facility and are sold directly into our primary markets, through distributors in the secondary markets, to end users, such as semiconductor integrated device manufacturers and wafer processors as well as electronic component and assembly manufacturers. The Laser Systems Group also derives significant revenues from parts sales and servicing systems in its installed base at customer locations. System applications include laser repair to improve yields in the production of dynamic random access memory chips, or DRAMs, permanent marking systems for silicon wafers and individual dies for traceability and quality control, circuit processing systems for linear and mixed signal devices, as well as for certain passive electronic components, and printed circuit boards manufacturing systems for via hole drilling, solder paste inspection and component placement inspection. Typical selling prices for such laser systems range from $100,000 to $1.5 million.

Industry Overview

      The use of precision motion control components and lasers are growing for number of applications in industries, such as medical, automotive, consumer products and aerospace, as well as in semiconductor and electronics industries. In the long term, subject to market cycles, we expect expenditures for capital equipment incorporating either, or both, laser and precision motion control technologies to increase as the result of the advantages offered over other more traditional technologies with respect to improved speed, higher accuracy, greater flexibility and smaller dimensions. Both are enabling technologies in the definitional sense that these allow production of devices, which are either not possible or not economical by use of other technologies. These include, for example, applications such as hermetically sealing implantable defibrillators.

      We see the principal market drivers for our businesses to be:

	•	advances in materials and process technology that are creating new opportunities for laser processing and high precision motion control as enabling technologies;
	•	the continuing development of medical devices, automotive components, consumer products, semiconductor, and electronic components that require new manufacturing technology; and

3

Table of Contents

	•	the replacement of older, less flexible manufacturing tools.

      The Components Group benefits from having a broad product portfolio, are used in many diverse markets by a broad range of customers. This has enabled revenues for the Components Group to be the least cyclical of the three business segments. Specifically, scanning components and multi-axis scan subsystems are used in various materials processing and inspection applications by OEM’s in the medical, industrial and electronics markets. Our printer products service the critical care medical equipment market. Our precision optics products are used for specialized applications by OEMs in aerospace and semiconductor industries. A major market for our air bearing spindles is electronics.

      The Components business also benefits from lower operating costs for distribution and product support required by OEM customers, in comparison to our other business segments, which serve end-user markets.

      In general, the total market for lasers is growing, however, growth rate varies according to laser type, end user industry and geography. Projections for growth range from single digit to mid-teens based on the individual segments. For our served market sectors, we project overall market growth in 2004 of about 7%. Additionally, we believe that our new products, introduced in the third quarter of 2002 will continue to improve our penetration into new and existing customers. Further, we expect our acquisition of the Spectron range of products will also enhance our sales growth.

      The laser market we serve is expanding in line with the growth of overall industrial capital equipment. Our broad range of customers reduces the cyclical impact of individual industry cycles. Major markets served include automotive components, electronics, aerospace, medical and light industrial.

      During 2003, we increased our marketing activities in 2003 in Japan, Asia-Pacific and China with a resultant increase in revenues form the region. We look to development of infrastructure in China as a source for continued sales growth for our laser products. Therefore, we will continue to focus on this region.

      Our laser systems are sold primarily into the semiconductor and electronic markets. The semiconductor and electronics industries are characterized by ever increasing demands on throughput, reduced device size and increased device complexity, performance, traceability and quality. Semiconductor and electronic devices are used in a variety of products including electronics, consumer products, personal computers, communications products, appliances and medical instruments.

      These markets have historically been subject to economic fluctuations due to the substantial capital investment required in those industries. In the past, this has led to significant short-term over or under capacity. The most recent downturn in demand, which began in mid 2001, for capital equipment in our major markets was due to the downturn in general economic conditions, combined with our customers’ current excess of manufacturing capacity and their customers’ excess inventories of components. Historically, when the economy improves, excess inventories are consumed and excess capacity is absorbed, eventually leading to renewed orders for capital equipment.

      During the most recent business down cycle, both the semiconductor and electronics industries have undergone significant restructuring which may affect the historical cycle. Four major factors have combined to radically alter both industries:

	•	the number of producers in each has decreased;
	•	absence of capacity increases;
	•	equipment throughput has increased; and
	•	pressure for lower prices due to more competition.

4

Table of Contents

      The number of active producers of DRAM’s has declined in the past three years due to consolidation caused by the economics of the marketplace. In Japan alone, which led the world in DRAM production through the last business cycle, the number of manufacturers has declined from six to one. After such consolidation, the capacity utilization in the industry was still low. However, it was showing signs of slowly being consumed by increasing demand through 2003. Similarly, the electronics manufacturing services sector had consolidated because of excess capacity.

      Equipment had been procured primarily for technology changeover, as opposed to increasing capacity. However, late in 2003, indications of buying for capacity increases have surfaced. In the past, up-cycles were fueled by additions of capacity to meet increased demand for chips. The absence of demand for more capacity in semiconductors in the most recent downturn was due, in large part, to the saturation in the end markets for products such as computers, mobile telephones and other wireless devices. Production of printed circuit boards is similarly affected.

      Equipment now being provided has higher throughput at relatively the same or lower price than the prior generation. Further, the transition from 200 millimeter to 300 millimeter wafers in the production of DRAM’s produces more than twice as many chips on a single wafer. Combined, these two factors reduce the number of systems required and, hence, the overall available market.

      Based on these factors, we had not planned for a strong recovery in this business sector during 2003, but had restructured our Laser Systems business in 2002 and 2003 to become profitable at a lower revenue level. We continue to focus on new technology and applications to improve opportunities for growth and profitability.

Corporate Strategy

      We believe our product lines are complementary and share the same underlying core competencies. Broadly, our strategy is to exploit our expertise in precision control of laser power and micro-positioning, in optimizing laser/material interaction and in developing new lasers for high precision processing. Accordingly, the key elements of our overall corporate strategy include:

	•	invest in precision motion control components and laser-based technologies, products and capabilities which define GSI Lumonics us as one of the leading companies in markets that offer strong profitable growth opportunities;
	•	increase market penetration through expanded product offerings of the Components and Laser businesses;
	•	explore opportunities in emerging markets and industries that would benefit from our technology;
	•	continue to develop new laser systems for our leading customers; and
	•	acquire complementary products and technologies.

      Consistent with our strategy, during 1999 through 2001 we divested certain product lines that were not strategic for our growth, thereby allowing us to redirect resources to opportunities in our strategic markets.

      In 2002, we took specific actions to strengthen our position in each of our three business segments.

      In the second half of 2003, we returned to profitability. During 2003, we also completed three acquisitions consistent with our stated strategy of expanding our product lines and technology in the laser and precision motion control components business groups.

      We increased market share in medical printing products with a design win with a major medical device OEM. We re-designed and introduced, in concert with a leading OEM, our new multi-axis scan subsystem. With the acquisition of Westwind Air Bearings, we have secured a significant market position in the supply of air bearing spindles to PCB drilling system manufacturers. We have redirected our precision optics business

5

Table of Contents

      We directed our product development and marketing activities into a few selected market segments where the clear benefits of laser technology match with the segments’ attributes of process speed, consistency, flexibility and value added by the laser process. We have developed a number of new products, including focus heads for lasers, a series of side-pumped DPSS laser modules and a new range of small high power Nd:YAG lasers. These offer competitive price and processing performance in current and emerging industrial markets. Our lasers produce high quality, repeatable cuts, welds, holes and specialist marks in products where laser processing is the key value-adding step in the manufacturing process.

      We work extensively with major customers to qualify our products into their production processes. Combining this with our service, technical and spare parts support ensures a longer-term business partnership with our customers.

      We have installed M430 equipment at six major DRAM manufacturers. This is our new technology platform for memory yield enhancement, which was initially introduced in the latter part of 2001. We have installed the 300 millimeter SECS GEM (Semiconductor Equipment Communication Standard Generic Equipment Model) factory automation interface for wafer and die marking products and memory yield improvement systems. We introduced the CSP 300 last year and introduced the CSP 200 for beta site customers in 2003, the industry’s first production system for die marking chip-scale packages, or CSP, on 200 and 300 millimeter wafers. Marking of CSPs is critical for both manufacturing process traceability and product identification. We believe the use of CSPs, which are small (down to sub-1mm in size), packageless IC devices, in next-generation end-user products, such as smart phones and advanced PDAs, is expected to grow as functionality increases and product form factors shrink in size. We also released the LT2100 next generation laser trimmer for hybrid thick film and thin film component substrates. This next generation equipment enables processing of smaller devices with greater accuracy and speed.

Products and Services

      Our revenues in 2003 were derived from the following business segments, in millions of United States dollars:

      Precision Motion Control Components and Subsystems. We produce optical scanners and scanner subsystems, which include optics, software and control systems. These are used by the Company in some of its laser systems and by our customers in a variety of applications including materials processing, test and measurement, alignment, inspection, displays, imaging, graphics, vision, rapid prototyping, and medical applications such as dermatology and ophthalmology.

      Printer Products. We produce a variety of printing products, primarily for medical applications. These printers are used in end products such as defibrillators, patient care monitors, and cardiac pacemaker programmers. They provide a permanent record of a patient’s condition during critical medical care.

6

Table of Contents

      Film Imaging Systems. We produce laser imaging and digitizing subsystems to process data sets from computer-assisted tomography, magnetic resonance imaging or nuclear medicine equipment. This application of lasers for imaging directly on film requires precise micro-positioning for pixel placement and adjustable contrast range. This process replaces traditional chemical development of photographic films.

      Precision Optical Components. Our specialty and precision optical components are sold under the name WavePrecision. We specialize in complex, tight tolerance optical components and subassemblies for aerospace and semiconductor. Unique product features include polishing to sub-angstrom tolerances and proprietary coating techniques.

      Encoders (DRC). We offer a wide variety of modular rotary kit, rotary shaft, hollow shaft, and diffractive linear kit encoders, including custom-designs. DRC encoders are found in aerospace, automotive, medical instrumentation, semiconductor processing, and factory automation applications.

      Air Bearing Spindles. Our high speed precision spindles are marketed under the Westwind trade name. The major application is in the manufacture of mechanical drilling systems for the PCB industry. There is a robust after-market business in supplying the consumable elements (collets) of the PCB drilling systems, as well as refurbishment of high duty-cycle spindles. Other application for specialty air bearings include optical inspection, imaging, wafer dicing, magnetic disk storage verification, and coatings.

      We manufacture lasers for the light automotive, electronics, aerospace, medical and light industrial markets for advanced manufacturing applications. Our lasers can be controlled and directed with precision and used in a wide spectrum of applications. Lasers lower production costs and offer fast solutions and flexibility on the production line. Our JK Series laser systems incorporate advanced solid-state laser technology to produce efficient, reliable, dependable and accurate production systems. These systems operate at uniform energy density, improve process efficiency and require less energy. These systems use our patented power supply, allowing a wide range of applications, including drilling cooling holes in jet engine turbo fans. They also permit high speed, repetitive processing which maximizes production rates. Our JK Series can be readily linked with robotics systems to provide manufacturers with a flexible production tool.

      JK Series continuous wave Nd:YAG lasers. We produce a range of 400W-2000W average power continuous wave Nd:YAG lasers for welding, cutting, and drilling. Applications range from high speed welding of fuel injectors and sensors to cutting car and truck chassis members.

      Pulsed Nd:YAG lasers. We produce a range of 50W-100W pulsed Nd:YAG spot and seam welding lasers and the JK Series of pulsed Nd:YAG lasers for welding, cutting, and drilling in the 150W to 600W range. Applications include disc drives, cardiac pacemakers and mobile telephone batteries.

      Diode pumped and lamp pumped Nd:YAG lasers. We produce a range of lasers from 10mW to 400W in several configurations, primarily designed for incorporation into OEM marking equipment. These lasers derive from our Spectron acquisition and are available in continuous wave and pulsed variants.

      Sigma Series Nd:YLF. We produce a range of continuous wave lasers up to 7W for silicon processing and electronic PCB manufacturing applications.

      Excimer Lasers for materials processing. We produce high repetition rate and high energy industrial Excimer lasers with power ranges from 10W-80W with integrated cryogenic gas processing for extended gas lifetimes. Applications include marking, remote sensing, surface structuring and polymer processing.

      CO 2 Lasers for marking and coding. We produce a range of DC and pulsed CO 2 lasers for marking and high precision machining of non-metallic workpieces and a 200W high power pulsed CO 2 laser for large area ablative machining. The Spectron acquisition has also added a high power (220W) DC CO 2 product range, mainly used in the scientific markets as well as an increased range of CO 2products at low powers.

7

Table of Contents

      Our laser systems are used in several production process steps within the semiconductor industry and in the production of electronic components and assemblies.

      Laser Trim and Test Systems. These systems enable production of electronic circuits by precisely tuning, with a laser, the performance of linear and mixed signal devices. Tuning is accomplished by adjusting various component parameters with selective laser cuts, while the circuit is under test, thereby achieving the desired electrical performance. These systems combine material handling, test stimulus, temperature control and laser trim subsystems to form turnkey production process packages. Applications include power management, data conversion, sensors, RF, precision analog devices used in the mobile communication market, as well as automotive electronics.

      Permanent Marking Systems. We provide products to support the product marking requirements of the semiconductor industry. WaferMark laser systems are used for the marking of silicon wafers at the front end of the semiconductor manufacturing process, aiding process control and device traceability. These systems incorporate advanced robotics and proprietary Super SoftMark process control technology to provide debris free marking of high-density silicon wafers along automated production lines. We also supply systems for marking the individual dies on wafers. Our automated wafer marking system supports individual bare die traceability marks. The system incorporates a tightly coupled vision system for automated wafer identification and mark alignment on each die. Complete system operation is managed with software for intuitive process monitoring and automated wafer map downloading through a single graphical user interface. Our systems are used in the silicon foundry, the wafer fab and in the back-end die marking process.

      Memory Repair Systems. DRAMs are critical components in the active memory portion of computers and a broad range of other digital electronic products. First-pass manufacturing yields are typically low at the start of production of a new generation of higher capacity memory devices. Laser processing is used to raise production yields to acceptable economic levels. Our memory repair laser systems allow semiconductor manufacturers to effectively disconnect defective or redundant circuits in a memory chip with accurately positioned and power modulated laser pulses. Shrinking DRAM die-density to tight circuit pitches below two microns requires systems, such as ours, to operate with exceptional accuracy of less than 0.2 micron while processing at a rate of 30,000 or more circuits per second. As a point of reference, the diameter of a human hair is greater than 100 microns.

      The producers of electronic components and assemblies, particularly surface mount technology assemblies, have a number of our laser systems available to support their process requirements. Features of these systems include precision laser spot size, laser power control, high-speed parts handling, and applications adaptability.

      Our laser systems are used in various process steps in the production of printed circuit boards and flex circuits.

      Via drilling. Our DrillStar products, which are capable of drilling micro vias at very high speeds in every type of material commonly used for printed circuit board fabrication, supports the miniaturization trend within the industry.

      Surface Mount Measurement Systems. Our surface mount measurement products are also used in the manufacture of printed circuit board assemblies. In the manufacture process, surface-mount solder, in paste form, is stenciled onto the circuit board with a screen printer, and components are then placed in their respective positions on the board by automated equipment. Our systems use our patented three-dimensional scanning laser data acquisition technology to inspect either solder paste depositions or component placement accuracy.

      Thick and Thin Film Laser Processing Systems. Our laser systems are used in the production of thick and thin film resistive components for surface mount technology electronic circuits, known as chip resistors, as well as more general-purpose hybrid thick and thin film electronic circuits. These systems optimize the operating parameters of RF devices, sensors, resistor networks and other devices.

8

Table of Contents

Customers

      Many of our customers are among the largest global participants in their industries. Many of our customers participate in several market segments. During 2003, our largest customer accounted for 9.4% of our total sales and our top 25 customers accounted for 50% of our total sales. During 2002, our largest customer accounted for 8.5% of our total sales and our top 28 customers accounted for 50% of our total sales. The increase in concentration from 2002 to 2003 is due in part to the increase in sales volume in the end-user systems business to certain customers.

Marketing, Sales and Distribution

      We believe that our marketing, sales and customer support organizations are important to our long-term growth and give us the ability to respond rapidly to the needs of our customers. Our product line managers have worldwide responsibility for determining product strategy based on their knowledge of the industry, customer requirements and product performance. These managers have direct contact with customers and, working with the sales and customer service organizations, develop and implement strategic and tactical plans aimed at serving the needs of existing customers as well as identifying new opportunities based on the market’s medium-to-long term requirements.

      Components are sold worldwide, mostly through direct sales, as well as through distributors to OEMs. There are direct application engineering and customer support centers located in Massachusetts, Germany, China, and Japan to support pre- and post-sales of our products. Because of the relatively small physical size of the products sold and fundamental nature of the products, the Components Group employs a factory direct strategy in support of its worldwide customer base and does not perform field repair of its products.

      Lasers are sold worldwide, either directly or through distributors to OEMs and both captive and merchant systems integrators in North America and the United Kingdom, and through distributors in Europe, Japan, Asia-Pacific and China. Sumitomo Heavy Industries Ltd. (a significant shareholder of the Company) is our distributor in Japan. Our worldwide network of integrators are also an active sales channel offering complete turn key solutions to customers demanding single point responsibility. Significant revenues are derived from providing parts and technical support for lasers in our installed base.

      Laser Systems are sold directly, or, in some territories, through distributors, to end users, usually semiconductor integrated device manufacturers and electronic component and assembly manufacturers. Our worldwide advanced manufacturing systems sales activities are directed from the product business unit sites in North America, Europe, Japan and Asia Pacific. Field offices are located close to key customers’ manufacturing sites to maximize sales and support effectiveness. Significant revenues are provided from servicing systems in our installed base at customer locations. In Europe, we maintain offices in the United Kingdom, Germany, and in the Asia-Pacific region, in Japan, Korea, Taiwan and Singapore.

Competition

      We face substantial competition in each of our markets from both established competitors and potential new market entrants. Significant competitive factors include product functionality, performance, size, flexibility, price, market presence, customer satisfaction, customer support capabilities, breadth of product line, technology and intellectual property. We believe that we compete favorably on the basis of each of these factors. Competition for our products is concentrated in certain markets and fragmented in others.

      We expect our competitors to continue to improve the design and performance of their products. There is a risk that our competitors will develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new processes or technologies will emerge that render our products less competitive or obsolete. Increased competitive pressure could lead to lower prices for our products, adversely affecting our sales and profitability.

9

Table of Contents

      In component markets, we compete primarily with Cambridge Technology, Inc., a unit of Excel Technology, in scanning components, and Scanlabs Gmbh for scanning subsystems. Most of our competition for printer products comes from make/buy decisions by the medical OEMs. Competition in precision optics, and encoders is application specific and fragmented among numerous suppliers. For our air bearing spindles in the PCB market, Westwind has significant market presence, but still faces competition from Mechatronics, Precise, Jevco and ABL (50% owned by Hitachi). In other markets for air bearing spindles, competition is application specific. Our competitive factors vary between products and markets, but the primary ones that affect the Components Group are price, technological features, quality and on-time delivery.

      In the laser markets, which we serve, we compete primarily with Trumpf-Haas, Rofin-Sinar, NEC, Coherent, Spectra Physics, LambdaPhysik, Unitek-Miyachi and Lasag. While there are numerous competitive factors that vary amongst product lines and markets, the competitive factors that our Laser business faces are quality, variety, product performance, sales and service support, new products and costs.

      In laser-based processing systems for the semiconductor and electronics markets, we compete primarily with companies such as NEC, Electro Scientific Industries, Hitachi, Rofin-Sinar, EO Technics, CyberOptics and Innolas. The main competitive factors that impact the Laser Systems Group are price, total cost of ownership and technical competency, but there are many other factors.

Manufacturing

      We perform internally those manufacturing functions that enable us to add value and to maintain control over critical portions of the production process. To the extent practical, we outsource other portions of the production process. During the last year, we continued to improve the management of both our internal production processes as well as the management of supplier quality and production. Our Laser Systems segment focused on outsourcing low value parts and modules with the retained internal activity focused on subsystem integration and testing, with particular emphasis on our customers’ applications. We believe we achieve a number of competitive advantages from this integration, including the ability to achieve lower costs and higher quality, bring new products and product enhancements more quickly and reliably to market, and produce sophisticated component parts not available from other sources.

      We manufacture our components at facilities in Billerica, Massachusetts, Moorpark, California, Poole, United Kingdom, and Suzhou, China. Our lasers in Rugby, United Kingdom and laser systems in Wilmington, Massachusetts. Each of our manufacturing facilities has co-located manufacturing, manufacturing engineering, marketing and product design personnel. We believe that this organizational proximity greatly accelerates development and entry into production of new products and aids economical manufacturing. Most of our products are manufactured under ISO 9001 certification.

      We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used on our premises. We believe we are in material compliance with these regulations and have obtained all necessary environmental permits to conduct our business.

Research and Development

      We continue to make a strong commitment to research and development for core technology programs directed at creating new products, product enhancements and new applications for existing products, as well as funding research into future market opportunities. Each of the markets we serve is generally characterized by rapid technological change and product innovation. We believe that continued timely development of new products and product enhancements to serve both existing and new markets is necessary to remain competitive.

10

Table of Contents

      We carry out our research and development activities at the manufacturing locations cited above. We also maintain links with leading industrial, government and university research laboratories worldwide. We work closely with customers and institutions to develop new or extended applications of our technology.

      We maintain significant expertise and continue to advance our capabilities in the core technologies listed below.

      Scanners: high precision servomechanisms, electronic amplifiers, controller software and motor technologies, typically associated with a broad spectrum of laser systems.

      Precision Subsystems: Software controlled electro-optical and thermal technology subsystems for medical, electronic and industrial applications.

      Light Processing Optics: design and manufacturing process capability for production of laser quality lenses, mirrors of high dynamic rigidity, high performance mirrors and lens coatings.

      Air Bearings: high precision, high speed air bearings and associated mechanical, optical and electrical components.

      Lasers: both gas and solid-state, designed to produce efficient, reliable and accurate lasers in a broad range of configurations for material processing applications.

      Laser Beam Deliveries: design and manufacture of fiber optic beam deliveries and focus heads for integration into complex manufacturing systems either by integrators or end-users.

      Laser Control Software and Systems Interfaces: development of laser control systems and interfaces for integrating our lasers into customers manufacturing systems.

      Electronics: design of wide bandwidth power amplifiers and high signal-to-noise ratio and low thermal drift signal detection circuits; design and manufacture of analog servo controllers with low electromagnetic interference circuitry.

      Software: development of real-time control of servomechanisms, process system control and machine interfaces.

      Inspection: design of non-contact measurement probes, systems and related software.

      Systems Design and Integration: creation of highly efficient and effective application-specific manufacturing solutions, typically based on lasers and their interaction with materials, including integration with robotics systems.

Sources of Supply

      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.

11

Table of Contents

      We manufacture many of our own machined parts, particularly in air bearing manufacture. However, non-critical machined parts are often purchased externally. We purchase fully-functional electronics as well as certain key components, such as laser diodes, from external sources.

      We design and assemble our lasers. Supply of our proprietary parts comes from both internal sources, as well as a network of specialist, qualified suppliers predominantly located in North America and the United Kingdom. We purchase certain critical parts from single sources to ensure quality and consistency.

      We purchase certain major subsystems, such as lasers, motion stages, certain vision systems, fully-functional electronics and frames and racks, from the merchant market. Our optics components are sourced both internally by manufacture and externally by purchase in the merchant market. In some cases, upper level assemblies and, in some cases, entire systems are outsourced to electronic manufacturing services companies.

Patents and Intellectual Property

      Our intellectual property includes copyrights, patents, trademarks and tradenames, involving proprietary software, technical know-how and expertise, designs, process techniques and inventions. As of February 2004, we held 142 United States and 107 foreign patents; in addition, applications were pending for 64 United States and 126 foreign patents. We have also obtained licenses under a number of patents in the United States and foreign countries and may require licenses under additional patents. There can be no assurance as to the degree of protection offered by these patents or as to the likelihood that patents will be issued for pending applications.

      We also rely on a combination of copyrights and trade secret laws and restrictions on access to protect our trade secrets and proprietary rights. We routinely enter into confidentiality agreements with our employees and consultants. There is a risk that these agreements will not provide meaningful protection of our proprietary information in the event of misappropriation or disclosure.

Human Resources

      At December 31, 2003, we had 1,067 employees in the following areas:

      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.

12

Table of Contents

Government Regulation

      We are subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health, a branch of the United States Food and Drug Administration. Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. We are subject to similar regulatory oversight, including comparable enforcement remedies, in the European markets we serve.

Other

      Information concerning product lines, backlog, working capital and research and development expenses may be found in Item 7, Management Discussion and Analysis. Information about geographic segments may be found in note 13 to the financial statements.

Available Information, Website and Access to Financial Filings

      We maintain an Internet website at http://www.gsilumonics.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Form 10-K. We make available free of charge through our website our proxy statements, registration statements, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. Our SEC filings are also available over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we have filed by visiting the SEC’s public reference rooms in Washington, D.C. and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. You may also inspect our SEC reports and other information at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. In addition, our reports and other information are filed with securities commissions or other similar authorities in Canada, and are available over the Internet at http://www.sedar.com.

      Additionally, the Company makes available on its website its Code of Ethics.

Special Note Regarding Forward-Looking Statements

      Certain statements in this Form 10-K constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, tax issues and other matters. All statements contained in this Form 10-K that do not relate to matters of historical fact should be considered forward-looking statements, and are generally identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “objective” and other similar expressions. Readers should not place undue reliance on the forward-looking statements contained in this document. Such statements are based on management’s beliefs and assumptions and on information currently available to management and are subject to risks, uncertainties and changes in condition, significance, value and effect, including risks discussed in reports and documents filed by the Company with the United States Securities and Exchange Commission and with securities regulatory authorities in Canada. Such risks, uncertainties and changes in condition, significance, value and effect, many of which are beyond our control, could cause our actual results and other future events to differ materially from those anticipated. We do 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.

13

Table of Contents

      The principal owned and leased properties of the Company and its subsidiaries are listed in the table below.

The facilities house the segments as indicated by the numbers below. Facilities are not dedicated to just one segment:

      1 — Components Group

      Additional sales, service and logistics sites are located in Burlington, Massachusetts, Japan, Korea, Taiwan, Singapore and the People’s Republic of China. These additional offices are in leased facilities occupying approximately 25,000 square feet in the aggregate.

      During fiscal 2003, we sold our former sites in Kanata, Ontario and one of our sites in Nepean, Ontario.

14

Table of Contents

      We believe the productive capacity of the remaining facilities to be both suitable and adequate for the requirements of our business. The Company is in the process of trying to sell or sublease its excess facilities.

      Information regarding legal proceedings are contained in note 11 in the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

      No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

PART II

Market Information

      Our common shares, no par value, trade on The NASDAQ Stock Market under the symbol “GSLI” and on the Toronto Stock Exchange under the symbol “LSI.” From September 29, 1995 until the 1999 merger between General Scanning, Inc. and Lumonics Inc., Lumonics Inc.’s common shares were traded on the Toronto Stock Exchange under the symbol “LUM.”

      The following table sets forth, for the periods indicated, the high and low trading prices per share of our common shares as reported by The NASDAQ Stock Market in United States dollars and the Toronto Stock Exchange in Canadian dollars.

Holders