-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IDwBnHRidsZ53seFhQoz/e03ZW1oIBFZ48gGgL2KuIDhfJXYkUJHKM+0dxKl6ffn hfNS9wG5G1rddGSwEcqdmw== 0000927016-01-503597.txt : 20020410 0000927016-01-503597.hdr.sgml : 20020410 ACCESSION NUMBER: 0000927016-01-503597 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010928 FILED AS OF DATE: 20011109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GSI LUMONICS INC CENTRAL INDEX KEY: 0001076930 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 381859358 STATE OF INCORPORATION: A3 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25705 FILM NUMBER: 1780573 BUSINESS ADDRESS: STREET 1: 105 SCHNEIDER RD KANATA STREET 2: ONTARIO CANADA CITY: K2K 1Y3 MAIL ADDRESS: STREET 1: 105 SCHNEIDER RD KANATA STREET 2: ONTARIO CANADA CITY: K2K 1Y3 FORMER COMPANY: FORMER CONFORMED NAME: GSI LUMONICS DATE OF NAME CHANGE: 19990331 FORMER COMPANY: FORMER CONFORMED NAME: LUMONICS INC DATE OF NAME CHANGE: 19990115 10-Q 1 d10q.txt FORM 10-Q 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 SEPTEMBER 28, 2001 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.) 105 SCHNEIDER ROAD, KANATA, ONTARIO, CANADA K2K 1Y3 (Address of principal executive offices) (Zip Code) (613) 592-1460 (Registrant's telephone number, including area code) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As at October 17, 2001, there were 40,449,229 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...................... 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 22 PART I - OTHER INFORMATION............................................ 23 ITEM 1. LEGAL PROCEEDINGS........................................ 23 ITEM 5. OTHER INFORMATION........................................ 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 23 Signatures............................................................ 24 2 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)
SEPTEMBER 28, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS Current Cash and cash equivalents....................................................... $ 87,894 $113,858 Short-term investments.......................................................... 20,005 20,020 Accounts receivable, less allowance of $3,365 (December 31, 2000 - $2,758)...... 50,175 85,226 Income taxes receivable......................................................... 4,387 -- Inventories..................................................................... 67,102 77,906 Deferred tax assets............................................................. 14,957 25,615 Other current assets............................................................ 9,859 5,465 --------- --------- Total current assets........................................................ 254,379 328,090 Property, plant and equipment, net of accumulated depreciation of $22,093 (December 31, 2000 - $23,961)................................................... 34,102 33,368 Deferred tax assets................................................................ 7,693 6,253 Other assets....................................................................... 39,217 37,398 Intangible assets, net of amortization of $12,170 (December 31, 2000 - $11,363)................................................... 22,037 26,075 --------- --------- $357,428 $431,184 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness............................................................... $ 11,098 $ 11,414 Accounts payable................................................................ 14,594 30,030 Accrued compensation and benefits............................................... 7,759 12,797 Income taxes payable............................................................ -- 32,489 Other accrued expenses.......................................................... 28,854 46,561 Current portion of long-term debt............................................... 2,654 3,821 --------- --------- Total current liabilities................................................... 64,959 137,112 Long-term debt due after one year.................................................. -- 2,697 Deferred compensation.............................................................. 2,046 2,108 --------- --------- Total liabilities........................................................... 67,005 141,917 Commitments and contingencies (note 7) Stockholders' equity Capital stock, no par value; Issued common shares of 40,448,229 (December 31, 2000 - 40,162,608)............................................. 302,967 301,667 Additional paid-in capital...................................................... 1,159 759 Retained earnings............................................................... 1,029 1,152 Accumulated other comprehensive loss............................................ (14,732) (14,311) --------- --------- Total stockholders' equity.................................................. 290,423 289,267 --------- --------- $357,428 $431,184 ========= =========
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 SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- Sales.................................................. $41,277 $97,631 $205,526 $278,368 Cost of goods sold..................................... 31,969 58,547 134,265 165,313 -------- ------- -------- -------- Gross profit........................................... 9,308 39,084 71,261 113,055 Operating expenses: Research and development.......................... 5,626 8,993 19,444 26,276 Selling, general and administrative............... 16,363 20,625 53,151 60,852 Amortization of technology and other intangibles.. 1,390 1,127 4,054 3,508 Other............................................. (170) (243) (1,570) (2,913) -------- ------- -------- -------- Income (loss) from operations.......................... (13,901) 8,582 (3,818) 25,332 Gain on sale of assets............................ -- 1,680 -- 2,388 Interest income, net.............................. 759 998 3,382 1,582 Foreign exchange transaction gains (losses)....... 9 (229) 256 (2,003) -------- ------- -------- -------- Income (loss) before income taxes...................... (13,133) 11,031 (180) 27,299 Income tax provision (benefit)......................... (4,646) 3,855 (57) 9,529 -------- ------- -------- -------- Net income (loss)...................................... $ (8,487) $ 7,176 $ (123) $ 17,770 ======== ======= ======== ======== Net income (loss) per common share: Basic.......................................... $ (0.21) $ 0.18 $ -- $ 0.47 Diluted........................................ $ (0.21) $ 0.17 $ -- $ 0.45 Weighted average common shares outstanding (000's)..... 40,410 39,807 40,307 37,606 Weighted average common shares outstanding and dilutive potential common shares (000's)................... 40,410 41,731 40,307 39,644
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 NINE MONTHS ENDED ------------------------- ------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ (8,487) $ 7,176 $ (123) $ 17,770 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Gain on sale of assets............................. -- (1,680) -- (2,388) Translation loss on liquidation of a subsidiary.... 723 -- 723 -- Depreciation and amortization...................... 2,738 2,598 8,975 8,177 Compensation expense............................... 200 -- 400 -- Provision for (recovery of) deferred income taxes.. 5,821 (2,519) 8,848 (2,036) Changes in current assets and liabilities: Accounts receivable................................ 15,456 (8,644) 32,617 (14,238) Inventories........................................ 5,061 (3,012) 507 (30,836) Other current assets............................... 4,232 (1,604) 852 (2,893) Accounts payable, accrued expenses, and taxes payable............................................ (23,929) 10,105 (73,947) 12,306 -------- -------- -------- -------- Cash provided by (used in) operating activities......... 1,815 2,420 (21,148) (14,138) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of a business, net of cash acquired.... -- (6,548) -- (6,548) Sale of assets..................................... -- 12,457 6,000 26,193 Additions to property, plant and equipment......... (1,858) (1,451) (6,885) (6,160) Maturity of short-term investments................. 32,726 21,755 80,880 29,097 Purchase of short-term investments................. (20,005) (31,507) (80,865) (52,804) Decrease (increase) in other assets................ 423 281 (1,819) 835 -------- -------- -------- -------- Cash provided by (used in) investing activities......... 11,286 (5,013) (2,689) (9,387) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Additions to (payments of) bank indebtedness....... 596 (5,989) (316) (12,442) Repayment of long-term debt........................ (3,762) 5 (3,762) (2,732) Issue of share capital (net of issue costs)........ 536 3,090 1,300 78,251 -------- -------- -------- -------- Cash provided by (used in) financing activities......... (2,630) (2,894) (2,778) 63,077 -------- -------- -------- -------- Effect of exchange rates on cash and cash equivalents... 254 582 651 1,946 -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents........ 10,725 (4,905) (25,964) 41,498 Cash and cash equivalents, beginning of period.......... 77,169 71,675 113,858 25,272 -------- -------- -------- -------- Cash and cash equivalents, end of period................ $ 87,894 $66,770 $ 87,894 $ 66,770 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest........................................... $ 188 $ 273 $ 443 $ 994 Income taxes....................................... $ 779 $ 1,973 $ 32,902 $ 3,913
The accompanying notes are an integral part of these financial statements. 5 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF SEPTEMBER 28, 2001 (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 United States for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, these interim 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, 2000. The results for interim periods are not necessarily indicative of results to be expected for the year or any future periods. 2. INVENTORIES Inventories consist of the following: September 28, December 31, 2001 2000 ------------- ------------ Raw materials............ $37,567 $42,468 Work-in-process.......... 8,274 11,083 Finished goods........... 12,538 15,392 Demo inventory........... 8,723 8,963 ------- ------- Total inventories..... $67,102 $77,906 ------- ======= 3. 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 nine months ended September 28, 2001, the Company issued 287,930 shares of common stock pursuant to share options exercised for proceeds of $1.3 million and 2,309 shares were cancelled. ACCUMULATED OTHER COMPREHENSIVE INCOME At September 28, 2001, accumulated other comprehensive income was comprised of an accumulated unrealized loss of $5.0 million after tax on investment in Packard BioScience Company common stock and $9.7 million of accumulated foreign exchange translation adjustments. 6 The components of comprehensive income are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- Net income (loss)................................... $(8,487) $ 7,176 $ (123) $ 17,770 Other comprehensive income (loss)................... Cumulative effect of change in accounting policy for cash flow hedges (note 5)........... -- -- (164) -- Realized gain on cash flow hedging instruments, net of tax (note 5)............... (806) -- (642) -- Unrealized (loss) gain on cash flow hedging instruments, net of tax (note 5)............... (32) -- 774 -- Foreign currency translation adjustments....... 870 (1,572) (1,495) (2,754) Translation loss on liquidation of a subsidiary 723 -- 723 -- Unrealized gain (loss) on equity securities, net of tax..................................... (1,140) -- 383 -- --------- --------- --------- --------- Comprehensive income (loss)......................... $(8,872) $5,604 $ (544) $ 15,016 ========= ========= ========= =========
NET INCOME PER COMMON SHARE Basic net income per common share was computed by dividing net income by the weighted-average number of common shares outstanding during the period. For diluted net income 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 losses for the three months and nine months ended September 28, 2001, the effect of converting options was antidilutive. Common and common share equivalent disclosures are:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- ------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- Weighted average common shares outstanding......... 40,410 39,807 40,307 37,606 Dilutive potential common shares................... -- 1,924 -- 2,038 --------- --------- --------- --------- Diluted common shares.............................. 40,410 41,731 40,307 39,644 ========= ========= ========= =========
At September 28, 2001, the Company had options and warrants outstanding entitling holders to up to 4,137,864 and 68,024 common shares, respectively. EMPLOYEE STOCK PURCHASE PLAN At the Annual General Meeting of Shareholders on May 8, 2001, the Shareholders of the Company approved the adoption of the Employee Stock Purchase Plan (the "Purchase Plan"). A total of 300,000 common shares have been reserved for issuance under the Purchase Plan. The Company will make open market purchases and/or issue treasury common shares to satisfy employee subscriptions under the Purchase Plan. The Purchase Plan provides for consecutive offering periods during which payroll deductions may be accumulated for the purchase of common shares. The initial offering period commenced on July 1, 2001 and will end on December 31, 2001. Thereafter, each offering period will continue for a period of six months following commencement. The purchase price per share at which shares will be sold in an offering period under the Purchase Plan is the lower of 85% of the Fair Market Value of a common share at the beginning of the offering period or 85% of the Fair Market Value of a common share at the end of the offering period. Fair Market Value, as defined by the Purchase Plan, is the weighted average sale price of the shares for the five (5) day period preceding the grant date and the exercise date. 7 4. RELATED PARTY TRANSACTIONS In addition to matters discussed elsewhere, the Company had the following transactions with related parties. The Company recorded sales revenue from Sumitomo Heavy Industries, Ltd., a significant shareholder, of $3.4 million in the nine months ended September 28, 2001 and $7.3 million in the nine months ended September 29, 2000 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 $1.8 million as at September 28, 2001 and December 31, 2000, respectively, are included in accounts receivable on the balance sheet. In January of 2001, the Company made an investment of $2 million in a technology fund, managed by OpNet Partners, L.P. 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 long-term other assets on the balance sheet. 5. FINANCIAL INSTRUMENTS CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS At September 28, 2001, the Company had $56.4 million invested in cash equivalents denominated in U.S. dollars with maturity dates between October 2, 2001 and December 10, 2001. At December 31, 2000, the Company had $81.1 million invested in cash equivalents denominated in both U.S. and Canadian dollars with maturity dates between January 8, 2001 and February 27, 2001. The carrying value of cash equivalents approximates their fair value. At September 28, 2001, the Company had $20.0 million invested in short-term investments denominated in U.S. dollars with maturity dates between November 1, 2001 and February 4, 2002. At December 31, 2000, the Company had $20.0 million invested in short-term investments denominated in U.S. dollars with maturity dates between January 8, 2001 and March 30, 2001. The carrying value of short-term investments approximates their fair value. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, the Company implemented, on a prospective basis, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, the "Statement"). This Statement requires all derivatives to be recognized in the consolidated balance sheet at fair value, with changes in the fair value of derivative instruments to be recorded in current earnings or deferred in accumulated other comprehensive income, depending on whether a derivative is designated and effective as a hedge and on the type of hedging transaction. The Company recorded a transition adjustment loss of $164 thousand in other comprehensive income as a result of adopting SFAS 133 on January 1, 2001. The loss was recognized in earnings during the period ended March 30, 2001, and at that time the underlying hedged transactions were realized. The Company applies hedge accounting as allowed by the Statement. At September 28, 2001, the Company had twelve derivatives that qualified as foreign currency cash flow hedges. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer intended to occur, and any previously deferred hedging gains or losses are recorded to earnings immediately. Earnings impacts for all designated hedges are recorded in the consolidated statement of operations generally on the same line item as the gain or loss on the item being hedged. The Company records all derivatives at fair value as assets or liabilities in the consolidated balance sheet, with classification as current or long-term depending on the duration of the instrument. Currency forwards and options are used by the Company to manage exposures to changes in currency exchange rates associated with sales transactions. 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. As of September 28, 2001, the Company had nine foreign exchange forward contracts to purchase $19.9 million U.S. dollars and three foreign exchange option contracts to purchase $17.7 million U.S. dollars with an aggregate fair value loss of $32 8 thousand after-tax recorded in accumulated other comprehensive income and maturing in December 2001, March 2002 and on the 15th of each following month until August 15, 2002. 6. RESTRUCTURING RESTRUCTURING CHARGES 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, 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, and 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. Cumulative draw-downs by cash payments of $3.2 million have been applied against the provision, resulting in a provision balance of $9.3 million as at September 28, 2001. The remaining provision is expected to be substantially drawn-down by the fourth quarter of 2001, except for certain long-term leased facility costs. The following table summarizes changes in the restructuring provision.
(in millions) SEVERANCE FACILITIES OTHER TOTAL ------------ ------------ ------------ ------------ Provision at December 31, 2000........... $ 1.2 $ 8.3 $ 3.8 $ 13.3 Draw-downs during first quarter.......... (0.7) (0.8) (1.3) (2.8) Draw-downs during second quarter......... (0.2) (0.4) (0.1) (0.7) Draw-downs during third quarter.......... (0.2) (0.2) (0.1) (0.5) ------------ ------------ ------------ ------------ Provision at September 28, 2001.......... $ 0.1 $ 6.9 $ 2.3 $ 9.3 ============ ============ ============ ============
OTHER During the third quarter of 2001, the Company recorded a benefit of $0.2 million related to settlement of litigation. During the third quarter of 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line. 7. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS Robotic Vision Systems, Inc. v. View Engineering, Inc., USDC Case No. 95-7441. In March 2000, the United States District Court for the Central District of California entered judgement in favor of View Engineering, Inc., a wholly owned subsidiary. Robotic Vision had alleged infringement relating to lead inspection machines formerly sold by View Engineering and sought damages of $60.5 million. The District Court found Robotic Vision's patent invalid and Robotic Vision appealed that decision. The Court of Appeals affirmed the invalidity judgment on May 7, 2001. On August 8, 2001 Robotic Vision filed a Petition for a Writ of Certiorari with the Supreme Court of the United States. On October 9, 2001, View Engineering filed its Brief in Opposition to Robotic Vision's Petition. Electro Scientific Industries, Inc. v. GSI Lumonics Inc. On March 16, 2000, Electro Scientific Industries, Inc. filed an action for patent infringement in the United States District Court for the Central District of California against the 9 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 no.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 fees. GSI Lumonics indemnified Dynamic Details with respect to these allegations. On August 14, 2001, the United States District Court for the Central District of California granted GSI Lumonics' 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. The Company intends to vigorously contest Electro Scientific's appeal. Electro Scientific Industries, Inc. v. General Scanning, Inc. In September 1998, the United States District Court for the Northern District of California granted Electro Scientific's motions for summary judgment against General Scanning in this case on a claim of patent infringement and on the issue of whether Electro Scientific committed inequitable conduct by intentionally failing to cite prior art to the U.S. Patent Office in connection with one of its patents. The Court denied General Scanning's motion for summary judgment that the Electro Scientific patents are invalid due to prior art. During March 1999, the Court granted Electro Scientific's motion for partial summary judgment that upgrade kits, sold by General Scanning for 1.3 micron laser wavelength memory repair, infringe the Electro Scientific patents in suit. In April 1999 a federal court jury issued a verdict that Electro Scientific's patent 5,473,624 was invalid, and that Electro Scientific's patent 5,265,114 was valid, and awarded a $13.1 million damage judgment against the Company. In July 1999, the Court refused Electro Scientific's requests to increase damages awarded by the jury in April, and for attorney fees, but granted interest on the damages. The Company recorded a provision during the three months ended April 2, 1999 of $19 million to reflect the amount of the damage award plus accrued interest and related costs. The Court also affirmed the jury's decision to invalidate one of the two patents asserted by Electro Scientific in the case. The Company appealed the decisions on infringement, the validity of the second patent and the award of damages. The Company was required to post an unsecured bond with the court in order to proceed with the appeal. The Court of Appeals affirmed the judgment on April 18, 2001 and the Company paid approximately $15.3 million in May 2001 in satisfaction of the judgment. Other. As the Company has disclosed since 1994, a party has commenced legal proceedings in the United States against a number of U.S. manufacturing companies, including companies that have purchased systems from GSI Lumonics. The plaintiff in the proceedings has alleged that certain equipment used by these manufacturers infringes patents claimed to be held by the plaintiff. While GSI Lumonics is not a defendant in any of the proceedings, several of GSI Lumonics' customers have notified GSI Lumonics that, if the party successfully pursues infringement claims against them, they may require GSI Lumonics to indemnify them to the extent that any of their losses can be attributed to systems sold to them by GSI Lumonics. GSI Lumonics does not believe that the outcome of these claims will have a material adverse effect upon GSI Lumonics, 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 8. SEGMENT INFORMATION GSI Lumonics Inc. designs, develops, manufactures and markets laser systems and components as enabling tools for a wide range of high-technology applications, including computer-chip memory repair processing, inspection systems for solder paste and component placement on surface-mount printed circuits, via drilling, hybrid circuit trim and circuit trim on silicon. The Company also provides precision optics for Dense Wave Division Multiplexing networks. Major markets for its products include the semiconductor, electronics, and telecommunications industries. The Company's principal markets are in the United States, Canada, Europe, Japan and Asia-Pacific. GEOGRAPHIC SEGMENT INFORMATION The Company attributes revenues to geographic areas on the basis of the customer location. Long-lived assets are attributed to geographic areas in which Company assets reside.
(in millions) THREE MONTHS ENDED ---------------------------------------------------------- SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ---------------------------- ----------------------------- Revenues from external customers: United States................. $ 25.6 62% $ 49.0 50% Canada........................ 0.8 2% 5.0 5% Europe........................ 6.1 15% 15.2 16% Japan......................... 5.6 14% 15.7 16% Asia-Pacific, other........... 3.0 7% 10.7 11% Latin and South America....... 0.2 0% 2.0 2% ------ --- ------ --- Total.................... $ 41.3 100% $ 97.6 100% ====== ======
NINE MONTHS ENDED ---------------------------------------------------------- SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ---------------------------- ----------------------------- United States................. $ 95.6 47% $129.2 46% Canada........................ 11.0 5% 13.4 5% Europe........................ 43.0 21% 58.4 21% Japan......................... 34.0 17% 43.1 15% Asia-Pacific, other........... 21.1 10% 30.0 11% Latin and South America....... 0.8 0% 4.3 2% ------ --- ------ --- Total.................... $205.5 100% $278.4 100% ====== ======
AS AT ---------------------------------------------------------- SEPTEMBER 28, 2001 DECEMBER 31, 2000 ---------------------------- ----------------------------- Long-lived assets: United States................... $ 32.6 $ 35.7 Canada.......................... 9.9 9.9 Europe.......................... 12.6 12.9 Japan........................... 0.8 0.7 Asia-Pacific, other............. 0.2 0.2 ------ ------ Total.................... $ 56.1 $ 59.4 ====== ======
9. DIVESTITURE On April 2, 2001, the Company completed the sale of operating assets of the Laserdyne and custom systems product lines without a gain for proceeds of approximately $9 million, subject to final adjustment per the terms of the Asset 11 Purchase Agreement. Sales for these product lines were $2.9 million and $18.6 million for the nine months ended September 28, 2001 and September 29, 2000, respectively. 10. RECENT PRONOUNCEMENTS On June 29, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. As a result, the pooling-of-interests method will be prohibited. SFAS 142 establishes criteria for recognition of intangibles and how they should be accounted for after initial recognition and changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement, which for the Company will be January 1, 2002. However, for any acquisitions completed after June 30, 2001, goodwill and intangible assets with an indefinite life will not be amortized. On October 1, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The distinction is important because assets to be disposed of are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The new rules also will now require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as is presently required. In addition, more dispositions will qualify for discontinued operations treatment in the statement of income. The Company will adopt the Statement effective January 1, 2002. The adoption of SFAS 141 will not have an impact on the business, results of operations, and financial condition of GSI Lumonics. The Company is still evaluating the impact of the adoption of SFAS 142 and SFAS 144 and has not yet determined the effect of adoption on the business, results of operations, and financial condition of the Company. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read this discussion together with the consolidated financial statements and other financial information included in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in the forward-looking statements. Please see the special note set forth below under "Forward-Looking Statements." All dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in United States dollars, unless otherwise stated, and in accordance with U.S. GAAP. OVERVIEW We design, develop, manufacture and market laser systems and components as enabling tools for a wide range of high-technology applications, including computer-chip memory repair processing, inspection systems for solder paste and component placement on surface-mount printed circuits, via drilling, hybrid circuit trim and circuit trim on silicon. We also provide precision optics for Dense Wave Division Multiplexing networks. Major markets for our products include the semiconductor, electronics, and telecommunications industries. In addition, we sell to other markets such as the medical industry. Our systems sales depend on our customers' capital expenditures that are affected by business cycles in the markets they serve. The events of September 11th and thereafter have further hindered our ability to develop any certainty about the timing of any turnaround of the downward trends in the last three quarters. Our strategy is to focus the Company's resources on our strategic markets and core businesses, building on synergies we have already created, tightening operational controls and consolidating operations. Our efforts continue to focus on reductions in all areas of non-essential costs. HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2001 AND OUTLOOK o Revenues dropped dramatically for the quarter to $41 million from $77 million in the second quarter and $98 million in the third quarter of 2000. o Net loss for the quarter was $8.5 million and net loss per share was $0.21 compared to net income of $7.2 million and $0.17 diluted net income per share in the third quarter of last year. o Orders continued at the same level as the second quarter at $34 million. Ending backlog was $56 million (excluding $1 million related to discontinued and divested products) as compared with $84 million (excluding $19 million related to discontinued and divested products) for the third quarter of last year. o The change in cash, cash equivalents, and investments for the quarter was close to breakeven at a net usage of $2 million including a payment of $4 million related to debt arising on the purchase of General Optics in 2000. Cash, cash equivalents and short-term investments were $107.9 million at September 28, 2001. In addition, we own approximately 4.5 million unregistered shares of common stock in Packard BioScience Company with a quoted market value of approximately $35.6 million as at September 28, 2001. Normally, GSI Lumonics experiences seasonality in both sales and bookings, with softness in the first quarter, strength in the spring, slowdown in the summer months, followed by a strong fourth quarter. Given the change in booking patterns experienced in the first three quarters of this year, the discontinuance of our general purpose marker product line, and net of the recently completed divestiture in early April, we expect that consolidated quarterly sales in the fourth quarter will remain at the sales level experienced in the third quarter. 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. 13 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2001 The following table presents unaudited quarterly results of operations as a percentage of sales. This information has been presented on the same basis as the consolidated financial statements.
THREE MONTHS ENDED ----------------------- SEPTEMBER SEPTEMBER 28, 2001 29, 2000 --------- --------- Sales.......................................................... 100.0% 100.0% Cost of goods sold............................................. 77.4 60.0 --------- --------- Gross profit................................................... 22.6 40.0 Research and development....................................... 13.6 9.2 Selling, general and administrative............................ 39.7 21.1 Amortization of technology and other intangibles............... 3.4 1.2 Other.......................................................... (0.5) (0.3) --------- --------- Income (loss) from operations.................................. (33.6) 8.8 Gain on sale of assets......................................... -- 1.7 Interest income, net........................................... 1.8 1.0 Foreign exchange transaction gains (losses).................... -- (0.2) --------- --------- Income (loss) before income taxes.............................. (31.8) 11.3 Income tax provision (benefit)................................. (11.2) 3.9 --------- --------- Net income (loss).............................................. (20.6)% 7.4% ========= =========
Our sales were $41.3 million in the third quarter of 2001 compared to $97.6 million in the third quarter of 2000. On a pro forma basis, net of discontinued and divested product lines, sales were $37.5 million and $68.9 million, respectively. Sales by Market. The following table sets forth sales to our primary markets for the three months ended September 28, 2001 and September 29, 2000, respectively.
(in millions) THREE MONTHS ENDED --------------------------------- SEPTEMBER 28, SEPTEMBER 29, 2001 2000 ------------- ------------- % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- Semiconductor....................................... $ 6.6 16% $26.8 27% Electronics......................................... 1.8 4 14.4 15 Medical............................................. 10.7 26 14.4 15 Components.......................................... 5.8 14 8.9 9 Optics.............................................. 3.2 8 4.0 4 Other............................................... 3.7 9 16.4 17 Parts and service................................... 9.5 23 12.7 13 ------ ----- ----- ----- Total............................................ $41.3 100% $97.6 100% ====== ===== ===== =====
On a pro forma basis net of discontinued and divested product lines, sales for the three months ended September 28, 2001 were 56% of sales experienced in the third quarter of 2000 as a result of reduced and/or deferred capital spending by our customers in the continued economic slowdown. 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 resulting in lower capital spending. Decline in bookings over the past four quarters seem to have stabilized at a level of $34 million for second and third quarters of 2001. Semiconductor systems sales for the third quarter decreased by $20.2 million compared to the same period of 2000 and electronics systems sales decreased by $12.6 million due to decline in market conditions since the middle of 2000. Sales to the medical market decreased by net $3.7 million from the same period of 2000 due primarily to the divestiture of the Life Sciences business and Laserdyne/custom system product lines offset by improvements in sales of imaging and printer products. Sales of components for the third quarter of 2001 decreased by $3.1 million compared to the same period of 2000. Sales of optics for the third 14 quarter of 2001 decreased by $0.8 million compared to the same period of 2000 due to a sharp decline in sales to a significant customer offset by additional sales from the acquisition of General Optics at the end of the third quarter of 2000. Sales to the other markets (including aerospace, packaging and automotive) decreased by $12.7 million from the same period of 2000 due to the restructuring of the AM Series product line in Rugby, UK and sale of the package coding product line in Hull, UK. Parts and service sales decreased by $3.2 million from the same period of 2000 as a result of the divestiture of product lines. Sales by Region. We distribute our systems and services via our global sales and service network and through third-party distributors and agents. Our sales territories are divided into the following regions: the United States; Canada; Europe, consisting of Europe, the Middle East and Africa; Japan; Asia-Pacific, consisting of ASEAN countries, China and other Asia-Pacific countries; and Latin and South America. 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 September 28, 2001 and September 29, 2000, respectively.
(in millions) THREE MONTHS ENDED ------------------------------------------- SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ------------------ ------------------ % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- United States....................................... $25.6 62% $49.0 50% Canada.............................................. 0.8 2 5.0 5 Europe.............................................. 6.1 15 15.2 16 Japan............................................... 5.6 14 15.7 16 Asia-Pacific, other................................. 3.0 7 10.7 11 Latin and South America............................. 0.2 0 2.0 2 ----- ----- ----- ---- Total............................................ $41.3 100% $97.6 100% ===== ===== ===== ====
Backlog. We define backlog as unconditional purchase orders or other contractual agreements for products for which customers have requested delivery within the next twelve months. Order backlog at September 28, 2001 was $56 million (excluding $1 million related to discontinued and divested products) compared to $65 million at June 29, 2001 and $84 million (excluding $19 million related to discontinued and divested products) at September 29, 2000. Gross Profit Margin. Gross profit margin was 23% in the three months ended September 28, 2001 compared to 40% in the three months ended September 29, 2000. Gross margins reflect the impact of fixed manufacturing and service overhead costs and inventory loss provisions during a period of lower product and service volumes. Research and Development Expenses. Research and development expenses, net of government assistance, for the three months ended September 28, 2001 were 13.6% of sales or $5.6 million compared with 9.2% of sales or $9.0 million for the three months ended September 29, 2000. The decline was due primarily to the impact of divested product lines. Research and development activities focused on products targeted at the electronics, semiconductor and telecommunications markets. Selling, General and Administrative Expenses. SG&A expenses were 39.7% of sales or $16.4 million in the three months ended September 28, 2001, compared with 21.1% of sales or $20.6 million in the three months ended September 29, 2000. The decline in spending was due primarily to the impact of lower sales, divested product lines, cost cutting measures, and shutdown days. The impact of continued cost cutting efforts was understated by significant legal costs and expenses for the patent infringement lawsuit with Electro Scientific Industries that was recently resolved in our favor and for the patent infringement lawsuit which the Company initiated against Rofin Baasel, Inc. (formerly AB Lasers, Inc.) and Carl Baasel Lasertechnik, GmbH. SG&A expenses are expected to further decline during the fourth quarter as the impact of initiatives undertaken by us to streamline our business and reduce our cost structure are expected to be realized. Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles was 3.4% of sales or $1.4 million in the three months ended September 28, 2001, compared with 1.2% of sales or $1.1 million in the three months ended September 29, 2000. 15 Other. During the third quarter of 2001, the Company recorded a benefit of $0.2 million related to settlement of litigation. During the third quarter of 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line. Interest Income. Net interest income was $0.8 million in the three months ended September 28, 2001, compared to $1.0 million in the three months ended September 29, 2000. The decrease was due to a combination of declining interest rates and a slightly lower average short-term investments balance during the third quarter of 2000 compared to the third quarter of 2001. Income Taxes. The effective tax rate was 35.4% for the third quarter of 2001, compared with 34.9% in the same period in 2000. The change in the effective tax rate was primarily due to the change in the Company's geographic mix of earnings. Our earnings are subject to different effective tax rates in each of the countries in which we operate. A change in our overall tax rate can result when there is a change in our geographic earnings mix. Net Income (Loss). As a result of the foregoing factors, net loss for the third quarter of 2001 was $8.5 million, compared with net income of $7.2 million in the same period in 2000. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2001 The following table presents unaudited quarterly results of operations as a percentage of sales. This information has been presented on the same basis as the consolidated financial statements.
NINE MONTHS ENDED --------- --------- SEPTEMBER SEPTEMBER 28, 2001 29, 2000 --------- --------- Sales.......................................................... 100.0% 100.0% Cost of goods sold............................................. 65.3 59.4 ----- ----- Gross profit................................................... 34.7 40.6 Research and development....................................... 9.5 9.4 Selling, general and administrative............................ 25.8 21.9 Amortization of technology and other intangibles............... 2.0 1.3 Other.......................................................... (0.8) (1.1) ----- ----- Income (loss) from operations.................................. (1.8) 9.1 Gain on sale of assets......................................... -- 0.8 Interest income, net........................................... 1.6 0.6 Foreign exchange transaction gains (losses).................... 0.1 (0.7) ----- ----- Income (loss) before income taxes.............................. (0.1) 9.8 Income tax provision........................................... 0.0 3.4 ----- ----- Net income (loss).............................................. (0.1)% 6.4% ====== =====
Our sales were $205.5 million for the first nine months of 2001 compared to $278.4 million for the first nine months of 2000. On a pro forma basis, net of discontinued and divested product lines, sales were $187.5 million and $198.6 million, respectively. Sales by Market. The following table sets forth sales to our primary markets for nine months ended September 28, 2001 and September 29, 2000, respectively. 16
(in millions) NINE MONTHS ENDED ------------------------------------------ SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ------------------ ------------------ % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- Semiconductor....................................... $ 57.3 28% $54.7 20% Electronics......................................... 37.2 18 68.7 25 Medical............................................. 31.0 15 44.2 16 Components.......................................... 20.7 10 23.2 8 Optics.............................................. 14.5 7 9.5 3 Other............................................... 10.2 5 40.2 14 Parts and service................................... 34.6 17 37.9 14 ------ --- ------ --- Total............................................ $205.5 100% $278.4 100% ====== === ====== ===
Sales declined for the nine months ended September 28, 2001 compared to the same period in 2000 as a result of strategic divestitures that have repositioned the Company to focus on our core businesses, and weakening economic conditions. The decline of new orders during the first nine months of 2001 reflected a continued slowdown in demand for systems and products in the semiconductor, electronics and telecom optics markets. On a pro forma basis, net of discontinued and divested product lines, bookings were approximately $135 million resulting in an ending backlog of approximately $56 million, as compared with bookings of $225 million and ending backlog of $84 million for the first nine months of last year. Sales by Region. The following table shows sales to each geographic region for the nine months ended September 28, 2001 and September 29, 2000.
(in millions) NINE MONTHS ENDED ------------------------------------------ SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ------------------ ------------------ % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- United States....................................... $ 95.6 47% $129.2 46% Canada.............................................. 11.0 5 13.4 5 Europe.............................................. 43.0 21 58.4 21 Japan............................................... 34.0 17 43.1 15 Asia-Pacific, other................................. 21.1 10 30.0 11 Latin and South America............................. 0.8 0 4.3 2 ----- ----- ----- ----- Total............................................ $205.5 100% $278.4 100% ====== ===== ====== ====
Gross Profit Margin. Gross profit margin was 35% for the nine months ended September 28, 2001 compared to 41% for the nine months ended September 29, 2000. Gross margins reflect the impact of fixed manufacturing and service overhead costs and inventory loss provisions during a period of lower product and service volumes. Research and Development Expenses. Research and development expenses, net of government assistance, for the nine months ended September 28, 2001 were 9.5% of sales or $19.4 million compared with 9.4% of sales or $26.3 million for the nine months ended September 29, 2000. The decline was due primarily to the impact of divested product lines. Research and development activities focused on products targeted at the electronics, semiconductor and telecommunications markets. Selling, General and Administrative Expenses. SG&A expenses were 25.8% of sales or $53.2 million for the nine months ended September 28, 2001, compared with 21.9% of sales or $60.9 million for the nine months ended September 29, 2000. The decline in spending was due primarily to the impact of lower sales, divested product lines, cost cutting measures, and shutdown days. 17 Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles was 2.0% of sales or $4.1 million for the nine months ended September 28, 2001, compared with 1.3% of sales or $3.5 million for the nine months ended September 29, 2000. Other. During the first nine months of 2001, the Company adjusted an accrual related to litigation with Electro Scientific Industries, Inc. and recorded a benefit of $1.6 million. During the nine months ended September 29, 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line and $2.7 million received for licensing some of the Company's technology. Interest Income. Net interest income was $3.4 million for the nine months ended September 28, 2001, compared to $1.6 million for the nine months ended September 29, 2000. The increase was due to the investment of proceeds from the April 2000 share offering and significant proceeds from the sale of assets during the fourth quarter of 2000, contributing to an increased average cash and investments balance during the first nine months of 2001 compared to the same period of 2000. Interest income was negatively impacted by declining interest rates during 2001 compared to 2000. Income Taxes. The effective tax rate was 31.7% for the nine months ended September 28, 2001, compared with 34.9% for the same period in 2000. Our effective 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. Our earnings are subject to different effective tax rates in each of the countries in which we operate. A change in our overall tax rate can result when there is a change in our geographic earnings mix. Net Income (Loss). As a result of the foregoing factors, net loss for the nine months ended September 28, 2001 was $0.1 million, compared with net income of $17.8 million for the same period in 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $87.9 million on September 28, 2001 compared to $113.9 million at December 31, 2000. In addition, short-term investments were $20.0 million at September 28, 2001 compared to $20.0 million at December 31, 2000. The investment in equity securities at September 28, 2001 of $35.6 million, consisting of approximately 4.5 million shares, or 6.5%, of Packard BioScience Company common stock, is included in other long-term assets. These equity securities are subject to market fluctuations and, during the nine months ended September 28, 2001, we recorded an unrealized gain of $0.4 million (after tax) as a separate component of accumulated other comprehensive income. Cash flows used in operating activities for the nine months ended September 28, 2001 were $21.1 million, compared to $14.1 million during the same period in 2000. Net loss, after adjustment for non-cash items, provided cash of $18.8 million in the first nine months of 2001. Decrease in accounts receivable due to lower sales provided $32.6 million. This was more than offset by a decrease in current liabilities using $73.9 million, including $32.9 million of income taxes paid relating to the gain on sale of the Life Sciences business recognized in October 2000 and income tax installments for the first nine months of 2001 and $15.3 million paid in May 2001 in settlement of the legal judgment in a patent infringement action filed by Electro Scientific Industries, Inc. In the first nine months of 2000, net income, after adjustment for non-cash items, provided cash of $21.5 million, offset by $35.7 million of increases in accounts receivable, inventories, other current assets and current liabilities. Cash flow used in investing activities was $2.7 million during the nine months ended September 28, 2001, primarily from the purchase of $80.9 million of short-term investments and $6.9 million of property, plant, and equipment, offset by the maturity of $80.9 million of short-term investments. Cash proceeds of $6.0 million were received on the sale of certain assets of the Laserdyne and Custom Systems product lines on April 2, 2001. In the first nine months of 2000, investing activities used $9.4 million, primarily from the purchase of short-term investments and property, plant and equipment, and the acquisition of General Optics. This was offset primarily by the disposal of assets and the maturity of short-term investments. 18 Cash flow used in financing activities was $2.8 million for the nine months ended September 28, 2001. In comparison, financing activities provided $63.1million during the same period in 2000, primarily due to a large issue of share capital. We have credit facilities of $39.1 million denominated in Canadian dollars, US dollars, Pounds sterling and Japanese yen. Bank indebtedness, of which $11.1 million was outstanding at September 28, 2001, is due on demand and bears interest based on the prime rate. As at September 28, 2001, the Company had unused and available demand lines of credit amounting to $19.9 million and outstanding letters of credit of $8.1 million. Accounts receivable and inventories have been pledged as collateral for the bank indebtedness under general security agreements. The borrowings require, among other things, the Company to maintain specified financial ratios and conditions. We are currently in compliance with those ratios and conditions. We believe that existing cash balances, together with cash generated from operations and available bank lines of credit, will be sufficient to satisfy anticipated cash needs to fund working capital and investments in facilities and equipment for the next two years. RECENT PRONOUNCEMENTS On June 29, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. As a result, the pooling-of-interests method will be prohibited. SFAS 142 establishes criteria for recognition of intangibles and how they should be accounted for after initial recognition and changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement, which for the Company will be January 1, 2002. However, for any acquisitions completed after June 30, 2001, goodwill and intangible assets with an indefinite life will not be amortized. On October 1, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The distinction is important because assets to be disposed of are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The new rules also will now require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as is presently required. In addition, more dispositions will qualify for discontinued operations treatment in the statement of income. The Company will adopt the Statement effective January 1, 2002. The adoption of SFAS 141 will not have an impact on the business, results of operations, and financial condition of the Company. The Company is still evaluating the impact of the adoption of SFAS 142 and SFAS 144 and has not yet determined the effect of adoption on the business, results of operations, and financial condition of the Company. 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 19 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 or year 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. 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. 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 7 to the 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. 20 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, utilization of different systems and equipment, and difficulties in staffing and managing foreign operations and diverse cultures. 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 by the tragic events of September 11, 2001 and the unfavorable economic conditions. 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. 21 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 cash equivalents, short-term investments and debt obligations. At September 28, 2001, the Company had $56.4 million invested in cash equivalents and $20.0 million invested in short-term investments. Due to the average maturities and the nature of the investment portfolio, a change in interest rates is not expected to have a material effect on the value of the portfolio. We do not use derivative financial instruments in our investment portfolio. We do not actively trade derivative financial instruments but may use them to manage interest rate positions associated with our debt instruments. We currently do not hold interest rate derivative contracts. 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. As of September 28, 2001, the Company had nine foreign exchange forward contracts to purchase $19.9 million U.S. dollars and three foreign exchange option contracts to purchase $17.7 million U.S. dollars with an aggregate fair value loss of $0.03 million recorded in accumulated other comprehensive income and maturing in December 2001, March 2002 and on the 15th of each following month until August 15, 2002. 22 PART I - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See the description of legal proceedings in Note 7 to the Financial Statements. ITEM 5: OTHER INFORMATION The Company has entered into severance agreements with Kurt A. Pelsue, V.P. Technology and Alfonso DaSilva, V.P. Customer Service. The agreements, in each instance, provide for a severance payment and certain other benefits if employment with the Company is terminated upon or following defined change of control events or by the Company without cause. The effective date for the agreement is May 24, 2001 for Mr. Pelsue and July 9, 2001 for Mr. DaSilva. Each agreement continues for a minimum term of three (3) years from its respective date and will automatically extend for periods of one year after the initial term unless the Company or the executive gives notice at least ninety days prior to the expiration of the current period that the agreement will not be extended. Under the agreement, the payment in the event of termination without cause is equal to a minimum of one year and a maximum of two years of the sum of (a) annual base salary; (b) targeted annual bonus; (c) prorated portion of annual bonus; and (d) the cost of certain employment benefits. If the termination of employment occurs upon or following a defined change of control of the Company, the payment is equal to three times the sum of (a)-(d). Pursuant to these agreements, all unvested options then held will immediately vest, provided that such options shall expire upon the earlier of (i) three years or the remainder of the option term in the event of a change of control, or (ii) six months or the remainder of the option term in the event of a termination for cause. The Company entered into a Separation Agreement and General Release on August 21, 2001 with its V.P. Sales, Patrick D. Austin. Pursuant to the terms of the agreement, Mr. Austin, whose employment with the Company ended on September 28, 2001, will continue to receive salary payments and health benefit coverage for a period not to exceed twelve (12) months. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A) LIST OF EXHIBITS 10.24 Severance Agreement between the Registrant and Kurt A. Pelsue dated May 24, 2001 10.25 Severance Agreement between the Registrant and Alfonso DaSilva dated July 9, 2001. 10.26 Separation Agreement and General Release between the Registrant and Patrick D. Austin dated August 21, 2001. B) REPORTS ON FORM 8-K None 23 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 November 8, 2001 - ---------------------- (Principal Executive Officer) Charles D. Winston /s/ THOMAS R. SWAIN Vice President Finance and Chief Financial November 8, 2001 - ------------------- Officer (Principal Financial and Accounting Thomas R. Swain Officer)
24 EX-10.24 3 dex1024.txt SEVERANCE AGREEMENT DATED 5/24/2001 Exhibit 10.24 SEVERANCE AGREEMENT ------------------- THIS AGREEMENT, dated May 24, 2001, is made by and between GSI Lumonics, Inc, a New Brunswick, Canada corporation (the "Company"), and Kurt Pelsue (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; WHEREAS, the Board has determined that is also in the best interests of the Company to encourage the Executive's continued employment with the Company by providing the Executive with certain severance benefits in the event of a termination of the Executive's employment with the Company under certain circumstances unrelated to a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement ------------- are provided in Section 15. 2. Term of Agreement. The Term of this Agreement shall commence on the date ----------------- hereof and shall continue in effect through the third anniversary of the date hereof; provided, however, that commencing on January 1, 2004 and each January 1 -------- ------- thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred - ------- -------- ------- during the Term, the Term shall expire no earlier than the thirty-sixth (36th) month beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company and in consideration of the Executive's covenants in Section 4, the Company, under the conditions described herein, shall pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 or 9.2, no Severance Payments shall be payable under this Agreement unless there shall have been (or, pursuant to the second sentence of Section 6.1, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. Subject to the terms and conditions of ------------------------- this Agreement, in the event of a Potential Change in Control or an applicable takeover bid (as defined in the Ontario Securities Act) is made by a Person or Persons acting jointly and in concert in response of any securities of the Company prior to the first occurrence of a Change of Control, the Executive shall remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control or one hundred and twenty (120) days after the commencement of such takeover bid, (ii) the date, if applicable, that any such take over bid has been abandoned or ended, (iii) the date of a Change in Control, (iv) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. Subject to the Executive having received, in full, from the Company all payments and benefits required hereunder and upon written request from the Company, the Executive agrees to sign a release of any claims he/she may have against the Company in connection with his/her employment and/or termination from employment with the Company in a form, mutually agreed upon, that is customary for such transactions. Notwithstanding any provision of this Agreement, Executive acknowledges that any obligations which the Executive has with the Company pursuant to a separate written agreement relating to confidentiality, non- competition, non-solicitation, and inventions shall continue to be governed by the terms of such separate agreement. 5. Compensation Other Than Severance Payments; Equity. -------------------------------------------------- 5.1. If the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, during any period when the Executive so fails to perform the Company shall pay the Base Salary to the Executive, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement (other than the Company's short- or long-term disability plan, as applicable, but including any bonus or incentive plan) maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2. If the Executive's employment shall be terminated for any reason, the Company shall pay the Base Salary to the Executive through the Date of Termination, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3. If the Executive's employment shall be terminated for any reason, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 5.4. Notwithstanding anything to the contrary contained in any equity plan or arrangement of the Company or any agreement between the Company and the Executive, if the Executive's employment with the Company is terminated under circumstances which entitle the Executive to Severance Payments pursuant to Section 6.1, 9.1 or 9.2 hereof, any outstanding stock option, restricted stock or other equity or equity-based award granted to the Executive shall become immediately vested and exercisable and shall (i) for terminations under Section 6 and to the extent applicable, remain outstanding for the shorter of the remainder of its full term or three (3 years) from the Date of Termination notwithstanding the termination (or any post-Change in Control termination) of the Executive's employment with the Company, or (ii) for terminations under Section 9.1, remain outstanding for the shorter of six (6) months from the Date of Termination or the remainder of its full term, notwithstanding the termination of the Executive's employment with the Company. 6. Severance Payments. ------------------ 6.1. If the Executive's employment is terminated following a Change in Control, other than (a) by the Company for Cause, (b) by reason of death or Disability, or (c) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control and during the Term by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause during a Potential Change in Control Period, or (ii) the Executive terminates employment for Good Reason during a Potential Change in Control Period. Except as described in Section 9.1 or 9.2, the Executive shall not be entitled to benefits pursuant to this Section 6.1 unless a Change in Control shall have occurred. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive (i) a lump sum severance payment, in cash, equal to three (3) times the sum of (a) the Base Salary, and (b) the target annual bonus available to the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which the Date of Termination occurs (without giving effect to any event or circumstance constituting Good Reason) and (ii) a prorated portion of the Executive's bonus compensation for the fiscal year in which the Date of Termination occurs (assuming that any applicable performance objectives were achieved at the targeted (100%) level of performance and without giving effect to any event or circumstance constituting Good Reason) calculated by multiplying (A) the targeted amount of such bonus compensation (at 100% performance) by (B) a fraction, the numerator of which is the number of days in the applicable fiscal year through the date of termination and the denominator of which is 365. (B) For the thirty six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and Executive's dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and Executive's dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and Executive's dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence. (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan (other than any such plan covered by the provisions of Section 6.1(A)(ii) hereof), calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the targeted (100%) level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. 6.2. Gross Up. -------- (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3. The payments provided in subsection (A), of Section 6.1 and in Section 6.2 shall be made not later than the fifth day following the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of Section 6.2), provided, however, that in the case of any payment made pursuant to the second sentence of Section 6.1, such payment shall be made not later than the fifth day following the Change in Control; provided further, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company or, in the case of payments under Section 6.2, in accordance with Section 6.2, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4. The Company shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment under Section 6 of this Agreement, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided thereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 6.5 The Company shall pay, to a maximum of fifteen thousand dollars ($15,000) in local currency, the reasonable fees and related expenses actually incurred by the Executive in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance the consulting organization retained by the Executive to provide the services. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1. Notice of Termination. Any purported termination of the Executive's --------------------- employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i), (ii) or (iii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2. Date of Termination. "Date of Termination," with respect to any purported ------------------- termination of the Executive's employment after a Change in Control, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3. Dispute Concerning Termination. If within fifteen (15) days after ------------------------------ any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4. Compensation During Dispute. If the Date of Termination is extended --------------------------- in accordance with Section 7.3, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, the Base Salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. If the Executive's employment with the Company ------------- terminates following a Change in Control, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6, 7.4, 9.1 or 9.2. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Other Severance Payments; Successors; Binding Agreement. ------------------------------------------------------- 9.1. If the Executive's employment is terminated during the Term under circumstances which do not entitle the Executive to Severance Payments pursuant to Section 6 hereof, and such termination is not a termination (a) by the Company for Cause, (b) by reason of death or Disability, or (c) by the Executive without Good Reason, then the Company shall provide the Executive with the Severance Benefits described below and the Severance Payments described in Section 6.1, except that the following modifications shall be made to the Severance Payments: (A) The Executive's Base Salary and target annual bonus shall be multiplied by a minimum factor of one (1) and a maximum factor of two (2) based on the formula set out below, (rather than three (3), as provided in Section 6.1(A)): (i) If the Executive's length of service (LOS) with the Company is less than two (2) years, the factor shall be one (1); and (ii) If the Executive's LOS with the Company is two (2) or more years, the factor shall be one (1) plus a fraction (A/B) represented by the following: A (numerator) = 1 month for each full year of service that the Executive had with the Company excluding the first year of service. B (denominator) = 12 --------------- (B) The benefit continuation provided in Section 6.1(B) shall be for a minimum of one (1) year and a maximum of two (2) years based on the formula set out in (A)(i) and (ii) above (rather than 36 months). In addition to the Severance Payments described above, the Company shall also provide benefits described in Section 6.4, but subject to a maximum of five thousand dollars ($5,000) and Section 6.5 to the Executive. 9.2. In addition to any obligations imposed by law upon any successor to the Company, the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control and during the Term, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. Notwithstanding the foregoing or anything to the contrary in this Agreement, in the event the Company sells, spins out, splits off or otherwise carves out or divests the Wave Precision, Inc. line of business or subsidiary operation of the Company ("Carved Out Entity") and the Executive decides to accept employment with the Carved Out Entity following the transaction, the Executive shall not be entitled to the Severance Payments set out in Section 9.1 above. 9.3. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: GSI Lumonics, Inc. C/o GSI Lumonics Corporation 39 Manning Road Billerica, Mass. 01821 USA Attention: General Counsel 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall not supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company unless and until the Executive's employment with the Company is terminated in a manner entitling Executive to benefits hereunder. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. ----------------------------------- 14.1. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: 15.1. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. 15.2. "Auditor" shall have the meaning set forth in Section 6.2. 15.3. "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. 15.4. "Base Salary" shall mean the annual base salary in effect for the Executive immediately prior to the Date of Termination or a Change in Control, as such salary may be increased from time to time during the Term (in which case such increased amount shall be the Base Salary for purposes hereof), but without giving effect to any reduction thereto. 15.5. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 15.6. "Board" shall mean the Board of Directors of the Company. 15.7. "Cause" for termination by the Company of the Executive's employment shall mean (i) the continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board or a representative on behalf of the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, (ii) the engaging by the Executive in conduct which results in demonstrable and material monetary harm to the Company or its subsidiaries or, in the reasonable opinion of the Board, brings the Executive or the Company into disrepute, (iii) the failure or refusal of the Executive to comply with the lawful directions or instructions of the Company on any material matter; (iv) any material breach by the Executive of the Executive's non-disclosure and confidentiality agreement and/or obligations or any written Employment agreement with the Company, (v) use by the Executive of drugs or of alcohol in a manner which materially affect his/her ability to perform his/her employment duties, (v) any material act of dishonesty directed at the Company or any client of the Company or (vi) the conviction of the Executive by a court of competent jurisdiction or the Executive pleading nolo contendere to any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude. No claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. 15.8. A "Change in Control" shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall have occurred: (A) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 30% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in Section 15.8(C)(i); (B) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (C) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 30% or more of the combined voting power of the Company's then outstanding securities; or (D) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least [60]% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. 15.9. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 15.10. "Company" shall mean GSI Lumonics, Inc. and, except in determining under Section 15.8 whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. 15.11. "Control" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. 15.12. "Date of Termination" shall have the meaning set forth in Section 7.2. 15.13. "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of five (5) consecutive months or 180 days in any period of 365 days, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. 15.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 15.15. "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. 15.16. "Executive" shall mean the individual named in the first paragraph of this Agreement. 15.17. "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in subsection (A), (E), (F) or (G) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (A) The assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change in Control; or the diminution or adverse alteration in any material respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (B) Any reduction in the Executive's rate of Base Salary or failure by the Company to pay the Executive salary in accordance with any agreement between the Executive and the Company, or any reduction in the Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Date of Termination or the Change in Control or failure by the Company to provide the Executive with total cash and stock compensation opportunities in accordance with any agreement between the Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which the Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (C) the relocation of the Executive's principal place of employment to a location more than 25 miles from the Executive's principal place of employment immediately prior to the Date of Termination or a Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (D) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within fourteen (14)days of the date such compensation is due; (E) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to theDate of Termination or a Change in Control which is material to the Executive's total compensation or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (F) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Date of Termination or Change in Control or the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive prior to the Date of Termination or at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled pursuant to a written agreement with the Company or on the basis of years of service with the Company in accordance with the Company's normal vacation policy for Executives in effect prior to the Date of Termination or at the time of the Change in Control; or (G) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. 15.18. "Gross-Up Payment" shall have the meaning set forth in Section 6.2. 15.19. "Notice of Termination" shall have the meaning set forth in Section 7.1. 15.20. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities and (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 15.21. "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following subsections shall have occurred: (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty (30)% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 15.22. "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall lapse immediately following the first to occur of (i) a Change in Control or (ii) the one year anniversary of the occurrence of a Potential Change in Control. 15.23. "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. 15.24. "Severance Payments" shall have the meaning set forth in Section 6.1. 15.25. "Tax Counsel" shall have the meaning set forth in Section 6.2. 15.26. "Term" shall mean the period of time described in Section 2 (including any extension, continuation or termination described therein). 15.27. "Total Payments" shall mean those payments so described in Section 6.2. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. GSI LUMONICS, INC. By:_____________________________ Name: Charles D. Winston Title: President & CEO EXECUTIVE _______________________________ Name: Kurt Pelsue Address:________________________ _______________________________ (Please print carefully) EX-10.25 4 dex1025.txt SEVERANCE AGREEMENT DATED 07/09/2001 Exhibit 10.25 SEVERANCE AGREEMENT ------------------- THIS AGREEMENT, dated July 9, 2001, is made by and between GSI Lumonics, Inc, a New Brunswick, Canada corporation (the "Company"), and Alfonso DaSilva (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; WHEREAS, the Board has determined that is also in the best interests of the Company to encourage the Executive's continued employment with the Company by providing the Executive with certain severance benefits in the event of a termination of the Executive's employment with the Company under certain circumstances unrelated to a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement are provided in Section 15. 2. Term of Agreement. The Term of this Agreement shall commence on the ----------------- date hereof and shall continue in effect through the third anniversary of the date hereof; provided, however, that commencing on January 1, 2004 and each -------- ------- January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred - ------- -------- ------- during the Term, the Term shall expire no earlier than the thirty-sixth (36th) month beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company and in consideration of the Executive's covenants in Section 4, the Company, under the conditions described herein, shall pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 or 9.2, no Severance Payments shall be payable under this Agreement unless there shall have been (or, pursuant to the second sentence of Section 6.1, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. Subject to the terms and conditions of ------------------------- this Agreement, in the event of a Potential Change in Control or an applicable takeover bid (as defined in the Ontario Securities Act) is made by a Person or Persons acting jointly and in concert in response of any securities of the Company prior to the first occurrence of a Change of Control, the Executive shall remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control or one hundred and twenty (120) days after the commencement of such takeover bid, (ii) the date, if applicable, that any such take over bid has been abandoned or ended, (iii) the date of a Change in Control, (iv) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. Subject to the Executive having received, in full, from the Company all payments and benefits required hereunder and upon written request from the Company, the Executive agrees to sign a release of any claims he/she may have against the Company in connection with his/her employment and/or termination from employment with the Company in a form, mutually agreed upon, that is customary for such transactions. Notwithstanding any provision of this Agreement, Executive acknowledges that any obligations which the Executive has with the Company pursuant to a separate written agreement relating to confidentiality, non- competition, non-solicitation, and inventions shall continue to be governed by the terms of such separate agreement. 5. Compensation Other Than Severance Payments; Equity. -------------------------------------------------- 5.1. If the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, during any period when the Executive so fails to perform the Company shall pay the Base Salary to the Executive, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement (other than the Company's short- or long-term disability plan, as applicable, but including any bonus or incentive plan) maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2. If the Executive's employment shall be terminated for any reason, the Company shall pay the Base Salary to the Executive through the Date of Termination, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3. If the Executive's employment shall be terminated for any reason, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 5.4. Notwithstanding anything to the contrary contained in any equity plan or arrangement of the Company or any agreement between the Company and the Executive, if the Executive's employment with the Company is terminated under circumstances which entitle the Executive to Severance Payments pursuant to Section 6.1, 9.1 or 9.2 hereof, any outstanding stock option, restricted stock or other equity or equity-based award granted to the Executive shall become immediately vested and exercisable and shall (i) for terminations under Section 6 and to the extent applicable, remain outstanding for the shorter of the remainder of its full term or three (3 years) from the Date of Termination notwithstanding the termination (or any post-Change in Control termination) of the Executive's employment with the Company, or (ii) for terminations under Section 9.1, remain outstanding for the shorter of six (6) months from the Date of Termination or the remainder of its full term, notwithstanding the termination of the Executive's employment with the Company. 6. Severance Payments. ------------------ 6.1. If the Executive's employment is terminated following a Change in Control, other than (a) by the Company for Cause, (b) by reason of death or Disability, or (c) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control and during the Term by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause during a Potential Change in Control Period, or (ii) the Executive terminates employment for Good Reason during a Potential Change in Control Period. Except as described in Section 9.1 or 9.2, the Executive shall not be entitled to benefits pursuant to this Section 6.1 unless a Change in Control shall have occurred. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive (i) a lump sum severance payment, in cash, equal to three (3) times the sum of (a) the Base Salary, and (b) the target annual bonus available to the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which the Date of Termination occurs (without giving effect to any event or circumstance constituting Good Reason) and (ii) a prorated portion of the Executive's bonus compensation for the fiscal year in which the Date of Termination occurs (assuming that any applicable performance objectives were achieved at the targeted (100%) level of performance and without giving effect to any event or circumstance constituting Good Reason) calculated by multiplying (A) the targeted amount of such bonus compensation (at 100% performance) by (B) a fraction, the numerator of which is the number of days in the applicable fiscal year through the date of termination and the denominator of which is 365. (B) For the thirty six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and Executive's dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and Executive's dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and Executive's dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence. (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan (other than any such plan covered by the provisions of Section 6.1(A)(ii) hereof), calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the targeted (100%) level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. 6.2. Gross Up. -------- (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3. The payments provided in subsection (A), of Section 6.1 and in Section 6.2 shall be made not later than the fifth day following the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of Section 6.2), provided, however, -------- ------- that in the case of any payment made pursuant to the second sentence of Section 6.1, such payment shall be made not later than the fifth day following the Change in Control; provided further, however, that if the amounts of such -------- ------- ------- payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company or, in the case of payments under Section 6.2, in accordance with Section 6.2, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4. The Company shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment under Section 6 of this Agreement, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided thereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 6.5. The Company shall pay, to a maximum of fifteen thousand dollars ($15,000) in local currency, the reasonable fees and related expenses actually incurred by the Executive in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance the consulting organization retained by the Executive to provide the services. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1. Notice of Termination. Any purported termination of the Executive's --------------------- employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i), (ii) or (iii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2. Date of Termination. "Date of Termination," with respect to any --------------------- purported termination of the Executive's employment after a Change in Control, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3. Dispute Concerning Termination. If within fifteen (15) days after ------------------------------ any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4. Compensation During Dispute. If the Date of Termination is extended --------------------------- in accordance with Section 7.3, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, the Base Salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. If the Executive's employment with the Company ------------- terminates following a Change in Control, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6, 7.4, 9.1 or 9.2. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Other Severance Payments; Successors; Binding Agreement. ------------------------------------------------------- 9.1. If the Executive's employment is terminated during the Term under circumstances which do not entitle the Executive to Severance Payments pursuant to Section 6 hereof, and such termination is not a termination (a) by the Company for Cause, (b) by reason of death or Disability, or (c) by the Executive without Good Reason, then the Company shall provide the Executive with the Severance Benefits described below and the Severance Payments described in Section 6.1, except that the following modifications shall be made to the Severance Payments: (A) The Executive's Base Salary and target annual bonus shall be multiplied by a minimum factor of one (1) and a maximum factor of two (2) based on the formula set out below, (rather than three (3), as provided in Section 6.1(A)): (i) If the Executive's length of service (LOS) with the Company is less than two (2) years, the factor shall be one (1); and (ii) If the Executive's LOS with the Company is two (2) or more years, the years, the factor shall be one plus a fraction (A/B) represented by the following: A (numerator) = 1 month for each full year of service that the Executive had with the Company excluding the first year of service. B (denominator) = 12 --------------- (B) The benefit continuation provided in Section 6.1(B) shall be for a minimum of one (1) year and a maximum of two (2) years based on the formula set out in (A)(i) and (ii) above (rather than 36 months). In addition to the Severance Payments described above, the Company shall also provide benefits described in Section 6.4, but subject to a maximum of five thousand dollars ($5,000) and Section 6.5 to the Executive. 9.2. In addition to any obligations imposed by law upon any successor to the Company, the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control and during the Term, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. Notwithstanding the foregoing or anything to the contrary in this Agreement, in the event the Company sells, spins out, splits off or otherwise carves out or divests the Wave Precision, Inc. line of business or subsidiary operation of the Company ("Carved Out Entity") and the Executive decides to accept employment with the Carved Out Entity following the transaction, the Executive shall not be entitled to the Severance Payments set out in Section 9.1 above. 9.3. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: GSI Lumonics, Inc. c/o GSI Lumonics Corporation 39 Manning Road Billerica, Mass. 01821 USA Attention: General Counsel 11. Miscellaneous. No provision of this Agreement may be modified, waived -------------- or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall not supersede any agreement setting - -------- ------- forth the terms and conditions of the Executive's employment with the Company unless and until the Executive's employment with the Company is terminated in a manner entitling Executive to benefits hereunder. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of -------- this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. ----------------------------------- 14.1. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards -------- ------- set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms ----------- shall have the meanings indicated below: 15.1. "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. 15.2. "Auditor" shall have the meaning set forth in Section 6.2. 15.3. "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. 15.4. "Base Salary" shall mean the annual base salary in effect for the Executive immediately prior to the Date of Termination or a Change in Control, as such salary may be increased from time to time during the Term (in which case such increased amount shall be the Base Salary for purposes hereof), but without giving effect to any reduction thereto. 15.5. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 15.6. "Board" shall mean the Board of Directors of the Company. 15.7. "Cause" for termination by the Company of the Executive's employment shall mean (i) the continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board or a representative on behalf of the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, (ii) the engaging by the Executive in conduct which results in demonstrable and material monetary harm to the Company or its subsidiaries or, in the reasonable opinion of the Board, brings the Executive or the Company into disrepute, (iii) the failure or refusal of the Executive to comply with the lawful directions or instructions of the Company on any material matter; (iv) any material breach by the Executive of the Executive's non-disclosure and confidentiality agreement and/or obligations or any written Employment agreement with the Company, (v) use by the Executive of drugs or of alcohol in a manner which materially affect his/her ability to perform his/her employment duties, (v) any material act of dishonesty directed at the Company or any client of the Company or (vi) the conviction of the Executive by a court of competent jurisdiction or the Executive pleading nolo contendere to any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude. No claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. 15.8. A "Change in Control" shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall have occurred: (A) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 30% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in Section 15.8(C)(i); (B) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (C) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 30% or more of the combined voting power of the Company's then outstanding securities; or (D) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least [60]% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. 15.9. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 15.10. "Company" shall mean GSI Lumonics, Inc. and, except in determining under Section 15.8 whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. 15.11. "Control" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. 15.12. "Date of Termination" shall have the meaning set forth in Section 7.2. 15.13. "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of five (5) consecutive months or 180 days in any period of 365 days, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. 15.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 15.15. "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. 15.16. "Executive" shall mean the individual named in the first paragraph of this Agreement. 15.17. "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in subsection (A), (E), (F) or (G) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (A) The assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change in Control; or the diminution or adverse alteration in any material respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (B) Any reduction in the Executive's rate of Base Salary or failure by the Company to pay the Executive salary in accordance with any agreement between the Executive and the Company, or any reduction in the Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Date of Termination or the Change in Control or failure by the Company to provide the Executive with total cash and stock compensation opportunities in accordance with any agreement between the Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which the Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (C) the relocation of the Executive's principal place of employment to a location more than 25 miles from the Executive's principal place of employment immediately prior to the Date of Termination or a Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (D) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within fourteen (14)days of the date such compensation is due; (E) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Date of Termination or a Change in Control which is material to the Executive's total compensation or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (F) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Date of Termination or Change in Control or the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive prior to the Date of Termination or at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled pursuant to a written agreement with the Company or on the basis of years of service with the Company in accordance with the Company's normal vacation policy for Executives in effect prior to the Date of Termination or at the time of the Change in Control; or (G) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. 15.18. "Gross-Up Payment" shall have the meaning set forth in Section 6.2. 15.19. "Notice of Termination" shall have the meaning set forth in Section 7.1. 15.20. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities and (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 15.21. "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following subsections shall have occurred: (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty (30)% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 15.22. "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall lapse immediately following the first to occur of (i) a Change in Control or (ii) the one year anniversary of the occurrence of a Potential Change in Control. 15.23. "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. 15.24. "Severance Payments" shall have the meaning set forth in Section 6.1. 15.25. "Tax Counsel" shall have the meaning set forth in Section 6.2. 15.26. "Term" shall mean the period of time described in Section 2 (including any extension, continuation or termination described therein). 15.27. "Total Payments" shall mean those payments so described in Section 6.2. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. GSI LUMONICS, INC. By:_____________________________ Name: Charles D. Winston Title: President & CEO EXECUTIVE ________________________________ Name: Alfonso DaSilva Address:________________________ ________________________________ (Please print carefully) EX-10.26 5 dex1026.txt SEPARATION AGREEMENT DATED 08/21/2001 Exhibit 10.26 SEPARATION AGREEMENT AND GENERAL RELEASE ---------------------------------------- It is hereby agreed by and between PATRICK D. AUSTIN of 561 Saddle Lane, Ojai, California 93023 ("Executive") and GSI Lumonics, Inc., a New Brunswick, Canada company with a corporate office at 105 Schneider Road, Kanata, Ontario, Canada K2K 1Y3 (the "Company"), for good and sufficient consideration as more fully described below, that: 1. EMPLOYMENT STATUS: Executive's employment with the Company will cease ------------------ on September 28, 2001 (the "Termination Date"). As of the Termination Date, Executive's salary and benefits (including any eligibility to participate in Company benefit programs and plans) will cease, and any entitlement Executive has or might have under a Company-provided benefit plan, program or practice will terminate on the Termination Date, except as required by federal or state law, or as otherwise described below. 2. GENERAL BENEFITS: On the Termination Date, Executive will be entitled ---------------- to the following: (a) All base salary and wages earned through the Termination Date; (b) A payment for unused, earned vacation time accrued through the Termination Date, as vacation will cease to accrue as of the Termination Date notwithstanding any salary continuation pursuant to Section 3(a) below; (c) The opportunity to elect to convert the long term disability coverage (which will terminate on the Termination Date) to an individual policy, at the Executive's cost and expense; (d) The opportunity to elect to convert his life insurance policy coverage (which will terminate on the Termination Date) to an individual policy, at the Executive's cost and expense. (e) To exercise any Company stock options which the Executive holds that are vested, for a period of ninety (90) days following the Termination Date, notwithstanding anything to the contrary in the Executive's Stock Option Agreement. (f) Assume the rights, obligations and liabilities under the car lease agreement currently in place between the Company and the car lessor, with respect to the car the Executive is currently contributing lease payments against. All amounts set forth in this Section 2 are subject to any applicable federal, state and local deductions, withholdings, payroll and other taxes. 3. CONSIDERATION: In consideration for Executive's execution of this -------------- Agreement, including specifically the release provisions in Sections 4, 5, and 6, the Company agrees to the following: (a) Salary Continuation: The Company agrees to provide the Executive ------------------- with salary continuation based on the Executive's present annual base salary of two hundred and thirty thousand dollars (US$230,000) for a period commencing on the Executive's Termination Date and ending on the earlier of (i) twelve months from the Termination Date; or (ii) the date on which the Executive commences other employment (either full or part time and whether for a profit or not-for profit entity), provides consulting services, starts his own company or business, or commences self employment activities. Notwithstanding the foregoing, the Executive shall be entitled to hold one or more Board of Directors seats and to provide consulting services without triggering the termination of his salary continuation herein, provided and so long as the aggregate compensation that the Executive receives from holding such seats and performing such consulting services does not exceed an annualized run rate of fifty thousand dollars (US$50,000). It shall be the Executive's obligation to immediately notify the Company in writing of the date he commences the activities described in Section 3(a)(ii) herein and in such notification to provide details of the same including company names and addresses and with respect to Board of Director seats and consulting services, his compensation, regardless of whether such activities trigger the termination of his salary continuation. A failure by the Executive to immediately notify the Company as required herein shall be considered a breach of the Agreement and be subject to Section 11 below. The salary continuation shall be paid to Executive in accordance with the Company's current payroll practices on the first regularly scheduled payday next following the Termination Date set forth in Section 1 above; and (b) Health Benefit Continuation: The Company agrees to continue to --------------------------- provide the Executive's medical, dental and/or vision benefits in effect just prior to the Termination Date ("Health Benefits") through the salary continuation period described in Section 3(a) above, at the same level of contribution from the Executive and the Company, as existed prior to the Termination Date. At the end of such salary continuation period, the Executive shall have the opportunity to elect to continue coverage under the Company's health insurance at the Executive's cost and expense, pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The last day of the Executive's salary continuation period described above shall be the date of the "qualifying event" under COBRA. The Company agrees to provide the Executive COBRA information, at the appropriate time, under separate cover. (c) 401(k) Contribution: The Executive's 401(k) contribution will -------------------- continue, at the Executive's current participation levels, if any, through the Executive's salary continuation period, if the Executive elects to do so. If applicable, loan deductions will also continue. The Executive understands that it is his responsibility to contact CIGNA directly at 800-253-2287 to discuss distribution and loan payback options. (d) Financial and Tax Advise Reimbursement: The Executive shall be --------------------------------------- entitled to reimbursement from the Company of up to five thousand dollars (US$5,000) for any financial and/or tax advise sought by and provided to the Executive provided such advise was provided 2 prior to his Termination Date and the Executive provides supporting documentation, acceptable to the Company, of the advise provided and the charges incurred. (e) Executive Search Fees: At the request of the Executive, the --------------------- Company agrees to pay up to fifteen thousand dollars (US$15,000) directly to an Executive Search Firm, which the Executive has retained to assist the Executive in finding new employment. All such charges must be incurred during the salary continuation period described above and shall be billed by the Executive Search Firm directly to the Company, attn: V.P. of Human Resources. (f) All payments set forth in this Section will be subject to any applicable federal, state and/or local deductions, withholdings, payroll and other taxes. 4. SETTLEMENT OF AMOUNTS DUE: The amounts set forth above in Sections 2 -------------------------- and 3 shall be complete and unconditional payment, settlement, accord and/or satisfaction with respect to all obligations and liabilities of the Company, its partners, officers, directors, trustees, executives, representatives and/or agents to Executive, and with respect to all claims, causes of action and damages that could be asserted by Executive against the Company regarding Executive's employment with and termination from employment with the Company, including, without limitation, all claims for wages, salary, commissions, draws, incentive pay, bonuses, reasonable business expenses, vacation pay, stock and stock options, severance pay, attorneys' fees, compensatory damages, exemplary damages, or other compensation, benefits, costs or sums. 5. RELEASE, INDEMNITY AND COOPERATION: ---------------------------------- (a) Notwithstanding the provisions of Section 1542 of the Civil Code of California, in exchange for the amounts described in Section 3, and other good and valuable consideration, the receipt of which is hereby acknowledged, the Executive and his/her representatives, agents, estate, heirs, successors and assigns, absolutely and unconditionally hereby releases, remises, discharges, indemnifies and holds harmless the Releasees (defined to include the Company, its predecessors, successors, parents, subsidiaries, divisions, affiliates, assigns, and its and their current and former directors, trustees, shareholders, officers, Executives, representatives, attorneys and/or agents, all both individually and in their official capacities), from any and all actions or causes of action, suits, claims, complaints, contracts, liabilities, agreements, promises, contracts, torts, debts, damages, controversies, judgments, rights and demands, whether existing or contingent, known or unknown, suspected or unsuspected, including without limitation any claims incidental to or arising out of his/her employment with, change in employment status with and/or termination of employment from the Company. This release is intended by the Executive to be all encompassing and to act as a full and total release of any claims he/she may have or have had against the Releasees, whether specifically enumerated herein or not, that exist or ever have existed from the beginning of the Executives association with the Company (including any entities which the Company acquired and/or merged with)up to and including the date of this Agreement, including, but not limited to, any claims arising from any federal, state or local law, regulation or constitution dealing with either employment, employment discrimination and/or employment benefits such as those laws or regulations concerning discrimination on the basis of race, color, creed, religion, age, sex, sex 3 harassment, sexual orientation, marital status, national origin, ancestry, handicap, mental or physical disability, medical condition, veteran status or any military service or application for military service; any contract, whether oral or written, express or implied; any tort; any claim for equity or other benefits; or any other statutory or common law claim. (b) The Executive acknowledges that his/her intention in executing this Agreement is that this Agreement shall be effective as a bar to each and every claim specified in Sections 4, 5 and 6 of this Agreement. In furtherance of this intention, he/she hereby expressly waives any and all rights and benefits conferred upon him/her by the provisions of Section 1542 of the California Civil Code and expressly consent that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including as well, those related to unknown and/or unsuspected claims, if any, as well as those relating to any other claims specified in Sections 4, 5 and 6 of this Agreement. Section 1542 provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Executive further represents that he/she understands and acknowledges the significance and consequence of such release as well as the specific waiver of Section 1542. (c) Notwithstanding the foregoing, the Company agrees and hereby acknowledges that the Release in this Section 5 is not intended to and does not release the Company of any obligation it may have, pursuant to the Company's Bylaws or as mandated by statute to indemnify the Executive against all costs, charges and expenses, including any amount paid to settle an action or satisfy a judgment reasonably incurred by the Executive in respect of any civil, criminal or administrative action and/or proceeding brought against the Executive by reason of his having been an officer of the Company provided the Executive (i) acted honestly and in good faith with a view towards the best interest of the Company; and (ii) had reasonable grounds for believing that his conduct was lawful. (d) In consideration of Section 5(c) above, the Executive agrees, upon the written request of the Company and at the Company's cost and expense, to cooperate with and provide all reasonable assistance to the Company, with respect to any civil, criminal or administrative investigations, actions and/or proceedings involving the Company and relating in any way to Executive's jobs and responsibilities while at the Company or to any matters which the Executive handled, participated in or had knowledge of while employed by the Company, including but not limited to the Electro Scientific Industries, Inc. vs. Dynamic ----------------------------------------------- Details, Inc. and GSI Lumonics, Inc. case (No. SACV00-272 AHS ) currently - ------------------------------------ pending in the U.S. District Court (Southern Division of the Central District of California). 6. WAIVER OF RIGHTS AND CLAIMS UNDER THE AGE DISCRIMINATION AND EMPLOYMENT ----------------------------------------------------------------------- ACT OF 1967: Since the Executive is 40 years of age or older, Executive has - ----------- been informed that 4 the Executive has or might have specific rights and/or claims under the Age Discrimination in Employment Act of 1967 ("ADEA") and the Executive agrees that: (a) In consideration of extended exercise period for the Executive's stock options as provided in Section 2(e) above and in consideration of the amounts described in Section 3 hereof, which is in addition to anything of value to which Executive already may be entitled, Executive specifically waives such rights and/or claims to the extent that such rights and/or claims arose prior to or on the date this Agreement was executed; (b) Executive understands that rights or claims under the ADEA which may arise after the date this Agreement is executed are not waived by Executive; (c) Executive hereby is and was advised of his/her right to consult with his/her counsel of choice prior to executing this Agreement and Executive acknowledges that he/she has not been subject to any undue or improper influence interfering with the exercise of Executive's free will in executing this Agreement; (d) Executive has carefully read and fully understands all of the provisions of this Agreement, and Executive knowingly and voluntarily agrees to all of the terms set forth in this Agreement; (e) In entering into this Agreement Executive is not relying on any representation, promise or inducement made by the Company or its attorneys with the exception of those promises described in this document; and (f) Executive understands that he/she has twenty-one (21) days to review this Agreement prior to signing it and that the consideration stated in Sections 2(e) and 3 shall not be provided unless and until the Executive voluntarily decides to sign this Agreement and does not revoke the Agreement within the seven (7) day period described in Section 13 below. 7. PERIOD FOR REVIEW AND CONSIDERATION OF AGREEMENT: ------------------------------------------------ (a) When the Company presented Executive with this Agreement on August 1, 2001, Executive was informed that he has at least twenty-one (21) days to review this Agreement and consider its terms before signing it. (b) The twenty-one (21) day review period will not be affected or extended by any revisions, whether material or immaterial, that might be made to this Agreement. 8. PROPRIETARY AND COMPANY MATERIALS: --------------------------------- (a) Executive expressly acknowledges and agrees that Executive's obligations and the Company's rights under any Non-Disclosure, Confidentiality, Non-Competition, Invention Disclosure and Development Agreement signed between the Executive and the Company shall remain in full force and effect and survive the termination of Executive's employment with the Company. 5 (b) On or within seven (7) days after the Termination Date, Executive will return to the Company all proprietary and Company property and materials, including but not limited to, personal computers, laptops, fax machines, scanners, copiers, diskettes, intangible information stored on diskettes, software programs and data compiled with the use of those programs, software passwords or codes, tangible copies of trade secrets and confidential information, cellular phones, credit cards, telephone charge cards, manuals, building keys and passes, courtesy parking passes, names and addresses of all Company customers and potential customers, customer lists, customer contacts, sales information, memoranda, sales brochures, business or marketing plans, reports, projections, and any and all other information or property previously or currently held or used by Executive that is or was related to Executive's employment with the Company. Executive agrees that in the event that Executive discovers any other Company or proprietary materials in Executive's possession after the Termination Date, Executive will immediately return such materials to the Company. 9. NON-DISPARAGEMENT AND CONFIDENTIALITY: Executive agrees not to make -------------------------------------- any negative, adverse or otherwise detrimental remarks concerning the Company and including the Executives, officers, directors, shareholders, business, operations, technologies, products, services, marketing strategies, pricing policies, management, affairs and financial condition of the Company. Executive agrees that he/she shall not divulge or publish, directly or indirectly, any information whatsoever regarding the substance, terms or existence of this Agreement and/or any discussions relating to this Agreement, to any person or organization other than Executive's attorneys, accountants, financial advisors or members of Executive's immediate family. Nothing herein shall prohibit or bar Executive from providing truthful testimony in any legal proceeding or in communicating with any governmental agency or representative or from making any truthful disclosure required, authorized or permitted under law; provided however, that in providing such testimony or making such disclosures or communications, Executive will use his best efforts to ensure that this Section is complied with to the maximum extent possible. 10. NON-SOLICITATION AND NON-COMPETE: To the extent the same is legally --------------------------------- enforceable, the Executive agrees that during the Executive's employment with the Company and for the period that the Executive receives salary continuation pursuant to Section 3(a), the Executive shall: (a) refrain from, directly or indirectly: (i) hiring any employees, of the Company, its subsidiaries and affiliates, to work for a competitor of the Company; (ii) soliciting, enticing or encouraging any employees of the Company, it subsidiaries and affiliates to resign or otherwise leave their employment with the Company, its subsidiaries or affiliates; and (ii) soliciting, enticing or encouraging any customers of the Company, its subsidiaries and affiliates to discontinue their business relationship with the Company, its subsidiaries and affiliates and/or to enter into a business relationship with a competitor of the Company, its subsidiaries and affiliates. 6 (b) not accept employment with or provide consulting services to a competitor of the Company, its subsidiaries and affiliates or to otherwise start a business or perform self employment activities which compete with the Company's (including any subsidiary or affiliate) business. In the event this provision is held invalid, void or voidable as against public policy or otherwise, the invalidity shall have no impact on the other provisions of the Agreement, which shall remain in full force and effect, notwithstanding the invalidity of this Section 10. 11. BREACH OF AGREEMENT: Executive agrees that if Executive breaches any ------------------- of the promises set forth in this Agreement or if Executive challenges the general release of claims set forth in Sections 4, 5, or 6 of this Agreement, the Company shall have the right to terminate the benefits payable or provided to Executive under this Agreement, in addition to seeking all remedies available to the Company at law and in equity for such breach, including but not limited to repayment of all monies provided to Executive under this Agreement. 12. REPRESENTATIONS AND GOVERNING LAW: --------------------------------- (a) This Agreement sets forth the complete and sole agreement between the parties and supersedes any and all other agreements, understandings and/or representations between or by the parties, whether oral or written, including specifically the Termination Letter Agreement between the Executive and Lumonics, Inc. dated April 13, 1998; provided, however, that, except as expressly set out below in this Section 12(a), nothing in this Agreement will affect, modify, or supersede the following agreements, which shall remain in full force and effect in accordance with their respective terms and with the understanding that the Executive's employment with the Company was terminated on September 28, 2001: (i) All Non-Disclosure, Confidentiality, Non-Competition, Invention Disclosure and Development Agreements entered into between the Executive and the Company; (ii) All Stock Option Agreements entered into between the Executive and the Company, except that the exercise period shall be extended, for the Executive's benefit in accordance with Section 2(e) above. (b) This Agreement shall deemed to be made and entered into in the Commonwealth of Massachusetts and shall in all respects be interpreted, enforced and governed under the internal and domestic laws of Massachusetts without giving effect to the principles of conflicts of law thereof. (c) This Agreement may not be changed, amended, modified, altered or rescinded except upon the express written consent of both the Company and Executive. If any provision of this Agreement, or part thereof, is held invalid, void or voidable as against public policy or otherwise, the invalidity shall not affect other provisions, or parts thereof, which may be given effect without the invalid provision or part. To this extent, the provisions, and parts thereof, of 7 this Agreement are declared to be severable. Any waiver of any provision of this Agreement shall not constitute a waiver of any other provision of this Agreement unless expressly so indicated otherwise. (d) Executive may not assign any of his/her rights or delegate any of his/her duties under this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of the Company's successors and assigns. 13. EFFECTIVE DATE: After signing this Agreement, Executive may revoke it --------------- for a period of seven (7) days following said signing. This Agreement shall not become effective or enforceable until the revocation period has expired. EXECUTIVE REPRESENTS THAT HE HAS READ THIS AGREEMENT, THAT HE FULLY UNDERSTANDS THE TERMS AND CONDITIONS OF SUCH AGREEMENT AND THAT HE IS VOLUNTARILY EXECUTING THE SAME. IN ENTERING INTO THIS AGREEMENT, EXECUTIVE DOES NOT RELY ON ANY REPRESENTATION, PROMISE OR INDUCEMENT MADE BY THE RELEASEES OR ITS ATTORNEYS WITH THE EXCEPTION OF THE CONSIDERATION DESCRIBED IN THIS DOCUMENT. Executed this _______ day of ____________ 2001. ________________________________ ________________________________ SIGNATURE OF EXECUTIVE GSI LUMONICS, INC. PATRICK D. AUSTIN By: ______________________________ Title: ______________________________ STATE OF _______________________ COUNTY OF _________________ Date:________________________ On this _______ day of _____________, 2001, Mr. Patrick D. Austin, did appear before me with evidence of the same, and signed the foregoing Separation Agreement and General Release as his free act and deed. ___________________________________ Notary Public Name: 8 Commission Expiration Date: COMMONWEALTH OF MASSACHUSETTS COUNTY OF MIDDLESEX, SS. Date:________________________ On this _______ day of _____________, 2001, ______________________, the _________________________________ of GSI Lumonics, Inc. did appear before me with evidence of the same and signed the foregoing Separation Agreement and General Release on behalf of GSI Lumonics, Inc. as his/her free act and deed. ____________________________________ Notary Public Name: Commission Expiration Date: 9 -----END PRIVACY-ENHANCED MESSAGE-----